The investment drivers of
                 the British Aerospace firms




   Prepared by: Ricardo Rojas M



“The Investm...
Objective
   Indentify Investment attraction opportunities from the British
   OEM aerospace companies.


   Content

   •...
Global Industry

                                         Analysis


“The Investment drivers of the British          Prepa...
Aerospace market has been growing.
   A further growth is expected, which is, however, steady.




   Source: Datamonitor,...
Technology is expected to become more
important as a market success factor.
   The average technological level has been be...
Technology level determines the level of necessity
of global partnership and sourcing activity.
   The higher the technolo...
Partnershipsare
Partnershipsare becoming localised, while
sourcing activities are globalized.
   Europe and the US are the...
The Industry is driven by two market segments:
                                     segments:
Civil and Defence.
   Certif...
The aerospace industry is highly concentrated.
   The dynamic in the civil market appears to be dominated by
   Boeing and...
Market Analysis.
                                         • The US defence as main segment
   •The aerospace industry is  ...
Supply Chain

                                         Analysis


“The Investment drivers of the British          Prepared...
Aerospace industry is affected by global political
and economic factors.
   Aerospace demand variability and unpredictabil...
Industry operate a Make to Order system to
manage low volume and high variety production.
        low
   Products are prod...
Supply base reduction, partnership and lean
system are characteristics in the Supply Chain.
   Tier 1 firms are supplied b...
Outsourcing and vertical integration can be
utilised as capacity management strategies.
   However, it needs high level of...
The financial barrier is expected to become higher
due to higher level of technology.
   The high fixed cost structure pro...
Supply Chain Analysis.
   •Aerospace industry is affected
                                          • Suppliershave to div...
British Aerospace Firms

                   Capability Acquisitions


“The Investment drivers of the British   Prepared by...
The number of capability acquisition corresponds
to that of orders contracted by the British firms.
   British aerospace f...
M&A is the main strategy of British aerospace
firms to have an access to new capabilities.
   136 capabilities acquisition...
The number of firms which is actively investing in
new capabilities is limited.
   Six companies have acquired 80% of the ...
Production of electronics requires new
capabilities.
   In order to be competitive, firms involved in the production of
  ...
Investment in technology, expertise and
knowledge are source of competitive advantages.
                                  ...
The British firms tend to invest outside of the
country in order to acquire new capabilities.
   It is expected that this ...
Most of the acquisitions have happened in the two
global aerospace clusters (Europe and the US).
   The purpose of British...
The US is the main investment overseas
destination in the production of electronics.
   Although there are emerging low-co...
UK Bristish Aerospace capability acquisitions
   •The number of capability               • Although M&A is the main
   acq...
Acknowledgement
   I'd like to express my thanks to them who helped in the making
   of this project:




   Masumi Kinosh...
Appendix A. List of main capabilities and sub-
                                          sub-
capabilities




“The Invest...
Appendix B. Ultimate Global Owner (UGO)
methodology
   UGO methodology, a 25% of ownership rule, was used to
   identify t...
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Investment Drivers British Aerospace

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The objective of this presentation is to analyse the factors that determine the intensity of FDI in the British Aerospace Industry.

FDI was analysed as the Offshoring activity and three theories of the Theory of the Firm; Resources Based View, Resources Dependence View and Transaction Cost Economics were utilized as main frameworks to explain the company activity.

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Investment Drivers British Aerospace

