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Aerospace Globalization 2.0:
Implications for Canada’s Aerospace Industry
A Discussion Paper
November 2009
Prepared by:
Ann Arbor, MI USA * Amersham, UK * Singapore
www.AeroStrategy.com
1
Introduction In his titanic best seller, The World Is Flat, Thomas Friedman described a world where a level
playing field makes it possible for firms and individuals from developed as well as emerging
economies to compete in the global economy. To what extent does Friedman’s thesis apply to
the $450 billion aerospace industry? Is the aerospace industry becoming “flat?” The short
answer is a qualified yes. AeroStrategy believes that there is a profound shift taking place in the
manner that aircraft are conceived, produced and supported. The aerospace industry is moving
beyond an era of multi-national cooperation (Globalization 1.0) to an era of “horizontal
specialization,” where original equipment manufacturers (OEMs) and service suppliers tightly
integrate functions such as engineering, manufacturing, and customer support across multiple
locations on a global basis. AeroStrategy dubs this Globalization 2.0.
The purpose of this discussion paper is to assess the implications of this new paradigm and
other key structural trends for Canadian aerospace industry. It argues that Globalization 2.0,
combined structural trends such as the rise of BRIC (Brazil, Russia, India, China) countries and
the emergence of a Tier I supply chain model, will reshape the opportunities and challenges for
Canadian aerospace. Comparative advantage in aerospace, traditionally “sticky,” is now
becoming more fluid. Industry stakeholders, including firms and governments, must adopt new
strategies to survive and prosper.
This discussion paper is not a comprehensive competitive analysis of Canada’s aerospace
industry or an assessment of which programs or technologies will be winners.
Canadian Aerospace in Context Aerospace is a critical piece of the Canadian economy and a national success story. Aggregate
2008 industry revenue is $23.6B CDN, with 82% of this figure ($19.6B) comprising exports.
Direct employment is in excess of 83,000 with investment in R&D of $1.3B.1
Breaking this revenue down by market segment (Figure 1), aircraft and aircraft parts account for
51%, followed by aircraft engine and parts (15%), maintenance, repair & overhaul (18%),
avionics and electronics systems (6%), simulation and training (4%), space (2%), and other
(4%).
1 AIAC figures, June 2009
2
Where does Canada fit into the broader global market? AeroStrategy estimates that the global
aerospace industry is worth an estimated $450 Billion in 2008, and Canada ranks fifth overall in
industry size (Figure 2) – a notable achievement given the fact that Canada has the ninth
largest economy as measured by GDP.2
The United States, burgeoned by its massive $100B+ defense procurement budget has the
largest overall aerospace industry at $204B. The next largest industries, underpinned by
European defense spending and world class OEMs and service companies, are France
($50.4B), the United Kingdom ($32.7B), and Germany ($32.1B). Turning to Asia, Japan ranks
sixth ($14.1B), followed by China ($12B) and Russia ($10B).3 Rounding out the top ten are Italy
($9.9B) and Brazil ($7.6B).
AeroStrategy estimates that Canada, based on 2008 industry revenue of $23.6B CDN, has a
5% share of the global aerospace industry (Figure 3). Its highest overall share is in aircraft &
parts (6%), which is attributed to Bombardier’s position as a leading business and regional jet
OEM. Canada has a 5% share of the aircraft engine & parts segment on the strength of Pratt &
Whitney Canada, the leading small propulsion OEM, as well as engine module suppliers such
as Magellan Aerospace. In electrical systems & components, Canada has a relatively lower
share (4%); leading suppliers here include CMC Electronics, Honeywell, L3, and Thales. And in
maintenance repair & overhaul (MRO), simulation and training, Canada enjoys a 5% share and
boasts several world-class firms including Aveos, CAE, Cascade Aerospace, L3 MAS, IMP
Aerospace, and Standard Aero. In addition, there are numerous OEM service centers in
Canada.
2 Source: AeroStrategy analysis, industry associations, Teal Group. This is a conservative estimate based on a narrow definition of industry size that excludes some aircraft maintenance completed by airlines and military forces, raw materials, and secondary employment.
Aircraft and Aircraft Parts
51%
Aircraft Engines and Parts
15%
Avionics and Electronic Systems
6%Simulation and
Training4%
Maintenance and Overhaul
18%
Space2%
Other4%
Figure 1: 2008 Canadian Aerospace Industry
$23.6B
Source: AIAC
Figure in Canadian Dollars
3
Sources: industry associations, AeroStrategy analysis
Overall, Canada “punches above its weight” in aerospace relative to other advanced economies
and boasts numerous globally competitive firms. What are the implications of Globalization 2.0
and other structural changes in the industry?
Sources: AeroStrategy analysis, AIAC
3 China’s industry size is estimated to be 900B Yuan based on a March 2008 study by Market Avenue. Russia’s size is an AeroStrategy estimate
4
Aerospace Globalization 2.0
Before exploring Globalization 2.0 phenomenon, it is fitting to define “globalization.” The
concept, appropriately enough for a world-changing, world encompassing phenomenon, is
complex, controversial, elusive. Over the last 50 years, “the term has been used to describe a
process, a condition, a system, a force, and an age,” according to Prof. Manfred B. Steger.
Perhaps we can settle on George Ritzer’s composite definition, drawn from the work of dozens
of experts: “An accelerating set of processes involving flows that encompass ever-greater
numbers of the world’s spaces and that lead to increasing integration and interconnectivity
among those spaces.”
By this measure, the modern aerospace industry has always been global. Aircraft are, after all,
capital intensive, standardized, and sold to a global market of operators. But the work of
globalization is ongoing. In Globalization 1.0, the vast majority of value chain activities, including
engineering, manufacturing and product support, were conducted in the domestic market and
often concentrated around “headquarters.” OEMs occasionally sourced parts, components and
engines from foreign suppliers who, in turn, conducted most value chain activities in their own
domestic markets.
