SPECIAL INDUSTRY REPORT
2020
Shifts in Mobility and Transportation Infrastructure The New Normal in the Automotive Supply Chain A Guide to Aerospace Investment Decisions Disruption in the Automotive Industry
A Special Supplement to
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Table of Contents
Editor’s Note The COVID-19 pandemic is just the latest disruption to the automotive and aerospace industries, albeit a tremendous one at that with many plants slowing production or shutting down entirely as the coronavirus spread among the workforce and as the supply chain of parts was interrupted.
4 S hifts in Mobility and Transportation
Infrastructure in a COVID-19 World
A conversation with Nicole Barranco at Volkswagen Group of America reveals the need for the U.S. to focus on its mobility systems to meet evolving consumer demand.
Yet, this disruption also highlights some new opportunities. Automakers and their parts suppliers are moving forward with plans for electric vehicles (EVs) and autonomous vehicles (AVs), while rethinking their global supply chains. These companies will likely establish a stronger U.S. footprint and increase their use of automation and other new technologies.
7 The New Normal in the Automotive
As more AVs and EVs come on the market, the U.S. must also focus on upgrading its mobility infrastructure. Investment is need for widespread installation of charging stations as well as in the wireless infrastructure needed for vehicle-to-vehicle and vehicle-to-infrastructure communication.
9A Guide to Aerospace Investment Decisions
Supply Chain
While COVID-19 has disrupted the auto supply chain, it has created new opportunities to establish a stronger U.S. footprint, utilizing automation and other new technologies.
Where should aerospace focus production during a prolonged recovery — and for the long haul?
Consumers have great enthusiasm for all unmanned technologies, including drones, which represent just one segment of the aerospace industry that was burgeoning pre-pandemic. COVID-19 plunged the industry into crisis, and although it will take some time to fully recover, the U.S. still leads globally in aerospace attractiveness according to PwC’s 2020 rankings.
The pandemic is yet another of a series of disruptive events that have impacted the auto industry, but the outlook is brighter.
The U.S. auto and aerospace industries are meeting the challenges of this latest unprecedented crisis and now is the time to position your firm for what lies ahead as it adjusts to the new normal.
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Disruption in the Automotive Industry 13
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Shifts in Mobility and Transportation Infrastructure in a COVID-19 World By Michele Satterlund, Senior Vice President, Government Relations – State, McGuireWoods Consulting LLC
A CONVERSATION WITH NICOLE BARRANCO AT VOLKSWAGEN GROUP OF AMERICA REVEALS THE NEED FOR THE U.S. TO FOCUS ON ITS MOBILITY SYSTEMS TO MEET EVOLVING CONSUMER DEMAND.
VW’s throwback and futuristic, all-electric ID. Buzz is based on a dedicated EV platform that will underpin future Volkswagen electric vehicles.
hile the COVID-19 pandemic continues to create an environment of unpredictability, the one certainty is that the way in which people previously commuted to their jobs — and the way in which goods and services were traditionally delivered — is likely changed forever. It is still too early to predict the entire spectrum of mobility changes that are destined to occur, but one thing is for sure — the COVID-19 pandemic has laid bare the fact that our mobility systems are critical to our day-to-day lives and serve as the backbone of the U.S. economy. Now, more than ever, if the U.S. is to keep pace with the mobility advancements being made in other countries, government and business must address the need for an infrastructure strategy that contemplates a future mobility system that is both autonomous and electric. There is an up-front cost to ensuring a robust infrastructure network that can accommodate autonomous (AV) and electric vehicles (EV); however, the costs of not making these investments will be even greater as societal shifts demand mobil-
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ity systems that provide better health protection measures. Given the public health guidance issued by the Centers for Disease Control that recommends limiting contact with others, consumers are rethinking shared transportation models. In a survey conducted by the IBM Institute for Business Value,1 which polled more than 25,000 U.S. adults in April 2020, respondents indicated they plan to reduce their use of, or give up completely, mobility options such as ride-sharing, peer-to-peer networks, and public transportation. Some 17 percent of the respondents indicated they plan to use their personal vehicles more, and more than half indicated they would use ride-sharing apps less, or stop using them altogether, with 20 percent saying they will no longer use any form of public transportation, and 28 percent saying they will use it less often. Consequently, this raises the likelihood that even with the increase in teleworking, the use of mobility infrastructure systems is not likely to decrease, as more people rely on personal mobility options that allow for greater control over the numbers and frequency with which they come in contact with others. This means that the pace at which autonomous and electric mobility systems are developed will likely accelerate over the next few years, and investments must be made now in order to accommodate this changed world of mobility.
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To talk more about these changes, McGuire Woods Consulting asked Nicole Barranco, senior director of Government Relations at Volkswagen Group of America, to share her thoughts on pandemic-related shifts and the future of transportation.
Nicole Barranco,
a long time auto industry representative and attorney, is currently employed by the Volkswagen Group of America. She currently serves on the Board of the Unmanned Systems Association of Virginia. She was appointed as Vice Chair of Virginia’s Unmanned Systems Commission as well as the Florida Task Force on Autonomous Vehicles.
