STRATEGIC SOURCING
(MATERIALS MANAGEMENT AND PURCHASING)
(OSCM 3660-001, Spring 2019)
Dynamic Technologies (Due Date 4-18-19 11:59 P.M.)
Case Guideline
Paul Hong, Ph.D., CMA
Information Operations and Technology Management
College of Business and Innovation
University of Toledo
1
Introduction
This case is about strategic integration into the aviation and aerospace global supply chain:
Complexity of Aviation and aerospace industry is greater than that of automotive industry.
Demand shift to Asia Pacific is obvious in the coming years (2010-2029).
The purpose of this case is to expose students to
Issues related to strategic integration of global supply chain
Challenges of establishing domestic market advantage and global competitiveness.
Update: Review 2018 & 2019 Industry Outlook Reports
Students will have opportunities to examine
Key factors in strategic integration of global supply chain
Awareness of an increasing market potential in emerging markets
Implications of US firms for advanced and emerging market strategies
Note: Refer to:
Questions
Concept Questions: Define the following and provide an example.
(1) Strategic Integration; (2) Global Supply Chain; (3) Aviation and Aerospace Industry
General Questions: Answer the following questions based on (1) the case contexts.
1.1. What is the scope of cost management? What are key cost management measures?
1.2. What are the differences between large OEMs and all respondents (e.g., component suppliers)?
2.1. Differences between India and other Asian/European countries
2.2. Explain strengths and growth potential of Indian aviation and aerospace industry.
3.1. How would you assess the stage of Indian aviation and aerospace industry?
3.2. What are strategic priorities of Indian aviation and aerospace industry?
3.3. Explain the reasons why your team consider the above strategic priorities as such?
4.1. What are the advantages and disadvantages of activity details in India?
(Related to growth—its aspiration to Tier 1 suppliers)
4.2. Why? (Rationale for 4.1)
Questions
General Questions: Answer the following questions based on additional reading materials and google search as needed.
5.1. Update: Major trends of Advanced markets in relation to aviation and aerospace industry.
5.2. Update: Major trends of emerging markets (e.g., BRICs and India in particular)
6.1. Strategic roles of global SCM for aerospace and defense industry (aerospace-related)
competitiveness
6.2. Career growth potential in Aviation/Aerospace/Defense industry.
Conclusion
7.1. Team work description (Roles, division of work, References)
7.2. Coordination of Quality Control and Lessons (by individuals)
Case 2 Grading Details
Top 10 Aerospace Companies in the WorldNameHeadquarters Country 2018 RevenueThe Boeing Company USA$93.39bnAirbus SE Netherlands$75.27bnUnited Technologies Corporation (UTC)USA $59.83bn
Lockheed Martin CorporationUSA$49.97bn
General Dynamics Co.
STRATEGIC SOURCING(MATERIALS MANAGEMENT AND PURCHASING)(OS.docx
1. STRATEGIC SOURCING
(MATERIALS MANAGEMENT AND PURCHASING)
(OSCM 3660-001, Spring 2019)
Dynamic Technologies (Due Date 4-18-19 11:59 P.M.)
Case Guideline
Paul Hong, Ph.D., CMA
Information Operations and Technology Management
College of Business and Innovation
University of Toledo
1
Introduction
This case is about strategic integration into the aviation and
aerospace global supply chain:
Complexity of Aviation and aerospace industry is greater than
that of automotive industry.
Demand shift to Asia Pacific is obvious in the coming years
(2010-2029).
The purpose of this case is to expose students to
Issues related to strategic integration of global supply chain
2. Challenges of establishing domestic market advantage and
global competitiveness.
Update: Review 2018 & 2019 Industry Outlook Reports
Students will have opportunities to examine
Key factors in strategic integration of global supply chain
Awareness of an increasing market potential in emerging
markets
Implications of US firms for advanced and emerging market
strategies
Note: Refer to:
Questions
Concept Questions: Define the following and provide an
example.
(1) Strategic Integration; (2) Global Supply Chain; (3)
Aviation and Aerospace Industry
General Questions: Answer the following questions based on (1)
the case contexts.
1.1. What is the scope of cost management? What are key cost
management measures?
1.2. What are the differences between large OEMs and all
respondents (e.g., component suppliers)?
2.1. Differences between India and other Asian/European
countries
2.2. Explain strengths and growth potential of Indian aviation
and aerospace industry.
3.1. How would you assess the stage of Indian aviation and
aerospace industry?
3.2. What are strategic priorities of Indian aviation and
aerospace industry?
3.3. Explain the reasons why your team consider the above
strategic priorities as such?
3. 4.1. What are the advantages and disadvantages of activity
details in India?
(Related to growth—its aspiration to Tier 1 suppliers)
4.2. Why? (Rationale for 4.1)
Questions
General Questions: Answer the following questions based on
additional reading materials and google search as needed.
5.1. Update: Major trends of Advanced markets in relation to
aviation and aerospace industry.
5.2. Update: Major trends of emerging markets (e.g., BRICs and
India in particular)
6.1. Strategic roles of global SCM for aerospace and defense
industry (aerospace-related)
competitiveness
6.2. Career growth potential in Aviation/Aerospace/Defense
industry.
Conclusion
7.1. Team work description (Roles, division of work,
References)
7.2. Coordination of Quality Control and Lessons (by
individuals)
Case 2 Grading Details
Top 10 Aerospace Companies in the WorldNameHeadquarters
Country 2018 RevenueThe Boeing Company
USA$93.39bnAirbus SE Netherlands$75.27bnUnited
Technologies Corporation (UTC)USA $59.83bn
Lockheed Martin CorporationUSA$49.97bn
General Dynamics CorporationUSA$30.97bn
4. GE AviationUSA$27.37bnNorthrop
GrummanUSA$25.8bnRaytheon Company USA$25.34bnBAE
Systems (£18.32bn)
UK $23.59bn Rolls-Royce
UK$22bn
[1]
World’s Middle Class Growth
Source:https://www.visualcapitalist.com/mapping-the-worlds-
new-megacities-in-2030/
[1]
Cities with a Projected 2030 Population of more than 10 Million
Competition, Conflicts and Contribution in Asia
9
Automobile Component Parts
A single car has about 30,000 parts, counting every part down
to the smallest screws. Some of these parts are made at Toyota,
but we also have lots of suppliers that make many of these
parts. The 30,000 or so parts use different raw materials and
different manufacturing processes.
5. Boeing Global Supply Chain
The 737, which is made up of 367,000 parts, is assembled at a
factory in Renton, Wash., south of Seattle. Boeing delivered
372 of the single-aisle 737s last year — a little more than one a
day.
Scott
S&P Global Ratings 1
Industry Top Trends 2019
Aerospace and Defense
November 14, 2018
Key Takeaways
– Ratings Outlook: Rating trends across the global industry will
likely be fairly stable as
growing defense spending in the U.S. and Europe and increasing
aircraft production rates
support higher earnings and cash flow. However, the credit
quality of some commercial
aerospace suppliers could be affected by their continued
struggles to increase production
rates. Likely high levels of merger and acquisition (M&A)
activity in both sectors could also
6. lead to increasing ratings volatility.
– Forecasts: We expect credit ratios to improve in 2019 on
moderate revenue growth and
higher margins. However, this improvement could be
constrained by operational issues at
suppliers and increased leverage to fund M&A activity.
