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2020Accelerate competitive advantage in 2020 and beyond

THE STATE OF AEROSPACE AND DEFENSE

2THE STATE OF AEROSPACE AND DEFENSE 2020

With 2020 on the horizon, Aerospace and Defense (A&D) original equipment manufacturers (OEMs) are

challenged to bring the future into focus with 20/20 vision. And yet, a number of factors cloud their views,

including: the increasing frequency and size of mergers and acquisitions (M&A); chronic materials shortages

and rising prices; escalating global trade tensions; and the emergence of new competitors.

OEMs must do everything in their power to deliver the highest value to their customers and maintain a

competitive edge. This may require making adjustments to the value chain across the product lifecycle

to improve competitiveness and meet strategic growth objectives.

A&D AT-A-GLANCE OVER THE LAST 12 MONTHS

KEY M&A DEALS

United Tech + Raytheon

L3 + Harris

Mitsubishi + CRJ

TransDigm Group + Esterline Technologies

110 M&A DEALSwith a total value of

$58.3 Billionin Q2 2019 (PWC)1

A&DMARKET FORECAST

$8.7 Trillionover the next decade (Boeing)2

2

AN ERA OF RAPID CHANGE

3THE STATE OF AEROSPACE AND DEFENSE 2020

The Most Important Partnership Benefits

A recent study from Vanson Bourne commissioned

by Celestica confirms how critical the core

principles of the Acceleration Economy are

to OEMs as they collaborate with electronics

manufacturing partners to apply a more

holistic lens in re-evaluating their business.

In fact, the three most significant benefits cited

by respondents were:

70% INCREASING QUALITY AND EFFICIENCY

64% IMPROVING THE ABILITY TO MEET CUSTOMER EXPECTATIONS

56% EXTENDING INNOVATION THROUGH NEW SUPPLIER RELATIONSHIPS

Celestica calls the new era of rapid change, ‘The

Acceleration Economy’, where higher-than-ever

customer expectations, constant technological

innovation and globalized competition have

placed unprecedented demands on business.

What matters most right now is how organizations

adapt and prepare for the future.

In the A&D space, the change has been fast and

furious. Increased M&A activity and consolidation

is creating more complex, disparate and highly

fractured value chains; a global trade war could

bring additional tariffs and enforcement; and the

worldwide shortage of vital materials – such as

multi-layer ceramic capacitors – can extend

lead times to a full calendar year.

More companies recognize they need strategic

partners to help manage innovation, design,

production, quality and productivity challenges.

These partnerships are key to helping OEMs

achieve key priorities including:

• Extending innovation: OEMs want to become

more agile and focus on maximizing their

innovation capabilities and shortening product

development cycles.

• Putting quality and efficiency hand-in-hand:

Acquire parts cost effectively in lower cost

economies without sacrificing quality

and innovation.

• Making flexibility an imperative: Take a more

agile approach to better manage challenges.

4THE STATE OF AEROSPACE AND DEFENSE 2020

Priority #1 for OEMs is to clearly determine what

is core vs non-core to their business; enabling

them to stay competitive while delivering high

value to customers.

This requires a re-evaluation of the entire value

proposition, portfolio of service offerings and internal

business processes to determine what remains

essential to the company’s long-term success and

continued customer satisfaction – and what must

be outsourced to proficient providers to enable

a more acute focus on core activities. This better

positions OEMs to seize new opportunities in

design, licensing and the after-market marketplace.

Mergers and Acquisitions – More Pressure to Prioritize

A merger inevitably presents issues of product

redundancies that must be addressed quickly.

For decades, the M&A narrative was punctuated

by the acquisition of smaller shops. But last year

there was more consolidation among larger service,

licensing, and maintenance, repair and overhaul

(MRO) companies. The major players in these deals

shared a common goal: solidify partnerships with

the industry’s largest players such as Boeing and

Airbus by gaining the ability to deliver a wider

range of products and services.

Consider the merger of Harris Corp. and L3

Technologies finalized in July 2019, with a goal to

create the sixth largest defense company in the

U.S. and a top-ten defense company globally.

In an interview with Defense News, Harris CEO

Bill Brown said one of the new company’s priorities

is to determine which operations and product lines

are core vs. non-core.

THE BIG QUESTION – CORE OR NON-CORE?