Michele: What changes can you point to that suggest the pandemic is accelerating the pace at which autonomous and electric vehicle systems will be adopted? Nicole: Prior to the pandemic, there was already a growing acceptance of autonomous systems by the public, particularly as more consumers became comfortable with advanced driver-assistance systems that are now standard features in many vehicles. Systems like adaptive cruise control, lane centering, and automatic parking are all autonomous vehicle systems that the drivers are becoming more accustomed to as well as reliant upon. While the demand for these systems had been growing, there are a number of indicators that suggest the COVID-19 pandemic is increasing the pace at which autonomous and electric vehicle systems will be adopted. First, from an economic standpoint, more manufacturers are acquiring autonomous technology platform companies and making greater electric vehicle investments. While there have always been partnerships between manufacturers and technology companies, recently there has been a greater consolidation between the two. For instance, in June, Volkswagen AG closed on its $2.6 billion investment in Argo AI, a Pittsburgh-based autonomous vehicle innovator. Mercedes-Benz and NVIDIA joined forces this year to create automated vehicle architecture, and Volvo Cars and Waymo recently partnered in order to integrate Waymo’s self-driving technology to create an electric vehicle platform for ride-hailing services.
This fall, Volkswagen will introduce its new all electric EV — the “ID. 4”— which will join the group’s electric vehicle portfolio. Additionally, Amazon recently agreed to pay more than $1 billion to acquire Zoox, another autonomous technology platform that includes developing zero-emission vehicles built for autonomous ride-hailing services. These investments and acquisitions point to the investor enthusiasm that has grown as a result of the current crisis. Second, from the consumer perspective, the Consumer Technology Association (CTA), which, among other things, tracks mobility, smart infrastructure, and autonomous vehicles and technology, noted in a recent report2 that there is overall greater enthusiasm for all unmanned technologies, including drones, ground vehicles, and robotics, among the buying public. While mobility functions were always certain to change, the pace at which these changes are happening is picking up speed as society is adapting to a new normal. While the specific mobility modalities still remain to be seen, we know that consumers are rethinking shared transportation, and we as automakers expect increased consumer demand for vehicles that are both autonomous and electric.
Michele: Is the pandemic reshaping electric and autonomous vehicle infrastructure investments? Nicole: IEA’s May 2020 technology publication, Global EV Outlook 2020,3 reports that the EV market had been growing steadily both in and outside of the U.S. over the past 10 years, with the global stock of EVs passing 7.2 million in 2019. This is underscored by a recent report by Bloomberg NEF4 that not only projects a short-term improvement in internal combustion engine (ICE) vehicle sales after COVID-19 lockdowns are lifted, but anticipates EV sales will continue growing, with EVs reaching 58 percent of all passenger vehicle sales by 2040. However, it should be understood that across the United States, EV adoption generally remains low and the market requires further maturation. Battery electric vehicles (BEVs), specifically, have only gained a market share of 1.54 percent as of 2019. Unfortunately, despite the positive projections made by the Bloomberg and IEA reports, the disappointing news is that the growth is expected to come primarily from countries outside of the U.S. These countries, despite the COVID-19 pandemic, are continuing to make strong AV and EV infrastructure investments in anticipation of worldwide market growth in the EV sector. ~ 2020 5
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In addition to federal initiatives, states will also need to make substantial commitments and investments if the U.S. is to compete globally and support true market transformation. California serves as an illustrative example, given that the state has achieved the highest market share of EVs in the U.S. To reach this goal, the state has invested billions of dollars into market development and provides a number of consumer incentives, including the California Clean Vehicle Rebate Program, which rebates consumers up to $7,000 for the purchase of a zero-emission vehicle. Similarly, there are examples of non-financial incentives where states have realized enormous Michele: What investments should the success at steering consumers to adopt lowUnited States make to support autonoemission vehicles. Two examples include Virginia’s mous and electric vehicles? and Georgia’s high occupancy vehicle lane policies. When these policies were in place, the plan yielded Nicole: Despite the challenges of COVID-19, THE UNITED STATES indisputable positive results, and once repealed, the U.S. must move boldly forward in making MUST DIRECT consumers responded accordingly. EV and AV infrastructure investments or we FUNDING TOWARD It should be noted that EV infrastructure risk being outpaced by other countries. For THE WIDESPREAD investment is critical to inspiring confidence for instance, despite the pandemic, China has conINSTALLATION OF consumers to enter the market. Electrify America, tinued to identify ways to support and energize CHARGING Volkswagen Group of America’s subsidiary, conthe EV market, and the country is moving STATIONS, tinues to install more than $2 billion worth of EV forward with massive stimulus measures to ELECTRIFICATION infrastructure coast to coast. In fact, just this suminvigorate its economic recovery. Following the INCENTIVES, AND mer, Electrify America announced the completion pandemic, China worked quickly to extend its INFRASTRUCTURE of its first cross-country route, which allows electric EV subsidy (that was scheduled to expire) and INVESTMENTS. vehicle (EV) drivers to travel from coast to coast worked to ensure that the country’s COVID-19 using the largest open DC fast-charging network in stimulus package included strong investments the United States. It is the first of two cross-country in infrastructure, including 5G networks, artiroutes the network will complete