The model of self-sufficiency began to change in Europe in the 1960s and 1970s when
European OEMs pursued multi-national cooperation as a means to achieve scale and critical
mass for new programs. EADS (and Airbus) is a direct result, as are European fighter programs
like the Jaguar and Tornado. Military offset programs and the quest for market access provided
additional impetus.
based on revenues of leading Russian firms.
Figure 4: Aerospace Globalization 1.0
The Value Chain
• Most aerospace value chain activities conducted in the domestic market…and generally co-located at “headquarters”
• OEMs occasionally source parts, components, engines, and subassemblies from foreign suppliers
• Prevalent organizational model through early 2000s
Source: AeroStrategy
Value Chain adapted from Competitive Advantage (Porter,1985)
5
In the mid-1990s, falling transportation and communications costs, the expansion of liberalized
trade, advent of digital design tools, and end of the Cold War enlarged the possibilities for
aerospace’s industrial organization and hastened Globalization 2.0.
Vertical integration and co-location of activities in the domestic market, once standard operating
procedure, are less desirable today. A new model of “horizontal specialization,” where OEMs
tightly integrate functions such as engineering, manufacturing, and customer support across
multiple locations on a global basis, is growing in popularity. This goes far beyond the well-
known B787 and A350 supply chain models that make extensive use of Tier I suppliers. OEMs
are pursuing this more complex form of industrial organization for several reasons, including
enhanced productivity, leveraging the global talent pool, improving market access, upgrading
value propositions, and shortening cycle times.
To substantiate this shift, AeroStrategy analyzed the publicly announced investments of 121
leading aerospace OEMs and service companies going back to the early 1990s. Focused on the
most active functions – engineering/research and development (R&D), production, and MRO –
the study identified 497 major investments expanding one or more, including 283 joint ventures
and 214 organic investments (new facilities or business units). Since the objective was to
pinpoint where investments were made to establish new capabilities, AeroStrategy excluded
acquisitions, which tend to shift ownership of existing capabilities. There are several important
caveats to the research methodology. First, some firms were less forthcoming than others in
promoting their investments. Second, the research focused on the number of investments as a
Figure 5: Aerospace Globalization 2.0
• Firms tightly integrate engineering , manufacturing, and MRO across multiple locations on a global basis
• OEMs depend on global cadre of Tier I suppliers for entire systems
• Smaller proportion of value - added activity in domestic market
• Emerging organizational model in mid - 2000s Source: AeroStrategy Value Chain adapted from Competitive Advantage (Porter,1985 )
6
complete dataset of the value is not available. With these caveats in mind, two major findings
emerged from the research:
Functionally, MRO is the most popular investment category (45%), followed by
manufacturing (36%) engineering/R&D (19%)
Joint ventures were more popular than organic investments
The pace of globalization is accelerating (Figure 6). In the early 1990s, fewer than five
investments per year was the norm among the sample group. By 2008, it was 63!
Those are the facts. More important is an understanding of what drove the accelerated rate of
investment for each major function, a topic explored next in some detail.
Engineering and R&D
Aerospace engineering is one of the more glamorous technical professions, employing
hundreds of thousands of engineers, mainly in North America and Europe. Historically, the vast
majority of engineering and R&D work was conducted “in-house” by OEM engineers at large
research centers. Outsourcing was typically limited to local “job shops” or design firms that
absorbed peak engineering demand, primarily for unsophisticated parts design or structural
analysis.
Several trends intersected in the 1990s to lay the foundation for new approaches to design and
development. First was the maturation of digital design tools. The B777 became the first major
air transport program developed digitally, without the use of prototypes. This heralded a new
approach to design that segmented discrete tasks and bundled them into digital work packages.
The build-out of the broadband infrastructure in the early 2000s, a result of the technology
Figure 6: Major Aerospace Investments
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bubble, enabled digital design packages to move around the globe inexpensively, amplifying the
potential for outsourcing and offshoring engineering by making it more affordable. Finally, the
end of the Cold War and the trade liberalization that followed dramatically expanded the talent
pool for engineers worldwide, making skilled technicians available and accessible in Russia,
Eastern Europe, India, China, and Latin America.
Boeing was one of the first OEMs to leverage these new circumstances when, in 1993, it
established a small technical research center in Moscow employing 10 engineers. In 1998,
Boeing expanded its presence by establishing the Engineering Design Center. Its first project: to
redesign the B777’s center bin arches. Today, Boeing employs approximately 2,000 engineers
in Moscow, and its Russian contingent produced nearly one-third of the structural drawings for
the 747 Large Cargo Freighter.
Honeywell has had a similar trajectory. In 1994, it founded a small outpost in Bangalore, India,
starting with just six software engineers. Today, Bangalore is the headquarters of the Honeywell
Technology Solutions Lab, with 5,500 employees and operations in India, China, Czech
Republic, and the U.S.
More recently, GE created the Jack Welch Technology Center in Bangalore. Nearly a decade
later, it employs 3,000 engineers. Indeed, half of GE’s engineering team is now located outside
the U.S., with major centers in India, Mexico, and Poland.
Examples of engineering globalization abound, and they are not limited to major aircraft and
engine OEMs. Eaton Aerospace, for example, operates an engineering center in India with 200
engineers. Rockwell Collins has just established an engineering center in Hyderabad, India. And
Spirit AeroSystems has an engineering services joint venture with Russia’s United Aircraft
Corporation called ProgressTech.
So, which locations were the most popular destinations for engineering investments?
Understandably, Russia and India are among the three most popular locations (Figure 7). After
all, Russia has a superb aerospace engineering talent base, a legacy of the Cold War, and India
is well-known for its engineers – particularly in software.
