the threat of globalization

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The Threat of Globalization

The Impact on Aerospace Leadership - A Perspective Based on aglobal Heidrick & Struggles and Team SAI joint Survey

Presentation To: AVIATION Week's Eighth MRO Asia Event

By: Torbjorn Karlsson

October 15, 2008

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Setting the Scene – Continued MRO Growth

► $45.1B industry will grow to $68.6B over 10-yearforecast period

► Global growth is expected to maintain a 4.3%CAGR through 2018, with very strong growthexpected in Asia Pacific, China, and India

― North America, Western Europe, and AsiaPacific will remain largest markets

► Worldwide economic downturn will limit growth inshort term (1 to 2 years) as airlines reducecapacity, but long-term demand remains positive

► North America and Europe will likely be impactedmost by downturn; emerging markets in Asiaexpected to rebound quickly

► MROs that focus on aircraft market for acceleratedretirement will feel the most pain

► Trend of increased globalisation and consolidationwill continue

► As market expands, increased demands will beplaced on the MRO capacity, exacerbating humanresource contraints

Source: TeamSAI

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Key Points – Market & Talent

► There is a strong belief in continued globalization and consolidation.

► This globalization and consolidation will be impacted negatively by a shortage in human resources.

► That shortage is considered the single most important issue facing the respondents’ companies andthe industry at large.

► Within the context of the human resource concern, recruiting is thought to be the top HR matter,particularly among developing regions.

► As evidence of this challenge, MROs are struggling to maintain headcounts,but seem fairly pleased with the approaches they have at their disposal tofill open positions. Nevertheless, this is an area of concern, particularly inthe search for operational level employees.

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Globalisation

NorthAmerica -

US36%

Asia-Pacific33%

China8%

India3%

WesternEurope12%

NorthAmerica -Canada

3%EasternEurope

2%

MiddleEast3%

Moreglobalized

88%

Lessglobalized

2%Remain thesame10%

Key Points – Market & Talent

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► Looking forward, the search to fill such positions will increasingly lead companies to other regions ofthe world especially for developing regions. It appears that upper level employees will continue tobe imported from overseas, but this will not necessarily correct their shortage for operational levelemployees which are less likely to be sourced to foreigners.

► Executives do seem to be involved in addressing this issue, but there is also a concerning level ofdistrust with the existing management.

► Given the potential impact to reduce MRO capacity and raise wages, the issue is not expected to besolved easily.

► Results suggest that shortages of operational level staff (mechanics and technicians) may well drivethe greatest challenges the MRO industry faces in this area.

Key Points – Impact

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29%34%37%Grand Total

33%31%36%Other

33%33%33%OEM / OEM maintenance division

33%29%38%Independent MRO

30%43%26%Airline-owned or -affiliated MRO

17%38%45%Airline (maintenance department)

moderately tostrongly disagreedisagree agreeBusiness

My company has the right management in place today to cope with the expected growthand changes.

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21%15%71%Africa

39%26%85%Middle East

54%31%71%India

56%31%73%China

47%34%84%Asia-Pacific

34%21%85%Eastern Europe

29%29%88%Western Europe

13%17%76%Latin America and the Caribbean

30%36%83%North America

SalaryIncrease >15%

Impacteffecting growth

High/Significant Impact

Impact of human resources shortage on capacity in the next three years

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How to identify and address Leadership Risk and Performance

Shareholders demand ever increasing new performance through new strategies at new time horizonswith new relationship expectations. Can the team adapt?

A refocus to understanding and meeting needs of customers will demand new skills, capabilities andbehaviors. Can this be achieved?

With new success comes new opportunities for ongoing growth, diversity and development. Is suchpotential, capacity and capability evident in the team today?

Change brings instability and fragility in the senior talents of the company. How stable and secure arethey and are there robust succession plans in place to meet any executive ‘churn’ emerging?

3. What must happen toclose any gap and keep itclosed?

2. What leadership doesthe company have inplace now?

1. What leadership does thecompany need to succeed?

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As individuals, how are key executives going to respond to the change? How would they benchmarkagainst other key executives in such roles? Do they have robust successors and are they successionmaterial themselves? How do they feel about these changes?

As a team, how do they work together? How will they work under changes and new pressures? Howdoes the behavior of this group impact the wider organization?

How does this leadership capacity, behavior and potential benchmark against other institutions andagainst the intended direction for the company now?