“ Any time you put two companies with two

portfolios together and you rethink what strategy

you want to accomplish, there’s going to be

some pieces of the portfolio at the back end of

the bus. We have to look at where we want to put

our management time, capital, and (research and

development) investment. We can’t put it on pieces

that might not be as strategic.”

Bill Brown,

Chief Executive Officer, Harris Corporation

5THE STATE OF AEROSPACE AND DEFENSE 2020

Core vs. Non-Core: What Matters Most

• Every decision must account for the complete product lifecycle.

• Anticipate customer demands that can change suddenly and unpredictably.

• Partnerships matter – a lot. They contribute to the strength of the value chain and help OEMs identify

changes, pick up new ideas and fend off global rivals.

This report focuses on the three key areas of the product lifecycle experiencing the most impact as industry

players reassess their value chains and core vs. non-core priorities:

DESIGNING for EXCELLENCE THROUGHOUT the PRODUCT LIFECYCLE

IMPROVING SUPPLY CHAIN AGILITY

MAINTAINING LEGACY SYSTEMS and PRODUCT CONTINUITY

The 7 Questions OEMs Should Ask Themselves to Inform Core vs. Non-Core Decision Making:

Is there overlap in global footprint and logistics?

Is there a high potential for fragmented supply chains and low buying power?

Is there a lack of enforceable delivery and quality metrics?

Are there significant balance sheet and free cash flow challenges?

Are fixed costs growing?

Are there mature products that require long-term after-market support?

Is there differentiating IP in the manufacturing processes?

6THE STATE OF AEROSPACE AND DEFENSE 2020

DESIGNING FOR EXCELLENCE THROUGHOUT THE PRODUCT LIFECYCLE

Applying a “Design for Excellence (DFx)” approach is critical to managing

cost and vetting designs for manufacturability and long-term sustainability.

However, the rush to get a product to market quickly often prevents OEMs

from meeting these requirements. They may lack the tools, methodology or

resources to bring together all the necessary elements – supply chain, quality,

design, engineering, manufacturing, test and repair – to ensure the final

product meets cost, performance and reliability requirements.

Our recommendation is to work with partners to take a more holistic

approach to design - spanning the following areas:

Design for cost: Military unmanned aerial vehicles (UAVs) are

designed to fly for up to two days on surveillance missions at

altitudes of 60,000 feet. Others are loaded with 4,500 pounds

of weaponry.3 Commercial airlines are introducing direct flights

that require longer trips at higher altitudes. Every ounce counts

because adding more weight reduces speed, agility and flying time.

While OEMs are laser focused on meeting design requirements

related to weight, speed and agility, to stay competitive, they

must also ensure that designs meet cost, time-to-market, and

long term producibility goals.

Starting at the subsystem level, OEMs need to consider the parts

and components selected, the complexity of the design and the

fact that long lead times may impact component availability.

Robust supplier and part selection are key at the design stage to

ensure cost competitiveness, speed and quality; and to influence

the long-term viability of the product – even in the face of parts

shortages.

7THE STATE OF AEROSPACE AND DEFENSE 2020

Design for manufacturability and performance: This practice

ensures the early detection of manufacturing issues and reduces

any risk of production yield and volume ramp limitations -

critical factors to new technology integration.

For example, commercial airlines are flying further and longer;

military UAVs fly in both thin and frigid air and hot and dusty

desert regions; and radar systems are evolving into active

electronic scanner arrays with faster transistors that require

more power and generate more heat. Design engineers are

often challenged to figure out how to dissipate heat and shrink

form factors without sacrificing power. The right design analysis

and test strategies at the early design stage can help reduce the

risk of failure caused by thermal issues and enable a seamless

transition from design to manufacturing.

Design for obsolescence management: Selecting components

that will last the entire product lifecycle is also critical. If a part

becomes obsolete halfway through the life of a product, OEMs

have to be able to source, qualify and test alternates while still

meeting end customer expectations. This can drive significant

cost, tie up resources and impact delivery. Supply chain partners

who engage early in the product lifecycle can help OEMs plan

for obsolescence, and react quickly to unexpected issues such

as parts and materials shortages.

Value added value engineering (VAVE) strategies: OEMs may

need to redesign an existing system to meet specific price

points or to manage quality and reliability issues, yet many

don’t have these resources in-house. VAVE experts understand

the full product cycle and can collaborate with OEM designers

and production engineers throughout the redesign process

to ensure the best design, manufacturing and cost choices at

every step.

