Two Contrasting Events: Brexit and the Expanded Panama Canal Add New Dimensions for Active Planning- Part One
It’s the last Monday in June and as we pen this advisory commentary two major developments over these past few days are going to have a definitive long-term impact on various industry supply chains. One is the unexpected results of the referendum by voters in the United Kingdom endorsing an exit from the European Union. The other is yesterday’s formal opening of an expanded Panama Canal. Supply Chain Matters features two commentaries related to both developments. We begin with the Brexit vote.
The results of the Brexit referendum took many by surprise, including this author. On Friday, alone investors wiped away nearly $2 trillion in market value from various global equity markets in reaction to the news.
By voting to exit the EU, British voters have set off a series of events that many are describing as unprecedented. The most cited analogy seems to be- “unchartered waters and political events.” Such uncertainly not only surrounds the direct impact on the U.K., but on the EU alliance itself if other select countries take a similar course. Some fear the unwinding of Europe itself, which seems somewhat extreme at this point. However, it will add more political and governmental dimensions to this ongoing crisis, along with building pressure to accelerate Brittan’s exit to stave-off other efforts at similar separation.
Many of the implications currently reflect such uncertainty and caution. After all, the timeline of Brittan’s exit would likely span two or more years. None the less, there will be short and longer term industry supply chain impacts and various supply chain and S&OP teams need to begin thinking about and educating management on certain strategy scenarios. We view these impacts coming from specific industry, trade and transportation as well as people related dimensions.
Two major industries dominating UK based manufacturing are automotive and aerospace industry, the latter being focused primarily in commercial aircraft component manufacturing.
Two of the most dominant stakeholder brands of autos in the UK are Volkswagen and Tata Motors, The latter is currently the leading car maker in sales of various VW, Audi and Porsche branded vehicles and has a significant manufacturing presence in these brands as well as that of Bentley. For VW, the news is especially troubling given its current crisis for dealing with the financial and brand fallout stemming from the diesel emissions scandal across Europe and the United States. It adds yet another challenge to protecting its market interests. Tata Motors is the producer of Jaguar and Land Rover branded vehicles and the U.K. represents its single biggest market and source of profits. The shares of both of these manufacturers were impacted by the news of the exit EU mandate.
According to published business media reports, most global auto manufacturers seem to be collectively in reassessment mode regarding their current UK based operations. Concerns center on impacts on tariffs, uncertain currency fluctuations and the local market, as U.K. consumers themselves deal with new uncertainties and any economic consequences related to exit. According to a published report by The Wall Street Journal, registrations for new autos amounted to 18.5 percent of all European registrations last year. The WSJ cites forecasting firm data indicating that there could be as much as an $8.9 billion hit to auto OEM earnings and a nearly 14 percent decline in U.K. new car registrations in 2017. With the broader European auto industry coming off multiple years of retrenchment and downsizing as a result of the past global financial crisis, news of the UK exit, coupled with potentially other subsequent impacts, has many industry executives at-pause.
According to Wikipedia, the aerospace industry within the U.K. is the second- or third-largest national aerospace industry in the world, depending upon the method of measurement. The industry employs around 113,000 people directly and around 276,000 indirectly and has an annual turnover of around £25 billion. Domestic companies with a large presence include BAE Systems (the world’s third-largest defense contractor), Britten-Norman, Cobham, GKN, Meggitt, QinetiQ, Rolls-Royce (the world’s second-largest aircraft engine maker), and Ultra Electronics. External companies with a major presence include Boeing, Bombardier, Airbus, Finmeccanica, General Electric, Lockheed Martin, Safran and Thales Group. From our lens, the most significant company to watch will be that of Rolls Royce which was already struggling with growth and profitability challenges. Many of these providers exist in supply chain ecosystems being challenged to ramp-up production but at the same time, reduce overall costs. With such presence from many component manufacturers and actual commercial and military aircraft producers the open question is whether the reliance on a local currency and broken ties with EU trade policies will have an impact on the economics of the local industry. Only time will tell if they do.
From the independent trade and transportation lens, we had already predicted at the beginning of the year that major geopolitical developments centered on global trade agreements would present new concerns and challenges for industry supply chains. With a U.K. exit from the EU, industry supply chains need to factor another border crossing in their logistics and transportation plans, not to mention the potential for different tariffs or duties to emerge.
