Thanks to Ian Ferguson for this guest blog
Price to Win analyst Ian Ferguson gives his thoughts on the U.S. T-X Trainer competition...
A price shoot-out – that’s the phrase they’re using. There’s been a lot of excitement (the thousand-selling BAE Hawk finally ran out of performance puff and got dropped for a younger model before Northrop Grumman dropped out altogether, while Raytheon decided the Italians had brought a knife to a gunfight and dropped them: Leonardo stood right back up and came in punching with DRS and CAE.) Tell the truth, it’d be easy to kinda lose track. But one the question Boeing/Saab and Lockheed Martin/Korea Aerospace Industries gotta ask themselves is whether they feel lucky.
Doubtless both are well-prepared: but with very different weapons. Not the hardware: both aircraft have class, both could be contenders. On one side, LM/KAI have an off-the-shelf, fully-developed aircraft with little or no development risk. Boeing/Saab by contrast have a clean-sheet design: with a chunk of development cost to amortize. The battle is analytical. Boeing/Saab’s challenge is to take a market forecast – and then take a strategic decision on how much development cost to sink into the tender price.
Market Forecasters can be accused, sometimes justifiably, of living amongst abstractions. The relationship to reality of, for example, the phrase “the commercial aircraft surplus parts market will reach USD6.2B by 2023” is not as obvious as it might seem. At least it’s to only two significant figures. (Once in a while – thankfully not often, as he doesn’t figure in my personal forecast - I’ve wondered what revelations Saint Peter might have for me about markets I’ve attempted to forecast.) For some processes, equipment or services there really are no cost-effective ways to verify single-point estimates: and yet Consulting customers sometimes press analysts hard in the direction of their own agenda.
At the Air Vehicle level, the forecasting process is easier than for other markets. The results may not be better. The analysts tackling the challenge will find themselves in the limelight – perhaps unaccustomed, perhaps unwelcome. Will the Boeing analysts agree with the Saab analysts ? The British Aerospace view of Saab at the turn of the millennium was that they were unworldly: but Gripen sold just fine without BAE’s help. Sales Teams inevitably view analysts as unworldly, and their opinions may be valued at least for early-years sales prospects. If external Consultants have been engaged, their opinion is likely to be valued above the internal team’s view – and perhaps fed in at very senior levels. A difficult set of opinions to pick truth out of. Will Boeing/Saab be able to win, deliver and sell at a profit – and avoid the 787 scenario of locking in year after year of per-aircraft losses ?
Lockheed Martin’s challenge may be easier. In principle, there is no risk premium for the T-50: the changes needed to reach full tender compliance are negligible to the extent that LM has been flying journalists in 2017Q1. Development is effectively complete with around half of 150 orders delivered: this should give the partners a very clear idea of not only the real cost-to-produce but also the production learning curve benefits that can be priced in. Rumour is that several thousand separate learning curves are applied in Lockheed Martin’s F-35 price calculations – while that price itself comes in for relentless public scrutiny and challenge. And Lockheed Martin’s challenge is not simply accountancy, adding up all the little bits: it’s to accurately second-guess what Boeing/Saab come up with, and come in high enough to win without hanging a share-price albatross around their own necks.
These are all the analytical components of a real price-to-win shootout: a subject better understood and practised in the USA than in European Aerospace and Defence. Bottom-up analysis – price drivers, wrap rates, bargaining power of your competitor. Comparative and historical analysis for subsystems, similar systems. Parametric and alternative approaches. Then the intersection with Strategy Consultancy and Business Development: sanity-checking, strategic context and sales tactics. The best consulting projects – and the best use of consulting – are where insight leads directly to action. Better than relying on “feeling lucky.” Right, punk ?
Ian Ferguson is a Price to Win analyst with Amplio. He has over many years experiencein aerospace and specialises in helicopter upgrades and commercial aircraft.