More surprising, the U.S. was the second most popular destination for engineering/R&D
expansion, with many investments made by European firms. This underscores an important
point: cost is not the only consideration. What drives engineering globalization is more than just
labor arbitrage. OEMs also need to create better designs in shorter cycle times. The solution?
Access engineering talent pools wherever they exist. EADS thus selected Wichita, the epicenter
of the business aviation sector, for its North American engineering center. Another tactic: tap
engineering talent pools outside of aerospace. Consider recent investments in the state of
Michigan, neither a low-cost location nor home to an aerospace cluster. In 2008, the Spanish
aerostructures firm Aernnova opened an engineering center in Michigan with plans to employ up
to 600. Aernnova’s motivation was to leverage one of the world’s largest concentrations of
mechanical engineers courtesy of the faltering U.S. auto industry centered there. This year, GE
announced it will open an advanced manufacturing technology and software center in Michigan,
8
with plans to grow to more than 1,100 employees over the next few years.
* Includes joint ventures and organic investments for 121 largest OEMs; excludes acquisitions ** 2009 data is as at 31 August 2009
Source: AeroStrategy
Engineering services firms – key suppliers to OEMs – are also globalizing. North American and
European suppliers such as Assystem, Belcan, and CDI have expanded their reach by
establishing a global network of engineering centers. Moreover, they have demonstrated the
capacity to handle sophisticated work packages that go well beyond traditional “job shop”
contracts. Notably, Indian firms have become major engineering suppliers in a relatively short
time. New suppliers include Infosys, Infotech, HCL, Tata, and WIPRO – IT services firms that
have added engineering services to their offerings. These Indian firms have been particularly
successful in software development and stress analysis.
While OEMs will continue to conduct the vast majority of engineering and design activities in-
house, the utilization of engineering services suppliers is poised to expand as a result of greater
focus on core competencies (e.g., aircraft OEMs de-emphasizing aerostructures) and attractive
value propositions from a competitive global engineering services market. EADS alone spends
more than €2B per year on engineering services firms.4
With engineering becoming more globally integrated, how do firms deal with defense programs,
which account for as much as half of all aerospace engineering work? Clearly military
aerospace is not “flat” – particularly with local content requirements and national security
restrictions such as the U.S.’s International Traffic in Arms Regulations (ITAR) governing where
4 Source: EADS
Number
9
engineering activities are performed and the nationality of those performing them. Here again,
firms are seeking talent pools in unconventional locations. Pratt & Whitney and Honeywell, for
example, have engineering centers in Puerto Rico, a U.S territory. And some engineering
services firms are establishing low-cost domestic design centers in university towns like West
Lafayette, Indiana (home of Purdue University).
Manufacturing
Manufacturing is the most visible manifestation of Globalization 2.0. Again, the motivation goes
beyond mere cost savings to include enhanced market access, meeting offset obligations, and
hedging currency risk.
The intersection of manufacturing globalization and a new Tier I supply chain model is likely
accelerating the phenomenon. As Tier I suppliers take on responsibility for sourcing parts and
components for their own systems, they themselves face “make-buy” decisions. Many are
choosing to set up new facilities in low-cost locations.
Which country has garnered the most manufacturing investments? The leading destination was Mexico (Figure 7), a nation that, until recently, couldn’t be found on the major aerospace investment map. Why? Investors cite several reasons:
Access to a low-cost, dependable, and skilled labor force, as evidenced by Mexico’s
strong record in the automotive and consumer electronics industries
Completion of the U.S.-Mexico bilateral aviation safety agreement, which lets
manufacturers certify and ship components directly from Mexican factories
Proximity to U.S. and Canadian aerospace supply chains, facilitating reliable, low-cost
ground transportation
Confidence in Mexico’s willingness to protect intellectual property
Mexico’s elimination of duties for aeronautic components
As a result, dozens of OEMs have invested in Mexico in recent years, and the country now has
total aerospace employment in excess of 20,000, with exports of more than US$3 billion – a
figure that will grow significantly in the years ahead. Aerospace investment in 2008 alone was
US$1 billion. A good example of such an aerospace investment is Bombardier’s manufacturing
facility in Querétaro, an industrial hub of 1.6 million people 140 miles northwest of Mexico City.
Bombardier's interest in Mexico began with former Mexican President Vicente Fox, who
persuaded company officials to consider including his nation in their global manufacturing
network. After a lengthy search, Bombardier in late 2005 settled on Querétaro, which boasts a
number of corporate research centers, solid universities and an educated work force. Most
investments in Mexico are wholly-owned facilities because its indigenous aerospace sector is
modest and there is only a limited roster of potential joint venture partners.
10
Not surprisingly, China is another popular location for manufacturing investments. Like Mexico,
a key attraction is its large, low-cost, flexible labor force. But unlike Mexico, it has a broad
aerospace supplier base, as well as aspirations to be a major aircraft producer in its own right.
Perhaps the best known investment is the Airbus A320 production facility (a joint venture) in
Tianjin. Similarly, Embraer has set up an ERJ final assembly site in Harbin. Other popular
investment locations include Suzhou, Xian, Xiamen, and Chengdu. Investment in China may be
set to expand further with the creation of Commercial Aircraft Corporation of China (COMAC) to
oversee development of the 150-seat commercial jet. Chinese government support for COMAC
is strong, and Western OEMs will be key suppliers. As OEMs seek to ensure market access,
more investments, like Goodrich’s recent joint ventures to produce landing gear and engine
nacelle components with Xi’an Aircraft International Corporation, are sure to follow. Still, a key
concern for many Western OEMs is adequate intellectual property protection.
Russia is also a major draw for manufacturing investment. Some leverage Russia’s comparative
advantage in aerospace raw materials such as titanium. A good example is Ural Boeing
Manufacturing (UBM), a joint venture between Boeing and VSMPO-AVISMA intended to
machine titanium forgings for both B787s and Russian aircraft. Other investments, such as
Powerjet (NPO Saturn/Snecma JV) are tied to the Superjet initiative.