With major trade pacts such as the Trans Pacific Partnership (TPP) and the Transatlantic Trade Investment Partnership (T-TIP) still in ratification stages, a new unknown is entered, namely the U.K. as a separate negotiating party. With many pushing for quicker ratification because of the current anti-trade political environment, these agreements could be faced with having to factor the U.K. as an unknown until exit is achieved and new trade policies adopted, not to mention a possible change in political leadership. The implication extends to product labeling, country of origin, intellectual property protection and other unknowns at this point.
Finally there is the issue of people, both in talent attraction and retention. An advisory from CBI Insights notes- “The free movement of workers between the U.K. and the EU arguably made London into a top tech startup talent pool in all of Europe. The decision to leave the EU may cause a brain drain that could hamstring innovation in London.” Some others take issue with the notion of brain drain. However, multiple industry supply chains have already been impacted by the need for new talent and as supply chains become deeper invested in new technology needs and requirements, UK based producers, service firms and tech companies will need to assure that workers will find the U.K. economically and workplace attractive.
Brexit has ongoing implications beyond the U.K. that could conceivably impact other geographic regions, specific countries and industries. We advise supply chain and line-of-business teams to take on a precautionary approach towards any impacts brought about by Brittan’s exit from the EU. Rather than alarm, now is the time for active supply chain modeling and scenario planning to advise senior management of various business or financial implications, if any? Clearly, with overall global supply chain activity levels already trending toward contraction, and with this new politically active and vocal electorate, the global economy and global markets are becoming less uncertain. This is a time of constant strategy awareness and attention to needs for contingency planning with added visibility to ongoing global events. We highly recommend that industry teams be vested in market and industry intelligence, supply chain risk mitigation and technology that brings added intelligence and insights to both customer-facing and supply-facing operational, financial and global trends.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.
For the commercial aircraft industry and its respective supply chains, a consistent track record of new aircraft development and production release program delays unfortunately remains the same.
To add to its other program woes, Airbus announced this week that initial delivery of its planned A350-1000 model long-range aircraft will slip another year. The initial test flight, originally scheduled for about this time, is now not expected until after September. Indications are that initial deliveries of this new aircraft to launch customer Qatar Airways are not expected until the second-half of 2017.
In a statement, Airbus indicated: “.”We have adapted the A350-1000 schedule to ensure we fully satisfy our customers’ requirements for a mature aircraft from day one.” The manufacturer further added that it would put adequate resources in place to achieve program milestones.
According to business media reports, the first three test aircraft are currently in the final assembly stage. From that fact alone, we suspect that delays have more to do with the readiness of the supply chain to be able to scale to initial productions levels. To date, Airbus has reportedly booked 181 orders from 10 airline customers for this new model, the largest long-range aircraft offering for Airbus.
The 1000 model is the longest-fuselage version of Airbus’ new A350 family of wide-body jetliners. With this design and configuration, the aircraft can accommodate a range of from 366-440 passengers, which means lots of seat per plane. An ongoing constraint in wide-body supply chains has been availability of airline seats in-volume. Powering the A350-1000 will be a higher-thrust Rolls Royce Trent XWB engines from which will allow this largest model to attain even greater levels of fuel efficiency. Newer models of more technologically advanced aircraft engines have had their share of ongoing ramp-up problems as-well.
The program itself has had its ups and downs including in December of 2014, an announcement of a last-minute sudden delay in the initial delivery to launch customer Qatar Airways only to change that two days later. Since that time, the European based aircraft producer has experienced continual delays in its ability to support planned volume production of this model. As noted in a related posting last week, subsequent deliveries of new A350 model aircraft remain impacted due to adequate supply of cabin seating and interior equipment. Plans called for delivery of a total of 50 aircraft in 2016, but Airbus has managed to deliver only 10 so far this year due to the supply delays. There are a reported 40 of this aircraft in various stages of final assembly and Airbus has augmented production with added work stations to get late delivered cabin equipment installed as quickly as possible.
The ongoing tense customer relationship among Airbus and Qatar that dates back to the scheduled initial delivery of the A350 family now takes on more dimensions since Qatar had contracted for initial deliveries of the 1000 model starting this month. No doubt, Qatar’s candid and direct CEO will have the last word regarding this latest delay announcement.
While the latest Airbus program delay was probably motivated by prudence in assuring complete readiness of the supply chain, it does reflect and industry track record of continually underestimating the scope of program and supply chain challenges. With more and more major system components being outsourced to global based suppliers, aerospace supply chains seem to constant underestimate the ramifications and added requirements for increased design and production process coordination with major suppliers. What has not helped is an industry environment where booked orders far exceed available capacity placing more pressure of suppliers to meet aggressive milestones from multiple global manufacturers. Add to that, increased pressures for reduced costs and higher efficiencies and you get the picture of conflicted goals and priorities.
