1. The Aerospace Industry in Canada Salah Elatash Tanya DAmico Melissa McCartney Nicolas Murcia Stefan Pentchev

2. Tonights Agenda

Overview:Facts and Figures

Profitability of Industry

Embraer/Bombardier Trade Dispute

SWOT Analysis and Porters Diamond

Case: Bombardier

Conclusions

3. OVERVIEW FACTS & FIGURES 4. Canadas Aerospace Industry

What does the Aerospace industry engage in?

1- Manufacturing and services of aircrafts, aircraft systems and components.

2- Spacecraft, avionics, and other related electronics.

3- Ground-based infrastructures to support the operations of aircrafts and spacecrafts.

Furthermore,

Canada has a limited Defense Industry which includes a range of products and services from armored personnel carriers to command-and-control communication systems.

5. Canadas Aerospace Industry 6. Size of the Aerospace Industry

Canadian Industry ranked 5 thin the world

3 rdlargest manufacturer of civil aircraft

Comprises 700+ firms

• • • 400 aerospace

• • • 300 defense

Employs approximately 80 000 people

Generates revenues of about 21 billion

Occupies 6% of global market

7. Concentration of Aerospace Companies in Canada

Bombardier Aerospace the worlds third-largest aircraft manufacturer, controlling 47 per cent of world market share in 20-90 seat turboprop and regional jets

Pratt & Whitney Canada accounts for 34 per cent of world market share in small gas-turbine engines and dominates the global turboprop market

CAE the worlds largest supplier of commercial flight simulators, with more than 80 per cent of the global market share

Bell Helicopter Canada one of the worlds leading commercial helicopter manufacturer, accounting for 14 per cent of the world market

8. Industry Subsectors

Complete Aircraft

Aero engines & Parts

Aircraft Systems & Parts

Simulation & Training

Avionics & Mission Systems

Space Technologies

Earth Observation systems

Helicopters

Robotics

9. Geographical Distribution www.aviation-news.co.uk 10. Ownership structure Source : Statistics Canada 2002, Industrial Organization and Finance Division, Special Tabulation Assets Total Operating Revenues Canadian-Controlled 52 % 44.6% Foreign-Controlled 48% 55.4% U.S -Controlled 34.5% 42.1% Other Foreign-Controlled 13.5% 13.2% 11. Input-Output Analysis

In1990 for every additional $100 million of output from the aircraft and aircraft parts industry, output in the rest of the Canadian economy increased by an estimated $46.7 million

$100 million increase in aircraft industry output generates approximately 1,185 new jobs throughout the Canadian economy

12. Input-Output Analysis

Industry generated revenues of $21.7billion in 2004, of which 84percent came from exports

Contributed $9.2billion toward Canada's gross domestic product (GDP)(accounting for more than 5percent of Canada's total manufacturing GDP)

The industry invested more than $1.2billion on research and development (R&D) in 2004

13. 14. 15. Cost-Advantage Competitive Alternatives: KPMGs Guide to international business costs, 2006 Edition 16. Is the Canadian Aerospace industry profitable?

Revenues perspective:

Top 30 firms representing 95% of production

Bombardier represents about 45% of the industry's sales

Government is the main contractor for Space and Defence industries

Costs perspective:

Canada's defence-related research and development (R&D) is about $225million

Source: www.strategis.ic.gc.ca (Government of Canada) 17.

Compared to the manufacturing sector average,

Aerospace product and parts manufacturing value-added per employee was 24% higher

Average of 45000 Canadians at wage levels that were 35% higher

Aerospace product and parts manufacturing: Employment Source: www.strategis.ic.gc.ca (Government of Canada) 18. Employment projections 19.

The aerospace industry invested an average of $873million annually in R&D between 1994 and 2003, representing an average of 8% of industry sales

Aerospace product and parts manufacturing: R & D Source: www.strategis.ic.gc.ca (Government of Canada) 20. Capital investment inResearch and Development 21.

High export intensity

70percent of Canada's aerospace exports have gone to the US

annual exports averaged $8.9billion

Positive average annual trade balance of $1.7billion per year.

Trade and Competitiveness 22.

Embraer (Brazil) vs. Bombardier (Canada):

Compete for niche markets (ex: Business jet)and rely on taxpayer subsidies such as government loan guarantees by using dual-use regulations.

Canadawas granted authority to impose up to C$2.1 billion (U.S.$1.4 billion) in retaliation on Brazilian imports as a result of Brazils failure to comply with theAugust 1999 WTO ruling( www.csis.org )

The WTO has also found Canada guilty of providing illegal subsidies to buyers of Bombardier jets ( www.csis.org )

Unfair competitionfor the regional jet market?

Embraer has taken advantage of low labor costs and cheap currency

Bombardier has easier access to First World financing and technology

-Maurcio Botelho,Embraers CEO:

"The aerospace market right now is very sensitive to change."

