Insert Title Here

Key Trends In Commercial

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 Insert Bullet Text Level 1 Here Aerospace Supply Chains

– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here
Dr. Kevin Michaels

2017 Global Supply Chain Summit

4 April 2017 Montreál, Québec

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 Insert Title Here
Agenda
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• Insert Bullet Text Level 3 Here Supply Chain - A Brief History

Supply Chain Outlook

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 The two major aircraft supply
Insert chains
Title consist of several tiers
Here
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Aerospace Supply Chain Structure
 Insert Bullet Text Level 1 Here
– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here Aeroengine Design
OEMs Aircraft Aeroengine
Aircraft Systems OEMs OEMs IP/ Aftermarket
Design
Systems & Modules &
IP/Aftermarket Tier 1 Major Major
Structures Components
Parts & Parts &
Tier 2
Subassemblie Subassemblie
s s

Tier 3 Make-to-print parts & components

Tier 4 Raw materials, forgings, castings,

extrusions, hardware

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Source: and/or
AeroDynamic Notes
analysis Here
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 Jetliner supply chains Insert
have evolved
Title considerably
Here since the 1970s
Commercial Aerospace Supply Chain Trends
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1980s 1990s 2000s 2010s
 Insert Bullet
Aircraft Text Level 1 Here

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Self-sufficiency
Traditional model Regional jet OEMs adopt Tier 1 model
• Insert Bullet Text Level 3 Here
Global Express EJet
Boeing & Airbus Tier
First Tier 1 model Tier 1
1
Power8 787 PFS
Aeroengines
Traditional supply chain, risk sharing

Supplier reduction, Tier 1 adoption

GTF
LEAP Selective GE
vertical
integration

Low cost sourcing

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 Bombardier pioneeredInsert
the Tier Title
1 supply chain model in the 1990s
Here
InsertSupply
Aircraft Subtitle
ChainHere
Models

 Insert Bullet Text Level 1 Here

Legacy Model Tier One Model
– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here
OEM OEM

Tier I Tier I Tier I

Bombardier Global Express – Tier 1 pioneer in early 1990s

• Brought in 10-12 risk sharing partners with large work packages

• Reduced NRE $1B  $600 million
• Embraer embraced Tier 1 later in the decade (EJet)

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Source: and/or
Bombardier Notes
interview Here
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 Embraer, Airbus and Rolls-Royce followed
Insert Title Herewith Tier 1 approaches
Insert Subtitle Here
EJet
 Insert Bullet Text Level 1 Here • < 40 major suppliers
– Insert Bullet
NumberText LevelSuppliers
of Major 2 Here • 90% reduction compared to ERJ
• Insert Bullet Text Level 3 Here
OEM Model EIS Major
Suppliers
A350XWB
A380 2007 200
Airbus
A350XWB 2015 90 • 200 major suppliers on A380
EMB 145 1997 350
• Reduced to ~90 on A350XWB
Embraer
EMB 170/190 2004 38

Rolls- Trent 700 1994 ~500

Royce Trent XWB 2015 50 - 75 Trent XWB

• Reduced suppliers 80-90%

• Auto supply chain practices

Sources: AeroDynamic,
Insert Source and/orRolls-Royce
Notes Hereinterviews, AeroStrategy, Oliver Wyman
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 Then Boeing’s disastrous
Insert 787 supply
Title Here chain rollout struck
787 Major Aerostructures Suppliers Insert Subtitle Here
 Pursued aggressive Tier 1 model while also
introducing significant new technology
 Insert Bullet Text Level 1 Here
– Insert Bullet Text Level 2 Here  Intent was to reduce NRE $10B $6B and
• Insert Bullet Text Level 3 Here development time from six to four years

 Program delayed several years; actual NRE >$20B

 Deferred production losses reached $30B

 All of this while many of its suppliers were

substantially more profitable
Jim Albaugh – Former Boeing CEO

“On the 787, we outsourced too much. We had five different sections of
the fuselage all with their own processes and outsourced the wing…we
were driven too much by RONA – we didn’t balance it with risk”

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Sources: Christopher Tang and Joshua Zimmerman; BAML; AeroDynamic interview 6
 Many new manufacturing clusters
Insert Titleemerged
Here in recent years due to
globalization and Insert
the pursuit of low cost sourcing
Subtitle Here
Major Civil
Jetliner Aerospace Activity
Manufacturing Manufacturing Clusters
By Region
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– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here

Established Pre-2000
Emerged Post-2000

Source: AeroDynamic
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Notes Here
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 …and as a resultInsert
aerospace manufacturing
Title Here dispersed
Insert Subtitle Here
Jetliner Manufacturing Activity By Region
 Insert Bullet Text Level 1 Here
100%
– Insert Bullet Text Level 2 Here Rest of World  Jetliner manufacturing was
• Insert Bullet Text Level 3 Here heavily concentrated in North
80% America in the 1980s
Europe
60%  The rise of Airbus, Rolls-Royce
and Safran underpinned a shift in
40% activity to Europe

