investment drivers british aerospace

Prepared by: MSc, MBA Ricardo Rojas [email protected]

“The Investment drivers of the British Aerospace firms”

The investment driversThe investment drivers of of tthe he BBritish ritish Aerospace Aerospace firmsfirms

Prepared by: Ricardo Rojas M



Objective Objective

Indentify Investment attraction opportunities from the British OEM aerospace companies.

• Global Industry Analysis.

• Supply Chain Analysis.

• British Aerospace Firms Capability Acquisitions.

Content



Global IndustryGlobal Industry

AnalysisAnalysis



Aerospace market has been growing. Aerospace market has been growing.

A further growth is expected, which is, however, steady.

Source: Datamonitor, 2008



The average technological level has been becoming higher due to more use of composite materials and electronics.

Based on: Esposito, 2004 and AT Kearney 2009

Change in the engine industry

Introduction of new materials, new propulsion

systems and masive use of

electronic instruments

Composite materials and electronics

Technology is expected to become more Technology is expected to become more important as a market success factor.important as a market success factor.



The higher the technological level (aircraft), the higher the need to vertical integration/collaboration.

Source: Esposito, 2004

Technology level determines the level of necessity Technology level determines the level of necessity of global partnership and sourcing activity.of global partnership and sourcing activity.



USA

Canada

MexicoMexico

Brazil

Australia

Japan

Korea

Taiwan

ChinaChina

UKSpainSpain

ItalyItaly

GreeceGreece

France

GermanyNetherlands

Denmark NorwayNorway FinlandFinland PolandPoland HungaryHungary Czech RCzech R

AustriaAustria

Europe and the US are the major clusters. But sourcing activities have been spread around the world.

PartnershipPartnershipsaresare becoming localised, while becoming localised, while sourcingsourcing activities are activities are globalized.globalized.

Source: Wixted, 2009



Certification is compulsory in both markets (e.g. AS9100, AS9003 or AS9120) and regulations are becoming stricter.


The Industry The Industry is is driven by two market segmentsdriven by two market segments: : Civil and Defence.Civil and Defence.




The dynamic in the civil market appears to be dominated by Boeing and EADS (Airbus).

The aerospace industry is highly concentrated.The aerospace industry is highly concentrated.



•The aerospace industry is steadily growing .•Technology is expected to become more important as a market success factor.•Technology level determines the level of necessity of global partnership and sourcing activity.•Partnershipsare becoming localised,while sourcing activities are globalized.•The Industry is driven by two market segments.•The aerospace industry is highly concentrated.

Market Analysis.Market Analysis.

• The US defence as main segment market.

• The investment in technology capabilities, expertise and knowledge are the source of competitive advantage.

• Regulation and certification is one of the crucial barriers to entry in this market.

• Rivalry in the market is strong, companies competing intensely for government and commercial contracts.

• Final assembly firms have strong bargaining power with buyers and suppliers.

• The duopolio structure increases the switching cost for buyers and suppliers.



Supply ChainSupply Chain

AnalysisAnalysis



Aerospace industry Aerospace industry is is affected by global affected by global political political and and economiceconomic factors.factors.

Aerospace demand variability and unpredictability is result of changes in world economy and geopolitics.

Main civil aerospace demand drivers:• Energy• Power Purchasing Parity• Population growth• Wage

Main defence aerospace demand drivers:• Governmental Defence

Expending .

Based on: Phillips, 1999 and Tiwari, 2005.



Products are produced only after their being ordered.

Delivery schedule

BuyerFinal Assembly

Assembly House

Machine Shop

Forging House

Mill

Release delivery schedule

Source type

External Placed Order

Internal Placed Order

Issue PO for machine shop

Issue PO for forging house

Issue PO to mill

Issue PO to mill

Issue PO to mill

Forge parts

Machine parts

Assemble

Source: Bliczo et alt,p 300, 2004

Industry operate a Make to Order system to Industry operate a Make to Order system to manage lmanage lowow volume and volume and high variety production.high variety production.



Airlines

Avionic Avionic SystemsSystems

Weapon Weapon SystemsSystems

Airframe Airframe SystemsSystems

Power Power SystemsSystems

Aircraft Aircraft construction construction

assemblyassembly

FormingForming

ComponentsComponents

Raw material

MaterialMaterial

ToolingTooling

Service and Support Capabilities Service and Support Capabilities Service and Support Capabilities Service and Support Capabilities

AssemblyProduction / Sub assembly

Manufacturing Processes

Suppliers

Goverment

Tier 1 firms are supplied by a few direct companies, which have a system integrator function.

Source: Rojas, 2009

FormingForming


MaterialMaterial

ToolingTooling

FormingForming


MaterialMaterial

ToolingTooling

FormingForming


MaterialMaterial

ToolingTooling

Supply base reduction, partnership and lean Supply base reduction, partnership and lean system are characteristics in the Supply Chain.system are characteristics in the Supply Chain.