Shareholder returns at the larger
firms remain a concern, though less so now than in recent years.
– Assumptions: We expect production rates of commercial
aircraft to continue to increase in
2019, despite the flat to declining level of new orders, though at
a slower pace than in 2018.
In the U.S., we expect defense spending growth to moderate this
year, though companies will
continue to benefit from the strong growth in 2018. In Europe,
large order backlogs for
commercial (mainly the Airbus A320) and defense aircraft
continue to support credit metrics.
– Risks: The largest risk facing the commercial aerospace
industry is that suppliers will be
unable to keep up with higher production rates while, at the
same time, facing elevated
margin pressure due to their evolving relationship with the
aircraft manufacturers. For U.S.
defense contractors, political concerns and competing fiscal
priorities that limit the growth
of military spending are key risks to growth. In Europe, the
main risk is Brexit and its
potential impact on the supply chain for commercial aerospace.
The uncertainty over
Britain's EU exit has already led to increased inventories and
could cause production delays.
7. – Industry Trends: The commercial aerospace market is
softening somewhat but remains
strong. Increased U.S. defense spending should support demand
over the next few years,
though the longer-term outlook is more uncertain. The European
aerospace market remains
strong, although a number of companies have faced operational
setbacks. We expect
increased defense spending by a number of European
governments and the European
Defence Fund to support revenue growth for European firms.
Authors
Christopher DeNicolo, CFA
Washington, DC
+1 202 383 2398
[email protected]
spglobal.com
David Matthews
London
+44 20 7176 3611
[email protected]
spglobal.com
William Buck
London
+44 20 7176 3606
[email protected]
Industry Top Trends 2019: Aerospace and Defense
S&P Global Ratings November 14, 2018 2
8. Ratings trends and outlook
Global Aerospace and Defense
Chart 1 Chart 2
Ratings distribution Ratings distribution by region
Chart 3 Chart 4
Ratings outlooks Ratings outlooks by region
Chart 5 Chart 6
Ratings outlook net bias Ratings net outlook bias by region
Source: S&P Global Ratings. Ratings data measured quarterly
with last shown quarter ending September 30, 2018
Because we currently have stable outlooks on more than 80% of
the A&D companies that
we rate, we do not expect there to be many rating changes in
this segment over the next
12 months. For those companies with non-stable outlooks, there
is a very slight negative
bias. The vast majority of our outlooks on North American
A&D companies are stable and
most of the non-stable outlooks are related to pending
acquisitions. European-based
A&D companies make up only a small portion of our global
portfolio. The negative
outlooks that we have on a few European A&D companies
mainly reflect company-
specific factors.
0
2
15. 0
13 14 15 16 17 18
Aerospace & DefenseNet Outlook
Bias (%)
-60
-40
-20
0
20
40
60
13 14 15 16 17 18
N.America W.EuropeNet Outlook
Bias (%)
Industry Top Trends 2019: Aerospace and Defense
S&P Global Ratings November 14, 2018 3
Industry forecasts
Global Aerospace and Defense
Chart 7 Chart 8
16. Revenue growth (local currency) EBITDA margin (adjusted)
Revenue growth will be solid in 2019 due to increasing
production rates
on commercial aircraft and growing defense spending in the
U.S. and
Europe.
EBITDA margins should improve as commercial aircraft
suppliers benefit
from higher volumes and improving operations as the pricing
pressure
facing defense contractors lessen somewhat.
Chart 9 Chart 10
Debt / EBITDA (median, adjusted) FFO / Debt (median,
adjusted)
Leverage should decline as earnings increase, though this could
be offset
by the impact of M&A and, possibly, shareholder returns.
Companies in this sector should also see their cash flow
improve as their
earnings increase.
Source: S&P Global Ratings. Revenue growth shows local
currency growth weighted by prior-year common-currency
revenue-share. All other figures
are converted into U.S. Dollars using historic exchange rates.
Forecasts are converted at the last financial year-end spot rate.
FFO--Funds from
operations.
19. Forecast
0%
5%
10%
15%
20%
25%
30%
2015 2016 2017 2018 2019 2020
N.America W.Europe Global
Forecast
Industry Top Trends 2019: Aerospace and Defense
S&P Global Ratings November 14, 2018 4
Key assumptions
Commercial Aerospace
1. Aircraft demand moderating
Aircraft orders will likely remain at or below the level of
production (about 1,600 in 2018)
20. for the next few years. After peaking at a record of over 3,300
in 2014, the number of
orders declined to the 1,800-2,300 range in 2015-2017 and will
likely decline further in
2018. We expect this decline to occur because near-term
demand will have been met, the
manufacturers' large backlogs are leading to long wait times for
popular aircraft, and
there are few new models to drive increased sales. However, air
traffic continues to
increase at a faster pace than the historical average of 5.5% and
there is still demand to
replace older aircraft with new, more fuel-efficient models.
Widebody orders have been
particularly weak, especially for the largest version of each
model family, though we have
seen some strength recently and demand could increase further
in the next few years as
the airlines begin to replace their older Boeing 777s and Airbus
A330s. Orders for cargo
aircraft have also risen on demand from package express
companies like UPS. This
higher level of demand could continue if the global economy
remains strong, though
cargo aircraft represent a very small part of the market.
2. Increasing production supports higher revenues but the rate
of growth will
slow
Airbus and Boeing will likely continue to increase the
production rates of their popular
aircraft, including the Boeing 737 and Airbus A320, due to the
huge backlog of orders for
these aircraft. However, the rate of growth in the total number
of deliveries will likely slow
21. from the almost 10% level we expect for 2018 as manufacturers
reach their near-term
production targets for other aircraft, like the Boeing 787 and
Airbus A350, while older
model widebody production rates are flat to declining. Although
airlines would probably
like Airbus and Boeing to further increase the production rates
of their 737 and A320
aircraft, which are currently slated to peak at 57 a month and 63
a month, respectively, in
the next two years, issues with the supply chain could limit
future increases and may
even make reaching these targeted rates difficult. Deliveries of
both the 737 and A320
have been delayed in 2018 due to issues with the engines for
both families of aircraft and
the supplier-provided fuselage for the 737. Both manufacturers
expect to catch up with,
and meet, their full-year targets, though delays could continue
into 2019.
3. Margins and cash flow should improve
The significant increase in aircraft production and the large
number of new models
introduced in recent years, as well as the related operational
problems in some cases,
have constrained the earnings and cash flow of many suppliers
despite their higher
revenues. With the rate of production growth slowing and most
new models now in
production, suppliers should see improving margins and cash
flow. However, efforts by
the original equipment manufacturers (OEMs) to reduce their
costs could limit the
improvement in some of their suppliers' margins. Suppliers are
22. trying to offset this
pricing pressure by improving their operating efficiency through
increased automation
and other efforts, as well as by trying to reduce the costs from
their suppliers. Higher
material costs due to tariffs could also become an issue if the
suppliers and OEMs are
unable to pass these increases onto their customers.
Industry Top Trends 2019: Aerospace and Defense
S&P Global Ratings November 14, 2018 5
Chart 11 Chart 12
Large commercial aircraft orders Large commercial aircraft
deliveries
Source: Manufacturers' websites, S&P Global Ratings
U.S. Defense
1. Increased revenue as defense spending rises
The U.S. defense budget increased by more than 10% in fiscal
year 2018 to $590 billion.