Source: AeroStrategy
Figure 8: Major Aerospace Manufacturing Investments*
1990 – 2009** Number
* Includes joint ventures and organic investments for 121 largest OEMs; excludes acquisitions ** 2009 data is as at 31 August 2009
11
The United States, which ranks third in the number of manufacturing investments, demonstrates
that not all manufacturing will move to low cost regions. Honda, for example, selected North
Carolina as the site for its production facility for its new business jet, the HondaJet. There are
other motivations for US investment including access to its huge military market and desire by
European OEMs to source more value-added from suppliers outside the Euro Zone.
Canada is not amongst the top locations for the number of manufacturing investments but did
benefit from several significant manufacturing investments in recent years from the likes of
Bombardier, Pratt & Whitney Canada, and LISI Aerospace. In all likelihood, the value of
manufacturing investments would place Canada amongst the top ten locations.
Globalization 2.0 is already producing unlikely winners. Take Morocco. In the last decade the
aerospace sector there has grown from near-zero to a US$250-million industry employing 7,000
people. Investors include EADS, SAFRAN, Boeing, and Zodiac. Morocco’s attractions for
Europe parallel those of Mexico relative to the U.S.: geographic proximity (to Europe), historical
ties to and cultural affinity (with France), and low tariffs.
Maintenance, Repair, and Overhaul
Globalization 2.0 goes beyond the production and design of aircraft to their support. This isn’t
surprising. Aviation is global, operators are geographically dispersed. The high growth of
aviation in Asia-Pacific, for example, means that between today and 2018, airlines there will add
nearly 3,000 aircraft to the regional fleet.
Oddly, the regions boasting fastest air traffic growth – Asia-Pacific, Middle East, and Latin
America – are where maintenance and customer support infrastructure is the thinnest. As a
result, OEMs and maintenance suppliers (MROs) have ramped up their investment in
maintenance centers and service parts distribution centers over the last decade to create
customer support networks that are truly global. A good example is Bombardier’s recent
investments in spare parts depots in Montreal, Beijing, Sydney, Singapore, Dubai, and Sao
Paulo to complement its primary distribution facilities in Chicago and Frankfurt.
Two of the most popular countries for MRO investments (Figure 8) are Singapore and China –
but for different reasons. Singapore became a regional logistics hub by leveraging its business-
friendly environment and highly trained work force to capture a large number of technology-
intensive maintenance centers (for components and aeroengines) and service parts distribution
centers. China, in contrast, has attracted investment for labor intensive activities, such as
airframe heavy maintenance, as well as for distribution centers principally because of the
burgeoning Chinese market. Investors in airframe heavy maintenance facilities include well-
known suppliers Ameco Beijing, STAECO, STARCO, TAECO, and Boeing Shanghai Aviation
Service Corp. To this, one could add the veritable Who’s Who of civil aerospace OEMs that
have already established a presence in China to service its booming air transport fleet.
Equally interesting is the U.S. position as the most popular location for MRO investments. This
is largely due to the significant build-out of business aviation MRO infrastructure during the
booming 1990s and 2000s – and seventy percent of the business jet fleet resides here.
12
Investment by European firms is another factor. One example is TAESL, an engine overhaul
joint venture between Rolls-Royce and American Airlines.
The United Arab Emirates, fourth on the list, is arguably the biggest surprise. Why the lofty
ranking for a country of less than five million people? First is the nation’s aim of becoming a
global air transport hub status – Dubai International Airport is now the sixth busiest in the world
for international traffic – and the consequent growth of airline fleets such as Emirates and
Etihad. A second factor is the active role of UAE governments, including sovereign wealth funds,
in establishing an in-country aerospace cluster. The best known initiative is Dubai Aerospace
Enterprise, an aviation corporation launched in 2006 that comprises maintenance,
manufacturing, leasing, and infrastructure businesses. Abu Dhabi’s sovereign wealth fund
Mubadala has also been involved in several high-profile acquisitions. The combination of growth
and government support has attracted maintenance investments by Bombardier, BE Aerospace,
GE, Goodrich, Jet Aviation, Rolls-Royce, Sikorsky, and Thales. The emerging pattern has Dubai
focused on civil MRO and Abu Dhabi on military MRO.
These and other investments are creating new MRO hubs that are literally changing the
landscape of the aerospace industry’s maintenance infrastructure (Figure 10). Brazil, Mexico,
and Central America are attracting investments for labor intensive activities such as airframe
heavy maintenance that complement existing MRO clusters in Southern California, the Central
Source: AeroStrategy
Figure 9: Major MRO and Parts Distribution Investments * 1990 – 2009**
* Includes joint ventures and organic investments for 121 largest OEMs; excludes acquisitions ** 2009 data is as at 31 August 2009
Number
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U.S., South Florida, and Quebec. And in Europe, the Middle East, and Africa (known collectively
as EMEA), a similar pattern holds, with North Africa and Eastern Europe attracting investment
for labor intensive activities.
There are economic factors governing the location of these hubs. Airframe heavy maintenance,
a labor-intensive activity, is moving to low cost labor regions such as Mexico, Central America,
Eastern Europe, and China. US Airways and JetBlue, for example, are now sending some of
their aircraft for heavy checks to Aeroman, an MRO based in El Salvador. Notably, Canadian
firm Aveos acquired Aeroman in 2007 and has integrated it into its MRO network. In contrast,
engine and component MRO activity is capital intensive, remains focused in advanced
economies.
Canada boasts several industry-leading MRO suppliers but is not among the top MRO
investment locations according to AeroStrategy’s research. One contributing factor may be the
appreciation of the Canadian dollar, which reduces Canada’s competitiveness for labor intensive
MRO work such as aircraft heavy maintenance. A notable and recent Canadian MRO
investment is by engine MRO supplier Standard Aero, which recently broke ground on a 27,000-
square-foot expansion at their Winnipeg facility in support of future CFM56 MRO work.
