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  • 1. The Aerospace Industry in Canada Salah Elatash Tanya D’Amico Melissa McCartney Nicolas Murcia Stefan Pentchev
  • 2. Tonight’s Agenda
    • Overview:Facts and Figures
    • Profitability of Industry
    • Embraer/Bombardier Trade Dispute
    • SWOT Analysis and Porters Diamond
    • Case: Bombardier
    • Conclusions
  • 3. OVERVIEW FACTS & FIGURES
  • 4. Canada’s Aerospace Industry
    • What does the Aerospace industry engage in?
    • 1- Manufacturing and services of aircrafts, aircraft systems and components.
    • 2- Spacecraft, avionics, and other related electronics.
    • 3- Ground-based infrastructures to support the operations of aircrafts and spacecrafts.
    • Furthermore,
    • Canada has a limited Defense Industry which includes a range of products and services from armored personnel carriers to command-and-control communication systems.
  • 5. Canada’s Aerospace Industry
  • 6. Size of the Aerospace Industry
    • Canadian Industry ranked 5 th in the world
    • 3 rd largest manufacturer of civil aircraft
    • Comprises 700+ firms
          • 400 aerospace
          • 300 defense
    • Employs approximately 80 000 people
    • Generates revenues of about 21 billion
    • Occupies 6% of global market
  • 7.   Concentration of Aerospace Companies in Canada
    • Bombardier Aerospace – the world’s third-largest aircraft manufacturer, controlling 47 per cent of world market share in 20-90 seat turboprop and regional jets
    • Pratt & Whitney Canada – accounts for 34 per cent of world market share in small gas-turbine engines and dominates the global turboprop market
    • CAE – the world’s largest supplier of commercial flight simulators, with more than 80 per cent of the global market share
    • Bell Helicopter Canada – one of the world’s leading commercial helicopter manufacturer, accounting for 14 per cent of the world market
  • 8. Industry Subsectors
    • Complete Aircraft
    • Aero engines & Parts
    • Aircraft Systems & Parts
    • Simulation & Training
    • Avionics & Mission Systems
    • Space Technologies
    • Earth Observation systems
    • Helicopters
    • Robotics
  • 9. Geographical Distribution www.aviation-news.co.uk
  • 10.   Ownership structure Source : Statistics Canada 2002, Industrial Organization and Finance Division, Special Tabulation Assets Total Operating Revenues Canadian-Controlled 52 % 44.6% Foreign-Controlled 48% 55.4% U.S -Controlled 34.5% 42.1% Other Foreign-Controlled 13.5% 13.2%
  • 11. Input-Output Analysis
    • In 1990 for every additional $100 million of output from the aircraft and aircraft parts industry, output in the rest of the Canadian economy increased by an estimated $46.7 million
    • $100 million increase in aircraft industry output generates approximately 1,185 new jobs throughout the Canadian economy
  • 12. Input-Output Analysis
    • Industry generated revenues of $21.7 billion in 2004, of which 84 percent came from exports
    • Contributed $9.2 billion toward Canada's gross domestic product (GDP)(accounting for more than 5 percent of Canada's total manufacturing GDP)
    • The industry invested more than $1.2 billion on research and development (R&D) in 2004
  • 13.  
  • 14.  
  • 15. Cost-Advantage Competitive Alternatives: KPMG’s Guide to international business costs, 2006 Edition
  • 16. Is the Canadian Aerospace industry profitable?
    • Revenues’ perspective:
    • Top 30 firms representing 95% of production
    • Bombardier represents about 45% of the industry's sales
    • Government is the main contractor for Space and Defence industries
    • Costs’ perspective:
    • Canada's defence-related research and development (R&D) is about $225 million
    Source: www.strategis.ic.gc.ca (Government of Canada)
  • 17.
    • Compared to the manufacturing sector average,
    • Aerospace product and parts manufacturing value-added per employee was 24% higher
    • Average of 45 000 Canadians at wage levels that were 35% higher
    Aerospace product and parts manufacturing: Employment Source: www.strategis.ic.gc.ca (Government of Canada)
  • 18. Employment projections
  • 19.
    • The aerospace industry invested an average of $873 million annually in R&D between 1994 and 2003, representing an average of 8% of industry sales
    Aerospace product and parts manufacturing: R & D Source: www.strategis.ic.gc.ca (Government of Canada)
  • 20. Capital investment in Research and Development
  • 21.
    • High export intensity
    • 70 percent of Canada's aerospace exports have gone to the US
    • annual exports averaged $8.9 billion
    • Positive average annual trade balance of $1.7 billion per year.
    Trade and Competitiveness
  • 22.
    • Embraer (Brazil) vs. Bombardier (Canada):
    • Compete for niche markets (ex: Business jet) and rely on taxpayer subsidies such as government loan guarantees by using « dual-use » regulations.
    • Canada was granted authority to impose up to C$2.1 billion (U.S.$1.4 billion) in retaliation on Brazilian imports as a result of Brazil’s failure to comply with the August 1999 WTO ruling ( www.csis.org )
    • The WTO has also found Canada guilty of providing illegal subsidies to buyers of Bombardier jets ( www.csis.org )
    • Unfair competition for the regional jet market?
    • Embraer has taken advantage of low labor costs and cheap currency
    • Bombardier has easier access to First World financing and technology
    • -Maurício Botelho, Embraer’s CEO:
    • "The aerospace market right now is very sensitive to change."
