Jun 05 2020
The COVID-19 (coronavirus) outbreak has had a profound effect on both the global aerospace and automotive sectors. First identified in Wuhan, China, the virus has since spread globally over several months, resulting in many governments quarantining their populations and leading to an effective ban on passenger air transport, while also severely limiting domestic car usage. The closure of several borders resulted in a sharp decline in passenger numbers for airlines and the widespread cancellation of flights, while a stay-at-home order decimated demand for new vehicles. In this article, IBISWorld examines how the coronavirus outbreak has affected supply chain and the viability of smaller suppliers.
Commercial airlines have responded to the standstill in demand by cancelling aircraft orders as their fleet remain grounded. As international air travel grinds to halt and commercial airlines fight for survival, the deferral of aircraft deliveries has profoundly affected the supply chain. Inevitably, output in the Aircraft, Engine and Parts Manufacturing industry is anticipated to decline as commercial demand crashes. For example, major aircraft manufacturer Airbus has stated that global monthly production of its A320 will fall to 40 a month from 60, which equates to approximately US$2 billion (£1.5 billion) each month, for the rest of the year. The implications of reduced output for the supply chain are severe. Boeing and Airbus supply over 90% of the world’s commercial aircraft. As a result, these companies are in a position to exert significant power on suppliers. In practical terms, Airbus’ plans to cut global production translate into a reduction in demand for parts, components and engines.
Falling Airbus output will force suppliers to downsize their operations accordingly, with many already announcing significant job cuts and seeking government help. For many suppliers, the government’s Coronavirus Job Retention Scheme has not been enough to protect jobs amid a shrinking market. For example, aerospace supplier GE Aviation announced it was cutting up to 13,000 jobs in May 2020, which is expected to contribute to employment numbers in the aircraft parts manufacturing sector falling significantly in 2020-21.
A Rolls Royce jet engine requires 18,000 components and hundreds of suppliers, which gives an insight into the complicated nature of the supply chain. In May 2020, Rolls Royce plc, the largest player in the Aircraft Repair, Maintenance and Overhaul industry, wrote to 700 global suppliers to demand they agree to a price cut of between 5% and 15%, in order to maintain a relationship with the engine manufacturing giant. Firms in the Aircraft Repair, Maintenance and Overhaul industry operated with a profit margin of 8.4% on average in 2019-20 and for firms at the bottom of the supply chain, this price cut will erode their profitability and land them into bankruptcy. Midlands Aerospace Alliance, which represents small and large suppliers stated that the move will push majority of its members out of the supply chain. The Aircraft, Engine and Parts Manufacturing industry is expected to have been worth £38.2 billion in 2019-20 comprises primarily of small enterprises with low cash reserves that employ fewer than 10 people. As deliveries fall, IBISWorld forecasts that the industry’s revenue will decline by between 10% and 20% in 2020-21.
Suppliers that refuse to agree to the price cut will likely have to downsize their operations, leave the industry or be acquired by the aircraft manufacturer. In the domestic supply chain, some suppliers are critical to aircraft manufacturers and are not easily substitutable. The process of switching suppliers is difficult because the industry is heavily regulated and new suppliers require certification, which can take time to achieve. Rolls Royce plc, which announced it was cutting 9,000 jobs in May, has begun pushing orders to the next financial year and delaying payments to suppliers. However, large suppliers, commonly known as tier one suppliers, hold some market power and the ability to renegotiate prices. However, figures from the Office for National Statistics indicate that 79% of enterprises in the Aircraft, Engine and Parts Manufacturing industry, 79% of enterprises employ fewer than five, and these firms will find it very hard to push back against companies like Rolls Royce. In earlier years of strong demand, the majority of aerospace suppliers invested heavily in expanding capacity, but grounded sales because of the coronavirus means many of these firms are now unable to support fixed costs.
Prior to the pandemic, major car manufacturer Nissan urged the UK government to invest in the UK automotive supply chain because only 44% of UK-produced parts are used by UK car manufacturers, according to the Society of Motor Manufacturers and Traders. The same body stated that car makers and supply chain stakeholders invested just £90 million in the first six months of 2019, compared with £2.5 billion in 2015, as a period of economic uncertainty and lower sales reduced investment. As investment fell, car assemblers increased their reliance on imports and stockpiled some parts in order to mitigate the implications of a no-deal Brexit. At the end of May 2020, Nissan announced the closure of its Barcelona plant as part of global restructuring in line with falling global demand. However, the company re-affirmed its commitment to it Sunderland plant.
Nissan’s response to the steep decline in new car sales because of the coronavirus has been to cut the number of models it assembles and implement measures to cut production costs by 20%. As car production volumes fall, orders will dry up and the supply chain will shrink. For low-priced generic parts, UK manufacturers can easily switch to international suppliers, to the detriment of the Motor Vehicle Parts and Accessories Manufacturing industry. This could be curbed if the United Kingdom fails to reach a trade deal with the European Union for after the end of the transition period, as this would lead increased costs and custom delays when importing parts. The automotive supply chain is streamlined and uses just-In-time production techniques, which require smooth movement and relies on the delivery of components just hours before they are required on the assembly line. Parts manufactured in Europe cross the channel several times before being inserted into vehicles in UK plants, a process that may be delayed in the future.
The survival of the majority of the 1,300 enterprises in the Motor Vehicle Parts and Accessories Manufacturing industry is key to restarting production as lockdown measures are eased. Replacing a crucial supplier could delay restarting production for several weeks, as incorporating a new supplier to produce millions of parts involves time-consuming contract negotiations, pricing and agreements on lead times. For example, car parts manufacturer Valeo Electronics produced eight million products a day before the pandemic, for which it requires three billion components across 191 plants in 33 countries, giving an insight into the complicated nature of the supply chain. When lockdown measures were announced, car manufacturers placed emphasis on protecting the automotive supply chain. It is expected that large parts manufacturers will acquire smaller and struggling firms to increase consolidation in the supply chain.
The supply chain for both the aerospace and automotive sectors is anticipated to shrink in line with depleted demand. It is likely that the automotive and aeronautic industries will receive government funding or indirect assistance, because they are considered strategic enterprises that provide skilled jobs, drive innovation and provide healthy trade surpluses. For example, the average wage in the Aircraft, Engine and Parts Manufacturing industry is over £55,000, while employees in the Aircraft Repair, Maintenance and Overhaul industry take home almost £37,000 on average annually. Aircraft manufacturers generated over 80% of revenue from exports, at a value of approximately £31.5 billion in 2019-20, while the Motor Vehicle Manufacturing industry generated an estimated £26.4 billion from exports in the same year. As a result of these characteristics and their significant contribution to the UK economy, IBISWorld expects the government to step is to help firms remain viable.
IBISWorld industry reports used in this special report:
C29.100 - Motor Vehicle Manufacturing in the UK
C29.300 - Motor Vehicle Parts & Accessories Manufacturing in the UK
C30.300 - Aircraft, Engine & Parts Manufacturing in the UK
C33.160 - Aircraft Repair, Maintenance & Overhaul in the UK