Indian aerospace industry opens up

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India is fast becoming a major global aerospace market, aided by a combination of increasing defence spending, a booming commercial aviation market, and rising technological and manufacturing capabilities among local companies.

Comparisons with China, a major supplier for several OEMs and where AVIC, the state-owned manufacturer had a several-decades head start in manufacturing military and civil aircraft, are almost inevitable.

There will certainly not be the equivalent of Japan's Mitsubishi Heavy Industries or Kawasaki Heavy Industries - which are tier 1 suppliers for the likes of Boeing - any time soon. Even tiny Singapore, through maintenance, repair and overhaul firm ST Aerospace, has a company with a bigger global presence.

indian air force dhruv helicopters, rex features
 © Rex Features

 

However, almost every major Western aerospace firm wants to establish a presence in the country that is one of the largest markets for both civil and military aircraft. Stringent offset requirements in fulfilment of those tenders, a government that is keen to create a manufacturing hub, and indigenous firms with greater freedom to set up partnerships and participate the sector - and establish a niche in the global supply chain along the way - all help to boost this.

"The Indian aerospace industry is one of the fastest-growing aerospace markets in the world with an expanding consumer base comprising airlines, businesses and high-net-worth individuals. The rapid growth of this industry has attracted major global aerospace companies to India. All segments in the aerospace industry, including civil and military aviation and space, are showing a significant level of growth," analysts from PricewaterhouseCoopers said in a 2009 report.

Frost & Sullivan, a research firm, says that since 2005 air traffic has grown by 18%, the cargo market has increased by 14% and overall passenger movement by 20%. Despite the downturn, international and domestic aircraft movements could grow by 13% and 14% respectively over the next seven years. Passenger growth is projected to be 20% domestically and 16% in the international segment, while cargo expansion of 12% and 10% is expected in the domestic and international markets.

COMMERCIAL AIRCRAFT DEMAND

Boeing has projected a demand for 900-1,000 commercial aircraft worth $100 billion over the next 20 years. In the near term, PWC forecasts that there will be $25 billion spent on commercial aircraft and $100 billion on defence until 2014. All of these will factors will drive the growth.

Apart from government support, India's advantages are its relatively lower costs, the availability of talent, the capability that its information technology firms offer, and its location between the major markets in east Asia, the Middle East and Europe.

Before 2000, state-owned firms such as Hindustan Aeronautics dominated the local market. These companies also helped the development of an indigenous aerospace industry by subcontracting much of their work to other firms in the country. As a result, private sector firms such as Larsen & Toubro, Mahindra & Mahindra and the Tata Group began to acquire the capabilities in the market as well.

The doors inched open a little bit in 2001, when the government allowed 100% domestic private investment in the defence sector upon obtaining an industrial licence and foreign direct investment of up to 26% with conditions. The rules have been further relaxed over the past three years in the defence sector, with the private sector now allowed to become Tier 1 suppliers in military contracts and giving foreign firms greater flexibility in their choice of local partners.

The maintenance, repair and overhaul market could be a major beneficiary, with PWC estimating that it will grow by 10% annually and reach $1.17 billion by 2010 and $2.6 billion by 2020. PWC estimates that the aerospace industry spends more annually on MRO than on manufacturing or research and development, and the rapid growth of India's airline industry means that demand is increasing.

Indian labour costs are an advantage, says Frost & Sullivan, at $30-35 per man-hour. This compares with $55-60 in South-East Asia and Middle East and even higher in the USA and Europe. "India has the potential to service not just Indian aircraft, but also those from neighbouring regions," it adds.

Local firm Air Works wants to take advantage and plans to invest $120 million over the next three years to expand its existing MRO facilities and set up new ones. It has also signed a lease agreement with another local firm, Taneja Aerospace, to use 2.8Ha (7 acres) of land and up to five hangar spaces on a long-term basis.

air works mro, air works
 © Air Works

Apart from offering base maintenance, it plans to service engines and components. "We will need another $100 million and a strategic partner about a year-and-a-half down the line as we get into sophisticated engineering," says Fredrik Groth, chief executive of Air Works.

Airbus and Boeing announced plans to set up MRO facilities in the country a few years ago after selling aircraft to Indian and Air India respectively. National Aerospace of India, the holding company that was formed after the merger of the two carriers in 2008, will now undertake these projects.

Work is expected to begin later this year on the long-awaited Air India-Boeing joint venture in Nagpur, but Airbus potentially has the larger facility in New Delhi. This will begin with two A320 hangars, with a third narrowbody hangar to be added later. This will have facilities for widebodies and eventually will service more than 200 aircraft from customers in India and abroad.

The government has also said that aerospace will be one of the pillars of its attempt to boost India's manufacturing base. Several special economic zones dedicated to the aerospace industry are in the works, offering attractive tax and financial incentives for investors, although the economic downturn may have temporarily resulted in some of them being scaled back or delayed.

As manufacturing requires heavy investment in facilities, Hindustan Aeronautics remains the leader in India with its 19 production units. It has manufactured 26 different types of aircraft, mostly military, through indigenous development and licence-production deals. HAL also supplies components for the major companies - it produces Airbus A320 doors and has been contracted by Boeing to produce composite 777 flaperons.

"The composite 777 flaperon that HAL will produce represents a significant leap forward in technological capability, and supports Boeing's strategy to work in partnership with India's aerospace industry for the long term," says Boeing India president Dinesh Keskar.

