Interview: Using innovation to create
sustainable growth
Prism / 1 / 2019

Interview

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Interview: Using innovation tocreate sustainable growth
How Leonardo is preparing for future
market challenges
An interview with Alessandro Profumo, CEO, Leonardo S.p.A.
(formerly Finmeccanica Group S.p.A.)
Francesco Marsella, Giancarlo Agresti, Andrea Visentin
Alessandro Profumo is the chief executive officer of Leonardo
S.p.A., a role he has held since May 16, 2017. He has also been
the honorary chairman of AIAD (the Italian Industries Federation for
Aerospace, Defense and Security) since July 2017 and chairman of
the Fondazione Ricerca & Imprenditorialità since February 2018.
Born in Genoa, Italy on February 17, 1957, Profumo holds a degree
in business economics from Bocconi University. In 1977, he began
his career in banking, in which he worked for 10 years, before
joining the consulting sector at McKinsey & Company in 1987. In
1994 he joined Credito Italiano, starting out as the deputy generalmanager, and in 1997 he was appointed chief executive officer
and led the transformation of Credito Italiano into UniCredit Group.
Under his leadership, UniCredit Group became a leading European
banking player, growing from 15,000 to over 162,000 employees,with branches in 23 countries.

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Leonardo is active in many business areas, fromhelicopters, aircraft and space to electronics, defense
and security systems. What do you see as the mainmarket trends that will most affect your diverse
business?
Three global megatrends will sustain the development of
the aerospace, defense and security (AD&S) sector overthe next few years: security and geopolitics, with growing
geopolitical instability in different parts of the world, such
as Asia, the Middle East, North Africa and Sub-SaharanAfrica; the globalization of the world economy; and theadvent of new technologies. These dynamics will cause
the majority of countries to increase their investment in the
AD&S sector, budgeting additional resources for the period
2021–2027. Global defense budgets are also steadily
growing, and will be over $2,100 billion in 2027, a 31.4
percent increase compared to 2008. In Europe, we foresee
opportunities not only due to the European Defence Fund
(EDF), but also thanks to spending increases in many
NATO countries, which are investing to hit the statedtarget of budgeting 2 percent of GDP for defense by 2024.
We also expect to see the US market growing, as well as
the Middle East and Asia. In the aeronautic sector, we seesound growth in civil markets as well, with a positive trend
for both turboprop aircraft and outsourced aero-structures.

“Global defense
budgets are alsosteadily growing,
and will be over
$2,100 billion
in 2027”

Among disruptive technologies, suchas AI, robotics, the IoT and autonomous
flight, which may influence Leonardo
the most?
Leonardo is a company built on thelatest technology and is deeply, but not
exclusively, rooted in Italy’s industrial
fabric. We know how to combine our skills
with intensely innovative technologies,
enhanced through a balance between
research that is open, self-financed,
and financed by third parties. In 2018,
Leonardo employed 9,000 people in R&D
activity, such as our engineering and CTO
divisions, equal to about 20 percent of
all staff. Our high rate of technologicalinnovation and strong R&D expendituremean we hold a wide patent portfolio.
In 2017 Leonardo spent EUR 1.5 billion
on R&D activities, 13.4 percent of grouprevenues. We are at the leading edgeof the latest disruptive technologies fordual use: civil and military applications.
For example, don’t forget that unmanned
vehicles have been employed for morethan 20 years. Applications began in the
military, with the unmanned revolution
spreading to the civilian world. Now all
robotics technologies flow both ways.
We deal constantly with Big Data for civil,
dual and defense applications. You havenot mentioned cyber, but cyber is again
a technological area in which we are fully
active and committed, for both security
and defense applications. Even the IoT has
civil, government and defense applications– there is an Internet of Battlefield Things,
for instance. And there is much more,from advanced, even exotic, materials to
new-generation microelectronics. Since
we are involved in different businesssectors, we must master a broad rangeof technologies and leverage them across“In 2017 Leonardo spent€1.5 billion on R&D
activities, 13.4 percent ofgroup revenues”
multiple domains. As a matter of fact,
the latest disruptive technologies will alsoenable different business models and new
ways and methods of creating Leonardo’s
products.