 Rest of World has grown its share

20% US & Canada
since last decade

0%
1985 1995 2005 2015

Source: AeroDynamic
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Notes Here
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 Insert Title Here
Agenda
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 Insert Bullet Text Level 1 Here

– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here Supply Chain - A Brief History
Supply Chain Outlook

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 Aircraft OEM typically source
Insert 65% or
Title more of jetliner content
Here
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The 2017 Air Transport Sector
 Insert Bullet Text Level 1 Here
– Insert Bullet Text Level OEM integration
2 Here Aerostructures
& assembly
32%
• Insert Bullet Text Level 3 Here
28%

2017 Total
$113 Billion
Avionics
3%

Interiors
6%
Aircraft
Systems Aeroengines
11% 20%

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Source: and/or
AeroDynamic Notes
Analysis Here
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 Regional Jet OEMInsert
appear Title
committed
Hereto the Tier 1 model
Regional Jet – Supply Chain
OEMsSubtitle
Insert HereStrategies

 Insert Bullet Text Level 1 Here

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• Insert Bullet Text Level 3 Here

 Remains committed to Tier 1 model –  Like Bombardier, remains committed to

worked well on CSeries and past Tier 1 model
development programs
 Brought in some aerostructures
 Targeted aerostructures insourcing on content on E2 – insourcing wings
CSeries – composite wings in house
 Unlikely to insource aircraft systems
 Remains capital constrained – must but does retain landing gear capability
determine optimal outsourcing mix for through ELEB
future programs

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Source: and/or
AeroDynamic Notes
analysis Here
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 Airbus is also committed
Insertto Title
Tier 1 but
Here is pursuing aggressive
price reductions
Insert Subtitle Here

 Insert Bullet Text

Airbus Supply
Level 1 Chain
Here Evolution  Appears committed to Tier 1
– Insert Bullet A380
Text Level 2 Here
A300/320 A350 model
• Insert Bullet
Platform AIRBUSText Level 3 Here
AIRBUS AIRBUS  Increasing procurement from
Assembly 50% of cost 40% of cost 20% of cost North American suppliers with
Tier 1
Mobile production facility
Tier 1 Risk Sharing
 Launched A320 Scope+ cost
Tier 2
optimization program in 2014 –
pursuing price reductions >10%

Tier 3  Also exploring dual-sourcing of

certain components

Tier 4  Publicly contemplated insourcing

seats

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Source: Airbus and/or Notes Here
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 Boeing appears to Insert
be shifting away
Title from the Tier 1 model…
Here
Insert Subtitle Here
 Boeing’s 787 experience and desire to earn
 Insert Boeing
Bullet Supply
Text LevelChain Evolution
1 Here greater profits is driving a shift in supply chain
– Insert Bullet
787Text Level 2 Here
Future State? strategy
• Insert Bullet Text
Platform Level 3 Here  Boeing appears to be going “back to the
Boeing Boeing
Assembly future” and pursuing a pre-787 supply chain
Tie
model
Tier 1 Tier 1
Risk r1
Sharing  It is interested in “focused factories” that
Tier 2 Focused
produce low cost “make to print” products
factories
 It is in the second phase of Partnering for
Tier 3 Success initiative
– Additional price concessions
– Extended payment terms
Tier 4
– More aggregation of supplier purchasing
– Aftermarket revenue & royalties
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Source: and/or
AeroDynamic Notes Here
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 …and there areInsert
several Title
recentHere
examples of Boeing vertical
integration and focused
Insert Subtitle Here factories
 Insert Bullet Text Level 1 Here
– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here

Boeing’s propulsion Landing gear deals with New supplier for 737
center of excellence Heroux Devtek economy seats – now SFE

777X wing fabrication Taking on 777X flight Taking control of legacy

Facility in Everett control system integration aircraft parts distribution

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Sources: and/or
AeroDynamic NotesBoeing
research, Here
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 Norsk Titanium broke ground
InsertonTitle
two major
Hereadditive manufacturing
facilities…
Insert Subtitle Here
Plattsburg, New York – Industrial
 Insert Bullet Text Level 1 Here
Factory  Norsk focuses on aerospace-grade,
additive manufactured, structural
– Insert Bullet Text Level 2 Here
titanium components
• Insert Bullet Text Level 3 Here
 Its New York investment will be the
world’s first Rapid Plasma Deposition™
Oslo - European Assembly & Test Center factory; it will open in 2017

 It also broke ground on a new

European assembly & test center

 The upshot: additive manufacturing is

being capitalized

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Source: and/or
Norsk Titanium Notes Here
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 …and GE doubled down an additive
Insert Title manufacturing
Here in purchasing
two leading European suppliers
Insert Subtitle Here
Arcam AB Concept Laser
 Insert Bullet Text Level 1 Here
– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here

