Ambitious UK aerospace companies have tended to seek expansion across the Atlantic, rather than the English Channel, lured by the US defence market
No other country's aerospace industry can match the UK's success in breaching the fortress of the US defence market. Helped by a strong pound and London and Washington's "special relationship", a number of British companies have gained substantial footholds in the USA over the past decade. These operations - often run under special security agreements (SSA) which limit the transfer of technologically sensitive information to non-US parts of the company - have allowed these UK groups to dine at the same Pentagon table as their US-owned competitors.
Apart from BAE Systems and Rolls-Royce, both of which have large US subsidiaries, the UK's key tier one suppliers - Cobham, GKN, Meggitt and Smiths Aerospace, as well as smaller specialist companies such as UMECO - have bought their way into the US market. GKN has purchased nine US companies in the past five years and today two-thirds of its Aerospace Services division's 6,000 employees are US-based (GKN's Westland helicopter business, which it is selling to Agusta, is a separate business unit). This stateside success has contributed significantly to the division's growth of 25% a year over the past decade from $250 million to $900 million in revenues. Since 2000, sales have been increasingly skewed towards the defence market, says group director of sales, marketing and engineering, Graham Chisnall.
GKN Aerospace Services' biggest acquisition has been its 2001 purchase of Boeing's structures plant next to - and a major supplier to - the F-15 and F/A-18 assembly plant in St Louis. GKN has recently been linked with an even bigger Boeing prize - the US company's structures operation in Wichita - but a purchase looks unlikely. Strategically, the St Louis acquisition, which added 1,400 employees, was a perfect fit, says Chisnall. "It got us on to the turf in a big way. GKN doesn't challenge the primes and never will. What we got in St Louis was a win-win situation, where Boeing passed its assets over to someone who wants to be a world-class supplier." The fact that GKN can bring its own technological expertise to bear is crucial to the relationship, says Chisnall. "If you're simply offloading a nickel and dime operation, you might as well just pass the work to a low-cost economy."
GKN Aerospace Services also has plants in San Diego, California; Kent, Washington; and Tallassee, Alabama. Last year it established a secure factory in Cromwell, Connecticut to work on a $3.5 million contract to develop low-observable engine vanes and air inlets for the Lockheed Martin F-35 Joint Strike Fighter and its Pratt & Whitney F135 engine, using hybrid resin transfer moulding. It is also teamed with Bell Helicopter and Lockheed Martin to offer a variant of the EH101 in the VXX US presidential helicopter competition. Chisnall says the acquisition spree is likely to continue. "It is absolutely our strategy to expand in the USA."
Cobham has been one of the UK aerospace industry's most acquisitive companies over the past five years, spending £167 million ($300 million) last year alone on 13 businesses, most of them in the USA. They range in size from the 300-employee Litton Life Support business, which it bought from Northrop Grumman for $73 million, to the $1 million it paid for one of its suppliers, Xybion Sensors in Florida, which employs six people. This year Cobham has bought DTC Communications, which specialises in cameras and tactical radio links for the law enforcement sector, for $48 million, and Seattle-based airborne communications business Pentar.
Takeover strategy
"Acquisition is a very important part of our business," says chief executive Alan Cook. "We don't buy companies that need a lot of remedial work. We buy successful companies with strong management, operating in complementary areas to us." Key to the takeover strategy is allowing the existing managers to remain and focus on their market, says Cook. "We don't impose the Cobham culture down into the business units, beyond asking that they follow our accounting practices. One of the things we've been good at is getting owner-managers to stay with us. We don't rip the old names down from the walls within 24 hours. We prefer to keep the entrepreneurial spirit."
Having semi-autonomous businesses in the USA - run by Americans - helps win over those who place defence and homeland security contracts. "Buy America is alive and well and, since 9/11, there has been even more of a concern among politicians about where technology is going," says Cook. "The only way we can be successful in the USA is by having US citizens in management and operating under SSAs with outside boards of directors. It means there are parts of the business I can't visit, but we are used to operating there. Would we prefer it to be relaxed? Yes, but we understand the reasons and we work around it." Being a UK company clearly helps. "It's very difficult for an EADS or Thales to operate in the US defence market," says Cook.
