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Business risks in this inter-connected world: Aerospace and Defense

The Indian Context
An Original Equipment Manufacturer (OEM) is a company that produces parts and equipment that may be marketed by another manufacturer. The major OEMs, Tier 1 suppliers, Raw Material and Chemicals suppliers at the end of supply chain, are all based outside India leaving a limited scope for local suppliers who operate as Tier 2 and Tier 3 suppliers. This gets further limited in scope due to multiple and complex capabilities and capacities mix required to cover full length and breadth of components manufacturing involving desperate manufacturing technologies for machining, composites, sheet metals, forming, forgings etc.

Indian suppliers have to compete with well entrenched and established global suppliers who are already part of existing and a mature supply chain base near to OEMs and Tier 1 manufacturing set up. Due to this weak business positioning, Indian suppliers end up cornering small and low volume program components. In addition, profit margins also get further affected with currency fluctuations. 

Aerospace and defense requires long-term investment for sustained business growth. Upfront investment in capabilities and capacity development, customer approval, product development, First, article Product approvals to gradually fill order pipeline, necessitates long term investment at least in the first five years resulting in poor ROI in most cases. In subsequent years also, moving up in value chain requires continued add on investments affecting profitability hence need to acquire high volume /value programs and packages for business sustainability.

Due to 49% equity holding restrictions, foreign players with proven technologies and capabilities may be less  enthused to participate and set up manufacturing base in India leading to slow paced capabilities development and incremental evolution of entire supply chain ecosystem in India.

The top three business risks impacting Aerospace and Defense Industries 

1-    Disruptive Technologies
With disruptive changes in the areas of composites, additive printing, assembly automation etc. the manufacturing technology is rapidly becoming obsolete hence capacity built for ongoing program and packages with present technologies are at risk and would necessitate continued high investment in technology and its adaptation. 

There are only few high-volume programs running in the world. Older products have reduced future demands. This results in chasing for small orders from multiple customers which can be aggregated and produced with the existing resources and capacities to remain profitable. This poses a business risk due to thin order pipeline.

Being nimble, gradual investment for future expansion and developing key suppliers for outsourcing processes forms a first layer of hedging business risks. Caution and patience is the mantra. Further, developing and expanding customer base from multi sectors (requiring similar capabilities like automotive, medical etc.) to build strong and complementary order book can further de-risk business but at a cost of increasing complexity in operations. Continuous engagement with customers and various technology partners help in planning for the future investment for expansion of capacities and capabilities thus enhancing manufacturing footprint. 

2-    Skill and Talent management 
Continuous investment in selection, retention and development of talent pool to meet present and future business need, amidst rising aspirations and expectations, pose a great challenge on maintaining profitability in a scenario of "fixed rate long term contracts" due to rising manpower cost and inflation.

Availability of requisite specific skill is critical to meet quality and delivery commitment as company scales up it operation with addition of new capabilities. This gets further aggravated due to poaching from competitors. 

Transparency, engaging and challenging employees to take higher job responsibilities, continued communication and experimenting with flexi teams for various project work helps in maintaining talent pool in the company. A few others steps help in mitigating the business risks further.

.     Job enrichment and job rotation for key employees.

·      Development and growth plan for individual employees 

·      Encourage employees for higher studies to enhance their capabilities.

·      Build employee loyalty through retention initiatives to select key employees 

·      Salary increase commensurate with prevailing industry levels 

·      Succession planning  

3-    Security of Business Information System 
All the business processes from concept-to-service are increasingly becoming digital. Each activity is getting integrated and linked to various hardware’s and software’s inside and outside of the company. Outsourcing and various service providers are continuously interacting with organisations across various levels and engagement. In this business scenario following risks are envisaged 

·      Damage to business furtherance due to loss of proprietary information / techniques.

·      Loss of commercially sensitive information.

·      Damage to process equipment due to vandalism, etc.

·      Total collapse of business due to collapse or vandalism of IT systems.

·      Corruption of data due to inadvertent virus infection.

·      Theft of vital business information.

In light of the above, multiple mitigation actions are planned and implemented

·      Signing of Non-Disclosure Agreement with employees at the time of joining.

·      Thorough control, recording, data update and frisking to mitigate the data pilferage 

·      Backup and Disaster recovery plan in place in case of contingency. 

·      Firewall, antivirus program and update process followed throughout the company including individual work stations and devices per corporate policy.

·      Enabling of control systems to give access to server to only valid users with logins and password. 

·      Disabling of all USB drives to prevent data copying in USB devices.

·      All hardware’s and software’s comply with safety and security requirements.

·      A culture of trust and openness is being generated among employees.

In addition to the above, beyond business risks and their mitigation, business growth orientation is critical for Aerospace and Defense Industries in India considering huge opportunity of $100 billion for import substitution and Make in India. This requires policy support through joint envisioning and hand holding by Indian Government due to strategic and economic importance. A complete ecosystem requiring multi billion dollars’ investment need to be created through Public-Private-Government partnership. This is critical for continued order pipeline for a sustainable business. Government support in terms of bearing development cost for strategic defense projects will go a long way to develop critical capabilities and skills in India. 
 

Disclaimer: The thoughts and opinions expressed here are those by the contributors alone and do not represent the views of any other organisation, the forum moderator or that of Aei4eiA.

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Dr. Harish Pant,

Managing Director,

Hampson Industries Private Limited.

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