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How is the competitive environmentchanging? Which are, in your opinion,
the sectors in which new entrants are
threatening the status quo?

programs, at least in the defense domain.
Meanwhile, the technological edge isconstantly moving higher. This is the
key to remaining competitive: continue
to invest to renew know-how andcompetencies in order to cope with new
requirements, which demand innovativetechnologies that most newcomers
cannot provide. At the same time, these
new solutions need to remain reasonably
affordable; otherwise, a relevant part ofthe market will be lost. All of this means
new markets are opening up due to

New players are indeed entering themarket, but this is not due to any loweringof technology barriers. The very basic
entry barrier may actually remain stable,
therefore allowing newcomers to join.
They are usually strongly supported
by local government investments andtechnological advances and the latest
customer needs, while mature markets
can be abandoned as they shrink or stop
being attractive. Just to mention one
example, the “privatization” of space is an
ongoing revolution.
The unmanned aerial vehicle (UAV)
revolution is considered the “next big
thing” in the aerospace industry. Whatis the Leonardo view on the market?
What are the key issues to solve?
The hobbyist UAV is now a commodity,
while heavier and more advanced UAVs
(the so-called “prosumer” UAVs) are being
exploited for a variety of roles, which willgrow further. We still need to see larger
and more capable, expensive and complex
air vehicles enter the market. Thesesystems will provide both new capabilities
and a cheaper and more effective
replacement for traditional solutions. There
are, nevertheless, barriers in terms oftechnology, certification, safety, security
and air-space management. We cannot
believe that an unmanned aircraft would
be allowed to fly directly over our heads,
accepting lower safety and security
standards than for manned ones. The
opposite is true. Safety requirementsare being constantly increased, and thisdemands new technologies and solutions,which bring additional complexity and, tosome extent, weight and costs. The pathis clear, but it will take time, starting withlighter vehicles and specific roles andmissions, before moving on to heavier
air vehicles, and ultimately travel andtransportation. You will probably first see asingle pilot in the cockpit, then unmannedcargo, and only then, unmannedpassenger vehicles.
The space sector is increasing inimportance, as these technologies
are integrating more and more withterrestrial applications. Do you see
upside market opportunities in thisarea? Are you going to expand thespace division’s importance andprograms?
In 2022 the expected total value of thespace sector, including manufacturing
and services, will be approximately
EUR 114 billion, with a CAGR of
4.3 percent. Leonardo intends tostrengthen its services with Telespazioby exploiting the potential of the “Space
Alliance” in multiple ways. We will
look at consolidation in some specificgeographies and vertical markets in the
sector of satellite telecommunications
and geo-information, expand its role as asupplier of ground segment and systems
operations, increase involvement inspace economy projects, and adopt new
business models – also by exploiting
key innovations such as Big Data, data
analytics and LTE. The European space
strategy is laying the groundwork for solid
future growth in European space activity.
The European industry has been called

upon to contribute to the definition of
the strategy, becoming recognized as animportant stakeholder. We expect thisto continue in the delivery phase of thestrategy itself. We are also primed totake advantage of new business models
that are emerging in private spaceflight,
an industry called “new space”. The
protection of space assets, from satellites
to orbital space stations, is also a priority
issue, one to which we as an industry
can make a very important contribution.
Leonardo, as an international group, has aleading role in the European Commission’s
Galileo and Copernicus space programs.
Through Spaceopal, a joint venture
between Telespazio and the German
Space Agency, Leonardo is responsible
for managing the entire Galileo system
and its performance, including providing
some of the constellation’s cutting-edge
technologies.

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“In 2022 the expected total value of the space sector,
including manufacturing and services, will beapproximately €114 billion, with a CAGR
of 4.3 percent”
What do you think is the best strategy
to drive additional growth for
Leonardo?
We are entering a new phase in which
our core markets are going to grow atabout 6 percent, and we have a number ofquality products that are highly valued bycustomers, which positions us well in lightof key trends. Our enhanced businessapproach will increase Leonardo’s
penetration in key markets to boost
international business development. We
also need to continue to rationalize andstrengthen the portfolio, reshaping the
focus on core products and technologies,
and reinforce ourselves throughpartnership or M&A activities. All three
key Leonardo businesses – helicopters,
aircraft and electronics for defense andsecurity – will contribute to our growth,
including, of course, our customer supportand service offerings. At the same time,
Leonardo 2.0, the full deployment of our“One Company” model, will continue
the essential redevelopment of theorganization to leverage our key strengths.
We must make Leonardo work as one
company, leveraging cross-divisional
technologies, with a new approachto support best-in-class innovation.
Approximately 12 percent of revenues will
be invested in R&D in 2018, 95 percentof which will be dedicated to productdevelopment to help us better meetcustomer needs.

