10 minutes Print Quit Capital programmes in Aerospace & Defence What you need to know about the challenges of long-term investment programmes. Prepared by PricewaterhouseCoopers. April 2010 Managing complex capital programmes is always a challenging task however, it is becoming even tougher in today s tightening market conditions. Air transport drives economic and social progress. It provides access to global markets and generates trade and tourism. In meeting this soaring demand for capital programmes, European A&D companies are among the world's leading suppliers. The International Air Transport Association (IATA) forecasts continuous growth of five to six per cent annually. In absolute figures, this represents 2.2 billion passengers and 44 million tonnes of freight annually. Traffic increases, coupled with fleet renewal, will require the delivery of up to 25,000 new aircraft in the next 20 years, which represents a turnover of US$ 3.1 trillion. Programmes within the A&D industry are typically long-term investment projects which require large sums to develop, improve and maintain products such as aircraft, helicopters or satellites. And despite these optimistic future expectations, there is a variety of challenges within the A&D industry which concern all levels of the supply chain. Which topics should be on your agenda right now? 1. Which key issues must be managed as part of your capital programmes? 2. In a fierce global A&D market, how can you ensure that a programme delivery site is established smoothly in a foreign country? 3. How can you manage unexpected events effectively over the long lifetime of a capital programme? In the case of many capital programmes in the Aerospace & Defence (A&D) industry, the duration of an economic downturn or upturn is shorter than the programme life cycle itself. pwc
2 Which key issues must be managed as part of your capital programmes? Tackling programme complexities Whether you are the investor or the owner of a capital programme or on the supply side of the programme - the challenges are tremendous. In addition to delivery pressures driven by customer contracts, which include excessive penalty clauses, these programmes involve a great deal of technological progress and improvement. Again, the increased pooling of demand in the A&D market leads to even more complex and capital-intensive programmes which also entail higher risks. Additionally, these programmes are generally pan-european or globally structured which requires coordination efforts and standardised reporting structures. Tightening market conditions Due to the long life cycle of capital programmes, the challenges will become even greater over coming years. Changing priorities, shifting stakeholder interests, and the ups and downs of business cycles are additional challenges to be dealt with. European A&D companies are among the world leaders in delivering complex capital programmes. Nevertheless, increasingly fierce competition in the global market, combined with intellectual property issues in certain countries, make it difficult to maintain a competitive edge. Feasibility Concept Definition and Development Operate Programme initiation Pre study Basic concept Design, Specification Detail Engineering, Initiation Parts Manufacturing Conduct assembly process & Test Operation Readiness The capital programme life cycle a recurrent theme at all times. Always stay one step ahead!
3 Contracts, technologies and collaboration Complex contracts, litigious attitudes, technological challenges, multi-shareholder governance and multi-supplier set-ups in a European or global environment complicate collaboration between business partners in capital programmes. However, looking at programme organisation and operations, there is even more to consider. Constrained supplier capacities as well as increasing shortages of qualified engineers, commercial staff, accountants, lawyers and other professionals with a capital programmes background additionally complicate the situation. Change & claim management Suppliers/Partners Programme Contracts Change & claim management Customers Now is the time for decision-makers to strengthen their competitive position in this environment with innovative technologies, winning strategies and capital programme management excellence. The A&D industry, a hotbed of innovation, not only seeks opportunities for new product developments, it also applies innovation to change the way it runs its businesses. Large A&D companies are thus looking for ways to reduce transactional costs across the global trading partner spectrum by leveraging e-channels and technology. System integration Technologies System integration Sound and professional capital programme and investment management are essential for the success of capital programmes.
