Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 1 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries Submitted By: Ashish Jude Michael Participant PGPEx (OUC China + IIM Shillong, India) *Image show Embraer, Sukhoi, Tejas and Comac from Brazil, Russia, India & China respectively.
2 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries Table of Contents Executive Summary 1 Introduction to Aerospace & Defense Industry 1.1 Brief History about development of A&D Industry. 1.2 Present Scenario. 1.2.1 Effect of Euro Zone crisis on A&D Industry. 2 A Brief Introduction Aerospace & Defense (A&D) Industry in BRIC Countries 2.1 A&D Industry in Brazil 2.1.1 Present Scenario 2.1.2 PEST Analysis 2.1.3 SWOT Analysis 2.1.4 Market Growth 2.1.5 Opportunities 2.1.6 Suggestions 2.2 A&D Industry in Russia 2.2.1 Present Scenario 2.2.2 PEST Analysis 2.2.3 SWOT Analysis 2.2.4 Market Growth 2.2.5 Opportunities 2.2.6 Suggestions 2.3 A&D Industry in India 2.3.1 Present Scenario 2.3.2 PEST Analysis 2.3.3 SWOT Analysis 2.3.4 Market Growth 2.3.5 Opportunities 2.3.6 Suggestions 2.4 A&D Industry in China 2.4.1 Present Scenario 2.4.2 PEST Analysis 2.4.3 SWOT Analysis 2.4.4 Market Growth 2.4.5 Opportunities 2.4.6 Suggestions 2.6 How to grow together as BRIC using A&D industry as a tool? Exhibits: 1 -‐9 Sources & References:
Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 3 Executive Summary: This paper is about how the BRIC nations can use A&D industry as tool for growth for combined growth. We have analyzed each country through PEST & SWOT analysis and found their Core Competencies and Competitive Advantage. Then accordingly the strategies have to be set so that the maximum can be made out of each country. I have given a broader preoperative while concluding the paper. The main Idea behind this paper is to think that BRIC countries are not each other’s competitors but partners. If the work as a group they can speed up their economic growth. 1 Introduction to Aerospace & Defense Industry: 1.1 Brief History about development of A&D Industry. Aerospace & Defense Industry now days generally referred as A&D industry. If we want to find the history of this industry we can say it started in 1908 when Wright Brothers got an order from U.S. Army to make one aircraft and also when they licensed their patents to Astra Company to manufacture aircraft in France. Europeans took an earlier advantage in A&D business right from the start of First World War in 1914 during which French firms built about 200O, Germans about 1000 and Britain also approximately 1000 aircrafts. And Americans hardly 100 aircrafts. After the First World War most of the aircraft companies, which survived, were basically because of entrepreneur sprit. Americans invested on R&D and got many patents and this give them an upper hand over Europe and became a major player in A&D Industry. In the six-‐year period 1940 through 1945.In 1943, the aviation industry was Americas largest producer and employer with 1,345,600 people bent to the task of making aircraft. We can say this was the start of American dominance in A&D Industry. Production reached maximum during World War II, despite a minor blip for the wars in Korea and Vietnam. Instead, research ruled the industry. During cold war the demand of stealth and UAV increased. This lead to new technologies prompted a massive restructuring of the industry. Established airframe firms shifted from manufacturing to research, while the military channeled funds to technology-‐specific startup firms. And after the Cold war season started Globalization and the world became a Global Village. Hence the civil aviation became an important means of transport and this boost the A&D Industry. And at present Boeing and Airbus are major players in Commercial sectors. Where else Boeing, United Technologies were leaders in A&D Sectors during 2011 as per Fortune 500 (Refer Exhibit 2). 1.2 Present Scenario. Aerospace and defense industry delivers a second consecutive Year of record revenues and Profit in year 2011 as per data from Boeing & EADS (Refer Exhibit 3). If we consider commercial aerospace market things were appearing good and Industry leaders were optimistic as Air Traffic was strong and steady which was driving the after market business also the industry had delivered a record number of large aircraft and orders are available for next 8 years. 1.2.1 Effect of Euro Zone crisis on A&D Industry:
4 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries With the onset of Eurozone crisis it is difficult that the forecasted figures of 3.5% by IATA for the Air traffic in year 2012 can be met. This is because Europe is the largest Air Travel market in the world and the condition of Eurozone Crisis is deteriorating day by day. Still the implication of Eurozone Crisis on Commercial Aerospace OEMs and after market suppliers remains unclear. Though certain suppliers will be negatively affected by stringent credit standards and higher oil prices. And also the after market suppliers will be at greater risk than the Commercial Aerospace OEMs. 2 A Brief Introduction Aerospace & Defense (A&D) Industry in BRIC Countries 1800 1600 1400 16.831200 % 1000 World 800 World 600 BRICS BRIC 400 100.00 200 % 0 2007 2008 2009 2010 2011 As we can see from A&D Insights 2011 by pwc (Refer Exhibit 2) that A&D industry is still not totally globalized it ranks at 8 out of total 15 stated industries. There is a huge potential for emerging economies such as BRIC in A&D industry. And the economic slowdown is in some manner helping this as the top line is reducing hence OEMs are trying to maximize profit by decreasing the bottom line. One way of reducing the bottom line is by reducing the cost in manufacturing and R&D. OEMs are doing this by outsourcing the manufacturing & R&D to offset locations. And if observe the graphs shown above we can see that even the defense budget for BRIC is increasing continuously from 2007 onwards and if we compare to the world trend the increase in defense expenditure is at lower rate then BRIC , in near future BRIC will be the leading spenders. Even now they are accounting for about 16% of world total defense expenditure. This can observed from the recent data provided in A&D Insights 2011 by pwc (Exhibit 6), where a relation is shown in terms percentage of Total GDP the expenditure for each country. Where China spends maximum approximately 12 % and India is lowest about 4% with Brazil & Russia at 6% & 10% respectively. Similarly if we consider the commercial air traffic market we can observe that the U.S. & European market are nearly saturated. And the BRIC countries have large countries they have neary 40% of world’s total population scattered over 25% of earths land which they cover and with a combined GDP growth of about 25% of world. This is further strengthen by the recent statics given in A&D Insights 2011 by pwc (Exhibit 5) , which speaks that the air traffic in Asia-‐ pacific* is expected rise from present 21% in 2008 to 31% in 2028 of total world’s. This is further confirmed from the order books of Boeing & Airbus who have to deliver about 37% of their remaining orders for the period of (2009-‐2028) to Asia-‐pacific* region. (*Asia-‐pacific region includes India & China, which are key constituents of BRIC).
Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 5 And the rise in commercial air traffic also opens gates for MRO (Maintaince, Repair& Overhaul) in India & China. At present the MRO center for Asia-‐pacific region is Singapore. Just to give an idea about the potential of MRO market I would like to tell you that the total cost spent on MRO activities for an Commercial Aircraft in its useful service life is equivalent to the total initial cost of that Aircraft. Just analyzing the recent trends we can see that in 2009, the number of investments made by Top 50 Global A&D firms, in R&D side maximum 12 were done in India followed by 6 in Russia and 4 in China, in manufacturing side maximum 23 were done in China followed by 20 in India, 9 in Russia and 2 in Brazil. Hence we can observe a trend that India is soon becoming a R&D hub for A&D this may be also contributed to the government policies and political-‐socio-‐economic factors which I will be discussing later in this paper for each country. China is still maintaining its brand of “World’s Factory” in A&D sector too with one and only Airbus assembly line operating in Tenzin. The challenges faced by BRIC countries to retain and develop the A&D sectors are investment risk to IPR and the Frauds. The gravity of these issues can be understood from Exhibits 8&9, which are taken from A&D Insights 2011 by pwc. It can be suggested that the governments of BRIC nations should have stringent laws dealing with IPR & Frauds issues and also speed up the legal activities related to them. 2.1 A&D Industry in Brazil Aerospace Industry Export & Import 6,000.00 5,000.00 4,000.00 3,000.00 Brazil Export 2,000.00 Brazil Import 1,000.00 -‐ 2007 2008 2009 2010 2011 2.1.1 Present Scenario Brazil is one of the countries in BRIC, which is already playing a major role in A&D industry. Embraer, which is a major player in business jets, is from Brazil. Also it is the second largest exporter in Aerospace Industry after China among BRIC. It exported 5469.01 million USD(United States Dollar) while it imported 935.77 million USD worth of Aerospace goods. It is facing a tough competition from China & India now. Its core competency can be said to lie in Business Jets and some offset business generated by Boeing in Brazil. If we analysis the Defense spending it was relatively consistent in terms of growth in 2011 it was 3.53 billion USD and has been increased by 18% for 2012.
