Richard Aboulafia on Italian Aerospace and Defense
In his recent monthly Teal newsletter, Richard Aboulafia of the Teal Group provided an insightful overview on the state of play of Italian aerospace and defense. The global business is in a serious period of re-structuring and redesign. The Russians, the Brazilians, the Chinese and the Japanese all have aspirations, programs and capabilities, which are likely to re-shape the Boeing and Airbus duopoly. And with the Indian competition for new fighter aircraft as well as Brazilian decisions to come, the global fighter market will be re-defined as well. The US has its F-35s, F-15s, F-16s and F-18s.
The question is what will the US have to compete with in the context of the follow-on market in which the F-35 will be the key and the dominant factor in the US fighter base. The Italians provide an interesting case of adaptation. The Italian industry has been consummate in global partnering and the dynamic global aerospace and defense business: the success of their approach could well re-shape the competitive capabilities of the US, European and the new global aspirants. Richard’s commentary follows.
Italy is all about Slow Aerospace. Which is a good thing. I think.
Most of the aero world, particularly the Anglo-US aero world, is focused on cost savings, return on investment, and industry rationalization. Call it Fast Aerospace. Just as fast food emphasizes convenience and cheapness, Fast Aerospace has resulted in more efficiency but fewer jobs (and fewer planes). Italy’s Slow Aerospace, by contrast, focuses on jobs, heritage, market share, and sheer critical mass. The country’s industries offer a bewildering variety of aircraft. These have been created organically (new products, like AgustaWestland AW139/149), or by acquisition (Aermacchi’s M-346), or by resurrection (bringing back the dead, as with the C-27J/G.222) or by mummification (keeping old products alive forever, as with the MB.339). Italy’s slow aerospace principals are simple:
1. Never kill a program or destroy a production line. Slow food involves heritage products, like heirloom tomatoes and old breeds of pigs. Slow Aerospace also preserves the past. Sometimes this pays off. The second life of Piaggio’s Avanti, begun three years after the first life ended, has proven way more successful than the first (160+ planes since 2000 versus just 30 in 1990-1998). Similarly, keeping the AgustaWestland A.129 line in stasis for ten years was repaid by a Turkish order for 60 helicopters. By contrast, the geriatric MB.339 line has seen just 65 aircraft built over the past 18 years. Humorously, the MB.339’s Rolls Viper engine is the last pure turbojet in production and has enjoyed that status for several decades now. That’s like building a TV with a vacuum tube.
2. If a line goes cold, re-invent the product. If a line dies because orders finally dry up or because working capital takes a holiday, wait a few years and put the old wine in new bottles. Many Italian products are resurrections of old has-beens (and never-weres). That MB.339? It’s just a re-invented MB.326. The M-311 is merely a re-invention of the old SIAI-Marchetti S.211, which went cold after 60 planes. And when the G.222 finally died, Alenia kept the tooling, and years later created the C-27J, which will probably sell in modestly greater numbers. (111 G.222s, plus, say, 190 C-27Js…that’s 300 planes between 1975 and 2020. An average of seven planes per year…now that’s Slow Aerospace.)
3. Whenever anyone offers a program or a property at a distressed price, buy it. It took several decades for the UK Government to admit that Westland was an unaffordable asset, but somehow, it works just fine under Italian management. AgustaWestland also took over Bell’s AB.139 share (it paid off great). Most recently, AW has indicated it wants to buy Bell’s majority share of the 609 tiltrotor. Sure, the 609 turned into a high-risk program with marginal rewards. But if AW gets it, it will be THEIR high-risk program with marginal rewards. As an aside, AW’s emphasis on product development has paid dividends. In 2006 the company eclipsed Bell on the civil market, becoming the number two producer after Eurocopter. In a combination of Slow Aerospace Principals Two and Three, Aermacchi’s M-346 is a re-invention of the Yak-130 trainer, acquired for $77 million.
