“There are different ebbs and flows to the demands of the products if you’re Tier 1 or Tier 2,” Brodsky explains. For instance, a Tier 2 provider will see a downturn in a product at a different time than a Tier 1, and it faces different and usually less-direct risks related to OEMs. Also, profit margins tend to be different—and better—at the lower level.

A&D advisers echo Brodsky. Boeing’s pretax margin is expected to be 8.1% this year and Airbus 7.5%. That is compared with margins ranging mostly in the 10-25% range for Tier 1 and Tier 2 suppliers, according to Fairmont Consulting Group.

This is a primary driver behind supply-chain squeezes like Boeing’s Partnership for Success and Airbus’s Single-aisle Cost Optimization Program-plus, which affect Tier 1 providers first. “The paradox of margins is driving OEMs to look toward the supply chain for cost reductions and improved productivity,” Fairmont says.

This in general follows the growth of Tier 1 providers such as Spirit AeroSystems, UTC, Honeywell and Rockwell Collins, as OEMs have turned to suppliers for about two-thirds of their sourcing. In aerostructures, OEMs also are demanding integrated suppliers and risk-sharing partners, so Tier 2 companies are consolidating to become more like Tier 1s, according to global advisory company AlixPartners.

Brodsky acknowledges that economies of scale still matter, but asserts that suppliers can generate more heft without necessarily changing tiers. “The Tier 2s have now become mammoth corporations,” he notes.

At the same time, smaller Tier 2s and Tier 3s have to adapt to market evolution and ramp-up requirements, AlixPartners says in its July global A&D outlook. Likewise, Brodsky notes that his capital investments have become “larger and larger,” especially to become automated and find enough skilled workers, but there is relatively little incentive for small businesses to do that repeatedly as tax write-offs lessen over time.

In the end, long-term visions become the deciding factor. “It depends on that company,” adds 40-something-year-old Brodsky. “If it’s a private company and you’ve got older owners, you’re going to see less investment from them. You’re going to see much more investment from younger owners like myself or private equity-backed organizations that still fall under the small-business umbrella.” 


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