QUEBEC
CENTRAL AMERICA
Source: AeroStrategy
BRAZIL
MALAYSIA
Figure 10: Global Aerospace MRO Clusters
14
Other Structural Trends Shaping the Aerospace Industry
Beyond Globalization 2.0, there are several other significant trends reshaping aerospace
industry.
Shift to Tier I Manufacturing Supply Chain Model
One key shift rippling through the aerospace manufacturing supply chain is managerial rather
than technological: the move to a “systems integration” mode of production. Primary OEMs are
increasingly seeking partnerships with small groups of Tier I suppliers to develop and integrate
better turn-key systems solutions. This approach, pioneered by automotive OEMs in the early
1990s, has been adapted to aerospace, for example, by Embraer. Hamstrung by limited in-
house engineering resources and development capital for the EMB 170/190 series, the
company slashed its supplier base from 350 to 38, and increased risk-sharing partners from four
to 16. (Figure 11) This forced many Tier I suppliers to upgrade their systems integration
capabilities and take on new levels of commercial risk. Bombardier and Boeing also utilize Tier I
supply chain models, and Airbus is headed in this direction with its Power8 restructuring
program and supply chain practices on the A350XWB. This approach is not limited to aircraft
OEMs. Rolls-Royce reduced its supplier base from approximately 250 on the Trent 500 engine
back in 2002 to 75 on the Trent 1000. Future programs may involve no more than 40 suppliers.
Pratt & Whitney Canada is working with fewer than 30 suppliers on the PW600, compared to the
usual 100 or more.
Critics of the Tier I supply chain model point to Boeing’s well-documented production delays on
the B787 program as evidence that aircraft OEMs have transferred too much responsibility to
their suppliers. It is true that some Tier I suppliers were not prepared for the design, technology,
and/or supply chain requirements for the B787 program, and that aircraft OEMs will be more
cautious in outsourcing strategic components in future designs. At the same time, the vast
majority of Tier I suppliers have performed to expectations and will learn from the B787
experience. In the long run, the drive by aircraft OEMs to share investment costs, reduce
overhead, and focus on the highest value-added activities indicates that the Tier I supply chain
model is here to stay.
15
The Rise of BRIC Countries + Japan
Canada is well aware of the competitive challenge posed by Brazil in the aerospace industry.
Brazilian OEM Embraer is a direct competitor to Bombardier in the regional aircraft and
business aircraft sectors and will deliver nearly 60% of regional aircraft over the next decade.
What has changed is a concerted effort by several of the other so-called “BRIC” countries
(Russia, India, and China) as well as Japan to expand their position in the civil aerospace
industry. This isn’t surprising given the fact that Asia-Pacific will be the largest single market for
air transport aircraft over the next decade and its governments hope to parlay their growing
market clout into an increased aerospace industrial footprint. The relatively low penetration of
the aerospace industry in the economies of these countries (Figure 12) highlights the growth
potential. The aerospace industry comprises 0.6% of Russia’s GDP, followed by Brazil (0.5%),
Japan (0.3%), India (0.3%), and China (0.3%). Contrast these figures with the relatively high
aerospace penetration is in France (1.8%), Canada (1.6%), and the US (1.4%). If China were to
achieve aerospace penetration on par with Germany (0.9%) its aerospace industry would be
worth in excess of $40 Billion!
350
38
0
100
200
300
400
500
EMB 145 (1999)
EMB 170/190 (2004)
Figure 11 : Embraer - Number of Suppliers
4 risk sharing suppliers
16 risk sharing suppliers
Source: Embraer
16
Several new programs are on the horizon. In Russia, Sukhoi will introduce the Superjet in the
2010-2011 timeframe. While the long-term commercial success of this aircraft is far from
assured, AeroStrategy estimates that Sukhoi will deliver 110 units by 2018 – primarily to
Russian customers. The aircraft is designed to compete against the Embraer E-Jets and the
Bombardier CRJ programs. Sukhoi claims the SSJ will have 10-15% lower operation costs than
its Embraer or Bombardier counterparts for the price of $27.8 million. 5
China has much larger ambitions than Russia. China’s most significant investments in the civil aircraft industry include AVIC, a company developing a next generation regional jet, and Commercial Aircraft Company of China (Comac). AeroStrategy anticipates that AVIC will deliver nearly 150 regional jets through 2018. Comac, with significant backing by the Chinese government, plans to introduce a new single-aisle competitor by 2020. Numerous Western suppliers are currently submitting bids for this new aircraft.
Finally, there is the new Japanese competitor, the Mitsubishi Regional Jet (MRJ). Japan’s All Nippon Airways is the MRJ’s launch customer and in October 2009 Mitsubishi secured an order for 100 MRJs from Trans States Holdings (TSH), America's second-biggest independent regional carrier. Like the Bombardier C-Series, the MRJ is powered by the Pratt & Whitney Geared Turbofan, and it aims to sell 1,000 of its jets over the next 20 to 30 years. AeroStrategy anticipates just over 100 deliveries through 2018. The venture has strong backing; a blue-chip roster of Japanese firms will provide 67.5% of the initial capitalization of 70 billion yen. The Government of Japan will also be contributing part of the research and development costs.6
The impact of these new competitors is a significantly more competitive regional jet market
segment. As a result, Bombardier, which once dominated the regional jet segment in the 1990s,
will garner an estimated 22% of this segment from 2008 – 2018. Bombardier’s move into the
5 Flight International – 2 June 2007
6 Development Asia, April 2009
Figure 12: Aerospace Penetration (%GDP)
Country Aerospace
Industry ($B) GDP ($T) Aerospace
% GDP France $50.39 $2,864.35 1.8% Canada $23.60 $1,501.79 1.6% USA $204.00 $14,264.60 1.4% UK $32.67 $2,678.47 1.2% Germany $32.13 $3,662.36 0.9% Russia $10.00 $1,671.45 0.6% Brazil $7.55 $1,575.15 0.5% Japan $14.10 $4,908.35 0.3% India $4.00 $1,226.18 0.3% China $12.00 $4,415.99 0.3%
Source: EIU, Industry Associations, AeroStrategy analysis and estimates
17
larger single aisle segment via the C110/130 aircraft will result in an estimated 142 deliveries
over the 2014 – 2018 timeframe.
