5 minutos de lectura 1 may. 2018
Workers installing a jet engine

Cómo las compañías aeroespaciales y de defensa pueden competir en los mercados emergentes

Por Randall Miller

EY Global Advanced Manufacturing & Mobility Leader

Apasionado por la manufactura, la movilidad y la disrupción. Responsable por la diversidad e inclusión de las mujeres en las industrias de manufactura avanzada y la movilidad.

5 minutos de lectura 1 may. 2018

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  • A and D Edge Driving growth through emerging markets (pdf)

Regulatory, infrastructure-related and geopolitical challenges create hurdles for their operations and investments, but the opportunities are large.

In recent years, the global aerospace and defense (A&D) market has undergone a transition, in which leading players are pursuing opportunities in emerging and developing economies to address the pressure of declining business in domestic markets.

During 2012–16, defense expenditure by the US, the top defense-spending nation, declined at an average annual rate of 2.4% (although the proposed budget for 2019 recommends a significant increase). Defense expenditure by Europe has increased at a 1.2% compound annual growth rate (CAGR) during the same period.

While growth in defense expenditures by developed economies is sluggish, emerging economies, especially in the Middle East and the Asia-Pacific, are gaining importance among defense equipment manufacturers. Expenditures by countries in the Middle East and Asia-Pacific are driven by the ongoing need to monitor rising terrorist activities coupled with unstable geopolitical situations.

What are the key emerging markets for A&D?

Defense expenditure by a country is very strongly correlated with its GDP. Among the top 15 countries in terms of defense expenditure, six countries — China, Saudi Arabia, India, Russia, Brazil and Turkey — are emerging markets. These markets have an average expected GDP CAGR of 4.5%, during 2017–20, as compared to an average of 1.9% for developed economies.

In addition, other key factors, such as political stability, terrorist activities and relationships with neighbors, also play an important role in determining the level of defense expenditure of a country. Among emerging markets, countries with greater political instability and higher vulnerability to terrorist attacks tend to spend more for defense purposes.

Given the increased defense spending in the emerging economies, companies continue to seek opportunities in these markets. Furthermore, the governments of most of these countries are seeking to modernize their armed forces. They are also focused on developing their local defense manufacturing base and encouraging global majors to invest in their local industries.

In commercial aerospace, these markets, especially China and India, would drive demand for new aircraft deliveries over the next two decades. This makes it beneficial for manufacturers to expand their operations and grow their footprint in these markets to bring their businesses closer to where their customers are.

However, some of these emerging markets are closed markets, thereby providing limited investment opportunities for foreign defense players — nevertheless, they still remain among the top countries in terms of defense spending. The growth of their domestic defense markets would be important to watch for. Furthermore, trade relations among these countries play a critical role in these markets.

How can A&D companies expand their footprint in emerging markets?

Here are some of the key strategies adopted by global A&D players to compete in these markets while contributing to the development of the local industries:

  • Set up local manufacturing centers and build a local supply chain
    A&D companies are entering into partnerships with local players. While foreign A&D firms can increase their geographic presence and reduce cost of production through these partnerships, the emerging countries benefit from enhanced capabilities and employment. A&D companies are also roping in local players from emerging countries as their global suppliers.
  • Focus on aftermarket opportunities in emerging markets
    Most of the emerging countries have a fragmented and uncoordinated A&D aftermarket, characterized by an inexperienced workforce, immature logistic network and regulatory oversight challenges. However, rapid growth of air traffic in these markets is expected to fuel demand for MRO services, opening up opportunities for foreign players.
  • Engage in contracts involving technology transfer
    Emerging countries are increasingly seeking to enter into defense contracts. This involves technology transfer from foreign A&D players to strengthen their indigenous manufacturing capability. Foreign companies that share technologies with these countries enjoy enhanced collaborative opportunities for the developing local research, manufacturing and aftermarket capabilities in the local market.

A leading aero-engine manufacturer has partnered with a Turkish player for design, development engineering and production of engines for military transportation aircraft. They have also set up a tech development center in the country focused on developing new repair methods and using advanced welding and robotic technologies for engine repairs.

  • Set up R&D and innovation centers in emerging markets
    Most of the emerging countries have a fragmented and uncoordinated A&D aftermarket, characterized by an inexperienced workforce, immature logistic network and regulatory oversight challenges. However, rapid growth of air traffic in these markets is expected to fuel demand for MRO services, opening up opportunities for foreign players.
  • Contribute to the development of a local talent base
    Many emerging markets possess a significant gap between availability of skilled A&D workers and their market demand. To address this challenge, foreign A&D players are increasingly undertaking training initiatives by partnering with government and private firms in these countries. These facilities enhance local talent in the region, in turn improving the availability of skilled labor for foreign firms.

A US-based A&D firm has launched an apprenticeship program to support aircraft maintenance skilling initiatives in partnership with one of India’s government-owned enterprises’ engineering wing and the Indian Ministry of Civil Aviation to develop a skilled aviation workforce, anticipating increase in demand for new aircraft in the near future.

Resumen

Foreign players should take the potential roadblocks seriously while defining their market entry strategies and designing their route map for expanding in emerging economies. But with the right plan, the opportunities can outweigh the risks.

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Por Randall Miller

EY Global Advanced Manufacturing & Mobility Leader

Apasionado por la manufactura, la movilidad y la disrupción. Responsable por la diversidad e inclusión de las mujeres en las industrias de manufactura avanzada y la movilidad.