iacc's indo-us resurgence summit strengthening the aerospace ecosystem strictly private and...
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IACC's Indo-US Resurgence SummitStrengthening the Aerospace ecosystem
www.pwc.com
Strictly Private and Confidential
2 December 2013
PwC2 December 2013
Key Messages
Government support is essential to build an aerospace industrial base
Align policies for synergies eg eligibility of a WOS as IOP
Rationalise indirect tax provisions for ‘level playing field’ and encouraging MRO
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2
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Simplify and clarify export procedure4
FDI Cap5
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PwC2 December 2013
Key Messages
Clarity on equipment that requires an industrial licence
Strategically leverage Offset policy eg multipliers for FDI in manufacturing, credit for domestic sales
Companies need to invest and build capability for the long haul
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7
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Collaborations with global players essential 9
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PwC2 December 2013
Indian defence aerospace market continues to offer significant opportunity
IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem4
• IAF has completed the first phase of its 15-year modernization plan that began in 2006
• IAF envisages that it will procure assets worth more than 38 billion USD over the next two plan periods, thereby completing approximately 75% of its modernisation programme by 2022
• India ranks among the top 10 countries in the world in terms of military expenditure and is one of the largest importers of conventional defence equipment as it strives to modernize its forces and replace obsolete equipment
PwC2 December 2013
Recent policy changes in civil aviation and market potential has attracted OEMs, foreign airlines and domestic operators
IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem
• Indian aviation sector has continued to experience high passenger growth over last few years
• Total domestic passenger traffic in India grown at a CAGR of over 15.8% between 2010 and 2012
• India estimated to be among the top three aviation markets in the world by 2020.
• Currently, six domestic carriers operate in the Indian aviation space with a total fleet of over 400 aircrafts.
Challenges
• Volatility in fuel prices
• Steep depreciation of Rupee
• High taxes on ATF imposed by State Government (3% to 30%)
• High charges, poor infrastructure at airports
• Lack of promotion of Indian airports as transshipment hub
• MRO industry not taken off due to indirect tax structure
Recent entry of foreign players
• Singapore Airlines (SIA) – Has partnered with the Tata Group to target India’s full-service airline market, servicing both domestic and international routes
• Malaysia’ Air Asia plans to enter the low-cost carrier space in India, in partnership with the Tata Group and Telestra Teleservices
• Etihad Airways is in discussions to buy a 24% stake in Jet Airways to target the market's growing potential
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Jan Feb Mar Apr May Jun Jul Aug Sep0
1
2
3
4
5
6
3.28 3.29 3.12 3.24
3.833.64 3.54 3.6 3.46
5.024.79
5.07 4.99
5.58
4.9 4.765.15
4.46
2009
2010
2011
2012
2013
PwC2 December 2013
The Aerospace market offers significant growth opportunities but each has its own set of challenges
IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem
Aerospace Value Chain
Funding needs
Very highMedium for
virtual systems
Low to medium
Medium to high
Very high Very high Low to medium
Low to medium
Medium to high
Medium to high
Technical capability needed
Very high High High Very high Very high High Low MediumMedium to
highMedium to
high
Manpower availability
Limited – but
increasing
Limited – but increasing
Yes, but insufficient
technical skill
Limited – Training support needed
No - high levels of training needed
No - high levels of training needed
Yes. Training needed
Yes. Training needed
Yes. High levels of training needed
Yes. High levels of training needed
Time till participation
>10 years 0 – 5 years 0 – 5 years 5 - 10 years >10 years >10 years 0 – 5 years 5-10 years 5-10 years 5-10 years
ConclusionVery
difficult to participate
EOS, IT participation
potential.
Participation potential exists but focussed efforts are required to succeed
No participation potential until significant capabilities have been developed and
integrated
Medium to high participation potential. There are multiple advantages to opening Asia based MRO
operations with relatively low investments needed
R&DEngg. Desig
n
Manufacturing
Risk Sharing Partners
Assembly /
Testing
Sales / Leasing
Aftermarket and MRO
Line maintenanc
e
Airframe heavy and
modification
Engine maintenanc
e
Component maintenanc
e
Other Tier 1, 2 and 3 suppliers
Integrators /
OEMs
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PwC2 December 2013
Global OEMs are quite entrenched in the Defence and Civil Aerospace markets
IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem
Finmeccanica
Aerospace and defence market landscape
Civil
AviationNSO (e.g. ONGC), private
Tourism, news,
emergency
3. Civil / commercial market
Ministry of Defence
ArmyNavy and Coast G.
Air force
1. Defence market
MHA and state
governments
CRPFBorder forces
Others (CISF)
State police
2. Homeland security market
Central Police Forces
Services
Engg. Design
MRO
Products
4. Support market
UAC*
Lockheed Martin
HAL
Northrop
BAE System
EADS
EU
US
Ind
ia
Ru
ssia
C 130J TAS** M&M
Hawk, Jaguar
HAL
AW119
Tata
DRDO, HAL
A320, A330
EC135
MQ-4C
An-148 HALMIG, Sukhoi,
A-50EIMIG
Sea Harrier
Tejas,Dronier 228
AW101
Dronier 228, HJT
Rudra, LCH
Mi-17
Dhruv, Cheetah
1.Export market potential will be highlighted at a high level only; 2. Aero structure market potential has been illustrated based on end user potential for aircrafts and helicopters; *United Aircraft Corporation's **Tata Advanced System Note: The list of aircrafts is indicative. The list of players in Indian market is not exhaustive
Boeing C-17P-81
737, 777, 787
Partner: TCS, IIT
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PwC2 December 2013
However, the Indian players are largely confined primarily to low end activities
IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem
DesignComponent
ManufacturersAssembly
Aftermarket
High
Low
Complexity
• Design of complex structures and components
• Mission-critical software, product life-cycle management
• Testing services
• CAD design and documentation
• Procurement assistance
• Other Eng. Services (IT)
Tier 1 Suppliers
• Power plant and propulsion devices
• Avionics
• Landing gear assemblies
• Critical firing control
Tier 2 Suppliers
• Hydraulic systems
• Electrical power systems
• Surveillance systems
• Display systems
Tier 3 Suppliers
• Castings and forgings
• Structural sheet metal components
• Wiring, cabling, etc
• Final assembly
• Body
• Solution design
• Spare parts
• Service and maintenance
• Inspections
• MRO
• Logistics solutions
Current positioning of Indian suppliers
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PwC2 December 2013
There are adjacent opportunities the global and domestic players can pursue in the Indian Aerospace market
IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem
Aerospace and defence market landscape
Civil
AviationNSOs1, PSUs2, private
Tourism, news,
emergency
3. Civil / commercial market
Ministry of Defence
ArmyNavy and Coast G.