We are also performing continuous
portfolio management and assessment: insome cases, we are ending products andproduct lines, and leaving segments which
are not profitable enough. This enables us
to concentrate our resources on the mostpromising areas, those that guarantee
long-term business sustainability.
What are the strategies outlined inyour recent industrial plan to increase
operational efficiency and cash
generation?
Leonardo is carrying out an integrated
cost transformation program as partof our 2018–2022 industrial plan. Thistargets full exploitation of inter-company
synergies and aims to drive widespread
understanding of where spending can be
reduced, in terms of both external andlabor costs. Cost transformation initiatives
are currently under way in areas including
direct procurement costs, engineering,production, logistics and overheads.
Investing in sustainable growth andthe latest technologies is a key target.
We foresee making selected, marketdriven investments, at a level 150–200
million times higher than our 2015–2016
average. These will allow us, on the one
hand, to increase our emphasis on key
technologies and products for long-termsustainability, while making short-term
investments, such as around digitaltransformation, for the full deployment of

the One Company vision. Implementing
the latest technologies, such as the IoT
and Big Data analytics, is a fundamental
part of Leonardo’s activity, as I havealready said. We are operating at theleading edge of innovation across multiple
areas, from the space sector to unmanned
vehicles, for civil, dual and defense
applications, including Earth observationand monitoring of critical infrastructure.
What is Leonardo going to do to
anticipate changing market needs andavoid a passive strategy?
We are surely not passive at all – quite thecontrary! We aren’t sitting idle, waiting
until a potential customer knocks on ourdoor asking for a specific solution to meet
its requirements. Instead, we do ourown internally funded research, and are
constantly assessing which technologies
are most promising andneed to be exploited in order to ideally
position Leonardo to meet future
requirements. We are frequently
proposing new technologies andapplications to potential customers, before
they start thinking about them or their
possible uses. This process can uncover
new requirements and needs. But it isobvious that, in many cases, we cannot
develop these technologies without
government investment. This is different
to civil aerospace, in which we are very
active. In this domain you first have todevelop the technology, the product, andthe service, and only then will customers
eventually come and buy.
Cyber-security is gaining more andmore importance, as traditional andnew products require connection withthe external environment and third
parties. Will cyber-security become arelevant business line for Leonardo?

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Leonardo is at the forefront of cybersecurity, offering sophisticatedintelligence systems and dedicated,
real-time network information analysis
to police forces, government agencies
and private companies, thanks to our
security operations centers in Chieti in
Italy and Bristol in the UK. These operate
24 hours a day, with teams of cyberexperts. Leonardo’s main projects include
the ongoing NATO Computer Incident
Response (NCIRC) program, the largest
initiative in the cyber-security field outside

In line with the development guidelines
expressed in our new Industrial Plan, in2018 we began work on a CVC fund that
could contribute towards implementing
our technological roadmap. Leonardo is
the largest Italian manufacturing company,
measured by revenue, to have launcheda CVC fund.

the United States, which protects theinformation and ICT infrastructure at morethan 70 NATO sites in different member
countries.

on this?

How does Leonardo address corporate
venture capital initiatives? To what
extent do you think this practice could
contribute to the innovation cycle?
Thanks to our participation in European
research programs, Leonardo has
developed a solid network of research
institutions, universities and SMEs,
alongside our own investments inresearch & development. The company
is increasingly oriented towards creating
an “ecosystem of innovation”, based on
implementation of technological R&D
initiatives focused on open innovation,
through creation of synergies between
universities, research organizations,institutes and SMEs. This strategy aims
to build the critical mass necessary
to compete in international markets,
contributing to the progress of the ninth
United Nations Sustainable Development
Goal around a multi-annual financial
framework. Also, in terms of corporate
venture capital, Leonardo is among theprime movers in Italy, contributing tostrengthening the AD&S supply chain.