The A350 situation does not currently compare with the ongoing delivery delays with Boeing’s 787 Dreamliner program that has now amassed a reported $28 billion in ‘deferred production costs” because of continued multi-year delays in customer deliveries. None the less, the track record of missed program milestones and lack of supply chain readiness continues across most manufacturers.
In a recent Supply Chain Matters commentary, we highlighted that Airbus’s commercial aircraft delivery cadence was under a broader looking glass with perhaps undesired customer visibility. That visibility took on a more succinct perspective last week with the announcement of a customer order cancellation from none other than the Airbus A320neo launch customer.
Reports indicate that Qatar Airways has invoked a cancellation clause in its contract with Airbus for canceling one of a total of 50 A320neo family aircraft.
What makes this development more newsworthy are statements from the airline’s chief executive indicating that the airline could potentially cancel more aircraft orders, and further declaring to The Wall Street Journal: “It is (delayed deliveries) making a huge impact on my bottom line. We are, quite frankly, screaming.”
That is a statement that any aircraft manufacturer does not want to hear from a customer, let alone the designated and highly influential launch customer.
In January, because of undisclosed documentation and other issues, Airbus quickly changed initial delivery of the first A320neo off the assembly line to substitute customer Lufthansa when Qatar refused to accept initial delivery because of performance concerns.
Fabrice Bregier, head of Airbus’s commercial aircraft group acknowledged to the WSJ the aircraft’s lateness to original promise of delivery which was originally due for delivery in 2015. However on Friday, the same executive indicated to Reuters that the current delivery issues would be resolved by mid-year and the problems would be forgotten in months.
Perhaps the context of the latter statement was not exactly ideal given ongoing customer concern and sensitivities.
As we have noted in prior commentaries, the bulk of the contract delivery delays relative to the A320neo are not solely in Airbus’s court, and our shared with aircraft engine producer Pratt & Whitney. According to published reports, Pratt has struggled to get the new model engine up to required delivery milestones due to a reported turbine glitch and other software issues causing premature or false alert messages. Engine deliveries are not expected to catch-up until after June.
Meanwhile, similar to previous actions related to the Boeing 787 Dreamliner lithium ion battery crisis, a reported two-dozen completed A320neo aircraft continue to pile-up in parking areas located in Toulouse France and Hamburg Germany awaiting engine delivery and installation creating what one Airbus executive cited as a queue of “gliders.”
The latest published reports further indicate that Airbus will now attempt to make-up for the shortfall in 2016 delivery volume of A320neo aircraft by bringing forward deliveries of the existing version of the aircraft, now termed A320ceo (current engine option). Cudos to the Airbus marketing team for their novel re-branding.
In essence, Airbus and certain airline customers may trade-off the current low prices of jet fuel to gain earlier delivery of new aircraft rather than wait for the promised fuel efficiencies of the new engine option. The other new engine offering, the new LEAP model from CFM International is expected to be available in the second-half of this year as-well.
A tense launch customer relationship had already existed among Qatar and Airbus dating back to the scheduled initial delivery of the new Airbus A350 XWB aircraft. As noted previously, subsequent deliveries of new A350 model aircraft remain impacted due to adequate supply of cabin seating and interior equipment. Plans called for delivery of a total of 50 A350 aircraft in 2016, but Airbus has managed to deliver only 10 so far this year due to the supply delays. There are a reported 40 of this aircraft in various stages of final assembly and Airbus has augmented production with added work stations to get late delivered cabin equipment installed as quickly as possible.
The takeaway is obvious apparent strained and perhaps tense relationships involving an influential Middle East based airline customer, perhaps other customers, and certain suppliers. Unfinished aircraft sitting idle in all available spaces within manufacturer host airport tarmacs is of course a monument to supply chain glitches and disruption.
Once again, the commercial aircraft industry dominates business media headlines with product design and supply chain management glitches that are impacting delivery commitments, and it seems that no manufacturer is immune.
This week, The Wall Street Journal confirmed what many existing suppliers residing within the Airbus supply chain probably know, that the commercial aerospace firm continues to be challenged in consistency in supply chain customer fulfillment.