Air force
1. Defence market
MHA and state governments
CRPFBorder forces
Others (CISF)
State police
2. Homeland security market
Central Police Forces
Services
Engg. Desig
nMRO
Products
4. Support market
Ad
dit
ion
al
/ A
dja
cen
t op
port
un
itie
s:
• Aircrafts: Significant planned procurement of military aircrafts over the coming years
• Missiles: India is strengthening its missiles capability - cruise, aircraft mounted, surface to air
• UAVs: Increasing focus on purchasing UAV’s for different wings of armed forces (recon, attack), and MHA (police, anti-Naxal operations, emergency)
• Passenger and cargo: Expected to grow significantly with increasing growth in air traffic / growing economy
• Helicopters: Apart from huge potential market in defence (attack, transport, recon), applications like emergency medical services, news coverage, fire-fighting and law enforcement present a tremendous opportunity. NSOs dominate the market with 75% of the civil market, followed by government and private
2. Apply defence technologies for home & civil applications
1. Penetrate with defence portfolio
• MRO: Growing Indian market, saturating international MRO facilities, need for low cost destination to offload work
3. Extend horizontal capabilities / partner
Priorities in India
• Integrated surveillance and security solutions: Borders, sensitive installations, cities / towns
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PwC2 December 2013
We see the Aerospace companies go through three stages of growth in India, which can be expedited with greater policy support
IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem
Phase I:Create Foundation
Phase II:Growth
Phase III:Home Market
• Ensure business sustainability
• Make functions and ops scalable
• Refine organization structure
• Brand & product strategy• Support global supply
chain
• Expand in the Indian market
• Manage talent and quality challenges
• Grow with customers, industries
• Focus on adjoining sectors• Focus on new products not
offered in India
• Leverage India capabilities as home market
• Service nearby countries using local supply chain to service global requirements
• Leverage India as a global R&D and design hub for global product development
Phase 0:Market Entry
Foundational Assets
Trajectory of growth
• Establish presence in India
• Develop organization structure
• Make choices supply chain• Develop functions to
support business (HR, Finance, etc)
Northrop Grumman, Rolls Royce, L&T, TATA, Mahindra, Walchand
GEAxelTech Dassault, EADS, HAL, BEL
Local Knowledge Government Relationships Licence to operate
New Wave‘Originate’
First Wave‘Export’
Second Wave‘Regionalise’
While the Indian Aerospace and Defence industry moves from an initial phase (onset of govt. support, complete reliance on imports), to a growth phase (supporting govt. policies, shift towards domestic production, technology transfer, entry of large private players, SMEs), it still has distance to travel to get to a mature phase (high indigenization, R&D, consolidation and a buyer’s market). While companies manage their own growth, they will have to keep pace with the industry and its changing nature
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PwC2 December 2013
Enhanced policy support: However, we need to work more to develop a synergistic policy regime
IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem
• ‘Indian enterprise’ not defined
• Lack of clarity on the eligibility of a WoS for offset credits
• ‘Defence equipment’ not defined
• No clarity on ‘dual-use’ items for civil and defence application
• Long and uncertain time lag for obtaining an IL
• 26% cap restricting investments
• Problematic conditions regarding ownership and control by resident Indian citizens of a listed company
• Conflicting views in GoI on the definition of direct and indirect FDI
• Lack of tax incentives to Indian vendors
• Taxes in the domestic supply chain adding to costs
• Indirect tax structure favouring export of goods and direct imports by MoD vis-à-vis local supplies to MoD
DPP 2011 Industrial licence
• Lack of clarity on whether export/import licence is required for a ‘dual use’ item
• Long and uncertain time lag for obtaining export/import licence
• Absence of list of ‘friendly countries’ for free export
FDI policy Export and import policy
Tax regime
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PwC2 December 2013
Conclusion – Govt support essential for building aerospace industry
IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem
At macro level Benchmark against other countries Create a clear demand profile and
streamline procurement Remove ambiguities in licensing and
export policies Bring clarity on the definition of
defence equipment Focus on limited platforms to build a
vendor base Policy incentive and clustering for
MSMEs Align policies to create synergies Procurement and governance
improvements Cost of capital to compete
At company level Build capabilities for the long
haul Build capabilities for the global
supply Chain Acquisitions and partnering to
enter and grow Lead with the engineering design
and IT areas to build Become a fabric of the industry
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The information contained in this document is provided 'as is', for general guidance on matters of interest only. PricewaterhouseCoopers is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.
© 2013 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
Thank you
Dhiraj MathurExecutive DirectorNational Leader, Aerospace and DefencePricewaterhouseCoopers Pvt. Ltd., India
Tel: +91 124 3306042Mobile: +91 9958419296Email: [email protected]