    • -An industry advocacy group in Washington:
    • "Embraer is the risk-taking company that Bombardier used to be."
    • ( www.time.com )
    Trade dispute and Competitiveness
  • 23. Canada’s Aerospace Industry
    • The industry is currently facing numerous challenges, business focuses are changing
    • Now these demands have forced companies to focus more on process and product technologies, in order to come up with savings in product development, manufacturing and after-sales support .
    • It used to be driven by technological innovation, but now customers are demanding high reductions in costs, while also demanding greater technological and operational sophistication.
  • 24. Canadian Strengths and Weaknesses
    • Strengths
      • World leadership in key segments
      • Globally connected firms with world product mandates
      • Range of capabilities from OEM in-service support providers
      • Lucrative R&D incentives
      • Cost Advantage
  • 25. Canadian Strengths and Weaknesses
    • Weaknesses
      • Fragmented supply base
      • Few proprietary capabilities at lower end of the supply chain
      • R&D concentrated in a few firms
      • Minimal domestic defense procurement and defense R&D leverage and spending
      • Government support programs are limited and inconsistent
  • 26. Opportunities and Challenges
    • Opportunities
      • Strong after sales capabilities
      • Supply chain productivity
      • Sales financing policies and instruments
      • Defense procurement policies are changing
      • Investment & risk-sharing tools
      • Public and political support
  • 27. Opportunities and Challenges
    • Major challenges
      • Value of $CDN relative to other currencies, esp. USD
      • Productivity and competitiveness shortcomings
      • Market access (US; procurement preference/influence)
      • Access to civil programs driven by investment capacity; risk-share options
      • New sources of competition (e.g. China, Japan)
  • 28. Porter’s Diamond
    • Rivalry:
      • Industry is becoming more and more dominated by big players.
      • As costs increases SMEs are less able to compete.
    • Factor Conditions:
      • “ Brain Drain”. Shortage of skilled workers, especially educated ones.
      • Good technological infrastructure.
      • R&D needs improvement.
  • 29. Porter’s Diamond
    • Demand:
      • Defense industry demand is low.
      • Demand is more external than internal.
    • Related and Supporting Industries.
      • Large number of SMEs surrounding large companies provide support to them.
      • Government plays role in providing environment for supporting industries.
  • 30. Case in point - Bombardier
    • - The Cseries
      • Announced 2005
      • Original Entry – 2010 – Cancelled
      • R & D costs
          • Total - $2Billion
          • Up to date - $120M
          • 1/3 paid by CA, QC and UK governments
          • Break-even point - 500 aircraft
      • New Entry – 2013 – not launched yet
  • 31. Case in point - Bombardier
      • New R & D Issues
        • 15% Operational Cost Savings
        • Engine & Key Parts suppliers
        • Composite Materials
      • Manufacturing Location – CA, US, MX, UK
      • Complex Coordination
        • Financing of R&D
        • Financing of Sales
        • Risk-sharing partners
        • Suppliers
        • Launch airline
  • 32. Case in point - Bombardier
    • Competition
      • On what? – 3.4% profit
      • New Entrants
        • Russia – Sukhoi
          • Agreement with Boeing
        • Japan – MRJ – Mitsubishi Heavy Industries
          • COMPETITION ON TECHNOLOGY
          • $1Billion R&D – 1/2 of C-series
          • 20% increased fuel efficiency
          • Composite materials – supplier for Boeing 787
        • China
  • 33. Case in point - Bombardier
    • China
      • AVIC I (state-owned)
        • 90-seat ARJ21-700 – March 2008
      • Cooperation with the Competition
        • Bombardier Invests $100M in R&D of AVIC I
        • AVIC I Invests $400M in R&D of Cseries and construction of new facilities in China
      • Good Importer - Good Exporter
      • Space Program
  • 34. Case In Point – Boeing C17
    • CA Government Order
    • 4 planes - $3.4Billions
    • Regional Benefits =
    • 100% of the Purchase Price
    • Distribution of Benefits by Provinces
  • 35. Going Forward
    • Short-term emerging trends:
    • Differences among product market segments
    • Pacific market will exceed the U.S. and European markets, account for 1/3 of total value of aircraft deliveries
    • Strategies to reduce the risk through cost reduction efforts and to share that risk with suppliers and with former competitors.
    • Long-term trends:
    • The international aircraft manufacturing industry faces stagnant or uncertain markets over the next decade with more restructuring
    • aircraft and aeroengine development costs have climbed beyond the financial capacity of individual firms
  • 36. Is the Canadian Aerospace industry attractive?
    • High entry barriers
    • Suppliers and buyers have weak positions
    • Few threats from foreign firms
    • Moderate to strong rivalry among competitors
    • Strong bargaining power of government
    Source: McGill MGCR 423
  • 37. Conclusion
    • High profit potential: Attractive industry
    • Aircraft industry is not particularly capital intensive; less than 20% of GDP
    • Dependent on dollar
    • Consolidation  complicated by the high degree of offshore ownership
    • Demand for significant reductions in the cost, while at the same time demanding greater technological and operational sophistication
    • focus increasingly on process, as well as product technologies, in order to come up with savings in product development, manufacturing and after-sales support
    • For Canadian industry, one that is focused on niche and foreign markets and dependent on a weak Canadian dollar for a competitive advantage, the only demonstrably effective industry-specific government policy lever has been R&D assistance; R&D is the lifeblood of this industry.