What are the objective strengths, weaknesses, opportunities and threats apparent in this team ofleaders?




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What individual development can be rapidly introduced to maximize the success and engagement ofeach executive?

What group or team development must be achieved in order that we maximize the impact andeffectiveness (both internally and externally) of this team?

What can we learn about the relationship between the Board and executives in terms of where to focussupport and manage risk?

If we need to introduce new talent then what is needed, what is the definition of fit and how do wemanage this?




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What can a leader do

Any change in strategic direction, culture and stakeholders demands significant reflection andpreparation in a leaders behaviours, skills and intentions. We can provide the CEO and their teams witha highly tailored integrated program of support that will best focus their priorities and agendas inleading the organisation towards new performance and change. We can work with them to best ‘finetune’ their leadership capability and behaviours to create success and provide a discrete channel ofsupport in roles that are often fundamentally isolated.

What can I do tomaximize my success?

How am I trackingagainst this today?

What leadership isdemanded of me?

► Dialogue to draw understanding of the challenges being faced

► Exploring the leadership behaviors, techniques and competencies that will best meet thesechallenges successfully

► Sharing and supporting the CEO or senior leaders to more forensically look at their own team anddefine unique leadership strategies for each member

► Supporting and sharing techniques for the CEO to question the organization to establish itsleadership readiness and capacity

► Due diligence on the corporate strategy and vision against this preparedness

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► Highly tailored and discrete personal self review for participants – a leadership ‘health check’ thatwill provide tangible and objective insights into how best to leverage their leadership style and skillinto the needs of their team and their organization

► Normally includes 360 degree referencing, interviewing and profiling

► Detailed forensic reporting provided to participants and the organization on how to best supportand deploy this leader

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► High impact coaching against the development areas identified

► Sharing of techniques and tactics to optimize the leadership impact on the team and theorganization

► Climate leadership models and techniques shared to reinforce the corporate culture beingdemanded.

► Heidrick & Struggles onboarding support – readings, case lessons and peer mentoring as required.

► Exploration of succession planning risks and demands

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Conclusion

► Aerospace needs to embrace globalization at all levels, notjust blue-collar

► It requires the full attention and explicit and continuoussupport of the CEO

► HR Needs to be professionalized with strong focus on trainingand development, succession planning, retention and careerdevelopment, complementation and benefits

► A need to move to competency based hiring: identify globalbest practices and bring in talent from other industries

Long term leadershipdevelopment is a seniorchange managementprogram and should betreated as such:

► The AirAsia paradox: “Now everyone can fly” – Airlines are nolonger the only avenue to a global life

► Engineering is not attractive, the “NASA years” are over

► Industry pay has only recently started to become attractivebut still lags alternative professions like legal, medical andfinance

Its an industry problem - weno longer attract the bestand brightest:

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Survey High Lights

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Introduction

► With growth and cost demands on the rise and a generation of the workforceapproaching retirement, locating and retaining the skilled talent necessary toeffectively support the MRO business is an emerging issue.

► Given the concern that the need for qualified individuals at every level isoutpacing the supply of talent, with the potential of constraining growth ifcountermeasures are not taken to correct the dilemma, this survey wasdeveloped to gather industry insights.

► In order to clearly identify human resource issues within the MRO space andassess the implications, the two organizations jointly developed a surveyinstrument to gage staffing and leadership issues facing the MRO industry todayand in the coming years.

► The survey was administered in a web-based format and delivered to 2,800individuals (valid and unique email addresses) across the world and representinga range of responsibilities within the MRO and aviation industry.

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SeniorExecutive

Officer39%

Director/Manager

42%

OtherCorporate

Officer4%

Other15%

Other32%

Airline (maintenancedepartment)

18%

Independent MRO19%

Airline-ownedor affiliated MRO

8%

OEM/OEM maintenance

division

Introduction

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Globalization

MoreGlobalized

88%

LessGlobalized

2%Remain thesame10%

Continued Globalization

Across the board—by geography, company type and job functions and titles —there is a verystrong belief in continued globalization.

► 88% of the respondents feel the industry will be more globalized in the next three years.

There is also strong belief in continued consolidation

► 79% of respondents believe in more consolidation vs. the 21% that believe a plateau has beenreached.

► Interestingly, executives are the least bullish about increased consolidation with 67%, but anadditional 30% of the executives think it will at least hold steady..