Although the defense budget increased by only 3% in fiscal year
2019 (to $606 billion),
the lag between when the money is appropriated by Congress
and when it is actually
spent by the military should support higher revenues for most
defense contractors for the
next few years. However, the pace of growth will vary by
company depending on which
23. programs they are working on and what parts of the market they
address. In addition, the
longer-term growth prospects for defense spending are
becoming more uncertain. Higher
levels of U.S. defense spending should also be bolstered by
solid demand from countries
in the Middle East, Asia, and Europe for missile defense and
other weapons systems;
however, deliveries under existing foreign contacts as well as
new orders could be
cancelled or delayed due to political issues. Sales to Saudi
Arabia, the largest buyer of
U.S. weapons, could be halted due to the alleged murder of a
dissident journalist by the
Saudi regime, which could possibly affect the revenues of a
number of large defense
contractors.
2. Margins likely to moderate
The U.S. government continues to look for the best technology
at the most affordable
price even though overall defense spending has increased.
Therefore, we expect that the
elevated pricing pressure in this industry will persist, although
it will be less onerous than
in recent years. More recently, prime contractors have been
pressuring their suppliers to
reduce costs as well. Most companies have worked to
rationalize their cost structures in
order to bid more competitively on defense programs, though
much of these savings are
being passed on to their customers, which has limited any
material improvement in their
margins.
24. 3. M&A increasing while shareholder returns moderate
Increased defense spending has led many firms to shift their
cash deployment priorities
toward M&A and internal investment and away from
shareholder returns, which is a trend
that we expect to continue. However, the volume of share
repurchases and dividends by
the large firms will remain high, though these companies will
likely choose to fund their
shareholder rewards with internal cash flows. Acquisitions
could lead to elevated
0
500
1000
1500
2000
2500
3000
3500
2000 2003 2006 2009 2012 2015 2018*
Boeing Airbus
* YTD
*
25. 0
200
400
600
800
1000
1200
1400
1600
1800
2000 2003 2006 2009 2012 2015 2018f
Boeing Airbus
* Estimate
*
Industry Top Trends 2019: Aerospace and Defense
S&P Global Ratings November 14, 2018 6
leverage if firms do not pull back on their shareholder returns in
response; however, in
some cases, the effect on their credit quality could be moderated
26. by their improved scale
and expanded capabilities.
European Defense
1. European commitment to NATO driving future revenue
growth
Growth in the defense budgets of European countries, due to
geopolitical tensions and
the rising threats posed by cyberattacks and disruptive
technologies, is providing a
supportive environment for defense companies. European
members of the North Atlantic
Treaty Organization (NATO) are attempting to reach the NATO
spending target of 2% of
GDP (currently 1.5% on average) and continue to increase their
real spending on defense,
which we estimate will rise by 4.85% in 2018 (see chart below).
European governments
continue to move toward achieving “strategic autonomy”, which
aims to reduce Europe’s
reliance on U.S.-made weapons. We expect European defense
spending to continue to
rise and believe that this growth will be supported by the
European Defence Fund (EDF)
(which launched in June 2017) and the European Defence
Industrial Development
Programme (EDPIP). The EDF should create incentives for EU
member states to cooperate
on their acquisitions of defense equipment and technology by
providing co-financing
from the EU budget and practical support from the European
Commission. The EDPIP
should also support research and development in the industry
through its research
27. grants.
Chart 13
European NATO Members Defense Spending over time
Source: NATO
2. Digitization gathers momentum
As European governments modernize their armed forces and
cyber threats become a
common facet of modern warfare, European defense companies
are trying to establish
themselves as digital leaders through M&A or by seeking
partnerships. For example, on
Dec. 17, 2017, Thales (A-/Negative/A-2) announced that it was
acquiring Dutch-based
digital security company Gemalto for an enterprise value of
about €5.6 billion. Gemalto is
a major player in cybersecurity that derives about half of its
revenue from the production
of smart cards for mobile phones and payment cards and the rest
mainly through
identification systems, enterprise security, mobile platforms,
and the internet of things.
In addition, cyber security accounted for 5% of BAE Systems
PLC's (BBB/Stable/A-2)
revenue in 2017, while Airbus (A+/Stable/A-1+) has launched a
new digital program
-4.0
-3.0
-2.0
-1.0
28. 0.0
1.0
2.0
3.0
4.0
5.0
6.0
2011 2012 2013 2014 2015 2016 2017e 2018e
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Share of real GDP (%) [RHS] Annual real change (%) [LHS]
Industry Top Trends 2019: Aerospace and Defense
S&P Global Ratings November 14, 2018 7
called Quantum, which seeks to create new business models
around advanced
technology. We expect the capital expenditures of European
defense companies to
remain fairly stable at around 5% of revenue. Therefore, we
anticipate that most issuers
will utilize joint ventures or strategic M&A to boost their
29. digital capabilities.
3. European Defence Fund to encourage research and
development
The EDF and EDPIP should support increased levels of research
and development in the
industry through research grants by partially subsidizing
research costs for rated
entities. However, the full effect of this support will not be felt
in the next year because
the EDF has, as of yet, only allocated €90 million for defense
research projects for 2017-
2019. The EDF plans to make €500 million available for the
development of defense
technologies during 2019-2020 before both the EDF and EDPIP
receive increased funding
under the long-term EU budget starting in 2021.
Key risks and opportunities
Commercial Aerospace
1. The supply chain’s ability to increase production
Problems at the suppliers of engines, fuselages, interiors, and
other components to the
commercial aerospace industry have led to delays in the
deliveries of the Boeing 737 and
Airbus A320 this year, which could continue into 2019. These
problems not only affect the
earnings and cash flow of the suppliers but could also cause the
OEMs to delay further
production increases. At the same time, the relationship
between aircraft manufacturers
and their suppliers is evolving as the OEMs try to improve their
margins by reducing costs,
30. expanding their presence in the lucrative aftermarket, and
increasing their control over
aircraft development and production. This trend could lead to
reduced demand and lower
margins for aerospace suppliers, though we expect that this shift
will likely take a long
time to develop. The threat, however, has prompted some
suppliers to increase their
negotiating leverage by expanding the scope of their operations
through acquisitions.
2. Trade wars and other political issues
Commercial aircraft production involves a complex global
supply chain that could be
disrupted by possible changes in trade agreements, especially
between the U.S. and the
U.K. The tariffs imposed by the U.S. on aluminum, steel, and
Chinese imports have so far
not had a material impact on U.S.-based manufacturers or
suppliers, though they could
lead to modestly higher costs over time. Boeing usually has
price escalators in its
customer contracts, which they could use to offset some of the
increase, and also has
long-term contracts with its aluminum suppliers. Any retaliatory
tariffs placed on U.S.
aircraft by China would likely not affect Boeing's deliveries for
many years because Airbus
would be unable to replace any cancelled Chinese orders in the
near-term due to
production constraints.
In Europe, Brexit poses a risk not only to the credit metrics of
A&D companies but also to
the business models of the OEMs and their suppliers. If any
31. Brexit deal results in the U.K.
leaving the European Aviation Safety Agency (EASA), we
expect that there to be numerous
implications for U.K. and EU aerospace firms. Specifically, we
expect a no deal Brexit
(under which no agreements between the EU and the U.K. are
finalized by the time the
deadline for negotiations is reached) to lead to delivery delays
due to the increased
logistical burden, thereby delaying revenues and increasing the
associated
transportation costs. On October 2 EASA allowed a number of
U.K. firms that held certain
approvals to apply for third-party approval, although we still
believe this would increase
costs for these firms. However, we note that aerospace giant
Boeing recently opened its
Industry Top Trends 2019: Aerospace and Defense
S&P Global Ratings November 14, 2018 8
first ever European manufacturing plant in Sheffield despite the
potential uncertainties
surrounding Brexit.
