BRENDAN SOBIE / SINGAPORE
International customers, partnerships and domestic defence contracts are essential to South-East Asia's aerospace firms if they are to prosper or even survive
South-East Asia's major aerospace companies are looking abroad to fuel expansion at home and, in some cases, ensure their survival. Indonesian Aerospace (IAe) is trying to line up new international partners to support a drastic restructuring plan that proposes the start-up of several new aircraft manufacturing lines. Malaysia's Airod is looking to export several aircraft upgrade packages that have so far only been purchased domestically. Larger Singapore Technologies Aerospace (ST Aero) is also looking to secure international launch orders for several upgrade packages, and so far has been the most successful South-East Asian aerospace company in building an international business.
The three companies, the biggest in a region with a somewhat limited domestic market, say they may partner each other in the future to expand their capabilities for both regional and overseas customers. But regional politics make such partnerships difficult to forge and maintain.
Airod is instead now focused on bringing on BAE Systems as a potential investment partner. The company, 90% privately owned with the Malaysian government holding a 10% golden stake, is also studying a possible initial public offering.
Government-owned IAe is looking within Indonesia and abroad for the new capital it desperately needs to stay afloat. Some of this could come from other manufacturers, but IAe is mostly courting companies from outside South-East Asia such as China Aviation Industry Corporation II (AVIC II) and Poland's PZL.
ST Aero, publicly traded through parent company Singapore Technologies Engin-eering, is in a position where it can invest in companies or projects abroad. ST Aero will open a new joint-venture commercial aircraft maintenance centre in Chinathis year and is looking to open additional facilities in Europe and Australia. Closerto home, ST Aero president Tay Kok Khiang says the company would be interested in partnering or investing in other Asian companies.
"We are open minded," he says. "In today's world it is not safe to put everything in one basket. That is why we have traditionally been very diversified."
Commercial bias
ST Aero generated S$1.1 billion ($657 million) in revenues last year, with about 60% coming from commercial businesses and 40% from defence. In contrast, Airod and IAe rely on defence for the majority of their revenues.
IAe, formerly known as IPTN, generated only about $120 million in incomes last year, of which just $20 million was from aircraft maintenance. Unlike Airod and ST Aero, whose businesses are limited to maintenance and modifications, IAe counts aircraft manufacturing as its mainstay.
Airod's maintenance business is split roughly 50/50 between domestic and international customers and the company, which has not disclosed any financial information since 2001, is trying to expand its international portfolio further. Airod maintains all training, transport, search-and-rescue and VIP aircraft in the Malaysian air force fleet. Its international maintenance business covers Lockheed Martin C-130s and several engine types on the defence side and Boeing 737-200/-700s and Fokker F28s in its small civil unit.
Airod's modification business focuses mainly on the C-130, an expertise it acquired in the 1990s when Lockheed Martin owned a majority stake. Airod has stretched Malaysian C-130s and installed centre fuselage tanks and new avionics. But it is still trying to drum up launch export customers for all three modifications, with Middle East operators the main target.
"We're talking to a lot of people. A lot depends on funding," says new Airod chief executive Kamil Aziz, who on 1 January took over from Dato Rahim, promoted to president of Airod parent National Aero-space Defence Industries (NADI).
ST Aero is also trying to launch a C-130 upgrade programme with New Zealand and Singapore as possible launch customers. ST Aero is one of several vendors vying for a contract to be awarded this year by New Zealand for the upgrade of fiveC-130Hs, while Singapore plans to upgrade its fleet of 10 C-130E/Hs within the next few years. "The C-130 is a very big fleet in the world. Every year there is always some C-130 upgrade programme going on," says Tay.
Domestic competition
ST Aero already maintains C-130s for Singapore, the USA and several other operators. Airod maintains C-130s for Indonesia, the Philippines, Sri Lanka, Thailand and several undisclosed Middle Eastern countries. But many Asian countries are trying to build domestic C-130 maintenance capabilities - including the Philippines, Sri Lanka and Thailand. This trend could translate into a loss of revenues for Airod and ST Aero, but also provides potential partnership opportunities.
"We're of course eager to partner with any of these guys to help set it up," says Kamil. "We can't stop them - it's being driven by their own strategic and national interest. We'd like to be seen as an organisation that can support them and do more expensive types of things like upgrades and component support."
Adds Tay: "If a customer wants anything we'll do it, whether it will be able to help them build a capability, to train somebody [or] even to share some work."
Airod and ST Aero are also potential competitors for fighter upgrade packages. For example, Airod aims to launch a programme for the Northrop F-5, an aircraft ST Aero is now modifying for Brazil and Turkey. Airod must first win a contract in Malaysia to upgrade nine F-5s and then plans to select a foreign partner and later market the package internationally. A prototype Malaysian F-5F has been upgraded by the UK's Caledonian Airborne Systems, but Kamil believes Airod is well positioned to beat Caledonian for a contract to upgrade nine F-5Es.
"We think we'll be the logical choice," Kamil says, adding "there is a lot of interest" worldwide for F-5 upgrades. "I think the F-5 will be a good programme and we still think there's a market for it."
ST Aero, however, believes its F-5 upgrade line will close after it completes its current contracts with Brazil and Turkey.
