Innovation

Risk not, want not

Written by Allan Lynch

Risk-sharing. Remember that phrase-it may be coming to a deal near you.

Traditionally the purview of lenders and insurers that sought partners to back financial deals, risk-sharing has become the norm in the aerospace sector. Its most recent beneficiary is Composites Atlantic Ltd. (CAL) of Lunenburg, N.S.

In January, the $18-million-a-year manufacturer won a contract to produce the cockpit interiors for the new Airbus A380. With up to 800 seats, it’s the largest passenger aircraft in history.

CAL won the bid largely due to its willingness to supply the first five interiors to Toulouse, France-based Airbus Industrie SAS free of charge, at a total projected expense of $5 million once R&D, tooling and materials are factored in. The payoff, however, is a guaranteed contract that’s worth as much as $60 million on projected sales of 600 aircraft over the next 30 years. (The price per interior will drop to $100,000 as startup costs are defrayed.)

“Because we share the risk,” explains CAL president and CEO Maurice Guitton, “they give you the contract for life, while in the past they could compensate you and go somewhere else [in mid-contract.]” And with one Airbus deal under its belt, CAL has an inside line on future deals with the company.

Why is risk-sharing the norm in aerospace? Because the industry comprises many small suppliers vying for the business of a handful of huge customers, the 800-lb. gorillas can buy product on their own terms. Suppliers in similarly structured industries may eventually find themselves in the same position.

CAL’s achievement speaks also to the importance of face-to-face contact with prospective clients. You’ll constantly find Guitton and his staff in Seattle, Toulouse, Montreal and Sao Paolo, homes to the world’s largest aircraft manufacturers. “That’s where the purchasing people are, and that’s where the business is,” Guitton says. “You have to go there, make contact, keep showing your face and showing your technology, answer some bids and, sooner or later, you will get something.” CAL worked on Airbus for 10 years before finally winning a job.

Price was also a factor in securing the A380 contract. The cost of doing business in Lunenburg is low by Canadian standards, and Canada is a bargain compared with other industrialized nations-so CAL can produce a superior product at prices cheaper than those of its foreign rivals. As the loonie drops against the euro, Canadian suppliers are becoming even more attractive to European buyers. If you’re searching for new export opportunities, go east.

Originally appeared on PROFITguide.com
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