Aerospace Slides

Slide 1: Salah Elatash Tanya D’Amico Melissa McCartney Nicolas Murcia Stefan Pentchev

Slide 2: Tonight’s Agenda  Overview:Facts and Figures  Profitability of Industry  Embraer/Bombardier Trade Dispute  SWOT Analysis and Porters Diamond  Case: Bombardier  Conclusions

Slide 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.

Slide 5: Canada’s Aerospace Industry

Slide 6: Size of the Aerospace Industry  Canadian Industry ranked 5th in the world  3rd 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

Slide 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

Slide 8: Industry Subsectors  Complete Aircraft  Aero engines & Parts  Aircraft Systems & Parts  Simulation & Training  Avionics & Mission Systems  Space Technologies  Earth Observation systems  Helicopters  Robotics

Slide 9: Geographical Distribution www.aviation-news.co.uk

Slide 10: Ownership structure Assets Total Operating Revenues Canadian- 52 % 44.6% Controlled Foreign-Controlled 48% 55.4% U.S -Controlled 34.5% 42.1% Other Foreign- 13.5% 13.2% Controlled Source: Statistics Canada 2002, Industrial Organization and Finance Division, Special Tabulation

Slide 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

Slide 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

Slide 15: Cost-Advantage Competitive Alternatives: KPMG’s Guide to international business costs, 2006 Edition

Slide 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)

Slide 17: Aerospace product and parts manu Employment 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 Source: www.strategis.ic.gc.ca (Government of Canada)

Slide 18: Employment projections

Slide 19: Aerospace product and parts manufacturing: R & D  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 Source: www.strategis.ic.gc.ca (Government of Canada)

Slide 20: Capital investment in Research and Development

Slide 21: Trade and Competitiveness  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.

Slide 22: Trade dispute and Competitiveness 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)

Slide 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.

Slide 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

Slide 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

Slide 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

Slide 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)

Slide 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.

Slide 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.

Slide 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

Slide 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

Slide 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 

Slide 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

Slide 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

Slide 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

Slide 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

Slide 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.