Consolidation

Remain thesame21%

MoreConsolidation

79%

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Continued Growth Opportunities

Future Growth Opportunities by World Region

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

NorthAmerica

US

NorthAmericaCanada

LatinAmerica &

theCaribbean

WesternEurope

EasternEurope

Asia-Pacific

China India MiddleEast

Africa

Organic/internal Mergers/acquisitionsJoint ventures/alliances Private equity/leveraged buy-outsOff-shoring Other

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Challenges

In the face of continued globalization and consolidation, respondents considered the human resourceshortage as their companies’ greatest challenge. 41% ranked a human resource shortage as their topconcern amongst possible challenges.

Looking at the impact of recruiting, the vast majority of respondents feel it is a significant ormoderate issue for the MRO industry at large this year.

It is expected to become an even more important issue just three years into the future, as evidencedby a stated shift toward considering the issue more “significant” than “moderate” (68%/30%significant/moderate in 2011 vs. 45%/50% significant/moderate in 2008).

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Challenges

1%1%3%Other

20%10%13%Marketing and business development

22%13%9%Parts and materials / supply chain issues

26%18%4%Adequate training

20%30%31%Qualified leadership shortage

13%30%41%Human resource shortage

#3#1 #2Challenge Ranking

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Recruiting Impact

► Looking at the impact of recruiting across all employment levels 40-60% of respondents agree thatrecruiting will be a real (moderate to significant) challenge for each level in 2008 and that this willhave an impact on the business.

► As companies consider their future employment needs, it was noted that there is a general trendthat suggests there will be an increased reliance on other regions of the world to fill those needs.

► Airline-owned or -affiliated MROs are expected to be the most reliant on foreigners for support staff(27%), but will be among the lowest (13%) for operational staff. The Middle East is expected tomaintain a strong demand for technicians and mechanics, but China's demand appears like it mayfall (27% vs. 9%), perhaps due to improved skill development within their borders as regionsdevelop. A very similar trend is expected for support staff in these two regions. The trend in Chinais reversed or flat for the upper employment levels, suggesting they will have a continued demandfor managers and executives from outside the region.

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Leadership

► Over one-third (37%) of all MRO organizations do not believe their organization has the rightmanagement in place to deal with expected growth and changes.

► Independent MROs and OEM maintenance divisions have the most confidence in their leadership.Airline maintenance departments have the least trust in their management (45%).

► Interestingly, when looking at this issue through the lens of the respondent’s title (see Figure 18), itwas noted that senior executives were the most confident (45% feeling moderately to strongly thattheir company had the right management in place). Confidence at this level fell to 20% amongstthe director/manager types.

► Perhaps most concerning was the 17% confidence at the moderate to strong level amongst theother members of the C-suite (other corporate officers); however, 67% were more confident thannot amongst these individuals. The numbers are not necessarily unexpected, but they do suggestthere is some level of concern about the leadership.

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Impact

► From a worldwide perspective, 80% of the respondents feel that the human resource shortage willhave some impact on the MRO capacity available.

― Some 28% of the respondents believe this impact will be high or significant in nature.

― The shortage is predicted by more than a third (37%) of the respondents to drive a 15% ormore salary increase worldwide.

► Growth is clearly expected to be affected with greatest (high or significant) impact in North America(36%), Asia-Pacific (34%), China (31%), and India (31%).

► Overall, all business segments expect salaries in China and India to increase by 15% or more overthe next three years. Other regions are expected to see salary increases of less than 15%.

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Impact

21%15%71%Africa

39%26%85%Middle East

54%31%71%India

56%31%73%China

47%34%84%Asia-Pacific

34%21%85%Eastern Europe

29%29%88%Western Europe

13%17%76%Latin America & the Caribbean

30%36%83%North America

Salary increase>15%

High/ Significantimpact

Impact effectinggrowth

Region

37%80% 28%Worldwide

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The War for Talent

Appendix

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The War for Talent – A Global Issue

All over the world we are facing a shortage of talented people who have the transferabletechnical skills to compete in global business

► Today, only 20% of Americans have passports, yet American companies are looking to aggressivelyexpand into Europe and Asia

► Meanwhile European businesses are searching for footholds in Asia and also further expansion inNorth America

