The aerospace industry is back on course for growth again after the financial crisis. The main hurdles are public sector budget cuts and pressure to cut costs

• Roland Berger's survey of top managers shows the European aerospace industry is looking to grow more in markets such as China, India, Brazil and the Middle East
• For the companies surveyed, innovation strategies and efficient research and development (R&D) are top priority for the first time
• They aim to push for growth in the industry through new products and services (88%), opening up new market segments (64%) and extending their product ranges to include new areas of industry (22%)
• Increasing M&A transactions are helping the aerospace industry grow fast in new markets
• Asian investors are very interested in Western companies to get ahead in technology

After the global crisis, the aerospace industry is looking ahead once more and concentrating on international growth. Structured program management, international market strategies and more efficient research and development are key factors here. The prospects for growth in the aerospace industry are overshadowed by the budget cuts in the public sector, however. So any new future strategy will go hand in hand with expanding their product portfolios and opening up new market segments. Using aviation technologies in other areas of industry, like automotive, energy and infrastructure also offers new growth opportunities for the aerospace industry. These are the findings of Roland Berger Strategy Consultants' annual survey "Top Management Issues Radar 2011 – European Aerospace & Defense Industry", covering 110 top managers in six countries in Europe.

"As far as the European aerospace industry is concerned, the crisis in civil aviation is past, and growth is now top priority," says Stéphane Albernhe, Senior Partner and global head of the Aerospace & Defense Competence Center at Roland Berger. "Businesses have set their sights high, and expect to get back to their pre-crisis growth rates as soon as possible."

Services drive growth in the industry

To overcome these hurdles, the aerospace industry is looking mainly to expand its product range (96%). Increasingly, companies are looking into services: 88% of those surveyed plan to expand their service side in the next few years. "In particular OEMs that offer platforms still have some way to go to catch up on the service side," explains Manfred Hader, partner at Roland Berger. "Because, so far, only 12% of their sales comes from service. That is likely to change soon: because OEMs want to tap into the business potential in service too. That means they need to adjust their business models accordingly."

New market segments for the future

Of the companies surveyed, 64% also said they were aiming to move into more business areas, to minimize the risks involved in limited product ranges and customer bases. "New companies which are moving into the market and falling budgets are compelling the aerospace industry to broaden its sights," explains Stéphane Albernhe. The North American market is still number one as far as 73% of companies are concerned, due partly to the enormous defense budget. But the industry is looking increasingly toward Asia (67%), India (67%), South America (61%) and the Middle East (52%) to ensure itself additional prospects for growth.

Diversifying into new areas

To seize new business opportunities, 22% of those surveyed are also looking at other areas of industry. "Know-how, products and services from the aerospace industry can also be used in other industries, like automotive, energy, infrastructure or medical technology," explains Albernhe. Know-how from jet technology can also be used in industrial gas turbines, for example.

M&A activity is increasing – Asian investors want Western businesses

While organic growth is top priority for the aerospace industry (92%), more than 70% of companies are also looking to mergers and acquisitions (M&A) to break into new markets and/or increase their share of existing ones. M&A transaction volume is expected to increase, especially in civil aviation, the security sector and the defense industry.

"Tier-1 civil aviation companies are looking to acquire more competitors to profit from volume and scale effects and achieve critical size in the market," says Manfred Hader. In the security field, it is mainly good expansion prospects and high profit margins that are boosting M&As: because demand in markets like Great Britain, Saudi Arabia, India, the Arab Emirates and Turkey is growing at 6-8% p.a.

It is not just Western groups that are growing, however – they are being taken over themselves. "Chinese companies in particular are seeking to buy established companies to gain a foothold in the Western markets. That's one way Asian investors can get their hands on cutting-edge technology," says Stéphane Albernhe. Conversely, the Western aerospace industry is looking more to joint ventures with Asian companies to grow in the market there.