-An industry advocacy group in Washington:

"Embraer is the risk-taking company that Bombardier used to be."

( www.time.com )

Trade dispute and Competitiveness 23. Canadas Aerospace Industry

The industry is currently facing numerous challenges, business focuses are changing

Now these demands have forced companies to focus more on process and product technologies, in order to come up with savings in product development, manufacturing and after-sales support .

It used to be driven by technological innovation, but now customers are demanding high reductions in costs, while also demanding greater technological and operational sophistication.

24. Canadian Strengths and Weaknesses

Strengths

• World leadership in key segments

• Globally connected firms with world product mandates

• Range of capabilities from OEM in-service support providers

• Lucrative R&D incentives

• Cost Advantage

25. Canadian Strengths and Weaknesses

Weaknesses

• Fragmented supply base

• Few proprietary capabilities at lower end of the supply chain

• R&D concentrated in a few firms

• Minimal domestic defense procurement and defense R&D leverage and spending

• Government support programs are limited and inconsistent

26. Opportunities and Challenges

Opportunities

• Strong after sales capabilities

• Supply chain productivity

• Sales financing policies and instruments

• Defense procurement policies are changing

• Investment & risk-sharing tools

• Public and political support

27. Opportunities and Challenges

Major challenges

• Value of $CDN relative to other currencies, esp. USD

• Productivity and competitiveness shortcomings

• Market access (US; procurement preference/influence)

• Access to civil programs driven by investment capacity; risk-share options

• New sources of competition (e.g. China, Japan)

28. Porters Diamond

Rivalry:

• Industry is becoming more and more dominated by big players.

• As costs increases SMEs are less able to compete.

Factor Conditions:

• Brain Drain. Shortage of skilled workers, especially educated ones.

• Good technological infrastructure.

• R&D needs improvement.

29. Porters Diamond

Demand:

• Defense industry demand is low.

• Demand is more external than internal.

Related and Supporting Industries.

• Large number of SMEs surrounding large companies provide support to them.

• Government plays role in providing environment for supporting industries.

30. Case in point - Bombardier

- The Cseries

• Announced 2005

• Original Entry 2010 Cancelled

• R & D costs

• • • Total - $2Billion

• • • Up to date - $120M

• • • 1/3 paid by CA, QC and UK governments

• • • Break-even point - 500 aircraft

• New Entry 2013 not launched yet

31. Case in point - Bombardier

• New R & D Issues

• • 15% Operational Cost Savings

• • Engine & Key Parts suppliers

• • Composite Materials

• Manufacturing Location CA, US, MX, UK

• Complex Coordination

• • Financing of R&D

• • Financing of Sales

• • Risk-sharing partners

• • Suppliers

• • Launch airline

32. Case in point - Bombardier

Competition

• On what? 3.4% profit

• New Entrants

• • Russia Sukhoi

• • • Agreement with Boeing

• • Japan MRJ Mitsubishi Heavy Industries

• • • COMPETITION ON TECHNOLOGY

• • • $1Billion R&D 1/2 of C-series

• • • 20% increased fuel efficiency

• • • Composite materials supplier for Boeing 787

• • China

33. Case in point - Bombardier

China

• AVIC I (state-owned)

• • 90-seat ARJ21-700 March 2008

• Cooperation with the Competition

• • Bombardier Invests $100M in R&D of AVIC I

• • AVIC I Invests $400M in R&D of Cseries and construction of new facilities in China

• Good Importer - Good Exporter

• Space Program

34. Case In Point Boeing C17

CA Government Order

4 planes - $3.4Billions

Regional Benefits =

100% of the Purchase Price

Distribution of Benefits by Provinces

35. Going Forward

Short-term emerging trends:

Differences among product market segments

Pacific market will exceed the U.S. and European markets, account for 1/3 of total value of aircraft deliveries

Strategies to reduce the risk through cost reduction efforts and to share that risk with suppliers and with former competitors.

Long-term trends:

The international aircraft manufacturing industry faces stagnant or uncertain markets over the next decade with more restructuring

aircraft and aeroengine development costs have climbed beyond the financial capacity of individual firms

36. Is the Canadian Aerospace industry attractive?

High entry barriers

Suppliers and buyers have weak positions

Few threats from foreign firms

Moderate to strong rivalry among competitors

Strong bargaining power of government

Source: McGillMGCR 423 37. Conclusion

High profit potential: Attractive industry

Aircraft industry is not particularly capital intensive; less than 20% of GDP

Dependent on dollar

Consolidation complicated by the high degree of offshore ownership

Demand for significant reductions in the cost, while at the same time demanding greater technological and operational sophistication

focus increasingly on process, as well as product technologies, in order to come up with savings in product development, manufacturing and after-sales support

For Canadian industry, one that is focused on niche and foreign markets and dependent on a weak Canadian dollar for a competitive advantage, the only demonstrably effective industry-specific government policy lever has been R&D assistance; R&D is the lifeblood of this industry.