► The Japanese, for the first time in 15 years, given their economic upturn, are looking to expandoutside of their borders yet are finding they don’t have the senior management to get them there

► Chinese companies are following this trend and are increasingly committed to gaining a place onthe international stage. In particular, Chinese organizations which were once state owned want toknow if they have the same talent to compete against a General Electric, a Pepsi Cola, a Dell

► Indian companies are rapidly going global and as seen in their airlines,among other industries, are rapidly tapping into the global talent pool

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The War for Talent – Going Forward

In industrial nations the shortage of talent will worsen

► Japan alone will lose up to 60 million people over the next 30 years

► In 30 years there will be 70-80 million fewer Europeansthan there are today

► 50% of the top people in US companies will leave in thenext 3 years

We know the situation in China and India is different.Yet, in spite of the population wealth, the talent problem inChina is just as pressing

► The talent pool in China is shallow

► Exacerbated by the Cultural Revolution which affected a large group of individuals who would be inmanagement position now

► In China, just as in the rest of the world, there is a severe shortage in globally experienced seniormanagement

► A recent report by Business Week showed there is shortage of 70,000 globally experienced Chinesemanagers and by 2010, McKinsey predicts India will face a shortfall of 500,000 staff capable ofdoing work for multinationals

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An Engineering Perspective

► The shortage of top executive and engineering talent is just starting to be noticed.

► In the United States a presidential commission was established in 2003 and predicted a“devastating loss of skill, experience and intellectual capital”.

► According to a study by Bain & Co. and Deloitte Consulting only half of the 68,000 militaryengineers due to retire by 2010 can be replaced.

► According to a study by McKinsey Global Institute, young engineers coming forward in China maynot be enough to meet even local demand. The number who are considered suitable for work inmulti-nationals is just 160,000 – about the same number as are available in Britain.

► The supply of graduates isn’t the only problem. It is the depth of experience that is lacking, as wellas exposure to new and developing technologies.

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The challenge is in finding talent…

So how does all this help attract and retain talent in this region and globally?

► If you want to look like heroes, if not to your board, but potentially to your successor, you have toinvest in human capital

► That means making a decision to send high potential individuals abroad where they can gain thetechnical skill sets, organisational know-how and experience that will help your company grow, longterm

► The mistake most organisations make is that they send their Chinese nationals abroad for a shortperiod of time, not allowing them to reap the benefits of this experience

► …the other mistake is that they only send a couple

► It’s a long term investment – you need to operate a talent pipeline with employeescontinually being sent abroad, to return a few years later

► Human Capital is the oil of tomorrow – it’s in high demand and is oftenhard to find

In addition, most organisations think that once the talent has been acquired the hardwork is over

The acquisition itself may not be easy but the retention and on-boarding is just as critical

Currently 40% of senior hires globally leave their firm or are fired within 18 months ofjoining

It is in all of our best interests to decrease this percentage

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Heidrick & Struggles and Team SAI have combined their industry experience and resources to focusattention on this critical challenge facing the global aviation community.

Torbjorn Karlsson

Torbjorn Karlsson joined Heidrick & Struggles in 2006 to lead the Aviation, Aerospace and Defencepractice in Asia. He is also involved in the transportation and supply chain sectors. Torbjorn has spentmany years in aerospace industry in consulting, airports, aviation equipment sales and aircraft trading.Based in Singapore, he can be reached at [email protected] or+65 6332 5001. www.heidrick.com

About Heidrick & Struggles International, Inc.

Heidrick & Struggles International, Inc. is the world’s premier provider of senior-level executive searchand leadership consulting services, including talent management board building, executive on-boardingand M&A effectiveness. For more than 50 years, we have focused on quality service and built strongleadership teams through our relationships with clients and individuals worldwide. Today, Heidrick &Struggles leadership experts operate from principal business centers in North America, Latin America,Europe and Asia Pacific. For more information about Heidrick & Struggles,

TeamSAI is a Denver based practice of strategic & tactical management and operations consulting,serving all aspects of the aviation community including airlines, airports, manufacturers, MROs, andcorporate/fractional operations. TeamSAI also produces the annual World MRO Forecast, and is apartner with McGraw-Hill’s Aviation Week Group in their new MRO Prospector web based marketdevelopment tool for the MRO industry. TeamSAI, providing better direction through Strategy, Action& Insight. Additional information about TeamSAI is available at www.teamsai.com

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