4. Partner with as many people as possible. Accompanying Italy’s flying circus of aeronautical leftovers is a hyper-diverse portfolio of subcontracts. Italian industry has major partnerships with every airframer in the world, especially Boeing. Lockheed Martin and EADS. Finmeccanica is the only company in the world with a major partnership (Superjet) with Russia’s Sukhoi, a company not known for global partnerships. Finmeccanica’s Alenia unit is also the only non-French company to receive a major aerostructures contract from Dassault, a company famous for sticking to Franco-French partnerships.
5. Embrace redundancy. Just as slow food strives for a proliferation of dishes and ingredients, Slow Aerospace strives for a proliferation of products. Shopping for trainers? Alenia Aermacchi offers three jets (MB.339, M-346, M-311) and one prop (SF-260). Nobody uses a four-aircraft training syllabus, but why not blanket the market, even if it means intra-company competition? Italy also plans on being the only country to build in-country Eurofighter and F-35 JSF final assembly lines.
Contrast Italy with America, a paragon of fast food and fast aerospace. By 2015, despite having the world’s biggest economy and defense budget, the US is on course to have just two fixed-wing military production lines (down from nine today). What would happen if the F-22, one of the US planes slated for death, were an Italian Slow Aerospace program? For one, it wouldn’t be built at the US rate of 20 per year. It would be less than half that, but with almost as many jobs and the same infrastructure (again, efficiency is not the goal here). When the Italian Air Force had taken its fill, they’d still get three more each year, while the Ministries of Forestry, Fisheries Protection, and Cocoa would each get one. Export customers would get another few, perhaps with government subsidies. And if this Italian F-22 equivalent finally died, a decade or so later it would be upgraded and re-born as the F-22J. The eight per year production rate would resume.
The benefit of Italy’s Slow Aerospace practices is a slow and steady increase in the country’s aerospace work and global market share. There’s no way to verify this using official numbers. In true Slow Aerospace form, the statistics part of Italy’s aerospace industries federation website (http://www.aiad.it/Dati%20Statistici.asp) is “in construzione”. The drawbacks, of course, are equally clear. Many Italian programs feature very high costs relative to what’s actually produced. Large unionized workforces and giant, underutilized factories speak to a system that can’t scale down in the event of a market drop. When times turn bad, overcapacity really hurts. But as with Slow Food, Slow Aerospace doesn’t care about costs.
The big question: what could threaten this Slow Aerospace approach? The biggest threat is a shift in priorities. Italy’s aerospace umbrella company, Finmeccanica, increasingly looks like a fast aerospace company. It’s increasingly focused on growth and profit, like any Anglo-US aerospace company. Its purchase of DRS positions the company for growth in the key US defense/government market, but it was expensive, and a notable departure from the company’s usual investments in Italian-built aerospace products. As this is written, that Italian F-35 line is coming under threat for budget reasons.
The second threat to Italy’s Slow Aerospace is other countries getting annoyed. After all, the essence of Slow Aerospace is government support. Last year the European Union ruled that Italy violated EU law by awarding government helicopter contracts solely to AgustaWestland (in true Slow Aerospace style, Italy completely ignored the ruling). Also, Finmeccanica benefits from a very high level of government support (purchases, R&D, and a large equity stake).
So, why haven’t there been more complaints against Italy’s state support for aerospace? There are two primary reasons. One is that Italy has deftly played on both sides of the Atlantic, and is careful about directly competing with either side. Two, Italy has been careful to remain a US strategic ally. As a result, no idiot US congressmen are trying to re-name Italian spaghetti as “freedom noodles.”
But perhaps a third reason lies with Italy itself, a country that people fall in love with and don’t feel threatened by. Or, as fictional villain Hank Scorpio said on an episode of The Simpsons while contemplating which European country to destroy, “By the way, Homer, what’s your least favorite country, Italy or France?” To which Homer says, “France.” “Hah hah. Nobody ever says Italy,” Scorpio correctly notes.
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***Posted November 1st, 2009