The report, Airbus Tackles its Procurement Procrastination Woes, (Paid subscription or complimentary metered view) reports that Airbus executives are trying to end what has become an annual rite, the end-of-year hockey-stick effort to fulfill its annual target for customer airplane deliveries. Noted is that last December, commercial aircraft manufacturing delivered 79 aircraft in a single month representing about 12 percent of its annual total. However, these all-hands, round-the-clock efforts take an annual toll on manufacturing and supply chain resources, causing the New Year to get started on a muted rate.
Thus far through April, the company has delivered only 177 planes, just 27 percent of its annual committed output volume. As noted in prior Supply Chain Matters postings, deliveries of the new A320neo model single-aisle aircraft have shifted to June to allow engine provider Pratt and Whitney more time to correct some last-minute design and production issues. Additionally, the WSJ indicates that only four of the brand new A350 long-range jets have been delivered in the first quarter amidst supplier problems.
The company’s COO of commercial aircraft acknowledged to the WSJ the ongoing frustration and that: “we need to do better.” The report further indicates that the company is exploring further means to change the way airplanes are manufactured in a more predictable manner, language that often translate to additional manufacturing automation.
Both Airbus and rival Boeing face very aggressive supply chain and final manufacturing ramp-up targets over the next 3-4 years in order to meet both customer delivery expectations and aircraft program cash-flow milestones. At the end of April, Airbus reported net cash outflows of $3.37 billion largely as a result of delayed aircraft deliveries. In many cases, suppliers are not paid until finished aircraft are delivered to customers. Boeing is not immune to same challenges, having recently announced a series of significant job cuts and additional cost reduction initiatives.
Commercial aircraft supply chains thus remain in this unique quandary- upwards of 8-10 years of customer order backlog, but at the same time, enormous and continually building challenges in the ability to meet unprecedented supply chain and manufacturing output cadence.
Truly unique with its own set of dynamic challenges.
In the light of our previous posting related to Airbus and Boeing continuing to experience supply chain production scale-up challenges, we turn some attention to new news related to Bombardier’s C-Series program.
For the past several years Supply Chain Matters has highlighted Bombardier’s C-Series aircraft program, particularly challenges related to gaining market attraction as a viable alternative to more technology advanced single-aisle commercial aircraft needs. This effort placed Bombardier in direct competition with the Airbus A320 and Boeing 737 for new commercial airline orders. In 2013 Supply Chain Matters declared that the C-Series could indeed be a competitor.
A series of multi-year program setbacks and lack of substantial customer orders have resulted in building financial loses and questioning whether the aircraft would indeed make any mark. The aircraft is powered by the new geared turbofan technology provided by Pratt & Whitney which has experienced its own start-up design and production challenges. Upwards of $3.2 billion have already been written off from the program. Now, there are some signs of life amid some important new orders.
Last week, Delta Airlines agreed to acquire 75 of the CS100 model aircraft with options for an additional 50 aircraft, along with agreeing to serve as the U.S. launch customer. Delta additionally has the option to convert some of the latter orders to the large CS300 model. The firm order was valued at $5.6 billion in U.S. dollars and was characterized as possibly providing some measure of street credibility for the C-Series program. In announcing the order, Delta’s CEO indicate that the airline’s decision brings the C-Series as a third option in the mainline aircraft marketplace.
Deliveries are expected to begin in the spring of 2018 and Delta now represents Bombardier’s largest commercial aircraft customer. Delta announced a new order for Airbus A321 jets as well. Industry watchers and executives indicate that Delta was able to negotiate a very attractive financial deal for the C-Series jets. According to Delta, the CS100 will provide better fuel efficiency and a 30 percent improvement in maintenance costs over Delta’s existing Boeing 717 aircraft fleet.
Last week Bombardier reported year-over-year revenue and profitability declines. According to business media reports, the C-Series is not expected to reach a break-even cash flow basis until 2020. The company remains saddled with a large debt load as-well.
With the new Delta order, the diversified transportation equipment manufacturer has secured 325 firm orders for both the CS100 and CS300 aircraft, including airline customer Lufthansa and its Swiss International unit. According to business media reports, the company is still awaiting a commitment from government owned Air Canada for 45 jets, amid some threats of violation of World Trade organization prohibiting direct subsidies of aerospace by domestic governments. The company is seeking financial aid from Canada’s federal government but those talks remain uncertain. Bombardier has raised $2.5 billion since October after agreeing to sell almost half of its take in the C-Series program to the Quebec government as well as selling a stake in its train-making operations to a Quebec pension fund.