Q: What are some opportunities available for the A&D industry in Southern California?

KG: There are some big opportunities for a lot of consolidation over the next few years. Even large corporations are exploring consolidation. Many companies do not want as many assets as they used to have.

In terms of private equity, if there is a good deal of funding, there is a real opportunity to build portfolios and put together groups that have solid capabilities that can be integrated. The primes want more single sourcing. They do not want to have to go out to 10 different suppliers for something if they can find someone who can handle five or six manufacturing capabilities or services.

Q: What opportunities are there for smaller firms to stand out?

KG: I think the biggest thing firms have to do is decide what is going to differentiate themselves from every other mid-sized or small-sized manufacturer. I think those manufacturers that have very special machining capabilities, whether it be CNC based or single piece flow, enables them to take cost out and still make a solid margin. The second opportunity is to have a group of companies integrated into a larger product offering or service offering. This is a huge advantage because Tier 1’s do not like tying up everything in one small company. Let’s face it, the smallest part can stop a line for Airbus or whoever else, so they are definitely looking for increased models of capabilities.

Q: How did the Great Recession affect the A&D landscape?

KG: Well the recession hit everyone suddenly. The backlog of orders was strong, especially in the commercial segment, but the recession still caused significant restructuring in the industry, which led to layoffs. For instance, Boeing’s “Partnering for Success” program asks firms to sign up for 15%-25% price reductions with an agreement that they will get more business – which may or may not materialize. How do small and medium enterprises make money with these price pressures? If there is a single thing that will continue to hurt the industry, it is that you can only be so lean – it is becoming very difficult to make a decent margin on products.

Q: Can you speak more about consolidation in the aerospace industry?

KG:  I would say you see an upsurge in consolidation over the last three or four years, especially with the increase in private equity getting involved in aerospace manufacturing companies and acquiring portfolios. Clearly, there was recognition that these companies could produce a tremendous amount of cash and that growth was significant. I think what firms failed to realize was the difficulty in how are you going to make money, which again comes back my earlier comment about the biggest issue: achieving margins.

Q: What are some differences in Department of Defense vs. commercial contracting for manufacturing suppliers?

KG: The defense side of the business is not facing the same kinds of pressures; the military is still a very good place to make money because it is a cost-based system. When you negotiate with Northrop Grumman or the government you have to show your costs are justified; if you succeed, they have no problem passing that [cost] on to the government. You are not in a situation where Northrop Grumman looks at you and says, “You are going to build this valve for me for $1,000,” when you know it costs $1,500. It does not happen that way in defense. Now there are some price pressures, I will not deny that, but it is just not nearly the same.

Q: What are the challenges for growing manufacturing in Southern California?

KG: The biggest obstacle is talent. You have an aging population in almost every manufacturing center in the country. There are reasons why a place like Southern California becomes a hub for aerospace manufacturing. It has a talented labor pool and it’s a great place to live, so you have an ideal situation. But younger people do not want to go into aerospace. They would rather work for Google or Facebook, so aerospace is having an incredibly difficult time finding replacement talent. To me, it is the single greatest threat to the business here, as well as other places, but certainly Southern California. There has also been a lack of investment by the state in training. There used to be a lot more programs available than there is now, so training falls mainly on private companies. The human resources are what is necessary to keep these companies humming and growing. The loss of knowledge when you do not have people going up the ranks to replace retiring senior employees is a major issue and must be addressed in California and the rest of the country.

Q: Have partnerships or programs been effective in addressing any of these challenges or opportunities?

KG: There are definitely success stories on the small scale. Let me give you an example: College of the Canyons in Valencia has a specific program for teaching people manufacturing using CNC machines, which has been very successful. So, the answer to that is yes, when it is done right. However, these solutions are always done on too small of a scale. I really think there is an opportunity for colleges and universities to set up these types of trainings and I think they would get a lot of students if you advertise them at job fairs. These people would snatched up in a very short amount of time because it is so difficult to find talent.

Q: How would you like to see AMP SoCal support the industry?

KG: The best thing you can do, and it sounds like you are doing this, is raise awareness. I think in many respects, the industry has been taken for granted because it has been here for so long. California does billions of dollars’ worth in aerospace and defense every year so it is amazing to me there is not more awareness when you consider those numbers.