8THE STATE OF AEROSPACE AND DEFENSE 2020

While new product development is core to OEMs, partnerships greatly boost their capacity when it comes

to making designs manufacturable and scalable. They are even more valuable when it comes to redesign -

enabling OEMs to better manage interruptions and maintain a focus on areas that are core to their

business plan.

DESIGN FOR THE PRODUCT LIFECYCLE

EARLY DESIGN ENGAGEMENT drives

highest value, lowest risk

COMPLIANCE Adherence to the highest

industry standards

ONE-STOP SOLUTION Test solutions integrated

with manufacturing

Ensure the design

accounts for all stages of

the full product lifecycle

Meet compliance

requirements starting in

early stage design

Design-in test solutions

as part of the manufacturing &

product development process

FLEXIBILITY in the supply base

Integrate a failure and corrective ACTION PLAN

Incorporate a robust product OPTIMIZATION STRATEGY

React quickly

to unexpected parts

shortages or obsolete/

counterfeit materials

Data gathered from

analyzing failure and

root cause corrective

actions is integrated into

next-generation design

Include VAVE best

practices for cost

reduction, quality and

yield improvement

9THE STATE OF AEROSPACE AND DEFENSE 2020

IMPROVING SUPPLY CHAIN AGILITY

Three major factors are placing unprecedented pressure on the A&D supply chain, impacting an OEM’s

ability to meet cost, delivery and quality targets:

M&A Activity: The increase in mergers and acquisitions, especially among suppliers, can drive

added cost pressure for OEMs and suppliers throughout the supply chain. Actions focused

on lowering costs remain a top priority. Newly acquired entities must eliminate duplication,

drive rapid response to meet customer needs and meet their integrations objectives. While

this is not news to OEMs, how swiftly they adapt will be under unprecedented scrutiny.

Additionally, following the acquisition of many sub-tier casting and foundry companies, the

consolidated market puts added pressure on costs, supply chain processes and throughput.

Materials Shortage: A&D OEMs face surging demand

and additional strain from the automotive industry where

manufacturers are incorporating multi-layer ceramic capacitors

(MLCC) in their next-generation vehicles. Different industries

competing for the same parts can cause an average of a

40 to 52 week delay. With supply backed up for nearly a year,

companies are forecasting demand well in advance and risk

missing time-to-market commitments. Some MLCC suppliers

are adding capacity to meet demand but this will come with

higher prices and limited choices, ultimately affecting the

cost of the product in the market.

Potential Tariffs: New tariffs being debated by the U.S.

and across a wide range of products including steel and

aluminum loom as a significant possible impediment to

meeting customers’ high expectations. This situation is

fluid and has many potential outcomes. While companies,

politicians and industry representatives on both sides of

the Atlantic are proposing various measures to prevent

disruptions to global supply chains, OEMs’ financial teams

and defense customers could force the re-evaluation and

selection of alternate suppliers in the meantime.

Did You Know?every new TESLA MODEL 3 that hits the road uses anaverage of

9200 MLCCS.4

In a statement to The New York Times, an Airbus spokesperson said the proposed tariffs would serve only to exacerbate trade tensions and put companies around the world in a “LOSE-LOSE SITUATION.” 5

10THE STATE OF AEROSPACE AND DEFENSE 2020

Leverage Partners to Mitigate Disruption

OEMs need trusted supply chain experts to help them navigate and overcome their supply chain challenges.

Otherwise, they risk sacrificing their speed-to-market and ability to respond to customers’ emerging needs.

Key partnerships enable OEMs to create a more integrated supply chain – one that will pay dividends in the

long run. An agile and integrated ecosystem enables suppliers and their customers to identify remedies and

solutions to problems like materials or parts shortages – anticipating and addressing issues before they arise.

The Core Attributes of a Trusted Supply Chain Partner

Cultivates the right supplier relationships to enable greater flexibility, cost-efficiency,

expedient problem-solving and quicker go-to-market outcomes.

Understands the supplier landscape including their strategic and technological direction,

and is well-positioned to leverage the latest supplier innovations.

Brings multi-sector expertise, greater buying power and multi-industry exposure.

Implements a global operational platform and processes to consistently meet

delivery requirements.

Sets clear expectations for the supply base to ensure acceptable standards of quality

and reliability.

Embraces a data-driven approach that enables meaningful analytics around key

performance metrics and inventory, leading to more informed decision making.

11THE STATE OF AEROSPACE AND DEFENSE 2020

More important than ever to OEMs, is the ability to be nimble and invest in innovations that fuel the bottom

line and accelerate growth.