6 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 2.1.2 PEST Analysis PEST(ANALYSIS(FOR(A&D(INDUSTRY(IN(BRAZIL( POLITICAL(&(POLICY( ECONOMIC( 1. Stable(government.( 1. Seventh(largest(Economy(&(sixth(as(per(GDP.( 2. No(na;onalis;c(manufacturing(ambi;ons.( 2. Increased(the(defense(budget(by(18%(this(year( 3. High(import(du;es(on(behalf(of(Embraer.( hence(a(big(emerging(market.( 4. Defense(is(top(priority.( 3. Low(external(&(public(debt.( ( 4. Supports(manufacturing,(services(and(natural( resource(development(simultaneously.( SOCIAL(&(LEGAL( TECHNOLOGICAL( 1.IPR®ula-ons&below&average.& 1. Embraer&DNA.& 2.Low&unemployment.& 2. Experience&work&force&for&A&D&industry&as& 3.2014&FIFA&world&cup&&&2016&Olympic&will&create& Embraer,&one&of&the&largest&brand&in& the&market&for&more&commercial&air&traﬃc.& commercial&aircraNs&is&from&Brazil.& 4.&Large&popula-on&&&big&country&scope&for& 3. Has&all&the&resources&required.& increasing&air&traﬃc.& 4. Non&availability&of&exper-se&in&ITES.&
Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 7 2.1.3 SWOT Analysis SWOT(ANALYSIS(FOR(A&D(INDUSTRY(IN(BRAZIL( STRENGTH( WEAKNESS( 1. Embraer(DNA.( 1. IPR(regulaQons(below(average.( 2. Increased(the(defense(budget(by(18%(this(year(hence(a(big( 2. High(import(duQes(on(behalf(of(Embraer.(In(long(run(wil(be( emerging(market.( a(problem(as(local(ﬁrms(will(not(be(compeQQve(enough(for( 3. Low(external(&(public(debt.( global(market.( 4. Supports(manufacturing,(services(and(natural(resource( 3. Brazil(is(not(lowPcost.(( development(simultaneously.(( 4. Non(availability(of(experQse(in(ITES.( 5. Increased(the(defense(budget(by(18%(this(year(hence(a(big( ( emerging(market.( ( 6. Supports(manufacturing,(services(and(natural(resource( development(simultaneously.( 7. HighPspeed(development(of(biofuels(for(aviaQon.(( OPPORTUNITIES( THREATS( 1. Strategically-located-can-cover-South-American-Market-and- 1.Rise-in-compe<<on-in-A&D-from-India-&-China.- African.- 2.-Free-trade-scenario.- 2. Has-a-domes<c-brand-Embraer-which-is-one-of-the-major- 3.-Increase-in-the-compe<<on-of-Business-jets-faced-by-Embraer.-- player-in-commercial-business-jets-and-so-can-enter-in- - commercial-aircraB-business-in-future.- 3. Growing-A&D-market-in-BRICS-countries.- 4. Can-be-a-preferred-choice-for-manufacturing-for-Europe-&- US’s-OEMs-shiBs-their-base-from-Europe-as-it-rela<vely- neutral--rather-than-China-&-Russia.- 2.2.4 Market Growth By studying the PEST and SWOT Analysis we can see that there is still a relatively protective market because high import duties are levied may be to protect Embraer. On political front government is stable and they have not started investing in Defense Aircraft development. This makes it still available defense market for foreign companies, as there is no domestic competition. In next four years Brazil is going to hoist FIFA Football World cup in 2014 & Olympic in 2016. This will increase the air traffic with lots of tourists flying throughout the country hence is a large potential market in short term for Commercial aircraft companies. The increasing GDP is raising the per capita income and this will increase the time value of its nationals, which will further encourage them to use airways instead of roadways or railways. Hence in long term too the domestic air traffic is expected to rise with increase in economic growth. And the economic growth will also provide the rise in defense budget, which makes it an attractive defense market. 2.2.5 Opportunities We can say unless it opens its market for free trade it will be difficult its local companies to compete at global level. It is not a low cost manufacturing destination hence it can’t take that advantage from China. It has a labor, which is skilled in commercial aircraft industry but over all R&D is not up to the mark and IPR regulations are below average. Again in R&D India is becoming a global hub for A&D industry. 2.2.6 Suggestions
8 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries I would give the following suggestions: 1. Allow the local companies to compete with global companies in domestic market so that they may become strong to survive in International Market. This can be done by removing trade barriers and also promoting JV(Joint ventures) and FDI. 2. IPR regulations to be made stringent at preset they are the lowest among BRIC countries.(Exhibit 3. They should try to improve in ITES sector at least so that they can offer the complete package as they have all other resources available. 4. They are in South America which is full of Emerging economies hence can make their presence in that growing market. 5. Can target BRIC market especially India, requires a lot of business jets. 2.2 A&D Industry in Russia Aerospace Industry Export & Import 800.00 700.00 600.00 500.00 400.00 Russia Export 300.00 Russia Import 200.00 100.00 -‐ 2007 2008 2009 2010 2011 2.2.1 Present Scenario Russia was once a superpower but with time it lost its glory is now again want to resurrects for the ashes. It is one of the most technological advanced nation specially in defense sector. There are one of the best in Arm design and manufacture AK-‐47 is one of the example, even it is considered better than similar American & German Assault riffles. And in defense aircraft sector they have a very successful Sukhoi 30, Sukhoi-‐35 the latest. But if we see the exports and imports in Aerospace product its 742.16 and 192.38 million USD respectively. The core competency of Russians can be said in Defense sector from arms to aircrafts.
Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 9 2.2.2 PEST Analysis PEST(ANALYSIS(FOR(A&D(INDUSTRY(IN(RUSSIA( POLITICAL(&(POLICY( ECONOMIC( 1. Poli0cal(instablity.( 1. As(as(Per(GDP(9th(and(6th(largest(economy.( 2. Corrup0on.( 2. Basically(based(on(natural(resources.( 3. Defense(top(most(priority.( 3. A(con0nuously(rise(in(defence(budget(making( 4. Moderniza0on(of(defense(forces.( it(a(poten0al(market.( 5. Recently(changed(the(poli0cal(model(from( 4. Has(second(largest(numbers(of(air((ports(in( communist(to(democra0c.( world(hence(a(big(poten0al(for(commercial(air( ( traﬃc.( 5. Rise(in(Sovereign(debt.( ( 6. S0ll(not(a(part(of(WTO.( SOCIAL&LEGAL TECHNOLOGICAL 1. LessEnglishspeakingpopula9on. 1. DNAofanearlierSuperpowerwithproﬁciency 2. Highlydependentonlocallanguage. inhighendtechnology. 3. Deepimpactofcommunistteachings. 2. AleaderamongBRICSinA&Dsectorinterms 4. Asperareathelargestcountryandasper oftechnologyadvancement. popula9onstandsat…hencelocaldomes9c 3. HavelocalcompaniesinR&D,Manufacturing& airlinenetworkexistsbutisnotoperatedinan MROsectorofA&Dindustry.Ie.Sukhoi, eﬀec9vemanner. Antonovetc 5. Unemploymentisamajorissue. 6. LowIPRprotec9onlaws. 2.2.3 SWOT Analysis SWOT(ANALYSIS(FOR(A&D(INDUSTRY(IN(RUSSIA( STRENGTH( WEAKNESS( 1. 1.(DNA(of(an(earlier(Super(power(with(proﬁciency(in(high( 1. (Low(IPR(protecMon(laws.(( end(technology.( 2. Rise(in(Sovereign(debt.( 2. A(leader(among(BRICS(in(A&D(sector(in(terms(of(technology( 3. SMll(not(a(part(of(WTO.( advancement.( 4. Non(avaliablity(of(aVer(sales(service.( 3. Have(local(companies(in(R&D,(Manufacturing(&(MRO(sector( 5. Totally(dependent(on(Russian(language(specially(in( of(A&D(industry.(Ie.(Sukhoi,(Antonov(etc(Defense(top(most( technology(which(makes(it(diﬃcult(for(entering(into(global( priority.( market(&(seWng(global(R&D,manufacturing(&(MRO( 4. A(conMnuously(rise(in(defence(budget(making(it(a(potenMal( centers.( market.( 6. Geographical(locaMon(leser(number(of(ports(and(country( 5. Has(second(largest(numbers(of(air((ports(in(world(hence(a( lies(far(away(from(the(major(growing(market(ie.(Africa,( big(potenMal(for(commercial(air(traﬃc.( AsiaYsubconMnent(&(South(America.( 6. Russian(products(are(generally(considered(robust.( 7. Lack(of(engineers(&(managers(for(A&D(Industry.( 8. AdaptaMon(of(western(Quality(Standards(and(neither(any( development(of(Quality(Standards.( 9. No(FDI(in(A&D(sector(and(lack(of(competaMon(due(to(less( number(of(private(players.( OPPORTUNITIES* THREATS* 1. Rise*in*the*A&D*market*in*BRICS*countries.* 1. The*Overall*Growth*of*China*in*A&D*sector*is*posing*a* 2. Already*a*major*player*in*ﬁghter*aircraG*manufacturing*&* serious*compeKKon*to*Russia.* defense*sector.*** 2. A&D*industry*accept*the*western*Quality*&*Industry* 3. Has*a*good*relaKon*with*the*governments*of*BRICS*countries* standards*compulsory*to*adhere*to*sustain*in*Global*Market.* and*that*is*the*major*growing*porKon*in*A&D*sector.* 3. The*rise*of*outsourcing*business*in*India*for*A&D*Industry.* 4. HesitaKon*of*western*countries*in*sharing*technology*&* placing*R&D*faciliKes.* 2.2.4 Market Growth Russia is a developing market specially for commercial air traffic. It is the largest country in terms of land and for population to travel across it air travel is the only option. As it is already
10 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries a big producer of arms and fighter aircraft hence it is not much dependent on outside world for its defense needs. Still it is a growing market as its defense budget was 64.12 billion USD. 2.2.5 Opportunities I can clearly see an opportunity for Russia in World Defense market especially in Arms & Fighter Aircraft area. Their products are robust but lack service support and spares. They have a large market among BRIC nations such as India ,China & Brazil. They can eye commercial and cargo aircrafts too. At present one of the largest cargo aircraft Antonov An 225 was built by Russia and is used for transportations of space shuttles, heavy machinery etc. Suggestions I would suggest Russia to target markets of BRIC in defense market with improving its service & spares support. It can also open its service wings as a JV with the local players of each country so that it may have an cost advantage too. It can focus the manufacturing cargo aircrafts and outsource offset activities to India or China. India is world’s largest buyer of arms and so Russia can target Indian market for the same. 2.3 A&D Industry in India Aerospace Industry Export & Import 4,000.00 3,000.00 2,000.00 India Export India Import 1,000.00 -‐ 2007 2008 2009 2010 2011 2.3.1 Present Scenario The above graph represents the trend