this year, and ficial intelligence, ultra-high voltage transmisspans 11 states and over 2,700 miles to take drivers sion, and electric vehicle charging stations, to from Los Angeles to the nation’s capital, Washingname a few. ton, D.C. It is investments like this cross country To keep pace with this accelerating global network that will give consumers the confidence to marketplace, the U.S. must direct funding make the choice of electrification. toward the widespread installation of charging stations, electrification incentives, and infrastructure investments such as 5G networks that will improve vehicleMichele: Parting thoughts? to-infrastructure communication and will complement the deployment of AVs. Nicole: The COVID-19 pandemic has placed a spotlight on Addressing the COVID-19 recovery specifically, funding the importance of our nation’s mobility system and the need supporting the EV and AV economy is not only appropriate but for a future that not only includes cleaner air, but also meets critical within future federal response legislation. To date, no evolving consumer demand…It is critical that we fully utilize federal COVID-19 response bill has allocated funding specifithe opportunities created during this crisis to develop a clear cally aimed at stimulating this sector. Outside of direct spendset of goals and emerge ready to rethink how the U.S. can ing, the U.S. should look at other ways to support the industry, remain a mobility leader. <> namely, extending the federal EV tax credit. An extension of 1 https://newsroom.ibm.com/2020-05-01-IBM-Study-COVID-19-Is-Significantly-Altering-U-S-ConsumerBehavior-and-Plans-Post-Crisis this credit would incentivize sales and build consumer confi2 https://www.cta.tech/Resources/Newsroom/Media-Releases/2020/June/Consumer-Excitementfor-Drones,-Self-Driving-Vehic dence by signaling that the U.S. is serious about investing and 3 https://www.iea.org/reports/global-ev-outlook-2020 4 supporting these technologies. https://about.bnef.com/electric-vehicle-outlook/ The future of EV mobility presents an opportunity for the U.S. to build a post-COVID-19 world of new jobs and related technological advancements that we cannot afford to miss — be it battery manufacturing, communication opportunities related to the wireless infrastructure needed to accommodate vehicle-to-vehicle and vehicle-to-infrastructure communication, or the building of a robust EV charging system across the country. Growing the EV market in the U.S. will require the involvement of state/federal government to help incentivize consumers to make the choice of electrification.
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The New Normal in the Automotive Supply Chain By Daron Gifford, Partner and Automotive Consulting Leader, Plante Moran
WHILE COVID-19 HAS DISRUPTED THE AUTO SUPPLY CHAIN, IT HAS CREATED NEW OPPORTUNITIES TO ESTABLISH A STRONGER U.S. FOOTPRINT, UTILIZING AUTOMATION AND OTHER NEW TECHNOLOGIES. The global supply chain can no longer meet demand, exposing structural flaws in the automotive industry’s supply chain that will not be easily resolved and returned to a “normal” state in the COVID-19 world.
GLOBAL INSTABILITIES
or immediate evidence of disruptions in the automotive supply chain, you need to look no further than your local dealer. Many lots are nearly empty of new vehicles, with average dealer inventories across the U.S. far below the normal 50–60 days’ supply. How did this happen? Of course, the COVID-19 pandemic is a major part of the problem. When automotive production was abruptly halted in March, there were not any new vehicles being produced until early May. Even then, production has been proceeding in fits and starts. At the same time, consumers have continued to purchase vehicles, keeping auto demand surprisingly strong in an uncertain economy. OEM assembly lines have been attempting to move up to full production, but most are not there yet. While some blame it on productivity problems from social distancing, lack of labor available to come back to work, or line shutdowns due to coronavirus infections, the key culprit has been the automotive supply chain. As suppliers have been trying to ramp up, they have been hamstrung by their own designed global supply chains. Part volumes coming from Asia, especially China, are still recovering to prior levels. Trade disputes with China have not helped. And other closer countries, such as Mexico, continue to struggle with infection levels and manufacturing shutdowns on a daily basis.
Just since the turn of the 21st century, the U.S. economy has been disrupted by two major events that created catastrophes to the business world — 9/11 and the Great Recession of 2008–2009. The COVID-19 pandemic has been another economic crisis; however, it has been dramatically different. The extreme impacts to economies around the world liken it closer to World War II. Virtually every country has felt the residual effects ranging from complete lockdowns to frightened citizens who have been displaced by economic retractions. Trade policy disfunctions have also come into play. U.S. and China relations are at a new low point. Tariffs on steel, aluminum, and other products continue to be in force, and technology disagreements such as TikTok and Huawei are in the headlines daily. There is very little that can be predictable about trade in the near or long term. Combine these current global manufacturing challenges with “lean” supply chains developed over several decades, and you find an auto industry unable to function efficiently or come back quickly. Uncertainty about
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consumer demand going forward provides even more instability to vehicle production schedules upon which suppliers depend. The concepts of lean manufacturing thrive when production can be level, stable, and smooth. In that type of environment, inventories can be just-in-time and production moves ahead like clockwork. COVID-19 has shown how defenseless the global supply chain can become in the face of interruptions, catastrophe, and crisis. Though fixing it rapidly and in the middle of coming back from pandemic problems is a daunting task, an alternative which must be considered lies in returning at least some automotive production capacity to U.S. shores — not so much vehicle assembly, but the critical auto components needed to produce a functioning car, SUV, or truck.