3. A sharp downturn in the global economy in 2019
An economic downturn could reduce the volume of global air
traffic and possibly lead to
an increase in order cancellations and deferrals. This would be
exacerbated if the weaker
economic conditions also reduce the availability of financing to
fund aircraft purchases,
32. especially because the U.S. and major European export credit
agencies are not available
to support the market. However, the huge order backlogs at
commercial aerospace firms,
which stretch out to more than six years for some models,
provide some cushion for the
manufacturers to maintain their current production rates, at least
for popular models,
though they would likely delay further production increases.
U.S. Defense
1. Uncertainty about longer-term defense spending
Although we expect U.S. defense spending to increase modestly
for the next few years,
the growth rate will not likely exceed the pace of inflation and
we believe that actual
declines in nominal spending are possible. Despite increasing
threats from Russia and
China and consistent public support for a strong military, the
Trump Administration
recently called for a 5% cut to all government spending.
Nonetheless, Congress, which
actually appropriates the money, could vote for higher levels.
Growing fiscal deficits could
also limit defense spending, though a politically split Congress
may actually support
higher spending because both parties will be forced to
compromise to pass appropriation
bills. Finally, U.S. defense spending is still limited by
sequestration, which returns in
fiscal year 2020. Although we expect Congress to either
eliminate or temporarily waive
sequestration to allow the government to fund the military at
higher-than-sequestration
33. levels, which under sequestration would be $200 billion below
current levels, nothing is
certain in the current political environment.
2. M&A
M&A activity between defense companies has increased
significantly in the past two
years and is a trend that we expect to continue in 2019. This
increase is being driven by
improved visibility into near-term defense spending as well as
higher cash flows from
lower tax rates. The recent announcement of the planned merger
between two midsize
defense contractors, Harris Corp. and L3 Technologies Inc.,
could cause more small
industry players to combine to increase their scale and broaden
their product and service
offerings. The recent wave of acquisitions could also lead some
companies to divest the
noncore operations they obtained from their acquired
businesses. Although we expect
the large prime contractors to continue to acquire smaller
companies to gain new
technologies or enter new markets, we don't expect there to be a
merger between two
primes because the U.S. government would likely not allow it.
We also expect continued
consolidation in the government services market, which is still
price competitive despite
higher defense spending.
3. A sharp downturn in the global economy in 2019
U.S. defense spending is generally not sensitive to short-term
economic conditions
34. because it is usually determined by the threats the country faces
and political priorities.
Non-U.S. defense budgets can be more sensitive to economic
conditions, as evidenced by
recent cuts to Italy's defense budget, so foreign demand could
decline. Defense
contractors or suppliers that also have exposure to the
commercial aerospace or
industrial markets could be affected by downturns in those
sectors in a weak economy.
Industry Top Trends 2019: Aerospace and Defense
S&P Global Ratings November 14, 2018 9
Chart 14 Chart 15
U.S. defense spending U.S. supplemental war funding
Source: U.S. Department of Defense, S&P Global Ratings
European Defense
1. A disorderly Brexit could negatively affect supply chains
In terms of the potential effects of a disorderly Brexit, many
European defense
companies are focused on how Britain's separation from the EU
will affect their supply
chains. Defense OEMs often have complex cross-border supply
chains that would be
highly sensitive to the impact of a disorderly Brexit, which
could lead to immediate
production delays at the OEMs due to short-term disruptions in
35. their transport and
logistics, a longer-term rebalancing of supply chains as the
industry deals with the
potential introduction of customs checks, and disruption caused
by delays or changes in
the regulatory approval process. Smaller defense suppliers
would likely be the hardest
hit by a disorderly Brexit because they lack the scale, resources,
and liquidity to handle
sudden large swings in their working capital. In particular, we
have seen larger firms
increase their inventory and stock up on raw materials in
preparation for potential
transport or supply-chain issues, which is a strategy that smaller
suppliers may find hard
to emulate.
2. Brexit could alter the U.K’s role in the EU’s defense strategy
and lead to the
relocation of production
The U.K. is currently the EU’s biggest defense spender and one
of the few countries that
meets NATO’s target of spending 2% of its GDP on defense. In
fact, the country is
responsible for about 40% of the bloc’s current spending on
defense R&D. However, there
remain many unknown factors related to the aftermath of Brexit,
including what role the
U.K. will play in the EU's defense strategy going forward,
whether it will have access to
European research and industrial development funding, and how
the cross-border
movement of skilled labor will be handled. Although most
existing defense contracts will
likely not be affected, U.K. firms may be prevented from
36. bidding on future EU contracts or
vice versa. Some OEMs may also decide to relocate their
production assets to be closer to
their end customers and negate some of the aforementioned
risks.
Tellingly, the announcement of plans for a Franco-German
combat aircraft program to
replace the Eurofighter Typhoon and Dassault Rafale excluded
U.K. companies. The
U.K.’s plan to develop the Tempest fighter through a
consortium of rated entities (BAE,
Rolls Royce, and Leonardo) should help support U.K.-based
suppliers. However, both
$-
$ 100
$ 200
$ 300
$ 400
$ 500
$ 600
$ 700
FY01 FY04 FY07 FY10 FY13 FY16 FY19
B
il
38. s
Industry Top Trends 2019: Aerospace and Defense
S&P Global Ratings November 14, 2018 10
programs are a long way from production, with Tempest
expected to enter service in 2035
and the proposed Franco-German aircraft not expected to enter
service until 2040.
On the other hand, some of the impact of the U.K’s decision to
leave the EU has already
been seen in the bloc’s decision to raise its military budget for
the first time in six years,
after the U.K. dropped its opposition to the plan, with the
creation of more structured
defense cooperation through the EDF and DFPIP.
3. A sharp downturn in the global economy in 2019
With continued pressure from the U.S. over NATO spending and
the European
Commission's recognition of defense as a key priority, we do
not believe that EU defense
spending will be sensitive to short-term economic conditions.
However, because we
currently have negative outlooks on a number of rated entities
in Europe due to their
operational performance, Brexit could trigger additional
downgrades if defense spending
moderates. Also, if there is a large decline in asset values
(particularly government
39. bonds), these companies' pension deficits could increase, which
would raise their S&P
adjusted debt levels.
Related Research
– Countdown to Brexit: No Deal Moving Into Sight, Oct. 30,
2018
– U.S. Military Contractors Will Likely See A Modest Boost
From The Fiscal 2019 Defense
Budget, Feb. 20, 2018
This report does not constitute a rating action.