of Indian Exports & Imports in Aerospace sector. We can clearly see that the present exports are 1990.11 and 57.26 million USD in year 2011.This also shows an aspect that we are basically exporting the services (IT & R&D) and smaller level offset units which are mostly tier 3 suppliers. Hence a lager market exists of tier 1&2 suppliers also Indian Government promoting OEMs to set up an assembly line and the R&D. Though the OEMs have started investing in R&D which can be confirmed by the statistics given in A&D Insights 2011 by pwc (Exhibit 7) in a period between 2000-‐2011 about 12 investments have been made by top 50 ranking companies as ranked by Flight International Top 100 and about 20 in manufacturing sector of Aerospace. India has got an advantage where global players are investing in R&D and got a lead and slowly it is gaining some momentum in manufacturing though it will take some time to give competition to China. Where else it has definitely become a hot market for defense deals with the 10.2 billion USD Rafael deal or the Hercules & P-‐8I aircrafts deals which Boeing has won. In additional to this India is also developing its indigenized 4.5 generation, single engine, single seater Light Combat Aircraft (LCA) or commonly known as Tejas. It is now in its final phase and it expected to join the nation defense by 2020. Also its fairly independent on manufacturing of Combat Helicopters such as (LCH) and others as Dhruv. This has given India a through experience of working in R&D and manufacturing of Fighter aircrafts. With the organizations such as
Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 11 DRDO(Defense Research and Development Organization), ADA(Aeronautical Development Organization), ADE(Aeronautical Development Establishment), HAL(Hindustan Aernautical Limited) and BEL(Bharat Electronics limited). Where DRDO,ADA,NAL & ADE caters the R&D requirement, BEL is manufacturing the electronics related to FCS(Flight Control System) and WMS(Weapon Management System) and HAL overall assembly and manufacturing. The development of UAV(Unmanned Air Vehicles) is in very nascent stage. Hence we can say India has the basic building blocks for A&D industry, which are all following international standards such as AS9100 Rev C & EMS 140001. 2.3.2 PEST Analysis PEST(ANALYSIS(FOR(A&D(INDUSTRY(IN(INDIA( POLITICAL(&(POLICY( ECONOMIC( 1. Government(support.( 1. Major(economic(reforms(done(in(last(20(years.( 2. Induc;on(of(GAAR((General(An;(Avoidance(Rule).( 2. One(of(the(fastest(growing(economy(of(world(ranked(at(11( 3. Poli;cal(stability,(regulatory(eﬀec;veness,(rule(of(law(and( as(per(GDP(and((4th(largest(economy.( sovereign(debt.( 3. Increase(in(defense(budget(on(an(yearly(average(of(8%.( 4. Corrup;on( 4. Huge(poten;al(for(Air(traﬃc(business(as(2nd(largest( 5. Regional(issues(overpowering(important(country(level( country(popula;on)(and(7th(largest((Land).( economic(decisions.( 5. One(of(the(highest(saving(fund.( 6. Defense(Produc;on(policy(&(Defense(Procurement( 6. Defense(Oﬀset(Policy.( Policy(DPP).( 7. Recently(A&D(sector(opened(for(private(players(with( 7. Many(eminent(economist(in(poli;cal(senario.( investment(upto(100%(and(FDI(upto(26%.( 8. Defense(of(the(country(is(of(highest(priority.( 8. Largest(importer(of(Arms.( 9. Diﬃculty(in(star;ng(a(business(specially(in(A&D(sector.( 9. Founding(member(of(WTO.( SOCIAL(&(LEGAL( TECHNOLOGICAL( 1. Constant)treat)from)terrorists.) 1. Availability)of))founda2ons)for)developing)a)robust)industrial) 2. Many)interna2onal)disputes)with)neighbors.) base)in)the)aerospace)and)defense)(A&D))sector)for) 3. Safeguarding)Long)cost)lines.) R&D,OEMs)&)MROs)(Maintaince)Repair)and)Opera2ons))ie.) 4. Second)largest)army)of)the)world.) DRDO,)HAL)etc.) 5. )Low)cost)labor.) 2. Indigenized)development)of))Helicopters)by)(HAL))and) 6. Pool)of)second)largest)English)speakers.) AircraX)(LCA/TEJAS))is)under)progress.) 7. Large)pool)of)skilled)manpower)required)for)A&D)industry)is) 3. Experience)of)producing)robust))A&D)equipment)at)low)cost.) available.) 4. Availability)of))talent)suitable)for)A&D)Industry.) 8. Labor)problems.) 5. Knowledge)&)Implementa2on)of)Interna2onal)Quality) 9. Improvement)in)IPR)environment)with)the)onset)of) Standards)required)for)A&D)Industry)is)available.) pharmaceu2cals)companies.) 6. Availability)of))all)technical)exper2se)ie.)ITES,)Manufacturing,) 10. BeQer)equipped)legal)system.))) Management)and)R&D.)Makes)it)a)complete)package.)) 11. Highly)consolidated)SMEs)Base.) 7. Has)a)well)recognized)and)economical)space)program) 12. Highest)no.)of)scien2st)&)engineers.) operated)by)ISRO)which)is)a)recognized)name)at)Global)level.)