THE CASE FOR AMERICAN-MADE
COVID-19 HAS SHOWN HOW DEFENSELESS THE GLOBAL SUPPLY CHAIN CAN BECOME IN THE FACE OF INTERRUPTIONS, CATASTROPHE, AND CRISIS.
The advantages of increased U.S. auto parts production are obvious. It would tighten what’s become a far-flung global supply chain, weaning automakers of dependence on foreign suppliers and offering a leaner, faster route to reducing the cost of stockpiling inventory as a contingency plan. It’s also beginning to make more economic sense. The global supply chain as a whole is only getting more expensive. China has been the lowcost country of choice for years. However, their cost of production is increasing and likely to increase even more in an inwardly focused COVID-19 world. Other countries may be alternatives, such as Vietnam or Thailand; however, the supply chain from Asia is still long. Mexico is a solution closer to home and supported by the recent USMCA trade agreement to require more auto production in North America. But COVID-19 continues to haunt Mexico auto production, with high infection rates and production line shutdowns. The low labor cost advantage historically enjoyed by Mexico will be reduced now, according to USMCA terms, which will require higher direct labor wages for Mexican workers. Still, U.S.-based auto manufacturing faces obstacles of its own, beginning with the capital investment needed in new plants, new tooling, and new equipment. Perhaps even more challenging is the lack of manufacturing labor across the country. With unemployment still at record levels, you would think that there should be plenty of workers available. But despite years of headlines calling for the rebuilding of U.S. manufacturing, factory work still carries a stigma among American workers, leaving the country too light in skilled
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production employees. Yet, there may be some hope for the forwardlooking auto supplier. More automation, robotics, and new technologies will need to be used in the production lines. Automation will eventually make for better, higher-quality products, while also supporting productivity improvements needed in the work force due to coronavirus production changes. Capital investment — be it through new production plants and equipment, or by purchasing weaker competitors — will allow the strongest suppliers to grow and grab volume and market share. While COVID-19 may have left the industry in disarray, it’s created a prime opportunity to expand the business and establish a stronger U.S. footprint.
MAPPING OUT YOUR PLAN The coronavirus is not likely to go away for a very long time. There is no cure today, testing is still inconsistent, and while vaccines look promising, they are a long way from full production in volumes that will have a significant impact. Hot spots of infection will probably continue to pop up and disrupt production operations over the next 12 months and beyond. At Plante Moran, we have helped our clients in critical planning for their supply chains, focusing on key activities in three phases:
1 Respond: Manage through the current crisis. 2. Restart: Plan to reinitiate business operations. 3. Plan: Build readiness for the next disruption. Building readiness for the next disruption will require investment and planning out a new strategy for your global supply chain. While you cannot foresee everything in the future, suppliers need to have a structured plan and capability, including decision processes that can be flexible with events. COVID-19 was truly a Black Swan event; really no one saw it coming, even though many thought it was highly likely to occur. Scientists have long predicted a pandemic, but the rest of the world did not worry much. Major disruptions don’t happen often, and in the meantime, our attention typically goes to the immediate crisis at hand. Planning for readiness in your supply chain has not received much credibility — until now.
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A Guide to Aerospace Investment Decisions By Scott Thompson, U.S. Aerospace & Defense Leader, PwC
WHERE SHOULD AEROSPACE FOCUS PRODUCTION DURING A PROLONGED RECOVERY — AND FOR THE LONG HAUL?
he aerospace and defense (A&D) industry had a record year in 2019. Revenue passenger miles set a record, up 4.2 percent from 2018, and have been growing at roughly double GDP for the past two decades.1 Airbus’ and Boeing’s order backlogs ended 2019 at around 13,000 aircraft.2 The industry reported a record $780 billion in revenue — 5 percent over 2018. But in March 2020, the COVID-19 pandemic plunged the industry into crisis, literally overnight, with air traffic decreasing about 90 percent as society shut down and stayed at home.3 Hopes for a quick recovery have been dashed by the persistence of transmissions, and many believe it may take up to five years for a full recovery. Current projections are that airlines may rack up more than $80 billion in losses in 2020.4 One bright spot is demand for military equipment — it has been unscathed by the pandemic, at least for the moment. And while defense companies have had to grapple with some increased levels of absenteeism and adopt new production techniques to protect workers, the defense segment has fared relatively well. But for companies in commercial aerospace, the emphasis has switched from expansion to liquidity and de-risking the supply chain, while planning for a return of volume in three to five years. De-risking the supply chain has many consider-
ations, including protecting financially vulnerable suppliers, potential vertical integration, and deglobalization, which involve the potential for relocation. At the same time, aerospace manufacturing capacity took decades to build, and it should stay agile in order to fully rebound. Many A&D companies will likely emerge from the crisis changed — perhaps even enhanced. Industry stakeholders fully grasp that they may need to become more resilient, agile, and innovative in order to survive a disruption of this scale. So where are some ideal places for companies that need to consolidate production and relocate supply chains? What about defense companies that are still expanding? PwC’s 2020 Aerospace Manufacturing Attractiveness Rankings5 analyzed the key states and countries that drive the industry for the seventh year in a row. The report is a helpful tool in planning for production, enhancing manufacturing supply chains, and re-examining costs. We analyzed the macro considerations around the A&D industry, talent, cost, tax policy, infrastructure, and economy. The metrics and data are carefully examined to help companies find the appropriate areas to invest, build, expand, consolidate, or relocate operations. The methodology for the 2020 rankings changed when compared to previous editions. This year, the country rankings combined a total of 32 met-
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rics, and the state rankings were based on 36 metrics. The metrics were spread across the following seven categories: cost, economy, geopolitical risk, industry, infrastructure, labor, and tax policy. Geopolitical risk was excluded from the state rankings due to the similar risk for all states.