 Based in Mölndal, Sweden  Based in Lichtenfels, Germany

 Invented electron beam melting machining for  A pioneer in powder-bed-based laser melting
metal-based additive manufacturing technology – printed first Ti part for
A350XWB
 $68 million in revenue with 285 employees
 GE acquired 75% stake for $599 million
GE also unsuccessfully bid for SLM Solutions
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Source: and/or
Arcam, SLM, Notes
GE Aviation Here
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 GE will print up to 35%Title
Insert of its new
HereATP aeroengine
Insert Subtitle Here
Advanced Turboprop
 Insert Bullet Text Level 1 Here
 The Advanced Turboprop (ATP)
– Insert Bullet Text Level 2 Here engine powering the Cessna
• Insert Bullet Text Level 3 Here Denali will be made from 35%
printed parts

 Additive manufacturing will

eliminate 845 parts

 Leveraging additive
manufacturing in a white sheet
design will drive weight
reduction and fuel efficiency
improvement

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Source: and/or
GE Aviation Notes Here
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 GE is vertically integrating withHere
Insert Title advanced technology
Insert Subtitle Here

 Insert Bullet Text Level 1 Here

– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here

Insert Source
Source: and/or
AeroDynamic Notes
Advisory Here
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 2016 was a clear policy
Insert inflection point in the UK and US
Title Here
Insert Subtitle Here
COMPLETED
BREXIT
 Insert Bullet Text Level 1 Here Donald Trump • Pulled US out of Trans-
Pacific Partnership
– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here POTENTIAL
• Renegotiate NAFTA
• 45% tariff on Chinese
goods
• 20% tariff on Mexican
goods
• Reduce corporate taxes and
June 2016 November 2016 regulation
• Border adjustment tax

Has low cost sourcing peaked?

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Source: and/or
AeroDynamic Notes
Research Here
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 A proposal for a Border Adjustment
Insert Tax is under consideration
Title Here
Insert Subtitle Here
Border Adjustment Tax  A proposal for a “Border Adjustment Tax” is under
 Insert Bullet Text Level 1 Here consideration by the Trump Administration
– Insert Bullet Text Level 2 Here – 20% tax on all imports
• Insert Bullet Text Level 3 Here – Profits from exports are not taxed
– Could fund a reduction in corporate taxes from current 35%
-- the highest amongst advanced economies

 An “American Made” coalition of more than 25 major

companies dependent on exports – including Boeing,
UTC and GE – support the concept in principle if it results
in reduced corporate taxes

 An opposing coalition of companies dependent on

imports, including Target and Best Buy, oppose the
proposal

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Source: and/or
National Public Notes
Radio, Here
Media Reports
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 The $80B positiveInsert
US aerospace trade balance is at risk
Title Here
Insert –Subtitle
US Aerospace Industry 2015 Balance
Here of Trade

 Insert Bullet Text Level 1 Here Top Import Markets ($B US)
France $12.5 Mexico $2.4
– Insert
Top Bullet
ExportText Level 2($B
Markets Here
US) Canada $11.1 Italy $1.7
Japan $7.9 Singapore $1.2
China• Insert Bullet Text Level
$15.9 3 Here$7.2
Germany
Germany $7.2 Korea $1.1
UK $10.5 Singapore $6.2
France $9.9 UAE $6.0 UK $4.8 China $1.1
Canada $8.9 Mexico $5.6 Brazil $3.1 Imports $54.9 B
Japan $7.9 Brazil $5.1
Exports $134.6 B

 China and Mexico – two of Trump’s favorite targets -- are worth $21.5B in exports and support >120K
jobs
 Canada has a $2B positive trade balance with the US

Insert Source
Sources: and/or Notes
U.S. Department Here Bureau of the Census, CNN
of Commerce,
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 Aerospace Supply Chain Structure
The implications ofInsert
these trends
Titlefor suppliers is significant
Here
Commercial
InsertAircraft Supplier
Subtitle Here Outlook

•
 Insert Bullet Text Level 1 Here
OEMs
Aircraft Aeroengine
•
Pursuing major cost reductions
GE, Boeing insourcing / vertical integration
OEMs OEMs
– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here • Facing severe pressure from OEMs
Systems & M odules & M ajor
Tier 1 • Business models at risk
M ajor Structures Components

Parts & • Significant pricing pressure from customers

Parts &
Tier 2 • New opportunities to go direct to Boeing?
Subassemblies Subassemblies

• Many businesses at risk - attrition likely

Tier 3 Make-to-print parts & components • Need to focus on winning business models

Raw materials, forgings, castings, • Mostly consolidated

Tier 4 • Is the tide turning against vertical integration?
extrusions, hardware
• Additive manufacturing will impact

Insert Source
Source: and/or
AeroDynamic Notes
Advisory Here
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 Insert Title Here
Insert Subtitle Here

 Insert Bullet Text Level 1 Here THANK YOU!

– Insert Bullet Text Level 2 Here
• Insert Bullet Text Level 3 Here
Kevin Michaels
Managing Director – AeroDynamic Advisory, LLC
kmichaels@aerodynamicadvisory.com
+1 734 717 5011

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