Industry Top Trends 2019: Aerospace and Defense
S&P Global Ratings November 14, 2018 11
Cash, debt, and returns
Global Aerospace and Defense
Chart 16 Chart 17
Cash flow and primary uses Return on capital employed
Chart 18 Chart 19
Fixed versus variable rate exposure Long term debt term
structure
Chart 20 Chart 21
40. Cash and equivalents / Total assets Total debt / Total assets
Source: S&P Global Market Intelligence, S&P Global Ratings
calculations
0
10
20
30
40
50
60
70
80
2007 2009 2011 2013 2015 2017
$ Bn
Capex Dividends
Net Acquisitions Share Buybacks
Operating CF
0
2
41. 4
6
8
10
12
14
2007 2009 2011 2013 2015 2017
Global Aerospace & Defense - Return On Capital (%)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2009 2011 2013 2015 2017
Variabl e Rate Debt (% of Identifiable Total)
Fixed Rate Debt (% of I dentifiable Total)
0
43. LT Debt Due 3 Yr LT Debt Due 4 Yr
LT Debt Due 5 Yr LT Debt Due 5+ Yr
Nominal Due In 1 Yr
$ Bn
0
2
4
6
8
10
12
14
2007 2009 2011 2013 2015 2017
Global Aerospace & Defense - Cash &
Equivalents/Total Assets (%)
0
5
10
15
20
44. 25
2007 2009 2011 2013 2015 2017
Global Aerospace & Defense - Total Debt / Total
Assets (%)
No content (including ratings, credit-related analyses and data,
valuations, model, software or other application or
output therefrom) or any part thereof (Content) may be
modified, reverse engineered, reproduced or distributed in any
form by any means, or stored in a database or retrieval system,
without the prior written permission of Standard &
Poor’s Financial Services LLC or its affiliates (collectively,
S&P). The Content shall not be used for any unlawful or
unauthorized purposes. S&P and any third-party providers, as
well as their directors, officers, shareholders, employees
or agents (collectively S&P Parties) do not guarantee the
accuracy, completeness, timeliness or availability of the
Content. S&P Parties are not responsible for any errors or
omissions (negligent or otherwise), regardless of the cause,
for the results obtained from the use of the Content, or for the
security or maintenance of any data input by the user.
45. The Content is provided on an “as is” basis.
S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR
IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED
TO, ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS,
SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S
FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE
CONTENT WILL OPERATE WITH ANY SOFTWARE OR
HARDWARE CONFIGURATION. In no event shall S&P Parties
be
liable to any party for any direct, indirect, incidental,
exemplary, compensatory, punitive, special or consequential
damages, costs, expenses, legal fees, or losses (including,
without limitation, lost income or lost profits and
opportunity costs or losses caused by negligence) in connection
with any use of the Content even if advised of the
possibility of such damages.
Credit-related and other analyses, including ratings, and
statements in the Content are statements of opinion as of the
date they are expressed and not statements of fact. S&P’s
opinions, analyses, and rating acknowledgment decisions
(described below) are not recommendations to purchase, hold,
or sell any securities or to make any investment
decisions, and do not address the suitability of any security.
S&P assumes no obligation to update the Content
following publication in any form or format. The Content
should not be relied on and is not a substitute for the skill,
judgment and experience of the user, its management,
employees, advisors and/or clients when making investment
and other business decisions. S&P does not act as a fiduciary or
an investment advisor except where registered as
such. While S&P has obtained information from sources it
believes to be reliable, S&P does not perform an audit and
48. without the permission of Indian Institute of Management
Bangalore.
DYNAMIC TECHNOLOGIES (INDIA) LIMITED:
STRATEGIC INTEGRATION INTO THE AVIATION
AND AEROSPACE GLOBAL SUPPLY CHAIN
ABHOY K OJHA AND JISHNU HAZRA
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
49. Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 2 of 13
Ashwini Jethmalani, CEO and MD of Dynamic Technologies
(India) Limited (DTIL), as usual, had
arrived early at the board room for a strategy meeting where he
was soon joined by Nirmal Rego, the
Deputy Chief Operating Officer of DTIL’s Aviation Division
and Kavita Krishnamurthy, Head Corporate
Communications. While they waited for the others, they
prepared their own beverages from the range of
options available at the ‘‘beverage station’’ which was an
integral part of the room. As they sipped on
their beverages, Ashwini shared with Nirmal and Kavita why he
had insisted on a ‘‘beverage station’’
being part of the room and the story behind his emotional
attachment to the idea.
Tea had played a big role in the business model of Ashwini’s
first entrepreneurial venture during the
1980s, which he had launched with some friends while still a
50. student in Mumbai (then Bombay) to earn
‘‘pocket’’ money. At that time, it was not common for offices to
have their own duplication facilities, and
it was normal for office staff to avail the services of a vendor
located in the same building or close by for
duplication of their documents. Ashwini and his friends noticed
that very often the office staff would get
upset and irritated at having to wait for the services when the
work load at the vendor’s outlet was too
much or when they needed some duplication to be done
urgently. The friends identified this as an
opportunity to develop a new customer value proposition.
They invested in a couple of photocopying machines and rented
a small space on the ground floor of a
multi-story office building at Nariman Point, the heart of
Mumbai’s business district. There were other
small outlets including some that offered the same photocopying
service on the same floor that were well-
established. There was very little that the friends could offer in
terms of quality, speed, or price of service
that was not already being offered by the established vendors.
However, they ‘‘tweaked’’ their business
model and created a small sitting space and offered tea to the
51. office staff that brought work to the outlet.
This was sufficient to make their duplication outlet the vendor
of choice. As the ‘‘key’’ decision makers
in terms of choice of vendor were the office staff, offering them
value tilted the table in favor of their new
venture. The office staff had a place to sit and chit-chat among
themselves, and also enjoyed tea while
they waited which made them less restless or upset about the
wait even if occasionally the wait was
longer than desired. The lack of space available to the other
vendors did not allow them to duplicate the
same facilities, providing Ashwini and his friends the inimitable
competitive advantage in the relevant
market. This early lesson in business taught Ashwini the
importance of business models and also helped
him develop the discipline to pay attention to small details that
might make a difference in terms of
competitive advantage.
On March 20, 2010, Ashwini and his top management team were
meeting to decide on a business model
for DTIL’s Aviation Division to enhance its strategic
integration into the global supply chain of major
defense, aviation, and aerospace players such as Boeing,
52. Juggernaut, and the like. On that day, the team
had to decide on a business model that would give them a foot
in the door as a key supplier to Juggernaut
in the short run and an opportunity to be a big player in the
aviation and aerospace industry in the long
run. The team was aware of the organization’s capabilities
which were developed by working in the
Indian aviation sector for over 15 years and more recently as a
Tier 2 supplier to Juggernaut, a major
European conglomerate in the sector. As a Tier 2 supplier, DTIL
had worked with Flight Aerosystems,
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 3 of 13
which was a Tier 1 supplier to many aviation majors, including
53. Juggernaut. The management team now
needed to formalize a business model that would allow DTIL to
progress to a Tier 1 supplier, where it
would have full responsibilities of the supplies without any
intermediaries between it and Juggernaut.
There was a possibility of it also becoming the single source
supplier for the major company.
GLOBAL AVIATION AND AEROSPACE INDUSTRY:
PROSPECTS AND
CHALLENGES
All major defense, aviation, and aerospace players were
restructuring their manufacturing capabilities to
be competitive in the new global environment. Flattening or
declining prospects in the traditional high
income economies required the original equipment
manufacturers (OEMS) to seek other markets for
growth. There were increasing opportunities in the defense and
civil sectors of other high growth
economies, including India. However, cost pressures in the
traditional manufacturing hubs located in high
income economies required the OEMs to examine their supply
chains. Also, there were price pressures as
54. the customers in the low income economies were relatively
price sensitive and willing to choose cheaper
options. Fluctuating currency exchange rates made matters
worse, particularly for European OEMS as the
Euro had been appreciating relative to the US dollar as most
aviation transactions were conducted in US
dollars. Finally, owing to a decline in overall population, there
was also a declining workforce in the
traditional aviation and aerospace hubs, which had forced the
major players to reinvent themselves and
their supply chains.