AEROSPACE MANUFACTURING ATTRACTIVENESS RANKINGS BY COUNTRY The United States remained in the top-ranking position due to its large aerospace industry with $277 billion in sales last year. The U.S. was also the global leader in A&D exports in 2019, generating $141 billion in revenue, and A&D exports were the country’s top net export. In fact, the U.S. improved its dominance as a result of the 2018 tax reform, which helped improve its global tax policy ranking to 25. The U.S. scored in the top 10 in the other six categories. Following the U.S., Singapore moved up to the #2 spot. Singapore is Asia’s leading provider for aircraft maintenance, repair, and overhaul (MRO) needs, accounting for 10 percent of the world’s aerospace industry’s MRO output. It is also home to more than 60 foreign and domestic aircraft parts producers. Canada ranked #3, largely due to its highly educated labor force, low level of geopolitical risk, and industry size. Canada’s aerospace and defense industry has tripled its global market share in the last two decades, making it the fifth-largest aerospace producer in the world. Most (77 percent) of the industry’s products are manufactured for commercial aircraft,
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and 82 percent of the products are exported — the highest percentage globally. Also, the country’s Strategic Innovation Fund has encouraged R&D efforts, which in turn have spurred growth and expansion in the A&D industry. Canada’s A&D industry invested $1.4 billion in research and development — roughly a quarter of total manufacturing R&D in the country. Rounding out the top five are South Korea coming in at #4 and Japan taking the #5 spot. The countries filling out the top 10 are Australia, the United Kingdom, Germany, Switzerland, and Hong Kong. South Korea has been moving up the rankings in recent years. In December 2019, the government launched a policy to further ramp up its competitiveness in the A&D sector. The policy includes breaking into new markets and increasing demand for inbound travel, financing aircraft acquisitions, cutting airport fees, and investing in local MRO enterprises. The policy also called for increasing the number of slots at Incheon International Airport to as many as 70 per hour, with preference to inbound carriers. The country is also investing heavily in innovation: Its R&D investment as a percentage of GDP is number one in the world — 4.8 percent in 2018, up steadily from 3.1 percent a decade earlier. The country’s defense industry is also on track to becoming a rapidly growing A&D export juggernaut. Toward this aim, South Korea continues to offer incentives for international industrial collaboration — particularly cross-border commercial ventures with foreign defense contractors.
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AEROSPACE MANUFACTURING ATTRACTIVENESS RANKINGS BY STATE Georgia climbed to the top ranking after being runner-up last year, continuing its position as a stalwart top-10 finisher in our index. The state ranked in the top 10 in all categories except labor, with its ranking in infrastructure rising to number one from 15. The state’s A&D workforce of 108,000 is employed by more than 800 aerospace companies. Aerospace products, valued at $10.8 billion, account for the state’s top exports and represent the second-largest manufacturing industry in the state, representing $57.5 billion in economic impact. Georgia also cut its top corporate income tax rate to 5.75 percent from 6 percent in 2019. Ohio ranked #2 among U.S. states this year, buoyed by its attractive corporate tax structure, healthy economy, and strong industry presence. This year, Ohio ranked number one in the tax policy category, up from eighth last year. (The state has no corporate income tax but does levy business taxes on gross receipts.) With an A&D workforce of 38,000, Ohio is also the largest U.S. state supplier to Boeing and Airbus. The state has an A&D ecosystem of more than 550 aerospace and aviation A&D organizations, including Battelle Air Force Research Laboratory, the Ohio Unmanned Aircraft Systems Center, and the NASA Glenn Research Center. Last year’s winner, Washington, ranked #3. Over decades, the state has developed a deep and wide A&D ecosystem that goes well beyond Boeing, with some 1,400 aerospace and
related companies. Washington is the country’s long-standing A&D hub, with some 100,000 workers. North Carolina, Indiana, Arizona, Michigan, and California remained in the top 10, while Texas and Florida returned to the top 10 in 2020. California ranks near the bottom in the categories of cost and tax policy. However, its very strong rankings in industry, economy, and labor helped the state achieve a top-10 rank. California’s aerospace industry, which is made up of approximately 850 companies, falls only behind Washington. Also, the presence of three NASA research centers and the Mojave Air and Space Port has encouraged the growth and development of the state’s sector. South Carolina was this year’s biggest gainer, soaring to #14 this year from a ranking of #29 last year. Tailwinds included improved rankings in the index’s tax policy, labor, and economy categories. The state is home to approximately 400 private enterprises employing some 19,000 workers — with 5,000 jobs created over the 2011–2019 period. Sales of aircraft exports totaled $12.4 billion in 2019, up 56 percent from the previous year.