This is where licensing a product to a trusted partner can be a win-win situation.

MAINTAINING LEGACY SYSTEMS AND PRODUCT CONTINUITY

Key Considerations for Product Licensing

PRODUCT VOLUMES

declining or TECHNOLOGY

being phased out?

RESOURCES and CAPITAL TIED UP

in maintaining mature systems that need to

stay in service?

PRODUCT LINES being rationalized

as a result of a merger or

acquisition?

MANUFACTURING PROCESSES and

SERVICE AGREEMENTS aligned to meet cost, quality and efficiency goals?

Product Licensing is a bold move that enables OEMs to focus on their core - new product evolution and

development - while providing a strong customer service model for older products.

Financial: Licensing can facilitate the management of older product lines, particularly following a

merger. When Company A acquires Company B, it does not want to force Company B’s customers

to switch to Company A’s products. Licensing Company B’s products satisfies customers and

creates new revenue streams for the newly combined company. It also minimizes product support

costs for legacy products, provides ongoing, experienced customer support for mature product

lines, and funds future R&D.

Strategic: OEMs need to devote their R&D resources and personnel to developing new

technologies. Part of this process involves assessing whether a product or product line is still

core to their overall strategy. That said, it’s imperative to continue serving customers who rely on

older products with decades-long lifecycles. This presents a Catch 22: an OEM typically doesn’t

have the resources (i.e., cash, working capital, armies of engineers) to develop new products and

continue meeting customers’ high expectations for the service and support of older products.

In summary, as OEMs prepare for a successful 2020, we recommend the following key considerations:

EXTEND INNOVATION

Apply a DESIGN FOR EXCELLENCE

(DFx) Approach

Create a More RESILIENT

SUPPLY CHAIN

Implement new business models with

TRUSTED PARTNERS

Evaluate the entire set

of engineering and

design capabilities

and re-focus on

core strengths while

maximizing innovation

capabilities with

external resources –

bringing new solutions

to customers faster.

Embrace a full

product lifecycle

mindset to ensure

a fully-optimized

product by closely

monitoring costs

and vetting designs

for manufacturability

and long-term

sustainability.

Get ahead of

pending materials

shortages and

other global

business challenges

by creating

an integrated

ecosystem that

fosters greater

collaboration

between suppliers

and partners.

Evaluate partners

who can maintain

a product’s quality

and reliability for

the customer and

allow for an OEM to

re-allocate design

and manufacturing

resources – bringing

new innovations in the

pipeline to market.

ACCELERATE YOUR COMPETITIVE ADVANTAGE IN 2020 AND BEYOND

A Strategic Partner in the Transforming A&D Market

For more than two decades, Celestica has been a trusted partner to leading OEMs by helping them improve

their competitiveness and drive innovation in the design, engineering, manufacturing and after-sales support

of components, sub-systems and systems used in mission-critical applications.

1 “ Massive Raytheon/UTC Deal Highlights Q2 2019 M&A Activity — What Happens Now?” August 7, 2019, http://usblogs.pwc.com/industrialinsights/2019/08/07/massive-raytheon-utc-deal-highlights-q2-2019-ma-activity-what-happens-now/

2 “ Boeing Forecasts $8.7 Trillion Aerospace and Defense Market through 2028,” June 17, 2019, https://boeing.mediaroom.com/2019-06-17-Boeing-Forecasts-8-7-Trillion-Aerospace-and-Defense-Market-through-2028

3 “ Roblin, Sebastian, “Don’t Just Call Them ‘Drones’: A Guide To Military Unmanned Systems On Air, Land And Sea”, Forbes, Sept. 30, 2019: https://www.forbes.com/sites/sebastienroblin/2019/09/30/dont-just-call-them-drones-a-laypersons-guide-to-military-unmanned-systems-on-air-land-and-sea/#4649514e2b00

4 “ Wolfe, Daniel, “The global shortage of capacitors impacts all consumer electronics” Quartz, March 21, 2019 https://qz.com/1575735/a-mlcc-shortage-is-stifling-electronics-hardware-auto-makers/

5 “ Tsang, Amie, “U.S. Proposes New Taris on $4 Billion of E.U. Goods as Trade Dispute Grow”, The New York Times, July 2, 2019: https://www.nytimes.com/2019/07/02/business/us-eu-tariffs.html

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Visit www.celestica.com to learn more.