For HAL, the contract is an opportunity to show that it can step up and become a major player in the aerospace industry. "We are delighted that our strengths in composites are getting more international recognition," says Soundara Rajan, director, corporate planning and marketing at the company. "Showcasing HAL's composite manufacturing capability on one of the world's premier long-haul commercial jets positions us for even greater opportunities at the forefront of technology."

air india 777, boeing
 © Boeing

TATA PLANS

Others, however, are coming into the fray. Tata, an Indian conglomerate with a long history in the manufacturing segment, has plans to set up an aerospace production facility at its forthcoming special economic zone in Hyderabad. In January, Tata signed a contract with AgustaWestland to assemble the AW119 in India. Sikorsky and Tata agreed a deal in November to manufacture components in India, building on a June 2009 contract for Tata to assemble the Sikorsky S-92 helicopter cabins.

"Sikorsky's affiliation with Tata both strengthens our supply chain and extends our globalisation effort to establish significant operations in regions where the need for rotorcraft and support is great. India is certainly a key aerospace region, and we are thrilled to team with Tata and help serve and grow the business there," says Mick Maurer, senior vice-president of operations for Sikorsky.

EADS outsources $126 million worth of aero infrastructure and engine components each year to Indian vendors and expects that to rise to $1.3 billion annually by 2020. "As part of its industrial strategy, EADS is aiming to increase sourcing volumes in India either directly or in co-operation with Indian partners," says the European aerospace and defence conglomerate. "Establishing partnerships with Indian public and private sector organisations and direct investments are a key part of EADS's industrial strategy."

EUROCOPTER PARTNERSHIP

EADS's helicopter subsidiary Eurocopter has had one of the longest partnerships with Indian industry. Since 1962, it has worked with HAL in India to manufacture more than 600 Alouette 3 and Lama (known as Cheetah and Chetak locally) helicopters. HAL also produces airframes for the Ecureuil/Fennec family of rotorcraft. The European firm also plans to set up pilot training facilities in India for the civil and military segments and plans to invest €7-8 billion ($9.5-11 billion) over the next 10 years.

"India has an inherent edge over several other nations because of higher skills and lower costs of production. This makes India an ideal partner for Eurocopter as we are in the process of diversifying our global supply chain across the world. Over the next few years our association with India can be expanded into momentous industrial partnerships and co-operation," says Eurocopter.

sikorsky s-92, sikorsky
© Sikorsky
 Sikorsky and Tata agreed a deal in November to manufacture components in India, building on a June 2009 contract for Tata to assemble the Sikorsky S-92 helicopter cabins

"We shall continually strive to expand our footprint in India. To ensure that our customers receive the best end-to-end support in the country, it requires investment. This investment will help us create the right infrastructure to support our overall goal with respect to India. It will also help us create a skilled labour force that will in turn help build India's domestic capability."

Given their rapid growth over the last decade, it is perhaps no surprise that Indian software companies such as HCL, Infosys, Infotech, Tata Consultancy Services and Wipro have been active in the aerospace industry for several years. Increasingly, they are benefiting from the engineering services outsourcing programmes that PWC says will help India evolve from IT and low-end business process outsourcing work to high-end design services. Overseas companies view the Indian companies as "long-term partners and not as mere suppliers/vendors", it adds.

Honeywell Aerospace, which provides integrated avionics, engines, systems and service products for the aerospace industry, is one example. The US company has a design and development centre in India that it hopes to expand in the coming years.

In 2006, Airbus set up the Airbus Engineering Centre India in Bangalore where local engineers help develop capabilities in modelling and simulation, covering areas such as flight management systems and aerodynamics, to help in the design and production of aircraft such as the A380 and the A350. It is also working with Indian IT firms such as CADES, HCL, Infosys, Quest and Satyam to offer support across various aircraft programmes.

"IT and engineering majors also play an important role in projects that involve a transfer of technology from the respective foreign counterparts; this has helped foster indigenous growth of the sector," says PWC. "The business models of these companies have also evolved from simple models to ones that are unique, innovative and that involve the sharing of risk."

But numerous challenges remain for Indian firms and their overseas partners. The central and state governments could provide "greater clarity" in policy and do more to cut red tape, says PWC, and industry bodies need to step up as a "mediator" between the companies and government agencies.

Infrastructure is another issue. There are numerous plans to arrest a dire shortage of proper roads and expressways, airports and port facilities, but these need to be accelerated as they have not kept up with India's economic growth of the last decade. Acquiring land for greenfield projects can also be a potential minefield, with some investor-friendly states facing opposition from local community organisations.

COMPLICATED TAXES

India's complicated framework of direct and indirect taxes needs to be rationalised. Presently, there are separate state and central government taxes - and these can differ wildly from one state to another.

"The indirect tax structure actually works against domestic manufacturers as compared to foreign vendors as mentioned above in tax and regulatory framework. Its effect is to provide incentives for only subsystem and component manufacturing in India, with final assembly and supply being carried out outside the country," says PWC.

Despite these, there remains plenty of optimism. The country that is registering an average 8% GDP growth, has a population that is projected to be the world's largest within three decades, is developing a rapidly expanding middle class, and aspires to be a major global economic and political power. These factors will continue to help the country's aerospace industry grow in the near future.

"The potential for future growth of air travel, both domestically and internationally. If you take a realistic and broad look at the India market, what resonates is that there is more positive than negative and the prospects for long-term growth remains high," says Keskar.