CONTEXT B E H I N D T H E M E T H O D O L O G Y We emphasize that any methodology is imperfect; for example, there is no consistent data available for skilled manufacturing, a priority for the industry, but we were able to add a metric for ISO 9100 certifications in the state data for
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2020. Further, the data should be tailored to each company’s specific circumstances. Despite this, we believe our report is a useful tool that can be used as a framework to help evaluate investment decisions and as a guide for future strategy and planning. <>
Aerospace Industry Innovators Propelled to New Heights in Mississippi Mississippi remains at the forefront of the nation’s aerospace industry as leading, innovative companies continue to grow in the state, creating the high-tech, in-demand jobs of the future.
https://www.iata.org/en/pressroom/pr/2020-02-06-01/ https://dsm.forecastinternational.com/wordpress/2020/01/21/airbus-and-boeing-reportdecember-and-full-year-2019-commercial-aircraft-orders-and-deliveries/ 3 https://www.iata.org/en/iata-repository/publications/economic-reports/june-data-andrevised-air-travel-outlook/ 4 https://www.iata.org/en/iata-repository/publications/economic-reports/airline-industryeconomic-performance-june-2020-presentation/ 5 https://www.pwc.com/us/en/industries/industrial-products/library/aerospace-manufacturing-attractiveness-rankings.html 2
Universities in the state also are playing an important role in the aerospace industry. The FAA has designated Mississippi State University as a Center of Excellence for Unmanned Aircraft Systems, making it a hub of research that will integrate UAS into the industrial mainstream. In early August, MSU received a $1.42 million grant from the FAA for research, education, and training.
Relativity Space is the first and only While Mississippi plays an important company to integrate 3D printing, role in space exploration and has robotics, and software to design, for decades, the state’s aerospace build, test, and launch orbital companies also strongly support rockets in just days. In June 2020, the the U.S. military and its allies. In company once again expanded Relativity rocket testing at the Shannon, General Atomics recently at NASA’s Stennis Space Center in Stennis Space Center expanded again for the 12th time in Hancock County, Mississippi, home 15 years — a strong testament to the of the space agency’s largest rocket quality workmanship displayed by testing site. The $2.4 million investment the company’s employees. General Atomics is at the supports the growth of Relativity’s rocket vehicle and leading edge of Northeast Mississippi’s defense and engine testing capabilities. In 2019, Relativity expanded advanced manufacturing industries, where the company the F4 rocket engine test complex at Stennis, a $59 designs and builds its Electromagnetic Aircraft Launch million investment that is creating 190 jobs. Systems for the U.S. Navy and produces components for its Predator and Grey Eagle drones. Also at Stennis, NASA recently awarded Aerojet Rocketdyne a $1.79 billion contract for 18 additional Airbus Helicopters in Columbus recently was awarded RS-25 engines for its Artemis program, which aims to a $122.6 million contract by the U.S. Army for the return astronauts to the moon by 2024. The sophisticated production of 15 additional UH-72 Lakota light utility engines will be assembled and tested in Hancock helicopters. Airbus’ facility in Columbus has been County and will power the Space Launch Systems, which producing Lakotas for the U.S. Army since 2006 and has will carry astronauts even deeper into space. delivered hundreds of the technologically advanced helicopters on time, at cost, and meeting strict Army In January, Northrop Grumman announced an quality standards. expansion in Iuka to accommodate an increase in the production of large composite aerospace structures The state’s public-private partnerships work hard to for its Antares, Pegasus, and Minotaur launch vehicles ensure these companies and many more are positioned as well as United Launch Alliance’s Atlas V and Delta for years of long-term growth and success in Mississippi. IV launch vehicles. Among other work, the company Included in that list are industry leaders such as Rollsrecently started production of composite structures for its Royce, GE Aviation, Lockheed Martin, and Orbital ATK. new OmegA mid-to-large launch vehicle. Copy supplied by the MISSISSIPPI DEVELOPMENT AUTHORITY
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Disruption in the Automotive Industry By Dennis Cuneo
THE PANDEMIC IS YET ANOTHER OF A SERIES OF DISRUPTIVE EVENTS THAT HAVE IMPACTED THE AUTO INDUSTRY, BUT THE OUTLOOK IS BRIGHTER.
