The investment drivers of the British Aerospace firms

Prepared by: Ricardo Rojas M

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Objective
Indentify Investment attraction opportunities from the British OEM aerospace companies. Content • Global Industry Analysis. • Supply Chain Analysis. • British Aerospace Firms Capability Acquisitions.

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Global Industry Analysis

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Aerospace market has been growing.
A further growth is expected, which is, however, steady.

Source: Datamonitor, 2008

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Technology is expected to become more important as a market success factor.
The average technological level has been becoming higher due to more use of composite materials and electronics.
Composite materials and electronics Introduction of new materials, new propulsion systems and masive use of electronic instruments Change in the engine industry

Based on: Esposito, 2004 and AT Kearney 2009

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Technology level determines the level of necessity of global partnership and sourcing activity.
The higher the technological level (aircraft), the higher the need to vertical integration/collaboration.

Source: Esposito, 2004

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Partnershipsare Partnershipsare becoming localised, while sourcing activities are globalized.
Europe and the US are the major clusters. But sourcing activities have been spread around the world.
Denmark Norway Finland Poland Hungary Czech R

Canada

Netherlands

Germany
China Korea

France

USA

Mexico

Spain Italy

UK
Taiwan Austria Greece Brazil

Japan

Australia
Source: Wixted, 2009

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

The Industry is driven by two market segments: segments: Civil and Defence.
Certification is compulsory in both markets (e.g. AS9100, AS9003 or AS9120) and regulations are becoming stricter.

Source: Datamonitor, 2008

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

The aerospace industry is highly concentrated.
The dynamic in the civil market appears to be dominated by Boeing and EADS (Airbus).

Source: Datamonitor, 2008

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Market Analysis.
•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.
“The Investment drivers of the British Aerospace firms”

• 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.
Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Supply Chain Analysis

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Aerospace industry is affected by global political and economic factors.
Aerospace demand variability and unpredictability is result of changes in world economy and geopolitics.
Main civil aerospace demand drivers: • Energy • Power Purchasing Parity • Population growth • Wage Main defence aerospace demand drivers: • Governmental Defence Expending .

Based on: Phillips, 1999 and Tiwari, 2005.

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Industry operate a Make to Order system to manage low volume and high variety production. low
Products are produced only after their being ordered.
Mill Forging House Machine Shop Assembly House Final Assembly Buyer
External Placed Order Issue PO for forging house Issue PO to mill Issue PO to mill Issue PO to mill Forge parts Machine parts Assemble Issue PO for machine shop Source type Release delivery schedule

Delivery schedule

Internal Placed Order

Source: Bliczo et alt,p 300, 2004

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Supply base reduction, partnership and lean system are characteristics in the Supply Chain.
Tier 1 firms are supplied by a few direct companies, which have a system integrator function.
Material Material Material Raw material Material Tooling Tooling Tooling Tooling Forming Forming Forming Forming Components Components Components Components Airframe Systems

Power Systems

Goverment Aircraft construction assembly Airlines

Avionic Systems

Weapon Systems

Service and Support Capabilities

Suppliers
Source: Rojas, 2009

Manufacturing Processes

Production / Sub assembly

Assembly

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Outsourcing and vertical integration can be utilised as capacity management strategies.
However, it needs high level of base capacity, which is highly costly.
Capacity 100% Outsourcing 60% Vertical integration 40% Make orbuy decision Firms capacity Aerospace Demand

Base capacity

Time
Based on: Graham & Almed, 2000

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

The financial barrier is expected to become higher due to higher level of technology.
The high fixed cost structure promote the transition to a more concentraded industry.

Source: Esposito, 2004

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Supply Chain Analysis.
•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.
“The Investment drivers of the British Aerospace firms”

• 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.
Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

British Aerospace Firms Capability Acquisitions

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

The number of capability acquisition corresponds to that of orders contracted by the British firms.
British aerospace firms that gain a new production contract tend to acquire capabilities.

Source: Rojas, 2009; SBAC,.

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

M&A is the main strategy of British aerospace firms to have an access to new capabilities.
136 capabilities acquisition occurred in the last eleven years, most of which were Mergers and Acquisitions.

Ownership % Mean In-House Acquisition : 94.4% Joint Venture: 31.5% Extension: 100%

Offshore 97.1% 82.8% 100%

Source: Rojas, 2009

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

The number of firms which is actively investing in new capabilities is limited.
Six companies have acquired 80% of the total acquired capabilities in the last eleven years.

Source: Rojas, 2009

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

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

Source: Rojas, 2009

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Investment in technology, expertise and knowledge are source of competitive advantages. advantages.
Three main capabilities are demanded in the market: Service and Support, production of avionics and components.

Source: Rojas, 2009

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

The British firms tend to invest outside of the country in order to acquire new capabilities.
It is expected that this trend continue.

Source: Rojas, 2009

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Most of the acquisitions have happened in the two global aerospace clusters (Europe and the US).
The purpose of British firms that acquired new capabilities in the US cluster is mostly to enter in the market or re-locate production.

Source: Rojas, 2009

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

The US is the main investment overseas destination in the production of electronics.
Although there are emerging low-cost destinations, the technology level is the main determinant of the investment.

Source: Rojas, 2009

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

UK Bristish Aerospace capability acquisitions
•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.
“The Investment drivers of the British Aerospace firms”

• 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.
Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

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

Masumi Kinoshita. Promexico – United Kingdom.

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Appendix A. List of main capabilities and subsubcapabilities

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

Appendix B. Ultimate Global Owner (UGO) methodology
UGO methodology, a 25% of ownership rule, was used to identify the OEM British aerospace companies and its strategies.
Others <25% Others <25% Others <25% 2 <25% 1 3 60% 4 30% 5

25%

“The Investment drivers of the British Aerospace firms”

Prepared by: MSc, MBA Ricardo Rojas Montero rrmmex@netscape.net

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