There was a search for global partners who could match the
high quality requirements of the industry and
adhere to the delivery schedules of the original suppliers, while
substantially reducing the costs of doing
business in order to build or retain competitiveness in difficult
market conditions. Further, the Indian
government had introduced the offset policy for its defense
procurement which mandated that companies
that obtained government contracts had to obtain a minimum of
30% of the value of the contract from
India-based suppliers. This made it attractive for DTIL to
present itself as the supplier of choice.
55. A studyi based on a survey of OEMs in the aviation industry
suggested that global growth in the industry
would be close to or less than 2% annually. This, and other
studies, indicated that while North America
and Europe would continue to be the largest markets, the growth
in the industry would be skewed towards
other economies, particularly Asia, including India. According
to another study,ii the fleet of airplanes of
regional airlines in North America comprised 41% of the global
total in 2009 and would likely comprise
40% in 2029. The corresponding figures for Europe were 28%
and 19% suggesting a relative decline in
the market size, and those for Asia Pacific (including China)
were 16% and 22% suggesting an increase in
market size over 20 years. However, in terms of acquisition of
new planes, the shift to Asia Pacific was
clearer. About 30% to 35% of the demand for new airplanes
during 2010-2029 was expected to be from
Asia Pacific while North America and Europe were expected to
meet a little over 20% of the demand
each during the same period.
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
56. infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 4 of 13
The shift in the nature of global demand had encouraged the
dominant players in the industry to adapt to
the new realities. About half the respondents from a surveyiii of
OEMs indicated that managing costs was
a big priority, with those from the larger OEMs indicating that
they would provide greater emphasis to
reducing costs in the coming years. Figure 1 indicates some of
the actions that they were contemplating.
Reducing labor force and costs referred to the reduction in
activities conducted in the traditional
manufacturing hubs located in the high income economies of
North America and Europe. The next set of
actions suggested that new investments in the same centers
would be curtailed. The next two actions
57. suggested that the OEMs would be looking for external
suppliers and vendors to takeover some of the
activities that were traditionally conducted by them. Acquiring
suppliers to stabilize costs referred to
attempts to restructure the supplier networks to locate vendors
and suppliers in low wage economies.
Finally, sharing functions also suggested cooperative
approaches including joint ventures and
collaboration with companies in low wage economies to share
costs and risks. Similarly, another studyiv
also suggested that since growth in the industry would be driven
by what it referred to as rising
economies (rather than emerging economies), the traditional
aviation industry had to restructure its supply
chain operations to adapt to the new realities.
OPPORTUNITIES FOR THE INDIAN AVIATION INDUSTRY
There were tremendous opportunities for players in the Indian
aviation industry to get integrated into the
supply chain of the global aviation and aerospace industry. A
study comparing several countries in terms
of suitability to supply to the global industry ranked India better
than comparison countries on several key
58. parameters as shown in Figure 2. The study suggested that the
support provided by the government to
develop suppliers in the country contributed to the
attractiveness of India as a location for sourcing. The
excellent supply of cost-effective labor was also an advantage.
The infrastructure for the industry could be
better but was as good as other low income countries. The
education system in the country ranked better
than other countries except for the United Kingdom. The cost
advantage of sourcing from India was
comparable to several countries, while quality was expected to
be on par with the United Kingdom. On
cultural compatibility, India ranked lower than the United
Kingdom but higher than China, and on
English proficiency, it was as good as the United Kingdom and
better than others. There were no
advantages owing to time difference and distance from OEMs
across the countries.
The opportunities for the Indian aviation and aerospace industry
to be integrated into the global industry
are shown in Figure 3. Although, the opportunities were many,
Indian suppliers had largely restricted
themselves to CAD design and documentation and procurement
59. assistance in the design phase, and as
Tier 3 suppliers in the component manufacture phase. Some
companies, like DTIL, that had been Tier 3
and then Tier 2 suppliers, were aspiring to be Tier 1 suppliers
of components.
Organizations with capabilities to offer services in the design
phase had the potential to save costs for
OEMs primarily based on labor arbitrage. The cost of design
infrastructure and software would be the
same as in a high cost economy but the availability of high
skilled trained engineers available in India at
significantly lower compensation rates could contribute to
saving costs. Some estimates suggest that the
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
60. Page 5 of 13
cost savings could be as much as 50%. However, with some
enhancement in aviation and aerospace
domain knowledge and a better understanding of advanced
manufacturing techniques and processes, these
organizations could also contribute to cost reduction in the
remaining phases by developing components
that were better designed for manufacturing, performance, and
maintenance.
Organizations in the component manufacturing phase could
attempt to integrate seamlessly with the
global supply chain if they had a better understanding of the
design and manufacturing processes of the
components that they wished to migrate from the traditional
vendors to their own facilities in India.
Traditionally, many of the components were designed when
contemporary CAD/CAM software was not
available. Indian suppliers had an opportunity to use the phased
transfer of components from the OEMs or
vendors located in high income economies to redesign the
components and systems for improved
performance. Also, the traditional manufacturing processes were
designed around the need to operate in
61. high labor cost environments which dictated the design and also
the extent of automation in the process.
Indian organizations had the opportunity to re-engineer the
manufacturing process to make it more cost
effective for a lower labor cost environment. This might lower
capital costs of operations even as lower
labor costs provide much of the cost advantage.
At this stage, opportunities to participate in the aircraft
assembly phases might be restricted to large
players such as Hindustan Aeronautics Limited (HAL), which
had some experience in the defense and
space sectors in collaboration with international OEMs.
However, in the future, there might be
opportunities for many private sector players who had entered
the arena in the other phases.
There were tremendous opportunities in the Maintenance,
Repair and Operations (MRO) phase for Indian
companies. It was quite clearly a labor-intensive phase of the
aviation and aerospace industry’s value
chain. It was attractive for several airlines operating in India
who already conducted some of their own
MRO activities to expand into the market and offer cost-
62. effective services to the global market.
DTIL: SMALL IS BEAUTIFUL
DTIL was founded by Karan Jethmalani, Ashwini’s father, in
1973 with operations in the engineering
industry. It primarily manufactured hydraulic pumps. By the
mid-1980s, the company had grown to earn
revenues of about Rs. 16 million (approximately $1.29 million),
but it also had a lot of debt on its balance
sheet. After completing his bachelor’s degree in commerce,
Ashwini joined the family business in 1986
when he was barely 20 years of age. Gradually, he took charge
of the technology-based company and
guided it into a business with revenues of more than Rs. 5
billion (about $125 million) in 2008-2009.
DTIL produced highly engineered products in the automotive
and aviation sectors. It supplied hydraulic
pumps and valves, for global industrial, agricultural and
construction equipment (IACE) companies. In
the automobile sector, it provided automobile parts such as
chassis, turbo chargers, and castings to
European and Korean automobile companies. In the aviation
sector, it supplied high precision
63. components to Indian defense manufacturers, including HAL,
and in the aerospace sector to ISRO. More
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 6 of 13
recently, it had supplied machined and assembled components
to Juggernaut. The IACE business
contributed about 20%, the automotive sector about 66%, and
aviation and aerospace sector about 14% of
the revenues of the company. However, the aviation and
aerospace business contributed over 50% of the
operating profits while the IACE business contributed 30% and
the automotive business contributed the
remaining of about 20%. The company had plants in six
locations in India and abroad. It employed over
64. 50 scientists and 500 engineers who were supported by larger
number of skilled and semi-skilled workers.