Nikola will build electric semi-trucks in a plant under construction in Arizona that will employ 2,000 people.
he COVID-19 pandemic shut down the entire U.S. auto industry in the second quarter of 2020 — the most dramatic decline in vehicle production since World War II. For automakers and their suppliers, preserving cash and enhancing liquidity became primary concerns, and discretionary capital expenditures were put on hold. That’s the bad news. The good news is that most of the plants have reopened, and pent-up demand — especially for trucks and SUVs — has brightened the outlook for the industry. For example, Ford recently announced a surprise profit for the second quarter (counting a one-time gain from an investment in an autonomous driving technology company), and its overall results were better than projected. In general, many of the automakers and parts suppliers reporting earnings for the second quarter have a consistent story: the worst is over, and they are cautiously optimistic that sales will increase, but it will take some time for sales to reach pre-pandemic levels. Even as the pandemic has disrupted the industry, automakers continue to move forward on vehicle electrification and the development of autonomous vehicles. They are also taking a hard look at their supply chains for their North American operations because of pandemic-related concerns about relying on overseas supply and the impact of the new trade agreement, the USMCA, that replaces NAFTA.
ELECTRIFICATION OF VEHICLES CONTINUES TO ACCELERATE The most valuable automaker in the world today, based on the value of its pub-
licly traded stock, is the electric-vehiclemaker Tesla. While the stock prices of the traditional automakers fell during the pandemic, Tesla’s soared. Electrification of vehicles has reached the tipping point. Although the transition from internal combustion engine vehicles (ICEs) to electric vehicles (EVs) will take time, the adoption of EVs will accelerate as the technology improves and becomes cheaper, and as governments around the world carry out plans to eliminate the ICE. In a recent forecast, BloombergNEF1 projected that EVs will hit 10 percent of global passenger vehicle sales in five years and rise to 58 percent in two decades. EV sales in the United States will likely rise at a slower rate — with projections ranging between 10 percent to 15 percent over the next decade. But even at the low end of the projection range, by 2030, over 1.5 million EVs will be sold here — increasing the demand for battery plants, chargers, inverters, electric motors, and all of the other parts and infrastructure required to support those sales. All of the major automakers have announced plans to spend billions to electrify their fleets and are rapidly adding new EV models. Well-funded new entrants, such as Rivian, Nikola, and Lucid Motors, are constructing new EV plants. There are EV assembly and battery plants either in production or under construction in 11 states: Alabama, Arizona, California, Georgia,
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Illinois, Michigan, Nevada, Ohio, Tennessee, Texas, and South Carolina. More EV assembly plants and battery plants are on the way, and the economic impact will be substantial. Automotive News2 calls the battery the “billion dollar” automotive part. The largest battery plant in the United States — the Tesla/ Panasonic Gigafactory in northern Nevada — employs more than 7,000 people and represents an investment in excess of $6 billion. It has transformed the economy of the Reno area.
and in the process are opening up opportunities for communities with formerly shuttered auto plants (e.g., Rivian and Lordstown Motors) and in states that previously weren’t players in the vehicle industry (Nevada and Arizona).
AUTONOMOUS VEHICLE DEVELOPMENT CONTINUES
In addition to electrification, traditional automakers and high-tech companies continue to move forward on developing autonomous vehicle systems. While the pandemic may have temporarily slowed down some of these efforts, Here’s a summary of the major EV assembly including the interruption of testing efforts and suspension of and battery plants under construction: capital expenditures to conserve cash, there is little question that the move toward autonomy will continue. Tesla is building a $1 billion factory in Texas that will proAutonomous vehicles have quickly moved duce its new Cybertruck and will employ 5,000 from novelty items developed by Silicon Valley people. Together with its Nevada Gigafactory and tech companies to mainstream products under its Fremont assembly plant, Tesla will eventually development by the traditional automakers. employ over 20,000 people building EVs and Silicon Valley giants, such as Apple and Google’s batteries. Waymo division, are spending billions and using SK Innovation, a Korean battery company, their software expertise to accelerate the develis building a $2.6 billion battery plant in Georgia opment of autonomous vehicle systems. that will employ 2,000. Numerous startup companies are working on Ultium, a joint venture between General various aspects of autonomous hardware and Motors and LG Chem, is building a $2.3 bilELECTRIFICATION, software. Self-driving startup Argo AI, based in lion battery plant in Ohio that will house 1,100 AUTOMATION, Pittsburgh, Pa., was recently valued at $7.5 billion employees. AND THE NEW — and its largest investors are Ford and VolkswaLordstown Motors will begin building USMCA PRESENT gen. Argo is focused on developing an autonoelectric pickup trucks at the former GM LordCHALLENGES mous driver system, including the hardware and stown assembly plant and will eventually employ AS WELL AS software for self-driving vehicles. 