The Aerospace Industry in Canada Salah Elatash Tanya D’Amico Melissa McCartney Nicolas Murcia Stefan Pentchev

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

Overview:Facts and Figures

Profitability of Industry

Embraer/Bombardier Trade Dispute

SWOT Analysis and Porters Diamond

Case: Bombardier

Conclusions

OVERVIEW FACTS & FIGURES

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.

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.

Canada’s Aerospace Industry

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

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

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

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

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

Complete Aircraft

Aero engines & Parts

Aircraft Systems & Parts

Simulation & Training

Avionics & Mission Systems

Space Technologies

Earth Observation systems

Helicopters

Robotics

Geographical Distribution www.aviation-news.co.uk

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%

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

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

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

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

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

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)

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

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)

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

Employment projections

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)

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

Capital investment in Research and Development

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

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.

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

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 )

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.

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.

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

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

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

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

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

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

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)

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)

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.

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.

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.

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.

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

- 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

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

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

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

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

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

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

Case In Point – Boeing C17 CA Government Order 4 planes - $3.4Billions Regional Benefits = 100% of the Purchase Price Distribution of Benefits by Provinces

CA Government Order

4 planes - $3.4Billions

Regional Benefits =

100% of the Purchase Price

Distribution of Benefits by Provinces

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

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

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

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

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.

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.