Good growth, reduced profitability

With a view to the Group’s future, several major investments in the strategic growth areas of Space and Aerostructures were the main focus of RUAG’s development in 2017. The Space division started production at not one but two new sites in the United States. The facility in Decatur, Alabama, will be producing carbon fibre structures along the same lines as the out-of-autoclave procedure successfully introduced for the US launch vehicles in Emmen last year. Titusville, Florida, has successfully begun large-scale production of structures for the 900 satellites of the OneWeb satellite internet project. In addition, in Emmen the Aerostructures division has put into operation a state-of-the-art surface treatment facility using the environmentally friendly TSA method (chromic acid free anodizing). Moreover, in Eger, Hungary, the division has opened a new production facility in a “best-cost” country.

The encouraging order intake figure reflects the numerous successes in acquiring contracts and implementing projects. RUAG Space, for example, has won the right to supply (among other things) the control computer, various mechanical components and the protective thermal insulation for the next twelve satellites for the European navigation system Galileo.

RUAG Aerostructures was able to complete its transfer-of-work project begun in 2014, taking on full responsibility for the supply chain for two fuselage sections of the Airbus A320. With this, RUAG is making a key contribution to the manufacture of the A320 and will be able to fully exploit the model’s enduring commercial success.

The Aviation division has ensured longer-term capacity utilization by renewing the 5-year service-level agreement (SLA) for maintaining the Swiss Air Force’s aircraft fleets. The upgrade programmes for the Swiss F/A-18, F-5, Cougar transport helicopter, PC-6 and 35mm anti-aircraft guns progressed as scheduled. With these projects, RUAG can make
an important contribution to the longer-term operational capability of these systems, which are also crucial to preserving the Swiss defence sector’s know-how, for ensuring this industry’s continuing development and for maintaining RUAG’s own level of expertise. Moreover, the development of the business in MRO services in Australia for the F/A-18 and the new American F-35 Joint Strike Fighter was exceptionally successful.

RUAG Ammotec chalked up a success which bodes well for the future: the division gained consent for a licence to set up an ammunition production facility in Brazil, a market which had until now been completely closed. For RUAG Ammotec, this not only opens the doors to the world’s second-largest ammunition market, but also gives it additional options for increasing the flexibility of its production. The division is currently looking into a variety of scenarios to see whether, how and when it will be able to put its plans into action. In this regard, RUAG is also looking to preserve and increase its ability to compete at international level, which will ultimately also benefit its main customer, the DDPS.

For RUAG Defence, too, the renewal of the 5-year SLA for over 100 systems used by the Swiss Armed Forces was pivotal. It allows the division to make long-term plans and increase its efficiency, to the benefit of both partners. It also succeeded in forays into two new markets. Swiss manufacturer Boschung is developing its snow-clearing systems
for airports based on RUAG’s robotics platform, and with the deployment of the “Tactical Access Node” (TAN) voice and data router by the multinational battle group in Lithuania, the division was able to acquire its first ever NATO contract. RUAG’s communications technology is allowing different armed forces with different systems to communicate with each other.

An important step for the future is the separation of the Cyber Security area from RUAG Defence. The software-based business with internet security is fundamentally different from defence technology and requires a broader route to market. From 1 January 2018, the business unit will operate as a separate entity at Group level and is thus being further strengthened for its planned and essential growth.

The announced resignation of Board Chairman Hans-Peter Schwald on the occasion of the AGM of 26 April 2018, which had been planned for some time, marks the end of an era for RUAG. Hans-Peter Schwald, who has been a member of the Board since 2002 – a total of 16 years – and its Chair since 2014, has played a decisive role in the Group’s development from four state-owned and operated enterprises into an international technology group. After completing this process of growth and reorganization and successfully realigning itself, RUAG is now entering a new phase in its development.

Another change at the highest level of management occurred at the top of RUAG Ammotec. Cyril Kubelka left the Group after 14 successful years as the division’s CEO. The handover to Christoph Eisenhardt was seamlessly completed on 1 October. There was also a change at the top at RUAG Defence. Due to the way the division was developing, CEO Dr Markus A. Zoller made the decision to embrace a new challenge and left the company at the end of October. Since then, RUAG Defence’s Senior Vice President NEO Andreas Berger has been running the division on an interim basis.