4 In a fierce global A&D market, how can you ensure that a programme delivery site is established smoothly in a foreign country? The fast and efficient ramp-up of operations within a GFI transaction highlights all the aspects of a capital programme project. Looking ahead The big manufacturers in both the civil and military aviation segments are re-evaluating their supply chains as they seek to gain better control of their large programme pipelines. There is a growing desire by the major producers to exert supply chain discipline and control. Programmes among key players continue to be hit by delays, which have led to question marks over the strategy of outsourcing and joint ventures favoured for much of the previous decade. For the future, greater investment in, and competition from, fast-growing markets such as China will be one key trend. Greenfield Investment (GFI) transaction Setting up a subsidiary of a company and its structures and operations in a foreign environment is a challenging task. It very often interferes with day-to-day business, and means an additional workload for people and organisations. Additionally, a typical situation in a programme is that the operational programme management activities are not really aligned to the overall goals of the programme owner and the subjacent business case. Actions derived from short-term urgencies need to be in accordance with long-term objectives. Change request management as a crucial factor In many cases, programme progress originally scheduled is affected by programme changes. Such modifications impact the critical lead-time, regulatory timelines or technical requirements and suddenly dictate the priority and order of activities. Different disciplines of the programme organisation, such as procurement, engineering, parts production, assembly and logistics deal with these changes; yet they are often not monitored by programme management and thus not consolidated. It s all in the mix! Hence, materials purchasing, site logistics, commercial controlling and reporting, tax requirements or contractual and regulatory requirements must be handled appropriately. There is a need for the right mix of management consulting, engineering, operations, tax services, accounting and compliance expertise. Only early risk and opportunity identification, clear responsibilities and monitoring of the realistic programme picture help to prevent the programme getting out of hand especially in a foreign market such as China.
5 How can you manage unexpected events effectively over the long lifetime of a capital programme? No surprise is the goal! High complexity, changing conditions and shifting priorities are still a critical source of unexpected events during a capital programme lifetime. Constant access to a real picture of programme progress and performance is crucial for technical and commercial success. Integrating the languages from legal, technical, business, taxation, compliance, environmental and reputational areas is the key to obtaining a realistic picture of risks and opportunities. The right programme review approach is a powerful tool in providing such an independent view. Experience shows that the majority of risks arise in four main areas: contracts, technologies, suppliers and the programme itself. 1. Contracts 2. Technologies 3. Supplier/Partner 4. Programme Having a capable programme delivery organisation in place is a precondition for success in delivering an A&D capital programme. Issues & Risks: Over-promising deliverables, requirements, lack of back-toback mechanism Claim management: Supplier contract requirements too specific, lack of robust claim management Change Request Management: Customer contract requirements not specific, lack of robust change acceptance and execution process Complexity: New technologies with an incomplete development process, and new materials with an incomplete manufacturing process can have unpredictable effects on programme progress System integration: Too many technological interfaces, lack of continuous system integration in design phase Maturity: Lack of experience with combination of different technologies Fragmentation: Too many interfaces with suppliers and partners, lack of system suppliers Quality: Excellent engineers, but lack of professional programme management, delays & quality issues Robustness: Suppliers fold prior to programme completion Complexity: Too many programme interfaces and internal/ external parties involved, different standards for managing programmes Controlling/Reporting: Unrealistic reports regarding delays, overruns and fore casting additional risks Lessons learnt: Lack of simple process for capturing lessons learnt, no learning curve from programme to programme
6 Benefit from our long expertise and our experience in the field of A&D and capital programme management. Let's talk about your capital programme and make sure your company is prepared to tackle programme complexities and manage its way through tightening market conditions. Martin Bork Düsseldorf Phone: +49 211 981-7288 E-mail: martin.bork@de.pwc.com Jürgen Seibertz Frankfurt am Main Phone: +49 69 9585-1460 E-mail: juergen.seibertz@de.pwc.com Christian Elsholz Hamburg Phone: +49 40 6378-1980 E-mail: christian.elsholz@de.pwc.com
7 Our portfolio: We support you in all aspects of the capital programme life cycle. Greenfield Investment Greenfield Investment framework including business, tax and legal aspects Business case and investment decision Programme management set-up and governance Delivery organisation and processes (Company in a Box) Full support in virtually all of the countries in which we are active, as we have locations in 135 countries Programme review and Recovery Assessment of maturity level of programme organisation Early risk and opportunity identification, accounting & reporting reliability, realistic picture of the programme Leverage of specific and wellproven capital programme management assets Potential adjustment recommendations Continuous monitoring Programme finance and CSR Analysis of programme financing concepts Investment set-up Transactional risk mitigation Guidance in foreign direct investments Litigation support/arbitration Regulatory and compliance management Sustainability
www.pwc.de/de/industrielle-produktion Print Quit Home April 2010 PricewaterhouseCoopers refers to the German firm PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft and the other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.