Business as usual no longer cuts it for small suppliers being nudged aside by their larger competitors in the aerospace industry. That was the main message of the aviation panel hosted by the ACG 101 Corridor held earlier this month. A forecast presented at the meeting by Janes Capital Partners, an Irvine-based investment banking firm to the aerospace industry, showed that the minimum threshold for companies low on the aerospace supply chain is rising dramatically, and making it increasingly hard for small companies to remain competitive. In 2010, a company needed revenues of at least $35 million to offset fixed costs. By 2020, a company will need revenues of at least $100 million to effectively compete and make a profit, according to Janes’s calculations. That’s not to say that companies below that amount can’t stay in business— but it will be tough, Stephen Perry, managing director, told the audience of about 70 people at the meeting on May 2. “They can still make lots of money but they do it with scale on lower margins,” Perry said. Small suppliers to the industry said they are changing their business strategy to remain competitive. Personal relationships, which were once enough to bring in a quick $10 to $20 million in new business, no longer cuts it in today’s competitive environment where Boeing Co., Airbus and other aircraft companies look to cut back on the number of suppliers they use. To survive, industry suppliers from Burbank to Camarillo are collaborating with their competitors, making acquisitions, adding automated equipment, and offering engineering services. These business owners know that it will take time to grow a business from $5 million to $50 million. “You just can’t snap your fingers and change it,” said Erich Zimmermann, chief operating officer with CK Technologies Inc., a Camarillo test equipment manufacturer for aerospace and other industries. In the current business climate, suppliers are feeling pressure from supply chain and inventory management, as well as cost sharing with the aerospace companies on research and development. That R&D cost can be exceptionally expensive and carries the risk that it will not be successful, Perry told the audience. Dozens of suppliers from Burbank into parts of Ventura County and up into the Santa Clarita Valley fall well below the threshold in the Janes’s forecast. These companies are the ones that will have the hardest time in the coming years. CK Technologies brings in revenue of $5 million to $10 million. Air Electro Inc., an electrical connectors and contacts manufacturer and distributor in Chatsworth, brings in about $25 million in revenue according to President Steven Strull. S&H Machine in Burbank is an $8 million company, according to its president, Dave Fisher. To survive and thrive, these companies will need to invest to achieve scale, Perry said. They will need to buy new machines, move into larger facilities, invest in R&D to create either new products or new processes, or make an acquisition that adds a new geographic area or customer base, he said. S&H Machine has already taken some of those steps. The company has invested in automated equipment to do more assembly work with fewer employees, Fisher said. The company also has added engineering support to what it offers customers. There have been other, tougher decisions. For example, Fisher now gives clients prototype parts for free, eating the cost. It’s worth it in the long run, he said “The more we say yes the more we position ourselves for growth and to win business,” Fisher said. Air Electro supplies to Boeing and Airbus and is a subcontractor to tier one suppliers such as Honeywell and General Electric. The company, which dates back to the 1950s, is under pressure to remain quick and responsive to its customer base, Strull said. “As long as we are performing we have a sense of comfort,” Strull added. International sales have become increasingly important to Air Electro and its competitive strategy. The company has set up sales offices in Europe and Israel and is preparing to move into the Asian market. The company has been able to leverage its contacts in aerospace to enter new markets. For example, thanks to its relationship with GE, it now also supplies parts to the alternative energy industry. Entering that market “becomes a decision of how you want to promote and market it and setting up an infrastructure for those new industries,” Strull said. The challenge in diversification is to get the right mix. Ten percent to 20 percent is in a good range while a 50/50 split puts a company into a “no man’s land” where it’s neither an aerospace company nor an energy company, Perry said.
With Pressure On, Aerospace Suppliers Make Changes
