A wave of consolidation may have been sweeping across large tracts of the industry in recent years, but one sector of the aerospace and defence market - actuation - has remained largely untouched by the phenomenon. This is about to change, analysts believe.
Actuation generates revenues of nearly $4 billion a year, but remains largely unconsolidated. Players in this market segment have therefore failed to take full advantage of economies of scale, say George Burton and Richard Apps, directors of UK-based consultancy Counterpoint Market Intelligence. But this is unlikely to continue indefinitely - and there are several catalysts for the consolidation they believe is imminent.
As aerospace manufacturers have moved to cut costs to sustain their profitability following the most recent downturn, more and more risk has been pushed down the supply chain from the primes to their suppliers. In the actuation sector this has taken the form of customers demanding ever more complex packages, which of course mean higher value - and higher cost and risk - for the supplier. A prime example is Smiths' contract for Airbus A380 landing-gear extension and retraction systems, which the company describes as "the brain and the muscle" of the landing gear.
It is not simply that lower-tier suppliers are being required to produce more complex products or systems: changes in the technology itself also have an impact on the structure of the actuation supply chain: the increasing emphasis on electric actuation requires significant investment in research and development - a heavy burden to shoulder for many smaller players.
The undercarriage and thrust- reverser sectors of the actuation market are not yet progressing towards electric actuation, but this could change. "All actuation could become electric," points out Apps. "Undercarriage players are looking at it." Although he says that these developments could take some time, "these are advanced concepts for undercarriage".
Some have cushioned the blow of the need for increased funding through the "halfway house" of partnerships: for example Honeywell and Parker work together on the primary flight control system for the AVIC ARJ21. The fact that players are already collaborating in this way indicates that more formal link-ups - mergers and acquisitions - are likely to be on the way, although Apps says that "often consolidation is unrelated to previous partnerships".
Other factors are at play too: the aftermarket is getting less "cosy" as a source of revenue, says Burton.
"Modern support contracts are moving towards power-by-the-hour - the incentive is there to make the kit more reliable," he says, adding that margins on aftermarket revenues are decreasing. And as aftermarket as a percentage of revenues shrinks, it may cause some players to question whether they wish to remain in the actuation sector as independent entities, he adds. The prevalence of legacy equipment means "there is still a good aftermarket business out there, but in major contracts going forward, aftermarket will decrease".
As technological changes and shifts in the way actuation systems are procured alter the shape of the actuation sector, this could lead to different players becoming involved in that area of the business. Blurring of the barriers between hydraulics and electrical power systems might drive some consolidation, Burton predicts. "If you make aerostructures, you can't make an engine. Aerospace equipment suppliers have the capabilities to be players in actuation." In particular, companies which already have hydraulics expertise are well placed to move further into the actuation arena.
"We expect to see acquisitions they recognise that the actuation business is becoming more specialised," says Burton. Apps adds that "players in lesser actuators may make acquisitions to provide complete solutions". For example, Eaton is "a company with a lot of background capabilities in hydraulics and an ambitious growth strategy. We could see it making an acquisition," says Burton.
Other possibilities include Parker, which has seen significant growth through acquisition, and could decide to do more in actuation. And Smiths could decide to expand its electric actuation capability.
Consolidation will not be the only form of change - Counterpoint Market Intelligence predicts that actuation outsourcing could increase to as much as 80%. "This reflects the fact that the manufacturing - high-precision machining - is relatively routine and amenable to outsourcing," says Apps.
Private equity companies are likely to set their sights on the sector, too. "Almost no company is immune to private equity. It's a sector where there hasn't been much interest. We sense they might start being interested," he says.