Since 2015, the Swiss Federal Council has been giving some thought to RUAG’s future development in its role as the Group’s owner, together with the Federal Department of Defence, Civil Protection and Sport (DDPS), the Federal Department of Finance (FDF) and RUAG itself. The Confederation and RUAG are seeking a solution which guarantees RUAG’s provision of services to the armed forces and thus ensures that Switzerland’s security is not compromised. At the same time, the solution should allow the business to continue to grow, while reducing the risks for the Confederation, in particular with regard to IT security and financial liability. Existing jobs are to be protected to ensure that the company’s industrial capabilities remain in place.

To allow relations between the Confederation and the company to be configured in the best possible way and further strengthened, the Board of Directors has also created a new role, that of Vice President Owner Relations. The company was able to attract a competent, experienced figure for this challenging job in the person of the former Treasurer for the City of Bern, Alexandre Schmidt.

RUAG went ahead with several Group-level projects in 2017 with the aim of fundamentally improving the Group’s efficiency and performance across the board. Pivotal to the Group’s sustainable development is the multi-year Integrity@RUAG initiative. This provides a consistent anchor for compliance within the Group at all levels. Among other things, the Group introduced a new Code of Conduct in 2017. It also created an autonomous Compliance & Risk Management unit with its own Vice President, and every division will now have a Compliance Officer.

RUAG is looking to strengthen its ability to compete with the Groupwide ROS (RUAG Operating System) initiative. With this, the Group is introducing uniform lean management principles across the board in production and service delivery. These principles will make RUAG’s processes leaner and more efficient, as well as improving the learning capacity and accountability of the organization.

The economic environment seems set to remain unchanged for RUAG in the coming year. On the one hand this means that a positive global economic climate is providing growth stimuli in all areas. Added to this, defence budgets in the core markets of Switzerland and Europe are continuing to rise in general. On the other hand we have the worldwide increase in regional conflicts. These are making more countries subject to export restrictions, and they can thus no longer be considered as markets for military products and services. Accordingly, RUAG is expecting a further shift in the balance of its sales from the defence to the civil segment. Prospects for the three strategic growth pillars of Space, Aerostructures and Cyber Security are looking promising. The Space division’s new production sites in Decatur and Titusville will also improve the market opportunities in the institutional space business in the United States. The Aerostructures division can expect to see continuing growth in global demand for aircraft, and in particular increasing demand for the single-aisle models produced by Airbus. For the Cyber Security business unit, the global megatrend of digitization will continue to be the driver of growth in 2018. RUAG’s top priority for 2018 is the “RUAG Continued Development” project. The owner’s strategy of the Swiss Confederation must in future define appropriate parameters for the two areas which make RUAG what it is: on the one hand the activities it performs in a competitive environment (80 % of its goods and services) and, on the other, its duties to supply the armed forces, which are almost statutory in nature. The spectrum of solutions spans both the incipient – and necessary – process of decoupling of  relations between the Confederation and the Group, and a possible privatization or partial privatization.

The Federal Act of 10 October 1997 on Federal Armaments Companies was a milestone for the Swiss defence industry and is what made the establishment of RUAG possible in the first place. Based on know-how which had been built up over decades, a target-oriented owner’s strategy on the part of the Federal Council and an entrepreneurial Board of Directors and Management, an internationally respected and successful technology and defence company was developed and built up. However, to allow RUAG to continue to write the success story which started at its foundation and to develop further, the company needs to retain commercial freedoms and opportunities to assert itself against its competitors in the international arena. Its future competitiveness is also of vital importance to Switzerland as a centre for industry and technology, as well as to the country’s defence and security policy. RUAG has to be in a position to adapt in line with constantly changing markets. Thus changes also need to be made to the current operating conditions for the business. Otherwise we would run the risk of RUAG being confined to a “straitjacket” that no longer reflects the times. The Board of Directors and Group Executive Board are convinced that RUAG can still succeed even as global competition becomes fiercer. We look forward to further developing the business together with our shareholder, our customers, partners and employees, and thank you for your loyalty and your trust, as well as for the opportunity to work with you and for your dedication.