Growing Government/Industry Collaboration on Cluster Development
Another key trend is growing government/industry collaboration to create aerospace clusters.
The motivation for collaboration is to create high value jobs and exports in an era of increasingly
mobile capital and human resources. And in some instances the motivation includes national
security and the belief that a healthy aerospace sector creates a positive, high technology
image.
Government-industry can take several forms. In some instances governments serve as
catalysts to promote aerospace investment to outside investors. This includes serving as
information clearinghouses, streamlining administration, and offering tax incentives. The
aerospace promotion efforts of U.S. states such as North Carolina, Alabama, New Mexico and
Mississippi are examples of this level of collaboration.
A deeper level of collaboration is where governments participate in joint planning with industry to
identify strategic technologies, cluster requirements/gaps and human resource needs.
Governments can play an important role in implementing plans via research funding and
training.
Finally, governments can directly invest capital into a company or program. The support of
Quebec of several key aerospace programs is an example if this phenomenon.
The experience of three emerging aerospace clusters – Singapore, Malaysia and Mexico --
highlights to growing nature of industry-government collaboration.
OEM Segment Family 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Grand Total
Segment Share
AVIC Regional Asian Regional Jet 0 0 2 8 16 16 20 20 20 20 20 142 7% Bombardier Regional CRJ-700/900/1000 50 68 45 24 24 33 35 36 35 42 46 438 22% Embraer Regional EMB-135/140/145 6 10 8 0 0 0 0 0 0 0 0 24 1% Embraer Regional EMB-170/175/190/195 156 127 97 85 90 90 96 101 101 107 112 1,162 59% Misubishi Regional MRJ 0 0 0 0 0 0 9 18 25 25 25 102 5% Sukhoi Regional SUPERJET 0 0 6 8 12 15 15 15 15 12 12 110 6%
Regional Sutotal 212 205 158 125 142 154 175 190 196 206 215 1,978
Airbus Single Aisle A320 family 385 384 357 355 391 392 415 414 413 426 424 4,356 52% Boeing Single Aisle B737 family 284 355 324 324 360 360 384 382 384 396 396 3,949 47% Bombardier Single Aisle C110/C130 0 0 0 0 0 0 2 10 30 50 50 142 2%
Single Aisle Sutotal 669 739 681 679 751 752 801 806 827 872 870 8,447
Airbus Twin Aisle A330/340/350/380 96 107 102 96 88 88 106 129 166 189 187 1,354 41% Boeing Twin Aisle B767/777/787 86 109 87 89 163 221 240 228 238 240 252 1,953 59%
Twin Aisle Sutotal 182 216 189 185 251 309 346 357 404 429 439 3,307
Grand Total 1,063 1,160 1,028 989 1,144 1,215 1,322 1,353 1,427 1,507 1,524 13,732 Source: AeroStrategy
Figure 13: Air Transport Production Forecast
2008 - 2018
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Singapore
Singapore has transformed itself in a relatively short period of time to become Asia’s most
important MRO hub; it is arguably the aerospace success story of Asia. Singapore boasts more
than 30 major MRO facilities, the highest concentration of engine and component MRO
capability (Figure 14), and an aerospace industry with annual turnover in excess of $4 billion.
Beyond MRO, Singapore plays host to several world-class design and manufacturing operations
and, in 2007, achieved a major breakthrough when Rolls-Royce selected Seletar Aerospace
Parker to host its S$320 million final assembly and test facility for aeroengines – the first facility
of its kind in Asia. Recently Singapore has attracted several leading aerospace firms to establish
R&D centers in the city-state.7
Several factors underpin Singapore’s success including a flexible workforce, a corrupt-free and
transparent government and a highly respected legal system. But perhaps the most critical
success factor is a collaborative government-industry planning effort led by the Economic
Development Board (EDB); other organizations include the Ministry of Transport, the Work
Development Agency, the Aerospace Industry Association of Singapore and A*STAR --
Singapore's lead agency for fostering scientific research. The EDB’s approach places a
premium on integrating needs of industry rather than a classic “top down” approach for
economic planning.
7 AeroStrategy analysis, AAIS 2008 Directory
Engine MRO Component MRO
Source: AeroStrategy
Figure 14: Major Air Transport MRO Facilities in Asia Pacific
Component MRO KEY: Air Transport Engine MRO Facilities In Asia Pacific
Engine MRO KEY:
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Malaysia
The Malaysian Aerospace Industry is making a strong effort to strengthen its presence in the
global marketplace and has established an objective to be a major aerospace player by 2015.
Malaysia created a National Aerospace Blueprint in 1997 and has four focus areas for growth:
1) parts and components manufacturing; 2) maintenance, repair and overhaul; 3) avionics and
systems integration; and 4) aerospace training.
To this end, the country has created The Malaysian Aerospace Council (MAC), a national level
steering body. The MAC is chaired by the Prime Minister and represented by cabinet ministers,
heads of Government agencies and captains of industry. Established in 2001, the objectives of
the council are to provide vision and direction of the national aerospace industry and to provide
policy guidelines and indentify priority of aerospace activities.8
The results thus far are impressive. Malaysia is one of the top ten locations for MRO
investments and is an emerging MRO hub in Asia. Its MRO investors include AgustaWestland,
Eurocopter, EADS, GE, Goodrich, Hamilton Sundstrand, and MTU. Additionally it has attracted
manufacturing investments from the likes of Airbus, Boeing, Hexcel, Rolls-Royce, and Spirit
AeroSystems.