The aviation division was launched in 1995. In the early years,
the division participated in several projects
of the DRDO (an Indian Defence R&D organization), including
Lakshya, the pilotless target aircraft.
DTIL was also involved with the HJT-36, the intermediate jet
trainer, for which it provided some key
machined components and several jigs for HAL. It collaborated
with HAL on the Sukhoi MKI fighter
bomber for which it provided many mission critical
components. In addition, DTIL developed several jigs
for HAL. The involvement of DTIL in the design, development
and manufacture of these components and
jigs allowed it to develop capabilities and capacity to move up
the learning curve.
By the early 2000s, Ashwini and his team of managers started
preparing the organization for integrating
into the global supply chain of the aviation and aerospace
industry. The hydraulics business of the
organization had already been successful in going global after it
acquired an established but small
65. European manufacturer. Similarly, the automotive division had
already penetrated the automotive global
supply chain after the acquisition of a Korean supplier. The
major break for the aviation division of DTIL
came in May 2006 when they received certification to supply to
Juggernaut. Following that, in December
2006, they received a RFQ from Flight Aerosystems to
collaborate with it to supply flap track beam (see
Appendix 1) assembly systems to Juggernaut. This was an
opportunity for DTIL to integrate into the
global supply chain of a Tier 2 supplier of global majors.
After evaluation of offers from several from vendors in India
and outside, Flight Aerosystems selected
DTIL as a partner. Later, it became known that DTIL was
selected despite a lower cost offer from a
public sector company as Flight did not think the company
would meet the rigorous quality and schedule
requirements. It was also known that DTIL had been selected
over the offer from a well-established
private sector major in India, which had recently entered the
domain. The offer was twice as expensive as
Flight’s internal estimates, indicating that the organization
probably did not understand the industry cost
66. structure, and appeared quite bureaucratic despite being in the
private sector. DTIL was seen as the
organization with the right balance of domain knowledge to
meet quality and schedule requirements, and
the agility to deal with the transition process.
In May 2007, the letter of intent was received and by December
2007, DTIL received the required
certifications and approvals to supply. The project started in
2008 when the DTIL engineers were trained
by Flight in April and the plant was built in Bangalore and
machineries and jigs were installed by
October. The formal contract between Flight and DTIL was
signed in March 2009. In other words, for
about 15 months, DTIL invested in plant, machinery, and people
without a formal contract. During this
time, it was implicit that if the contract was not signed, then
Flight would buy back the machinery while
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
67. Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 7 of 13
the remaining investment would be DTIL’s risk. These 15
months also demonstrated the entrepreneurial
zeal at DTIL, with Ashwini having the appetite to take a
calculated risk but also communicating to Flight
and Juggernaut the seriousness of their intent to pursue this
opportunity.
According to the initial contract, Flight would supply the
machined components to DTIL who would
assemble the components of the flap track beam in the
Bangalore plant and hand them back to Flight who
in turn would supply it to Juggernaut. Two months after signing
the contract, DTIL received the first set
of input components from Flight in May 2009. By June 2009,
the first set of flap track beam assemblies
were completed and handed over to Flight Aerosystems and
commercial production was approved on
completion of the first article inspection. By October, all the
jigs were in place in the Bangalore plant.
68. The first set of units was dispatched in November, 2009. By
early 2010, nearly 150 units were supplied
on schedule with zero rejections. With DTIL’s success in the
first phase of the supplier relationship as a
Tier 2 supplier, Juggernaut was willing to explore the next
phase of the partnership with it as a Tier 1
single source supplier. This would require DTIL to go back to
the drawing board to take on greater risk
but also an opportunity to move up the value chain.
BUSINESS MODEL DECISION FOR THE FUTURE
The first phase of the supply of the component for Juggernaut
had been in partnership with Flight
Aerosystems. DTIL was a Tier 2 supplier as it did not have a
direct interface with the client but was only
supplying through Flight. In this phase, the complex machining
activity continued to be performed by
Flight and its other partners in Europe, and DTIL was provided
with the fully machined parts and focused
on the labor-intensive assembly activities. However, the success
of this phase provided confidence to
Juggernaut to consider DTIL not just as a Tier 1 supplier but the
single source supplier for the entire
69. family of its single aisle aircraft. A Tier 1 supplier implied that
Juggernaut would provide a contract for
the component for which DTIL would ‘‘own’’ the component
and have compete responsibility for the
performance of the component. However, the status of a single
source supplier was even higher. Not only
would Juggernaut source directly from DTIL, it would stop
sourcing from any other vendors. In other
words, it was prepared to develop an exclusive partnership with
DTIL to supply a core component for the
entire family of single aisle commercial aircraft. This offer
demonstrated the confidence Juggernaut had
developed in the capabilities of DTIL as a potential partner.
Now, DTIL needed to respond to the request
for a new level of relationship with an offer that would make it
very attractive for Juggernaut to accept
and at the same time create opportunities for the future of
DTIL.
At the meeting, G. Natarajan, the COO of the aviation division
suggested that DTIL could prepare a
proposal based on the same model that had already been in
operation in the first phase. Natarajan had
joined DTIL after retiring from HAL and had been very
70. instrumental in establishing the systems and
processes for the first phase of the component project. However,
he did not have aspirations to take on
more value-added machining operations that were done by
partners of Flight. He argued that all the
operational issues had already been sorted out in the earlier
phase and no major changes would be
required to the operations as long as the suppliers of machined
components continued with the old
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 8 of 13
relationships even without the involvement of Flight. Natarajan
had developed very good working
relationships with his counterparts in the European partners of
71. Flight during the first phase and he felt
comfortable that some of them would be willing to partner with
DTIL in the next phase. This required
very little additional capital expenditure, which appealed to
Ashwini. However, this business model did
not excite him as it did not suggest the possibilities of long-
term financial growth for the company. There
was a possibility that DTIL might continue in the same level of
activities for a long time, which was not
an attractive proposition.
Nirmal Rego, the Deputy COO suggested a model that was
dramatically different, and required almost all
the activities to be performed in the DTIL Bangalore plant. He
had joined DTIL from the automotive
division of DTIL in the middle of his career, and had
aspirations to quickly move up the value chain
which would benefit the company as well as him and his team.
He believed that DTIL had already
mastered the activities that had been transferred to it.
Transferring the high-end machining operations that
were performed by other vendors to DTIL facilities would help
the organization build new capabilities
and provide new opportunities for engineers and managers to
72. learn and grow. With an established cost-
effective base in Bangalore, DTIL would be a formidable
player. Like Natarajan, Nirmal also felt
comfortable in engaging the earlier vendors. He believed that
some key persons from those partners could
be involved to assist in the setup of the operations in Bangalore.
Ashwini liked the idea, and knew that if
he could pull it off, the business model had lucrative long-term
prospects. However, Ashwini was
concerned about three things. The first was the possibility that
the relationship with Juggernaut might hurt
if the transition did not happen smoothly. At this stage, he was
worried that Juggernaut’s assessment of a
potential failure of DTIL to maintain quality and schedule might
prevent Juggernaut from elevating the
relationship. On the other hand, if he could retain some of the
old partners in Europe, he could assure
Juggernaut of good quality even if the costs were somewhat
high and exerted pressure on his margins.
