Industry Today: The World of Manufacturing

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 Date:1/18/2010

 

Dollars & Sense
Losing Ground
Deloitte’s Tom Captain discusses America’s innovation leadership in aerospace & defense and gives reasons why it’s slipping away.

It was in America that the aerospace industry was born, with the Wright brothers' first flight at Kitty Hawk, N.C., in 1903. The technology and manufacturing prowess in subsequent decades built a legacy of aerospace leadership, contributing to the end of WWII, the end of the Cold War, the Berlin Airlift, the Apollo moon mission, the invention of GPS, widespread airline passenger travel, and many other accomplishments. This was enabled by the national motivation, educational resources, government support and creativity of the leaders, engineers and managers in the aerospace industry. However, there are changes in workforce demographics, funding sources, the industrial base and foreign competition, thus begging the question: Are we losing our innovation leadership?

Workforce education and demographics: In the medium and long term, education and a skilled workforce is the foundation of our ability to drive innovation. In recent years, America’s higher education institutions have awarded approximately 100,000 engineering degrees. In contrast, engineering, science and technology degrees awarded in India and China have recently been 350,000 and 600,000 respectively. The picture gets worse: In a recent survey of more than 270,000 college freshmen, only 7.5 percent said they intended to major in engineering – the lowest level since the 1970s. On top of that, the aerospace workforce is aging and 27 percent of aerospace workers are eligible to retire today, with nearly 60 percent of the workforce being 45 years and older. On the other end of the spectrum, 15.7 percent of aerospace workers are in the early stages of their career, comprised of 25-34 year olds. The implication is that the American workforce to drive tomorrow’s innovation in aerospace & defense (A&D) is not replenishing itself, and other countries are catching up.

Funding: Over the years, A&D technology innovation has largely been funded by our government either directly or indirectly. However, with pressure on defense spending, problems with program cost over runs and changing national priorities, the amount available to spend on research and development has been steadily decreasing over the last decade and the trend is expected to continue. If there is no real growth in the defense budget, acquisition accounts could slide from 35 percent of the budget in 2010 to 24 percent by 2020 according to the Congressional Research Service.

However, with the new 2010 DoD budget, and with the pending Quadrennial Defense Review being published, it is likely that there will be increased focus on innovation that addresses asymmetric threats seen in expeditionary warfare. Indeed there are bright spots in innovation: in unmanned aerial vehicles, miniaturization, robotics, ever more precise GPS targeting, intelligence gathering and persistent surveillance, and jet engine efficiency. Some of the most exciting innovations are in energy research to reduce dependence on foreign oil, and to reduce the environmental impacts of carbon emissions.

Industrial base: America’s defense industrial base, capability and capacity has been transforming in a positive fashion. The mega mergers of the A&D industry in the 1990s helped promote scale economies and pushed productivity in the industry to record levels. However, with declining defense spending, there is real threat to the health of the industry. At this level, the industrial base could face underutilization, be subject to cost cuts and rationalization to preserve profitability, and most importantly reduced investment, resulting in lower capability to innovate and create technical breakthroughs that have been the hallmark of the industry.

The size of the industrial base has been in a long term decline, despite the increase in industry revenues and profits. Indeed the U.S. A&D employment base has declined from 1.2 million workers in 1990 to 670,000 today. Worker productivity has improved during this period – 305 percent increase in productivity measured as profits per worker, adjusted for inflation. However, with the shrinkage of workforce, fewer defense programs to work on, and consolidation of companies, there are certain industrial capabilities, such as rocket nozzles, that may represent strategic assets, which could be lost.

Foreign competition: America grew an effective A&D industry and because of scale, size and need, was able to dominate the industry almost since its beginnings as we know it. However, due to computer aided design, global supply chains, and the growing ability, skills and capacity in low cost countries, a shift is occurring. The Internet, global commerce and growing capabilities are creating new competitors in China, Russia, Mexico and Japan. In addition, with the growth in wealth, and particularly the middle class economies in much of the developing world coupled with low relative wage rates, aerospace employment in these countries is growing. China has approximately as many industry workers that exist in the U.S. Canadian A&D employment is 80,000 and Mexico is forecasted to have 40,000 by 2012.With this kind of global capability and attractiveness of the low cost manufacturing capability, foreign competition must be considered.

Although there are many bright spots in continued technology innovation emanating from this industry, the long term trend is that foreign competition is real and we must ask if our innovation leadership is slowly dissipating. If so, then government and business leadership should consider the implications and react in a timely fashion.

Tom Captain, is a principal and vice chairman in Deloitte LLP, and is the Global and U.S. Leader for the Aerospace & Defense industry sector. He resides in Seattle.