12 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 2.3.3 SWOT Analysis SWOT(ANALYSIS(FOR(A&D(INDUSTRY(IN(INDIA( STRENGTH( WEAKNESS( 1. Government(support.( 1. Induc>on(of(GAAR((General(An>(Avoidance( 2. Availability(of((founda>ons(for(developing(a(robust(industrial(base(in(the(aerospace(and( Rule).( defense((A&D)(sector(for(R&D,OEMs(&(MROs((Maintaince(Repair(and(Opera>ons)(ie.(DRDO,( 2. Corrup>on( HAL(etc.( 3. Diﬃculty(in(star>ng(a(business(specially(in( 3. Knowledge(&(Implementa>on(of(Interna>onal(Quality(Standards(required(for(A&D(Industry(is( A&D(sector.( available.( 4. Pool(of(second(largest(English(speakers.( 4. Recently(A&D(sector(opened(for(private(players(with(investment(upto(100%(and(FDI(upto(26%.( 5. Low(innova>on.( 5. Increase(in(defence(budget(on(an(yearly(average(of(8%.( 6. Very(long(product(cycle(>me(as(many( 6. Defense(Oﬀset(Policy.( approvals(&(checks(to(be(done.( 7. Many(eminent(economist(in(poli>cal(senario.(( 7. Labor(problems.( 8. Pool(of(second(largest(English(speakers.( 8. Regional(issues(overpowering(important( 9. Low(cost(labor.( country(level(economic(decions.( 10. Improvement(in(IPR(environment(with(the(onset(of(pharmaceu>cals(companies.( 9. Poli>cal(inbstability,(regulatory(inb 11. Be]er(equipped(legal(system.(( eﬀec>veness,(rule(of(law(and(sovereign( 12. (Huge(poten>al(for(Air(traﬃc(business(as(2nd(largest(country(popula>on)(and(7th(largest((Land).( debt.( 13. Strong(IT(service(sector(and(similarly(Automobile(manufacturing(sector.(( 10. Strategic(Barriers.( 14. Adaptability(to(changed(scenario.( 11. Lack(of(Infrastructure(and(the(increase(in( Energy(deﬁcient.(( OPPORTUNITIES( THREATS( 1. It%is%one%of%the%fastest%developing%market%and%so%the%items%can%be%manufactured%as%all%required% 1.Stratergic%barriers%fot%criKcal%technologies%&% resources%are%available.% source%codes,%IP.%% 2. Can%become%a%MRO%hub%for%A&D%industry%because%of%availability%of%low%cost%human%resource.% 2.%US%InternaKonal%Traﬃc%in%Arms%RegulaKons%ITAR% 3. India%is%strategically%%located%and%developing%markets%of%Middle%East,%ASEAN%&%ASIA%can%be% restricKons.% targeted.% 3.Exchange%change%risk%ie.%DepreciaKon%in%dollar.% 4. Largest%no.%of%scienKst%and%engineers.%% 4.Tough%compeKKon%from%Brazil,%China%&%Russia.% 5. Increasing%domesKc%players%involvement%in%Indian%defense%industry%HALNBoeing,%BELNBoeing,% 5.ReducKon%in%overall%defense%budget.% UTCNBEL.% 6.DegradaKon%of%India’s%raKng%by%InternaKonal% 6. Increase%in%overseas%suppliers%involvement%in%Indian%defense%industry.% Agencies%ie.%S&P%has%reduced%from%BBB+%to%BBBN.%%% 7. Because%of%recession%&%Eurozone%crisis%proﬁt%margins%of%A&D%ﬁrms%are%squeezed%hence%to% % increase%proﬁt%they%will%try%to%reduce%their%cost%by%mostly%outsourcing.%% 8. Can%be%a%preferred%choice%for%manufacturing%for%Europe%&%US’s%OEMs%shiXs%their%base%from% Europe%as%it%relaKvely%neutral%%rather%than%China%&%Russia.% 2.3.4 Market Growth India has continuously raised its defense budget during last 5 years, and for the year of 2011 it was approximately 44.28 billion USD, which is about 4% of its GDP. It is the largest importer of Arms. And recent modernization of its Air Force has opened new doors of opportunity tor global players. It is definitely an attractive market in defense. If we see the Aerospace sector India has a huge potential for Air Traffic. As per capita income is increasing hence the purchasing power of middle class is also increasing which will extend the air traffic market to Indian middle class. This makes it a lucrative market for Global Commercial Aircraft Manufacturers. 2.3.5 Opportunities Discussing about opportunities we can say that India hasn’t got much experience in arms designing & manufacturing but there is definitely potential in Designing and manufacturing of fighter and military aircrafts and offset outsourcing of R&D and manufacturing activities in commercial aircraft market. It has got organizations like DRDO, HAL & BEL, which are AS9100 Rev C certified (HAL-‐LCA SBU & BEL-‐EW&A SBU) and HAL, BEL & other private companies acting as tier 2 & 1 suppliers for Boeing. There are many R&D have been set up. Also the players like Rafael Dassault , Lockheed Martin & Boeing have entered into JV(Joint Venture) with Indian companies. During the Aero India 2011 about the contracts of about 2 billions USD were signed between Indian & Foreign companies. Indian government has increased the competation in A&D sector by allowing few of Indian private Companies such as Wipro, Mahindra, Infosys, Tata, L&T & Reliance and giving them a title “Raksha Ratna”.Earlier the A&D sector was dominated by PSU
Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 13 (Public Sector Units) and Government. Also as per DPP(Defense Procurement Procedure) 2011 for any A&D contract at least 30% of job to be outsourced to Indian Companies.FDI upto 26% is allowed in A&D sector, special benefits are given to foreign companies setting up their R&D centers in India. In India R&D, manufacturing & (IT) services all three are available hence it offers a very good package for global players to outsource their activities to take advantage of low cost skilled talent. Also there is a large opportunity in MRO (Maintaince , Repair & Overhaul sector) at present Singapore is the MRO hub for all commercial aircrafts for Asia-‐pacific region. The problem is that Indian government has put heavy import duties about 19-‐20% on the equipment’s required for MRO. As I have already discussed earlier that the cumulative cost of service (MRO) of an aircraft during its useful life is equivalent to its initial cost. Hence it is a market with huge potential. If we consider the challenges, which India faces, are average IPR protective laws and the risk of frauds. Suggestions Government should continue its industry friendly policies and also make some A&D specialized SEZ(Special Economic Zone). Import duties on equipment’s related to MRO should be reduced or removed , IPR laws should be made stringent and frauds should be dealt strictly. 2.4 A&D Industry in China Aerospace Industry Export & Import 2.4.1 Present Scenario China as expected is un-‐doubly the leader of BRIC and it is keeping its position even in A&D industry too. Just referring this Aerospace export & import graph we can see that in year 2011 export and imports were 6391.72 million USD and 622.32 million USD respectively. The exports are huge as compared to Imports, which shows it is already a manufacturing factory of A&D industry though still there is potential to increase it. And even in defense sector they are self-‐sufficient. Their fighters are one of the best in world. And now they are planning to break the duopoly of Boeing & Airbus from Commercial Aircraft sector by launching their fully indigenously built commercial jet. Comac ARJ21 and Comac
14 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries C919 are two variants Comac (Commercial Aircraft Corporation of China, Ltd.) is planning to launch challenging Boeing & Airbus. 2.4.2 PEST Analysis PEST(ANALYSIS(FOR(A&D(INDUSTRY(IN(CHINA( POLITICAL(&(POLICY( ECONOMIC( 1. Stable(Government.( 1. Second(largest(Economy(&(Second(as(per(GDP.( 2. Full(Support(to(A&D(sector(by( 2. ConNnuous(increase(in(Defense(budget.( government.( 3. SOEs(exists((in(Fighter(aircraK(&(Defense(producNon( 3. No(private(sector(&(No(FDI(in(Defense(&( but(presently(using(indigenizaNon(and(only( Defence(Avionics.(( targeNng(domesNc(market.( 4. 35%(FDI(allowed(in(Commercial(AircraK( 4. (Presently(targeNng(the(domesNc(market(for(defense( sector.( sector(&(Global(market(for(Aerospace.( ( 5. Low(cost(resource(available.(( SOCIAL(&(LEGAL( TECHNOLOGICAL( 1. Highmoraleduetorecenteconomic 1. SOEsdirectlycomingintocompeJJonwithBoeing& successofChina. Airbusforbuildingcommercialjets. 2. Requiredtalentavailablewhichcanbe 2. HasallthetechnologyforbuildingasuccessfulA&D directlyusedforA&Dindustry. Industry. 3. LanguageBarrier. 3. AreawareofInternaJonalProcess&Quality 4. ChinaA&Dsectorworksinhighlyclosed standardsandcanfollowthem. environmentasdominatedbySOEsand 4. AregoodatreOengineering. closelymonitoredbyGovernment. 5. HaveagoodR&D&Manufacturingsector. 6. HasaweakITsupportascomparedtoIndiaforA&D sector. 7. Hasarecentlydevelopedverylarge&successful Spaceprogram.
Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 15 2.4.3 SWOT Analysis SWOT(ANALYSIS(FOR(A&D(INDUSTRY(IN(CHINA( STRENGTH( WEAKNESS( 1. (Stable(Government.( 1. No(private(sector(&(No(FDI(in(Defense(&( 2. Full(Support(to(A&D(sector(by(government.( Defense(Avionics.( 3. 35%(FDI(allowed(in(Commercial(AircraH(sector.( 2. Language(Barrier.( 4. ConJnuous(increase(in(Defense(budget.( 3. China(A&D(sector(works(in(highly(closed( 5. Low(cost(resource(available.(( environment(as(dominated(by(SOEs(and( 6. Required(talent(available(which(can(be(directly( closely(monitored(by(Government.( used(for(A&D(industry.( 4. Chinese(Quality(is(sJll(a(concern(as(the( 7. Are(aware(of(InternaJonal(Process(&(Quality( Chinese(products(are(not(widely(considered( standards(and(can(follow(them.( robust.(( 8. Are(good(at(reTengineering.( 5. Lacks(the(support(in(IT(where(India(has(an( 9. Has(the(required(Infrastructure.( advantage.( OPPORTUNITIES( THREATS( 1. Can&give&a&tough&compe22on&Boeing&&&Airbus& 1. Rise&in&compe22on&from&India&as&a&Tier&1,2,3& in&near&future.& supplier&for&A&D§or.&& 2. Can&become&leaders&in&2er&1,2,3&suppliers&for& 2. Hesita2on&in&western&countries&in&sharing& A&D§or.& informa2on&with&China&as&it&can&become&their& 3. China’s&rela2on&with&BRIC&countries.&& compe2tor&in&near&future.& & 2.4.4 Market Growth China is a big market for Air Traffic, till now only big cities are connected still small towns are out of reach. Hence we can say the main market is still not tapped to its potential. This give a lot of opportunity for commercial airliners ie. Boeing & Airbus. As far as defense is considered they are independent enough and have a strong domestic defense industry. Also they haven’t open up their defense sector for outside world. 2.4.5 Opportunities They eyeing opportunity in commercial aircraft market which is now dominated by duopoly of Boeing & Airbus. They are planning to launch their first aircraft within a couple of years. They are already a hot destination for offset manufacturing. But are still not into global defense market. One basic reason may be the absence of private companies in Defense sector. They can also try to tap the MRO segment. Suggestions Chins is doing many things right. Just I would suggest them to built some trust in global companies so that they may open their R&D centers in China. Also they should make IPR regulations more stringent. In order to reduce language barrier Chinese government has made compulsory English education in schools.
16 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 2.6 How to grow together as BRIC using A&D industry as a tool? Can BRIC works together as a team? Can they develop a sustainable model of co-‐operation? I can’t answer this at a general level but at the level of A&D industry it is fairly possible. One of the basic thing is that no two BRIC countries are similar in terms of core competencies and this can help them to work together also by doing so their dependence on US & Europe will drastically reduce. If I would had been given a task to frame a strategic policy for BRIC in A&D sector, first of all I would taken an account of core competencies of each BRIC country. Starting with Brazil we can say they have an upper hand in Business Jet segment they can focus on Business Jet markets and manufacture them. India ,China & Russia are one of the biggest markets for business jets as the growing number of business leaders, politicians & eminent personalities all require business jets. India ,China & Russia can give a preference Brazil’s business jets as they will be economical than those from US & Europe. While speaking about Russia one thing comes into mind is Sukhoi & AK 47. Their core competencies are Fighter aircraft and Arms. They can produce them and sell them to India, Brazil and China. Russian products are economical & robust but the problem comes for spare part availability. This can be solved if Russia give some Indian or Chinese countries contract of producing spares parts for their Aircrafts. At present India is one of the largest buyer of arms and BRIC constitute 16% of total world defense market. It’s a huge opportunity for Russia. India masters of IT services and a growing hub of R&D. India can provide the IT,R&D and all other services to all the requirements of Brazil’s Business jet company, Russian Defense industry and China’s commercial aircraft industry & offset manufacturing. It is also a destination of offset manufacturing after China in BRIC. This can help India to diversify its services industry at global level. China the most strongest economy of BRIC. It has bigger dreams than any of BRIC country. At present they are targeting commercial aircraft/jet market, which means to break the duo-‐poly of Airbus & Boeing. For China India, Russia & Brazil are certainly hot markets. India ,Brazil & Russia can give a preference to Chinese Commercial airliners as they will be economical. Also China is a hot destination for offset business means Brazil can shift some of its Embraer offset activities in China & India. If the above strategy can be implemented it will be a WIN-‐WIN situation for all BRIC Countries. BRIC countries should look each other’s as partners and not as competitors. -‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐-‐
18 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries Exhibit4 Globalization Exhibit 5 Exhibit 6
Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries 19 Exhibit 7 Exhibit 8: IP Risk
20 Development & Opportunities of Aerospace & Defense (A&D) Industry in BRIC Countries Exhibit 9 Frauds & How they are dealt. Sources & References: 1.A&D Insights 2011 by Mr. Neil Hampson published by PricewaterCoopers (PWC). 2. A&D Insights 2012 by Mr. Neil Hampson published by PricewaterCoopers (PWC). 3. Aerospace & Defence 2011 year in review and 2012 forecast by Mr. Neil Hampson and Mr. Scott Thompson published by PricewaterCoopers (PWC). 4. Unlocking Potential Indian Aerospace & Defence Sector by KPMG & CII. 5. SIPRI Military Expenditure Database 2012. 6. 2012 Global aerospace and defense industry outlook:A tale of two industries by Deloitte. 7.Wikipedia