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Aerospace Slides

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