The second was the expenditure on establishing a plant in the
context of high borrowing costs in India. He
believed that the capacity was available in Europe where capital
costs were lower. The third was the costs
associated with transportation. Procuring high volume and
73. weight of raw materials from Europe, shipping
them to Bangalore, and then shipping finished components back
to Europe looked problematic.
Ashwini suggested a business model that tried to blend the two
models but with more clarity of the value
proposition for Juggernaut. He suggested that DTIL should
think of conducting as much of the labor-
intensive activity in India and the capital-intensive activity in a
facility close to Juggernaut’s final
assembly operation. He believed that DTIL had developed
capabilities and processes acceptable to
Juggernaut which could not be replicated elsewhere as cost
effectively. He also believed that rather than
attempt to build capital-intensive capacity in Bangalore, he
could find a partner in Europe, which was
well-established in the supply chain, with spare capacity, to
perform capital-intensive activities. The cost
of capital in India relative to Europe supported this argument.
Although, it would not improve the cost
efficiencies or effectiveness, it would ensure that quality issues
were avoided. Another reason that
Ashwini thought that this model might work was the stringent
quality requirements for raw material
74. (aluminum and or titanium alloys) required for the aviation
industry that would have to be sourced from
Europe. Given that normally 80% to 90% of the metal block was
scooped out using skiving machines,
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 9 of 13
transporting raw material to Bangalore would likely add
unnecessarily to costs. It would be cheaper to
transport machined parts which would be about 10% to 20% of
the original metal block in terms of
weight. Further, the market for scrap, which was about 80% of
the raw material, was not well-developed
in India. Working capital requirements would have also
significantly increased because of long lead times
75. and high inventory. Moreover, Indian ports and customs were
notoriously inefficient in terms of time and
would have further added to the cost.
Ashwini looked at the sheet of paper (Table 1) that provided
him back-of-the-envelope estimates of
various costs. Although, he thought he could convince others
about the viability of the model he favored
in the short run, he needed to make a case by developing a more
detailed end-to-end cost comparison for
the three business models. He also had to think in terms of the
long run. Would any European firm agree
to cooperate with an organization that was potentially going to
take it out of business? Could DTIL make
it attractive for the owners of the partner firm to sell their
business? Also, if the owners did sell the stakes,
would DTIL be able to retain the talent or would it be
purchasing an empty shell? What would be the
management structure that would allow the India operations and
European operations to work seamlessly
to meet global quality standards while reducing costs and
maintaining delivery schedules? If the model
did not look sustainable, he might have to re-examine the
models suggested by Natarajan or Nirmal. He
76. also wondered that since the final assembly had to be finally
delivered to a plant in Europe, would it be
worthwhile considering the option to perform all the activities,
purchase of raw material, machining of
components, and assembly of components in Europe.
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 10 of 13
Figure 1
Action by aviation OEMS to manage costs
Source: Global Defense and Aerospace Outlook published by
KPMG (2013)
77. Figure 2
Comparison of countries on certain parameters
India China Russia UK Czech
Republic
Poland Indonesia
Government Support *** * * * * * **
Labor Pool *** ** ** ** ** ** **
Infrastructure ** ** ** *** * * **
Education System *** ** ** *** * * **
Cost Advantage *** *** *** * ** ** ***
Quality *** ** ** *** ** ** ***
Cultural Compatibility ** * * *** ** ** **
Time/Distance Advantage *** *** *** *** *** *** ***
English Proficiency *** * * *** ** ** **
Legend: *** Very Good ** Good * Poor
Source: Company internal documents
80. ts
Actions contemplated to manage costs
All respondents Large OEM respondents
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 11 of 13
Figure 3
Opportunities in Indian aviation and aerospace industry
81. Source: New Face of the A&D Industry: Victors, Victims and
Survivors by AT Kearney (2013)
85. This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 12 of 13
Table 1
Cost estimates for activities and transportation for manufacture
and assembly of
Flap Track Beam in Europe and India
Activity in Europe Activity in India
Capital Costs for High-End Machinery & Equipment
Cost of machinery & equipment $ 3,000,000 $ 4,500,000
Cost of installation of machinery and equipment Free $ 45,000
Cost of capital impact on one unit 3% 14%
86. Raw Material Costs (for one unit)
Cost of raw material (per kg). Assume 100 kg of Aluminum and
30
kg of Titanium alloy is required per unit.
Aluminum Alloy $ 15 $ 20
Titanium Alloy $ 90 $100
Cost and time for delivering to Machining Centers Europe India
to Europe Europe to India India
By air Cost (Time 4
days) $ 250 $ 600 $ 600 NA
By surface Cost (Time 10
days) $ 150 NA NA $ 100
By Sea Cost (Time
45 Days) NA $ 300 $ 300 NA
Cost of Machining (for one unit)
3 Axis Machining $ 50 $ 30
5 Axis Machining $ 110 $ 140
Net Revenue from scrap disposal $0 .05 per kg $ 0
Cost and time for delivering to Assembly Center Europe India
Europe India
By air Cost (Time 4
days)
87. $ 175 $ 500 $ 500 NA
By surface Cost (Time 10
days) $ 100 NA NA $ 100
By sea Cost (Time 45
days) NA $ 200 $ 200 NA
Assembly (for one unit)
Cost of assembly $ 27,615 $ 17,365
Direct labor and other costs $ 35 $ 15
Indirect labor and other overhead costs $ 25 $ 7
Cost and time to ship assembly to Broughton, UK
By air Cost (Time
4 days) $ 1500 $ 2500
By Surface Cost (Time
10 days) $ 1000 NA
By Sea Cost (Time
45 days) NA $ 800
Technical Training In-House $75,000
Source: Company sources (both company name and numbers are
disguised)
88. This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
Dynamic Technologies (India) Limited: Strategic Integration
into the Aviation and
Aerospace Global Supply Chain
Page 13 of 13
Appendix 1
Flap Track Beam
Flaps are moving parts at the trailing edge of wings that are
used to increase/decrease lift during take-off
or landing as required. They are fixed below the wings and
enclosed in flab track fairings (see left image
below) that provide the outer cover for the mechanisms. When
retracted the flap is aligned with the fixed
wing and when extended it provides a drag (see right image
below). The flap mechanism is mounted on a
flap track beam (see image at bottom), which is attached to the
89. wing and also facilitates the extension and
retraction of the flaps as required. The beam consists of several
machined parts and components that have
to be assembled together.
Source: https://www.quora.com/What-are-these-projected-
things-on-an-aircraft-wings
Source: Company documents
i 2013 Global Defense and Aerospace Outlook published by
KPMG
ii 2011 The Changing Face of the Aerospace & Defense
Industry by Capgemini
iii 2013 Global Defense and Aerospace Outlook published by
KPMG
iv 2013 New Face of the A&D Industry: Victors, Victims and
Survivors by AT Kearney
This document is authorized for use only by MOHAMMED
ALHASHIM ([email protected]). Copying or posting is an
infringement of copyright. Please contact
[email protected] or 800-988-0886 for additional copies.
https://www.quora.com/What-are-these-projected-things-on-an-
aircraft-wings