Mexico
As previously mentioned, Mexico has become an aerospace juggernaut in a relatively short
period of time. Whilst much of the coordination in Mexico is at the state level, the federal
government is investing $50 million in a National Public Aero Trade School. And foreign
investors are aided by NAFTA and the Bilateral Aviation Safety Agreement and low tariffs.
Mexico has more than 186 aerospace firms with exports in excess of $3 billion and total
employment of more than 20,000 as of 2008.
8 http://steer.might.org.my/aironline/index2.php?sub=aboutus
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STAKEHOLDER IMPLICATIONS This discussion paper argues that Canada’s aerospace industry faces a new set of opportunities
and challenges as a result of an emerging form of industrial organization (Globalization 2.0)
combined with the emergence of new competitors (BRIC countries + Japan) and a Tier I supply
chain model. What does this mean for Canadian stakeholders, e.g., aerospace firms and the
federal and provincial governments?
Implications For Canadian Aircraft & Engine OEMs
Canada’s principal aircraft and engine OEMs – Bombardier and Pratt & Whitney Canada – face
an intriguing set of challenges in the new environment that go beyond the significant bets that
they are making on new products, including the C-Series and new gas turbine engines.
Buckle down for new competition. The duopolies that characterize the aircraft market
(Boeing/Airbus for large jets, Bombardier/Embraer for regional jets) are poised to change with
suppliers from Russia, China, and Japan all targeting the regional jet market. And China, via
Comac, is also targeting the large jet market with plans to introduce the 168-180 seat C919 by
2016. Paradoxically, the Tier I supply chain model will reduce the entry barriers for these
budding aircraft OEMs, as they can cooperate with Western engine and aircraft system
Source: MexicoNow
Figure 15: Selected Aerospace Investments In Mexico
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suppliers for design, development, and product support. Aircraft systems OEM Goodrich, for
example, recently set up two joint ventures with Xi'an Aircraft Industry Company (XAIC) for
landing gear and nacelle systems. This decision was undoubtedly influenced by its desire to
land positions on the new C919 aircraft. Similarly, Pratt Canada will face new competition in the
aeroengine market. French OEM Snecma is developing a new power plant for the 10,000 lbs
thrust segment and is engaged in a joint venture with NPO Saturn, a Russian aeroengine
manufacturer, to develop a SaM146 for the Russian Regional Jet.
Align the value chain to Globalization 2.0. Bombardier and Pratt & Whitney Canada have
both modified their value chains to leverage opportunities created by Globalization 2.0.
Bombardier will build the C-Series fuselage in China, the wings for the same aircraft in Northern
Ireland, and expanded manufacturing capability in Mexico. It has also built up a global product
support network. Pratt & Whitney Canada has done much the same – through its parent
company it leverages a network of global engineering centers, and it continues to expand its
highly regarded global product support network. Both firms must continually search for new
opportunities to improve their competitiveness. Could Bombardier, for example, conduct more
of its engineering activities via engineering centers in low cost regions? Could Pratt & Whitney
Canada pursue more manufacturing in low cost regions? Both OEMs must balance these issues
with the desire of governments to maximize aerospace employment in Canada.
Implications For Sub-tier Aerospace Manufacturing Suppliers
Globalization 2.0 presents a particularly vexing set of challenges for Canadian sub-tier suppliers
– including manufacturers of components, parts and aerostructures.
Prepare for changing customer relationships. The emerging Globalization 2.0 supply chain
model will change many customer relationships in the years ahead. Increasingly, Tier I suppliers
will assume responsibility for supply chains -- and the selection of Tier II and Tier III suppliers.
The channel to market for sub-tier aerostructures suppliers, for example, will be through Tier I
aerostructures firms like Spirit AeroSystems and GKN Aerospace rather than through aircraft
OEMs. Similarly, hydraulics suppliers will sell to Tier I hydraulics systems suppliers like Parker
Aerospace. The upshot is that Tier I suppliers, focused on maximizing profit, will scour the globe
for the most competitive suppliers and in some instances may decide to make the component or
assembly rather than purchase it.
Go on the offensive. Rather than “going on the defensive” against competitors from low cost
regions, Canadian sub-tier suppliers should evaluate the new business opportunities created by
Globalization 2.0. The imperative is especially acute for Canadian manufacturers in labor
intensive market segments – an issue exacerbated by the strength of the Canadian dollar.
Issues to be addressed include:
How to gain positions on new programs in emerging markets?
How to enhance competitiveness versus low labor cost competitors by investing in new
technologies, production processes, or design concepts?
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Where to locate or re-locate value chain activities such as engineering, manufacturing,
product support, or back office operations (accounting, human resources, etc) to
enhance productivity?
Aviation Service Companies
Finally, Globalization 2.0 presents challenges and opportunities for Canadian firms engaged in
MRO and training services.
Pursue growth outside of North America. This discussion paper argues that the regions
boasting fastest air traffic growth – Asia-Pacific, Middle East, and Latin America – are where
MRO and training infrastructure is the thinnest. This equates to opportunities for Canadian
OEMs as well as leading aviation service suppliers such as Aveos, CAE, Cascade Aerospace,
L3 Communications, Magellan Aerospace, Standard Aero, and Vector Aerospace. There are
numerous Canadian success stories here – from Vector Aerospace operating a major military
helicopter depot in the UK, to Standard Aero creating a global customer base, to CAE building-
out a global pilot and training infrastructure. While the imperative to “go global” is clear for larger
suppliers, smaller and niche firms must decide whether to focus on the domestic market or
expand their horizons.