Smiths Aerospace's production facilities are split 50/50 between the USA and the UK. Smiths - which originated as a Victorian London watchmaker - began seriously developing a global aerospace operation in the 1980s and 1990s by acquiring a number of US avionics, mechanical systems and component businesses. Smiths doubled the size of its aerospace activities at a stroke in 2000 when it acquired TI's largely US-based Dowty Group and aerospace sales are now $1.6 billion. "We're always in an acquisitive mood, because that's how Smiths developed its portfolio," says Smiths Aerospace chief executive John Ferrie. "But now we're more focused. Any acquisition must fit in with our product and marketing strategies." The business has critical mass to do battle with major US first-tier suppliers, says Ferrie. "We now have a sufficient footprint in the USA to compete for Department of Defense business and we have an excellent relationship - we're involved in all the major defence programmes. Based on what we are winning, we're one of the top four tier-one suppliers in the USA."
UK companies that look across the Atlantic to expand their business are not attracted just by DoD contracts, says Terry Twigger, chief executive of Meggitt. Businesses are simply much easier to acquire in the USA than in continental Europe. "There's a relatively free market in companies," says Twigger. "This means most of the deals get done over there. If there were acquisitions to be had in Europe, we would be there too." But potentially lucrative Pentagon contracts help, he adds. "If you want to do business in the US defence market, you have to be there."
A series of acquisitions, including two late last year - Howden Airdynamics and Western Design Howden - has seen the DoD become Meggitt's biggest customer. Revenues from the defence market have gone from 25% of the company's sales in 2001 to 44% today. Like its UK counterparts, Meggitt operates under three SSAs, which means Twigger and his fellow British directors have to appoint outside directors to oversee the business unit, give a week's notice if they want to visit one of its plants and cannot enter parts of the facility handling the most sensitive projects. Despite this, Twigger is sanguine. "It's not a particularly onerous obligation and you learn to work within the system," he says.
Meggitt's acquisition strategy is similar to that of Cobham - the two companies have their head office in the Dorset town of Wimborne. It picks off companies offering technologies that will add value to the products it already offers. "We know most of our competitors and there are some out there that we would very much like to own, and we will track these, often for a long period," says Twigger. "We're also plugged into the network of bankers and brokers. We're fundamentally looking for businesses that conform to the Meggitt business model."
UMECO, another Top 100 player, is essentially a holding company for about 15 specialist distributors of aerospace consumables and components, all trading under their own brand names, such as Aeropia, Pattonair and Richmond Aircraft Products. Seven years ago, it was a moderately successful UK business, based near London's Gatwick airport, turning over £20 million.
Ripe sector
Chief executive Clive Snowdon and his fellow directors bought into the company because they saw the sector in which it operated as being ripe for a shake-up. "The distribution of low-value products in the aerospace industry had the most inefficient supply chain imaginable, where customers had too much stock but never the right part," says Snowdon.
By the late 1990s, UMECO had become market leader in the UK. But Snowdon says: "We always knew the real market was somewhere else." That somewhere else was the USA, and in 2000 and 2001 UMECO more than doubled in size when it bought two companies - Norwalk, California-based Richmond Aircraft Products, a supplier of vacuum processing materials, and Fort Worth, Texas-based Abscoa, which supplies fasteners, seals and other components.
The company does not manufacture its own products, but adds value by managing the supply of lower-value components and consumables. "We don't make things, because the moment we do, it will be a massive conflict of interest and result in chaos," says Snowdon. UMECO's biggest source of revenue - worth £55 million a year - is a deal to supply Rolls-Royce's Derby, UK and other European factories with all their parts up to £100 unit value. This year, the company won a similar contract to manage the inventory of hardware components for Bombardier, which Snowdon says "significantly extends our capabilities in the North American aerospace market". The arrangement initially covers the Canadian aircraft manufacturer's Montreal factory, but is likely to be extended to its other plants in Belfast, Toronto and Wichita.
Another key move for UMECO this year was purchasing Tailored Logistics (TLC), based in Fort Wayne, Indiana. The company provides kits of components for the overhaul of military equipment and its principal customer is the DoD. Although small - its sales are $15 million - TLC's prospects are good due to the huge repair backlog for military equipment returning from Iraq. The acquisition is an important "prong in our strategy", says Snowdon, "to get into the staggeringly large US DoD budget".
With US defence spending, the pound and transatlantic political ties all set to remain strong for the foreseeable future - and new opportunities emerging in the civil sector as the airline market recovers - the UK spending spree in the US aerospace market is likely to continue for some time.
MURDO MORRISON / LONDON AND BRISTOL
Source: Flight International
