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The investment drivers of

the British Aerospace firms

Prepared by: Ricardo Rojas M

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” rrmmex@netscape.net
Global Industry

Analysis

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” rrmmex@netscape.net
Partnershipsare becoming localised, while
Partnershipsare
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

France China
USA
Mexico
Korea

UK
Spain
Brazil
Taiwan

Italy Austria
Japan

Greece

Australia
Source: Wixted, 2009

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” rrmmex@netscape.net
Market Analysis.
• The US defence as main segment
•The aerospace industry is market.
steadily growing . • The investment in technology
•Technology is expected to capabilities, expertise and knowledge
become more important as a are the source of competitive
market success factor. advantage.
•Technology level determines • Regulation and certification is one of
the level of necessity of global the crucial barriers to entry in this
partnership and sourcing market.
activity. • Rivalry in the market is strong,
•Partnershipsare becoming companies competing intensely for
localised,while sourcing government and commercial contracts.
activities are globalized. • Final assembly firms have strong
•The Industry is driven by two bargaining power with buyers and
market segments. suppliers.
•The aerospace industry is • The duopolio structure increases the
highly concentrated. switching cost for buyers and suppliers.

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” rrmmex@netscape.net
Supply Chain

Analysis

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” rrmmex@netscape.net
Industry operate a Make to Order system to
manage low
low volume and high variety production.
Products are produced only after their being ordered.

Mill Forging Machine Assembly Final Buyer Delivery


House Shop House Assembly schedule
External
Placed
Order

Release
Issue PO for Issue PO for Source
delivery
forging house machine shop type
Internal schedule
Issue PO to Placed
mill Order
Issue PO to
mill
Issue PO to
mill

Forge parts

Machine parts

Assemble

Source: Bliczo et alt,p 300, 2004

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Forming
Airframe
Systems
Material Forming

Material Forming
Power Goverment
Material Forming Systems
Aircraft
Raw
construction
material
Tooling Components assembly
Avionic
Systems Airlines
Tooling Components

Tooling Components
Weapon
Systems
Tooling Components

Service and Support Capabilities

Suppliers Manufacturing Production / Assembly


Source: Rojas, 2009 Processes Sub assembly

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Aerospace
Demand
100%
Outsourcing
Firms
capacity
60%
Vertical Make orbuy
integration decision
40%

Base capacity

Time

Based on: Graham & Almed, 2000

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” rrmmex@netscape.net
Supply Chain Analysis.
•Aerospace industry is affected
• Suppliershave to diversify
by global political and economic
capacity and risk by operating
factors.
in other industries.
•Industry operate a Make to
• Capacity management is a
Order system to manage low
driver for global sourcing.
volume and high variety
• Information and
production.
Communication Technology is
•Supply base reduction,
extremely relevant to
partnership and lean system are
coordinate the Supply Chain.
characteristics in the Supply
• The bigger supliers (partners)
Chain.
are becoming the
•Outsourcing and vertical
predominant figures.
integration can be utilised as
• A few player in tier 1 and tier 2
capacity management
is a trend in the Supply Chain.
strategies.
• Entry to the market is most
•The financial barrier is
likely to happpen by horizontal
expected to become higher due
integration.
to higher level of technology.
“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” rrmmex@netscape.net
British Aerospace Firms

Capability Acquisitions

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Offshore
Acquisition : 94.4% 97.1%
Joint Venture: 31.5% 82.8%
Extension: 100% 100%

Source: Rojas, 2009

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” rrmmex@netscape.net
UK Bristish Aerospace capability acquisitions
•The number of capability • Although M&A is the main
acquisition corresponds to orders strategy to enter in the
contracted by the British firms. market, Supplier Management
•M&A is the main strategy. will be required to support the
•The number of firms which is activity (partnership)
actively investing is limited. • The necessity to gain an access
•Production of electronics requires to technology, expertise and
new capabilities. knowledge is the main driver
•Investment in technology, expertise of the investment.
and knowledge are source of • FDI is expected to continue
competitive advantages. growing in this industry.
•The British firms tend to invest • The production re-location
outside of the country. demands sites with skilled
•Most of the acquisition have labour and high technology
happened in the two global capabilites.
aerospace clusters . • Components, avionics and
•The US is the main investment Service and Support
overseas destination in the (aftermarket) will be main
production of electronics. capabilities demanded.
“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” rrmmex@netscape.net
Appendix A. List of main capabilities and sub-
sub-
capabilities

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” 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 5

<25%
25%
Others 4

<25%
30%

Others 2 3

<25% <25% 60%

“The Investment drivers of the British Prepared by: MSc, MBA Ricardo Rojas Montero
Aerospace firms” rrmmex@netscape.net