The Aerospace Industry: Prospects for Co-operation Among the IBSA Countries

Dr Mills SokoDirector, Mthente Research & Consulting Services (Pty)

Ltd.Senior Lecturer, University of Cape Town

SAIIA Research Associate

Overview

1. Project rationale & methodology.2. Global context.3. SA’s vision.4. Findings.5. Way ahead.

Project Rationale & Methodology

Purpose of report examine strategies for strengthening cooperation among IBSA countries in aerospace sector.– Based on in-depth interviews with

representatives of 5 SA aerospace companies.• Denel.• Aerosud.• Reutech.• Grintek.• African Defence Systems.

– Interviews informed by semi-structured questionnaire.

Project Rationale & Methodology

– Questionnaire covered 7 areas.• General.• IBSA economic relationship.• South-South cooperation.• Capabilities.• Value addition.• Role of government.• Threats.

– Also collected statistical information about aerospace companies.• Number of employees.• Annual sales.• Annual exports and imports etc.

Global Context

Aerospace industry key generator of wealth and driver of technological and economic development in industrialised countries.

Also crucial source of employment.– E.g. In 2000, European aerospace industry

employed 429 000 people. Global aerospace sector poised to expand

by 25% in real terms in next two decades to $250 billion per year.

Yet industry remains dominated by few economic powers.

Global Context

Company Country Annual sales (RB)

Military sales (RB) % Military

Boeing US 423 130 30% Lockheed US 235 188 80% EADS EU 210 52 25% BAE Systems UK 174 139 80% Raytheon US 156 125 80% Northrop US 79 56 70% Thompson CSF France 62 43 70% Finmeccanica Italy 35 17 50% Denel Aviation SA 1.6 1.4 88% SA Technical SA 2.2 0 0%

Annual sales of selected aerospace companies, 2000

Source: Paul Hatty, cited in A Strategy for Sustainable Economical and Growing Aerospace Industry, Pretoria: DTI, 2003

South Africa’s Vision

To develop aerospace sector as sustainable and growing industry by 2014.

To this end, government has sought to position sector as high-value global manufacturing industry and regional African transport hub.

DTI has unveiled Aerospace Industry Support Initiative (AISI) to bolster SA’s aeronautical, space and defence industries and encourage their full integration into global aerospace supply chains.

South Africa’s Vision

AISI seeks to achieve its objectives by:– Improving global competitiveness of

aerospace industry. – Providing an institutional platform for

encouraging partnerships and innovation among government, industry and academia.

– Identifying, developing and promoting the interests and capabilities of the SA aerospace industry.

Competitive Strengths

SA’s competitive strengths are in avionics, aerospace systems development, and production of airframes and engine components.

Other capabilities include inertial sensor systems, integrated logistical support and aircraft protection systems.

Findings: South/South Cooperation Currently very little or no aerospace

collaboration between IBSA countries. Respondents agreed on need for

coooperation, but important to clarify rationale for such cooperation.– Is the objective of cooperating to compete

with Boeing and Airbus? Or to have a sustainable high-tech industry that can provide skilled employment while making available tailor-made products to global manufacturers at reasonable prices?

Findings: South/South Cooperation Three areas of potential cooperation identified.

– First, expansion of aerospace supply chains, based on commercial opportunities offered by diverse capabilities of IBSA countries.• Premised on prospects offered by Embraer, Brazil’s

regional aircraft manufacturer.• From SA perspective, demand for regional aircraft in Africa

expected to grow in the future, with commercial carrying capacity poised to double over the next 6 years.

• Provides opportunities for provision of SA-based aircraft maintenance, modification and upgrade infrastructure to service regional African fleet.

• Also potential to create employment and spin-off companies.

Findings: South/South Cooperation

– Second, collaboration on aerospace systems in support of strategic defence needs.

• Global trend towards industrialisation of defence production offers opportunities for integrating domestic defence industry with global supply chains via international srategic alliances.

• SA engaged in discussions with Brazil with view to upgrading/replacing some of Brazil’s ageing airforce hardware – mainly fighter jets, but also supporting sub-sytems.

• Grintek made progress in entering Indian defence market – supplies Indian fighter aircraft with self-protection systems.

Findings: South/South Cooperation

Third, collaboration around small and micro satellites.– Brazil and India have strong competencies in

small and micro satellites, including launching capability.

– SA has small but reputable small and micro satellite industry and ground support infrastructure.

– Respondents called for more integrated approach in these fields.• Exchange expertise and technology platforms, and

foster closer working relationships between public and private sectors in IBSA countries.

Findings: Capabilities

Scope for developing better technological capabilities in aircraft and aircraft components production.– SA aerospace industry could exploit its competitive

niche areas to integrate SA manufacturers with Brazilian and Indian aircraft production sectors through, for example, risk-sharing development and government-supported marketing efforts.

– Concern that although IBSA countries have infrasctructure to develop vibrant aerospace sector, there was a lack of funding, a lack of defence coordination, and uncertainty about markets prepared to buy from IBSA grouping.

Findings: Capabilities

SA’s infrastructure capabilities vary: – Skilled personnel.

• SA universities offer useful courses.• Aviation baseload underpins appoinment of new

engineers. • Companies determined to further improve

industry’s skills base• E.g. Aerosud plans to increase staff from 200 to

700 within 2 years to meet contractual obligations, has been investing in skills training in partnership with DTI & DST.

– R&D spending low, but growing thanks to AISI programme.

Findings: Capabilities

– Insufficient investment in manufacturing facilities and capital equipment.

• Some companies, especially Aerosud, have led the way in investing in modern production methods and in increasing production output.

– Insufficient financial resources. • The IDC is willing to offer financial support,

provided a viable business case is made.

Findings: Value Addition

Europe and US high-cost manufacturers.– This offers oportunities for emerging economies.

• But important to note that aviation is a high-risk business requiring very large upfront investments with long-term break-even times.

Value addition instruments most likely to yield optimal benefits.– Boosting R&D.– Shared research.– Joint marketing arrangements.– Technological exchanges.

Findings: Role of Government

SA government’s approach to aerospace industry pro-active.

Government’s role is to:– Provide aerospace sector with strong

direction.– Collaborate with IBSA countries on projects.– Address concerns around import duties,

tariffs, manufacturing and investment incentives, and transaction costs.

– Provide subsidies for collaborative investment and manufacturing programmes.

Findings: Challenges/Threats

Corruption allegations levelled at Denel by Indian government.

Competition vs. Cooperation – Can IBSA countries develop common interest? Need for ‘win-win’ focus projects.

Problem of over-capacity and declining defence expenditure in Brazilian and SA defence industries.

Indian/Brazilian attitudes to SA government’s BEE policy.

Can SA’s Airbus/A400M strategy be balanced against imperative of South-South cooperation?

Way Ahead

Clear interest in SA in proposed aerospace programme.

DTI offered to host preliminary meeting of aerospace players in IBSA countries to explore ideas, proposals, plans and strategies that can take aerospace initiative forward.

Thank You