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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 considerations, 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 Rankings 5 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
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.
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,
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.
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 BEHIND THE METHODOLOGY
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
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. <>
1 https://www.iata.org/en/pressroom/pr/2020-02-06-01/ 2 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
Aerospace Industry Innovators Universities in the state also are playing Propelled to New Heights an important role in the aerospace in Mississippi industry. The FAA has designated Mississippi State University as a Center Mississippi remains at the forefront of Excellence for Unmanned Aircraft of the nation’s aerospace industry Systems, making it a hub of research as leading, innovative companies that will integrate UAS into the continue to grow in the state, creating industrial mainstream. In early August, the high-tech, in-demand jobs of the MSU received a $1.42 million grant future. from the FAA for research, education, and training. Relativity Space is the first and only company to integrate 3D printing, While Mississippi plays an important robotics, and software to design, role in space exploration and has build, test, and launch orbital for decades, the state’s aerospace rockets in just days. In June 2020, the companies also strongly support company once again expanded the U.S. military and its allies. In at NASA’s Stennis Space Center in Hancock County, Mississippi, home Relativity rocket testing at the Stennis Space Center Shannon, General Atomics recently expanded again for the 12th time in of the space agency’s largest rocket 15 years — a strong testament to the testing site. The $2.4 million investment quality workmanship displayed by supports the growth of Relativity’s rocket vehicle and the company’s employees. General Atomics is at the engine testing capabilities. In 2019, Relativity expanded leading edge of Northeast Mississippi’s defense and the F4 rocket engine test complex at Stennis, a $59 advanced manufacturing industries, where the company million investment that is creating 190 jobs. designs and builds its Electromagnetic Aircraft Launch Systems for the U.S. Navy and produces components for Also at Stennis, NASA recently awarded Aerojet its Predator and Grey Eagle drones. Rocketdyne a $1.79 billion contract for 18 additional RS-25 engines for its Artemis program, which aims to Airbus Helicopters in Columbus recently was awarded return astronauts to the moon by 2024. The sophisticated a $122.6 million contract by the U.S. Army for the engines will be assembled and tested in Hancock production of 15 additional UH-72 Lakota light utility County and will power the Space Launch Systems, which helicopters. Airbus’ facility in Columbus has been will carry astronauts even deeper into space. producing Lakotas for the U.S. Army since 2006 and has delivered hundreds of the technologically advanced In January, Northrop Grumman announced an helicopters on time, at cost, and meeting strict Army expansion in Iuka to accommodate an increase in the quality standards. production of large composite aerospace structures for its Antares, Pegasus, and Minotaur launch vehicles The state’s public-private partnerships work hard to as well as United Launch Alliance’s Atlas V and Delta ensure these companies and many more are positioned IV launch vehicles. Among other work, the company for years of long-term growth and success in Mississippi. recently started production of composite structures for its Included in that list are industry leaders such as Rollsnew OmegA mid-to-large launch vehicle. Royce, GE Aviation, Lockheed Martin, and Orbital ATK.
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