Adapt To More Competitive Markets. Aviation services markets – particularly in labor
intensive MRO activities like heavy maintenance – are changing rapidly as a result of
Globalization 2.0. Heavy maintenance labor hour rates, which often exceed $80/hour in airline
maintenance organizations, are often $40/hour or less in Latin America and East Asia. The
strong Canadian dollar only adds to the competitive challenge. As a result, more than 20% of
heavy maintenance by North American airlines is conducted by suppliers in other regions.9 This
means that Canadian suppliers must adapt to survive. MRO supplier Aveos, for example,
purchased El Salvador-based heavy maintenance supplier Aeroman in 2007 to shore up its
competitiveness in airframe heavy maintenance. Another example: Cascade Aerospace shifted
its focus away from the ultra-competitive air transport heavy maintenance market to focus on
military aircraft maintenance.
Beyond market sector-specific challenges, Globalization 2.0 will shape the business strategies,
organizational architectures and business processes deployed by Canadian aerospace
suppliers. The era of horizontal specialization, in which firms tightly integrate engineering,
manufacturing, and customer support functions across multiple locations worldwide, has arrived.
Suppliers must adapt to these new realities.
First, they must take stock of how Globalization 2.0 supports – or disrupts – current business
strategies. Consider, as Pankaj Ghemat points out in his excellent book Redefining Global
Strategy, the three broad motives for globalizing: arbitrage, aggregation, and adaptation.
Arbitrage is the one of the prime motivators for Globalization 2.0 – labor costs especially.
Embraer has leveraged its competitive advantage in labor to become a leading regional and
business jet OEM in a relatively short time – an act China’s Comac hopes to emulate in the
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single aisle aircraft segment. And the popularity of R&D centers in high-cost regions reminds us
that arbitrage is about more than exploiting labor cost differences – it is about leveraging global
talent pools. The much decried engineering talent shortage may thus be overblown. In the
words of a chief engineer at a major OEM, “We don’t see the shortage of engineers that others
do because we view the entire globe, rather than just our home country, as our human resource
pool.”
Aggregation – overcoming differences among countries by grouping them based on similarities
– is a second stimulus for globalizing. A growing number of aerospace firms view the market
through the prism of broad regional groupings such as North America, EMEA, and Asia-Pacific.
Sophisticated regional supply chains are emerging that see manufacturing supply chains as
ecosystems that span the full range of processes, from raw material mills to final assembly.
SAFRAN, for example, has established a North American organizational structure to support its
drive to garner a greater share of U.S. defense spending. It now employs more than 18,000 in
North America, including 8,000 in Mexico. Aggregation has also proved to be useful in product
support, encouraging OEMs and MROs to establish regional service parts and customer
support organizations. Most customers prefer to deal with in-region suppliers rather than calling
“headquarters” many time zones away. Pratt & Whitney Canada and Standard Aero are two
examples of Canadian firms that established regional support networks for MRO activities.
Finally, Adaptation – adjusting to differences across countries – is especially true in military
markets where unique mission requirements, weapons systems, communications protocols, and
sustainment requirements mandate that some country-specific customization is required.
Witness the success of BAE Systems in penetrating the U.S. defense electronics market.
Similarly, the Canadian training giant CAE has adapted its global network of training centers to
regional requirements.
Regardless of which “A” Canadian firms choose to emphasize, the overarching objective of
globalization is straightforward: to improve productivity or expand market access while
enhancing core competencies and protecting key intellectual property.
Implications for Canadian Governments
For Canadian governments, the effects of Globalization 2.0, including the global dispersal of
aerospace capabilities, are far-reaching. Opportunities – and threats – abound. AeroStrategy
believes that Canadian governments must consider several new realities in the aerospace
industry:
Prepare for new competition from the BRIC countries and Japan. Canada’s pioneering role
in creating the regional jet sector is now 15 years old and Bombardier faces several new
competitors in this space that boast government funding, ambition, and capability. One or more
of these countries may eventually join Embraer’s Brazil as a successful aircraft OEM, which will
further erode Canada’ s market position. And the odds of this scenario are increased with
9 Source: AeroStrategy analysis
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Airbus and Boeing apparently slipping development of a next-generation single-aisle aircraft to
2020 or beyond.
Government-industry coordination will grow in importance. Government-industry
coordination is increasingly important in Globalization 2.0, where labor and capital enjoy ever
greater mobility. AeroStrategy’s research demonstrates that most capability expansion is via
joint venture, which means that potential investors are looking for in-country partners. From
governments, they are looking for streamlined administration, transparency, the rule of law,
human resources, and technology. Governments and firms have a finite set of resources, which
means that coordinated strategic planning is increasingly important. Witness the Prime
Minister’s direct involvement in Malaysia’s aerospace planning.
Tier I suppliers will create a larger share of aerospace value and employment. Tier I
suppliers are poised to take on a greater share of aerospace technology development,
manufacturing, and employment as a result of evolving aircraft OEM supply chain strategies.
And Canada currently lacks a major Tier I supplier for aircraft systems, engine modules or
aerostructures. The Netherlands, for example, has built a very success aerospace cluster,
despite the demise of aircraft OEM Fokker by targeting advanced materials, aerostructures, and
MRO. The results are impressive – ranging from the development of GLARE, a new hybrid
glass/metal material used extensively on the A380, to a growing aerostructures profile, to the
Maintenance Boulevard initiative that seeks to link Dutch MROs in physical and virtual clusters.
Functional specialization can be successful. While most governments are focused on
building national champions or supporting development of a new program on home territory,
Globalization 2.0 phenomenon means that value creation and employment will increasingly
migrate to functional clusters such as India/Russia for engineering/R&D or Mexico for
manufacturing, or Singapore for MRO. Canada, which touts itself as a knowledge-industry
country, has attracted few R&D centers from non-Canadian firms.
Reviewing all of the evidence, the aerospace industry isn’t flat, but it is certainly becoming flatter
as a result of the Globalization 2.0 phenomenon.