Do you plan to treat new embryonicbusinesses, such as UAVs, throughdedicated and vertically integrated
entities? What is the Leonardo view

We are currently assessing what could
be the most efficient and effective
organizational structure for the“unmanned” sector. This technology has
ramifications in the air, on the ground,
above and below the sea, and even inspace. We are ascertaining how to best
manage this area, in which Leonardo hassignificant experience and capabilities.
The idea is to cross-leverage capabilities
and technologies that are spread between
several divisions, but that could probably
be better coordinated and exploited. And
we also understand that, in some cases,
we should allow businesses a degree of
independence and autonomy: this is what
we did when we acquired full control of
Sistemi Dinamici, a small company whichdevelops and builds unmanned rotary air
vehicles. Another example is in the cyberdomain, for which we want to concentrate
our activities under a single roof toallow the division to cope with a fastertechnology-to-product-to-market cycle.

“...thanks to our security operations centers in Chieti in
Italy and Bristol in the UK. These operate 24 hours aday, with teams of cyber-experts”
Is the recently implemented “OneCompany” organization model flexible
enough to cope with Leonardo’s
different businesses and customer
needs? What are the benefits you
expect on the commercial side, and on
the operational one?
The “One Company” model allows us totake advantage of synergies while, at thesame time, preserving specific featuresof divisional businesses. Through thisframework, Leonardo set up a “single anddecentralized” model based on divisions
and support functions. Divisions are thebasic elements in this organization, andare in charge of the main businesses.
The “One Company” organizationalmodel also sees harmonization ofbusiness support activities to ensure
more uniformity through single rules andprocesses and, at the same time, betterand more accountable control over the
single businesses. This allows divisional
management to better focus on businesscore processes. The model facilitates aunited approach to customers at grouplevel through the “one voice” logic, basedon well-defined and separate roles under
the coordination of the corporate center.
What are, in your opinion, the skills
and competencies that will be key inthe near future? How do you plan toattract, develop and retain talentand skills?

As set out in our New Leadership
Framework, Leonardo has recently
introduced focus on skills andcompetencies, in order to combine
technical capabilities, values andbehaviors. In this framework, technicalknowledge of products and processes isrelevant, and involves working together
with a distinctive managerial style that
ensures sustainable growth in themedium and long term. The global aim
of our training and learning activities is
to successfully face the challenges ofa fast-changing business environment.
This is why the key skill we expect from
employees, now and in the future, is lifelong learning agility.

“We are frequently
proposing new technologies
and applications topotential customers, before
they start thinking about
them or their possible uses”

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In conclusion, in an era of increasing
automation, do you feel that thehuman factor will remain relevant in
the future?
Digitization is impacting, and willcontinue to impact, our organizationin many ways, and its effects relate toour products and services both directly
and indirectly. Digitization is changing
the way employees live and act within
the organization, such as through moreconnections, more agility, wider access toThis implies a new way of innovating,which involves reducing inefficiency toremain competitive. For these reasons thehuman factor needs to be encouraged,in order to meet the needs I mentioned
before. Firstly, we need the entire
company to undergo a cultural shift tomeet our new organizational paradigms,
with training to ensure a minimum levelof relevant skills. Secondly, we are looking
to drive vertical cultural enrichment for
professionals and middle management
working on products and service design

information, and more efficient processes.
These can all be enabled by newtechnologies and new ICT paradigms.

and implementation, as well as anupskilling process which will enable us
to pursue excellence.

Leonardo is a global high-tech company
and one of the key players in aerospace,defense and security, highly diversified
in five divisions: helicopters, aircraft,aerostructures, electronics and cybersecurity, plus joint-venture activities inthe space sector. Headquartered in Italy,
Leonardo is a global company with morethan 45,000 employees, and has several
strategic partnerships in high-potential
international markets. In 2017, Leonardo
achieved a turnover of €11.5 billion,
with EBITA of €1 billion. The company’s
actual order backlog is around €33 billion,
equivalent to nearly three years of revenues.

DISTRIBUTION
OF SHAREHOLDERSGEOGRAPHICAL DISTRIBUTION
OF SHAREHOLDERS, FLOATING RATE

51.8%

INSTITUTIONALINVESTORS

43.5%

NORTH AMERICA

30.2%

MINISTRY OF ECONOMY
AND FINANCE

22.0%

UK/IRELAND

17.2%

RETAIL INVESTORS(ONLY DOMESTIC)

10.6%

FRANCE

7.4%

ITALY

8.3%

REST OF EUROPE

8.2%

REST OF WORLD

0.6%

TREASURY SHARES

0.2%

UNIDENTIFIED