1,000 people. The company entered into a $1.6 OPPORTUNITIES The speed with which autonomous vehicles billion merger agreement with a Special Purpose FOR AUTOwill be adopted is a hot topic in the industry. Acquisition Company (SPAC) and expects to go MAKERS, THEIR Several of the traditional automakers and tech public on the NASDAQ later this year. PARTS MAKERS, companies working on autonomous systems have Rivian will build electric pickups and SUVs in AND THE cautioned that full autonomy — Level 5 autonthe former Mitsubishi plant in Illinois, with a tarCOMMUNITIES omy — will be a long journey. But development get employment of 1,000 by 2024. The company THAT HOST efforts have accelerated. Waymo’s autonomous has raised close to $5 billion and counts Amazon THEM. vehicle technology has logged over 20 million and Ford as major investors. miles of real driving testing and 10 billion miles Lucid Motors began construction of its of simulated testing. Waymo’s fleet of self-driving $700 million plant in Arizona last December Chrysler Pacifica minivans are chauffeuring pasto build an all-electric sedan. Last year, Lucid sengers in the Phoenix area, without a person bereceived $1 billion in funding from Saudi Arabia’s hind the wheel, as featured on a recent YouTube sovereign wealth fund. video.3 Nikola will build electric semi-trucks in a plant under construction in Arizona that will employ 2,000 Amazon recently upped the ante in the self-driving race individuals. After being acquired by a SPAC in June, Nikola by acquiring Zoox, a self-driving startup that has developed began trading on the NASDAQ. At one point, its stock market a bi-directional vehicle with no steering wheel. Amazon has capitalization exceeded Ford and FCA, but has since dropped made other investments in the self-driving space and reportto a still impressive $14 billion in early August. edly is experimenting with self-driving trucks to ship cargo. Investors are pouring billions of dollars into EV startups, GM’s Cruise unit recently unveiled a self-driving vehicle, and
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as mentioned above, Ford and VW are major investors in Argo AI. Automated vehicles may one day alleviate projected labor shortages in the over-the-road trucking industry and can curb the spread of disease in future pandemics by enabling deliveries without human contact. The primary benefit of autonomous driving is the reduction of accidents, injuries, and deaths caused by vehicles driven by distracted or impaired drivers.
REGIONALIZING SUPPLY CHAINS The combination of the pandemic and the newly enacted USMCA is causing automakers in North America to rethink their global supply chains. The pandemic put global supply chains at risk, as parts plants around the world shut down. The USMCA, the successor trade agreement to NAFTA, is expected to increase vehicle parts sourcing within North America. The new agreement, one of the milestones of the
Trump administration, took effect in July. Under the USMCA, to qualify for tariff-free trade among the three countries, 75 percent of the finished vehicle content must be sourced in North America — an increase from NAFTA’s 62.5 percent content requirement. At least 40 percent of the manufacturing labor of the finished vehicles (45 percent for trucks) must be made at a wage rate of at least $16 per hour. In addition, 70 percent of the steel and aluminum used in auto production must be made in North America. The wage and metals requirements are new provisions that weren’t in NAFTA. The expected impact of the USMCA is that more auto parts and materials will be sourced within North America and the United States. For economic developers in the United States, this likely means more investment and jobs in the auto sector. <> 1 2 3
https://about.bnef.com/electric-vehicle-outlook/ https://www.autonews.com/suppliers/billion-dollar-part https://www.youtube.com/watch?v=2hqTnmn51Fg
The New Normal Continued from page 8 Part of that planning to boost preparedness ahead of what seems to be inevitable supply chain disruptions will be mapping out your supply chain. Think not only about where you acquire your parts and materials, but where the companies that you buy parts from will buy their parts. The first time around, this analytical effort will require significant research, but subsequent updates will become easier thanks to that initial heavy lift. The key is to reach out directly to your suppliers to identify the layers in the supply chain, finding out what parts are sourced and from whom and where. The results can be surprising, especially when you discover the tier 2 or 3 suppliers are not in the same countries. Hope is not a plan, and all businesses are wise to think about their worst-case scenarios regularly, but even doing that can still leave you exposed, albeit less vulnerable to disruptions.
THE NEW NORMAL OF SUPPLY CHAIN In the meantime, the auto industry will remain in a state of flux. We’re already seeing how shortages have reduced vehicle inventories, elevated auto prices, and killed off incentive programs that were ubiquitous just a few months ago. Even with reduced production, suppliers have not been able to keep up. Add in unemployment and shaky consumer confi-
dence, and the COVID-19 era is bound to favor companies that can adjust to the new environment. OEMs like Toyota, Honda, and Hyundai, which have more integrated supply chains and a track record of less expensive vehicles, will have an advantage over their competitors. Expect supplier consolidation to rise in the coming months. Lean manufacturing was built on the concepts of level, stable, and smooth. Nothing about the current climate meets that criteria. Suppliers must now operate at lower volume and higher labor costs, further burdened by the expense of shutting down and cleaning when outbreaks occur. Some have been temporarily propped up by government aid. But as that money dissipates and financial pressures heighten, lower valuations will mean discount shopping for strategic buyers seeking to expand their footprint. Auto supplier leadership will need to consider the uncomfortable calculus of how their business’ valuation might degrade in a variety of possible scenarios. No one can be certain how long all this will last, but to assume the industry will return to normal next year is unrealistic. That means now is the time to start making plans to position yourself for whatever’s to come. After months of outbreak with little sign of reprieve, this will be the new normal for some time to come. <>
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