  1. 1. The investment drivers of the British Aerospace firms Prepared by: Ricardo Rojas M “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  2. 2. Objective Indentify Investment attraction opportunities from the British OEM aerospace companies. Content • Global Industry Analysis. • Supply Chain Analysis. • British Aerospace Firms Capability Acquisitions. “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  3. 3. Global Industry Analysis “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  4. 4. Aerospace market has been growing. A further growth is expected, which is, however, steady. Source: Datamonitor, 2008 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  5. 5. Technology is expected to become more important as a market success factor. The average technological level has been becoming higher due to more use of composite materials and electronics. Composite materials and electronics Introduction of new materials, new propulsion systems and masive use of electronic instruments Change in the engine industry Based on: Esposito, 2004 and AT Kearney 2009 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  6. 6. Technology level determines the level of necessity of global partnership and sourcing activity. The higher the technological level (aircraft), the higher the need to vertical integration/collaboration. Source: Esposito, 2004 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  7. 7. Partnershipsare Partnershipsare becoming localised, while sourcing activities are globalized. Europe and the US are the major clusters. But sourcing activities have been spread around the world. Denmark Norway Finland Poland Hungary Czech R Canada Netherlands Germany France China USA Mexico Korea UK Spain Brazil Taiwan Italy Austria Japan Greece Australia Source: Wixted, 2009 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  8. 8. The Industry is driven by two market segments: segments: Civil and Defence. Certification is compulsory in both markets (e.g. AS9100, AS9003 or AS9120) and regulations are becoming stricter. Source: Datamonitor, 2008 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  9. 9. The aerospace industry is highly concentrated. The dynamic in the civil market appears to be dominated by Boeing and EADS (Airbus). Source: Datamonitor, 2008 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  10. 10. Market Analysis. • The US defence as main segment •The aerospace industry is market. steadily growing . • The investment in technology •Technology is expected to capabilities, expertise and knowledge become more important as a are the source of competitive market success factor. advantage. •Technology level determines • Regulation and certification is one of the level of necessity of global the crucial barriers to entry in this partnership and sourcing market. activity. • Rivalry in the market is strong, •Partnershipsare becoming companies competing intensely for localised,while sourcing government and commercial contracts. activities are globalized. • Final assembly firms have strong •The Industry is driven by two bargaining power with buyers and market segments. suppliers. •The aerospace industry is • The duopolio structure increases the highly concentrated. switching cost for buyers and suppliers. “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  11. 11. Supply Chain Analysis “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  12. 12. Aerospace industry is affected by global political and economic factors. Aerospace demand variability and unpredictability is result of changes in world economy and geopolitics. Main civil aerospace demand drivers: • Energy • Power Purchasing Parity • Population growth • Wage Main defence aerospace demand drivers: • Governmental Defence Expending . Based on: Phillips, 1999 and Tiwari, 2005. “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  13. 13. Industry operate a Make to Order system to manage low volume and high variety production. low Products are produced only after their being ordered. Mill Forging Machine Assembly Final Buyer Delivery House Shop House Assembly schedule External Placed Order Release Issue PO for Issue PO for Source delivery forging house machine shop type Internal schedule Issue PO to Placed mill Order Issue PO to mill Issue PO to mill Forge parts Machine parts Assemble Source: Bliczo et alt,p 300, 2004 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  14. 14. Supply base reduction, partnership and lean system are characteristics in the Supply Chain. Tier 1 firms are supplied by a few direct companies, which have a system integrator function. Material Forming Airframe Systems Material Forming Material Forming Power Goverment Material Forming Systems Aircraft Raw construction material Tooling Components assembly Avionic Systems Airlines Tooling Components Tooling Components Weapon Systems Tooling Components Service and Support Capabilities Suppliers Manufacturing Production / Assembly Source: Rojas, 2009 Processes Sub assembly “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  15. 15. Outsourcing and vertical integration can be utilised as capacity management strategies. However, it needs high level of base capacity, which is highly costly. Capacity Aerospace Demand 100% Outsourcing Firms capacity 60% Vertical Make orbuy integration decision 40% Base capacity Time Based on: Graham & Almed, 2000 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  16. 16. The financial barrier is expected to become higher due to higher level of technology. The high fixed cost structure promote the transition to a more concentraded industry. Source: Esposito, 2004 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  17. 17. Supply Chain Analysis. •Aerospace industry is affected • Suppliershave to diversify by global political and economic capacity and risk by operating factors. in other industries. •Industry operate a Make to • Capacity management is a Order system to manage low driver for global sourcing. volume and high variety • Information and production. Communication Technology is •Supply base reduction, extremely relevant to partnership and lean system are coordinate the Supply Chain. characteristics in the Supply • The bigger supliers (partners) Chain. are becoming the •Outsourcing and vertical predominant figures. integration can be utilised as • A few player in tier 1 and tier 2 capacity management is a trend in the Supply Chain. strategies. • Entry to the market is most •The financial barrier is likely to happpen by horizontal expected to become higher due integration. to higher level of technology. “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  18. 18. British Aerospace Firms Capability Acquisitions “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  19. 19. The number of capability acquisition corresponds to that of orders contracted by the British firms. British aerospace firms that gain a new production contract tend to acquire capabilities. Source: Rojas, 2009; SBAC,. “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  20. 20. M&A is the main strategy of British aerospace firms to have an access to new capabilities. 136 capabilities acquisition occurred in the last eleven years, most of which were Mergers and Acquisitions. Ownership % Mean In-House Offshore Acquisition : 94.4% 97.1% Joint Venture: 31.5% 82.8% Extension: 100% 100% Source: Rojas, 2009 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  21. 21. The number of firms which is actively investing in new capabilities is limited. Six companies have acquired 80% of the total acquired capabilities in the last eleven years. Source: Rojas, 2009 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  22. 22. Production of electronics requires new capabilities. In order to be competitive, firms involved in the production of electronics has been acquiring new capabilities. Source: Rojas, 2009 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  23. 23. Investment in technology, expertise and knowledge are source of competitive advantages. advantages. Three main capabilities are demanded in the market: Service and Support, production of avionics and components. Source: Rojas, 2009 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  24. 24. The British firms tend to invest outside of the country in order to acquire new capabilities. It is expected that this trend continue. Source: Rojas, 2009 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  25. 25. Most of the acquisitions have happened in the two global aerospace clusters (Europe and the US). The purpose of British firms that acquired new capabilities in the US cluster is mostly to enter in the market or re-locate production. Source: Rojas, 2009 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  26. 26. The US is the main investment overseas destination in the production of electronics. Although there are emerging low-cost destinations, the technology level is the main determinant of the investment. Source: Rojas, 2009 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  27. 27. UK Bristish Aerospace capability acquisitions •The number of capability • Although M&A is the main acquisition corresponds to orders strategy to enter in the contracted by the British firms. market, Supplier Management •M&A is the main strategy. will be required to support the •The number of firms which is activity (partnership) actively investing is limited. • The necessity to gain an access •Production of electronics requires to technology, expertise and new capabilities. knowledge is the main driver •Investment in technology, expertise of the investment. and knowledge are source of • FDI is expected to continue competitive advantages. growing in this industry. •The British firms tend to invest • The production re-location outside of the country. demands sites with skilled •Most of the acquisition have labour and high technology happened in the two global capabilites. aerospace clusters . • Components, avionics and •The US is the main investment Service and Support overseas destination in the (aftermarket) will be main production of electronics. capabilities demanded. “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  28. 28. Acknowledgement I'd like to express my thanks to them who helped in the making of this project: Masumi Kinoshita. Promexico – United Kingdom. “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  29. 29. Appendix A. List of main capabilities and sub- sub- capabilities “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net
  30. 30. Appendix B. Ultimate Global Owner (UGO) methodology UGO methodology, a 25% of ownership rule, was used to identify the OEM British aerospace companies and its strategies. Others 5 <25% 25% Others 4 <25% 30% Others 2 3 <25% <25% 60% 1 “The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero Aerospace firms” rrmmex@netscape.net

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