Based on: Graham & Almed, 2000

However, it needs high level of base capacity, which is highly costly.

Vertical integration

Outsourcing

40%

60%

Make orbuy decision

100%

Aerospace Demand

Firms capacity

Time

Capacity

Base capacity

Outsourcing and vertical integration can be Outsourcing and vertical integration can be utilised as capacity management strategies.utilised as capacity management strategies.



The financial barrier is expected to become higher The financial barrier is expected to become higher due to higher level of technology.due to higher level of technology.

Source: Esposito, 2004

The high fixed cost structure promote the transition to a more concentraded industry.



•Aerospace industry is affected by global political and economic factors.•Industry operate a Make to Order system to manage low volume and high variety production.•Supply base reduction, partnership and lean system are characteristics in the Supply Chain.•Outsourcing and vertical integration can be utilised as capacity management strategies.•The financial barrier is expected to become higher due to higher level of technology.

Supply Chain Analysis.Supply Chain Analysis.

• Suppliershave to diversify capacity and risk by operating in other industries.

• Capacity management is a driver for global sourcing.

• Information and Communication Technology is extremely relevant to coordinate the Supply Chain.

• The bigger supliers (partners) are becoming the predominant figures.

• A few player in tier 1 and tier 2 is a trend in the Supply Chain.

• Entry to the market is most likely to happpen by horizontal integration.



British Aerospace FirmsBritish Aerospace Firms

Capability AcquisitionsCapability Acquisitions



British aerospace firms that gain a new production contract tend to acquire capabilities.

The number of capability acquisition corresponds The number of capability acquisition corresponds to that of orders contracted by the British firms.to that of orders contracted by the British firms.

Source: Rojas, 2009; SBAC,.



Ownership %Mean

In-House OffshoreAcquisition : 94.4% 97.1%Joint Venture: 31.5% 82.8%Extension: 100% 100%

Source: Rojas, 2009

M&A is the main strategy of British aerospace M&A is the main strategy of British aerospace firms to have an access to new capabilities.firms to have an access to new capabilities.

136 capabilities acquisition occurred in the last eleven years, most of which were Mergers and Acquisitions.



Source: Rojas, 2009

The number of firms which is actively investing in The number of firms which is actively investing in new capabilities is limited.new capabilities is limited.

Six companies have acquired 80% of the total acquired capabilities in the last eleven years.



Production of electronics requires new Production of electronics requires new capabilities.capabilities.

In order to be competitive, firms involved in the production of electronics has been acquiring new capabilities.

Source: Rojas, 2009



Source: Rojas, 2009

Three main capabilities are demanded in the market: Service and Support, production of avionics and components.

Investment in technology, expertise and Investment in technology, expertise and knowledge are source of competitive advantageknowledge are source of competitive advantages.s.



Source: Rojas, 2009

It is expected that this trend continue.

The British firms tend to invest outside of the The British firms tend to invest outside of the country in order to acquire new capabilities.country in order to acquire new capabilities.



Most of the acquisitions have happened in the two Most of the acquisitions have happened in the two global aerospace clusters (Europe and the US).global aerospace clusters (Europe and the US).

The purpose of British firms that acquired new capabilities in the US cluster is mostly to enter in the market or re-locate production.

Source: Rojas, 2009



Source: Rojas, 2009

The US is the main investment overseas The US is the main investment overseas destination in the production of electronics.destination in the production of electronics.

Although there are emerging low-cost destinations, the technology level is the main determinant of the investment.



•The number of capability acquisition corresponds to orders contracted by the British firms.•M&A is the main strategy.•The number of firms which is actively investing is limited.•Production of electronics requires new capabilities.•Investment in technology, expertise and knowledge are source of competitive advantages.•The British firms tend to invest outside of the country.•Most of the acquisition have happened in the two global aerospace clusters .•The US is the main investment overseas destination in the production of electronics.

UK Bristish Aerospace capability acquisitionsUK Bristish Aerospace capability acquisitions• Although M&A is the main

strategy to enter in the market, Supplier Management will be required to support the activity (partnership)

• The necessity to gain an access to technology, expertise and knowledge is the main driver of the investment.

• FDI is expected to continue growing in this industry.

• The production re-location demands sites with skilled labour and high technology capabilites.

• Components, avionics and Service and Support (aftermarket) will be main capabilities demanded.



AcknowledgementAcknowledgement

Masumi Kinoshita.

Promexico – United Kingdom.

I'd like to express my thanks to them who helped in the making of this project:



Appendix A. List of main capabilities and subAppendix A. List of main capabilities and sub--capabilitiescapabilities



1

2 3

4

5

<25% 60%

Others

<25%

30%

Others

Others

25%

<25%

<25%

UGO methodology, a 25% of ownership rule, was used to identify the OEM British aerospace companies and its strategies.

Appendix B. Ultimate Global Owner (UGO) Appendix B. Ultimate Global Owner (UGO) methodologymethodology

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