"I think the F-5 packages are already a thing of the past," says Tay. "There are not many other F-5s in the world that are going to be upgraded. The Malaysians don't have much of an F-5 fleet. To do upgrades for 10-12 aircraft is suicidal. I'm not saying it cannot be done. It's always possible to do it for one aircraft, but it's not cost effective in my opinion."
ST Aero instead hopes eventually to expand into Lockheed Martin F-16 avionics upgrades, although Tay says such a launch is at least a year away because interested operators currently do not have enough funding.
Airod and ST Aero also have growing helicopter maintenance and modification businesses. ST Aero maintains and upgrades several Western helicopter types and is an authorised service centre for Agusta, Bell and Eurocopter. Airod's helicopter business focuses more on Russian models.
Airod has installed firefighting kits on Mil Mi-17s and has been contracted by Malaysia to install Western avionics on 10 Mi-171s. Airod believes it can later export these upgrades, given the growing fleet of Russian helicopters in South-East Asia. "It's a big area of interest right now," says Kamil.
Airod sister companies SME Aviation and Aviation Design are also adding Mi-171 assembly and upgrade capabilities as part of a push by parent NADI to expand its Russian ties. Sister company Aerospace Technology System Corporation (ATSC), formed in 1994 to support Malaysia's RSK MiG-29 fleet, is also looking to expand into MiG-29 avionics upgrades and Sukhoi Su-30 maintenance. Malaysia is considering outfitting its MiG-29 fleet with new Western avionics that are common with the systems to be installed on the 18Su-30s acquired last year.
IAe is similarly looking to bolster its ties with eastern Europe as Indonesia increasingly turns to manufacturers from this region for new defence aircraft. IAe aims to set up a regional logistics centre for Sukhoi fighters on the heels of the delivery last year of four Su-27/-30s. It is also trying to take advantage of increased trade between Indonesia and Poland by proposing a joint venture with PZL-Swidnik for licence- building SW-4 helicopters.
Economic summit
The SW-4 proposal, which could result in an agreement at this week's Indonesia-Poland trade talks, is one of several new ventures IAe is banking on as part of a new five-year business plan. IAe also seeks to licence-build Harbin Aircraft Industry Z-9A helicopters.
"We are discussing a licensing and risk sharing agreement with those two producers," says IAe managing director of commerce and business development Iwan Soemekto.
The SW-4 and Z-9A would help IAe fill the void left by the closure of its Bell 412 and Eurocopter BO105 production lines. But IAe needs PZL and Harbin parent AVIC II to cover the costs of setting up the new production lines because it has failed in attempts to secure its own loans.
For PZL and AVIC II to make such investments, the Indonesian government first must guarantee sales. IAe hopes the army will agree to acquire Z-9s, the police SW-4s and the air force additional licence-built Eurocopter NAS 332 Super Pumas. IAe has licence-built several Super Pumas for the air force, but needs to extend its licence agreement with Eurocopter to deliver an additional nine on back order. Eurocopter is now negotiating an extension with IAe, but has rejected an IAe proposal to also begin licence-building EC120s.
On the civilian side, IAe aims to develop a 19-seat turboprop with companies in Malaysia and potentially other South-East Asian countries. The new aircraft, dubbed the N219, will replace the 26-seat Casa-developed NC-212 as IAe's primary commercial aircraft project.
But IAe needs to line up $60-80 million to develop the N219, convince Malaysian companies to partner on the project and persuade local airlines to buy the aircraft. Industry observers doubt IAe can succeed in any of these efforts, saying Malaysian companies do not want to play secondary roles in the project as proposed by IAe.
"We have an existing relationship [supporting Malaysia's IAe-built CN-235s] but it's too premature to look at anything beyond that," says Airod's Kamil.
Observers also say private investors and potential local partners, only being courted after local banks last year rejected IAe's request for $173 million in loans, are skittish. While Indonesia's fast-growing regional airline sector could use small turboprops, sales will be tough given IAe's long history with failed projects, including the N2130 regional jet and N250 turboprop, and its uncertain future.
Island hopping
"Indonesia is a very big country. There is a lot of potential for island-to-island hopping. Whether they can sell externally is a separate matter," says ST Aero's Tay.
New IAe chief executive Edwin Soedarmo acknowledges customers are unhappy and that there is a huge image problem that must be overcome. "We need to improve our customer service," he says.
Financially, IAe needs new manufacturing lines and new partners to keep its 3,100 employees busy. "IAe needs to find a new partner soon, and I mean this year, or it will be dead," says one senior industry official.
IAe had 9,670 employees before a temporary shutdown in July, which coincided with the launch of a massive restructuring programme that is still being implemented. The shutdown was followed by an executive shake-up that included the hiring of Iwan and promotion of Edwin, the former director of IAe's engineering and research group. The new executive team claims it now has the government's support, which was lacking in recent years as the police and military shifted most of their maintenance out of IAe and asked for imported rather than indigenous aircraft.
"Building the N219 is a medium- to long-term project to develop the company," says Iwan. "In the next one-to-three years we need to rely on the old project, which is the CN-235."
IAe has a backlog of eight CN-235s, about half of which should be delivered this year, and is trying to sell additional CN-235s to Malaysia, Libya and Thailand. The company also hopes to expand its commercial aerostructures components business, which netted less than $1 million in revenues last year. IAe believes a new contract for small Airbus A380 wing components will contribute $20 million in additional annual revenues starting this year and it is bidding on a contract for Airbus A320 wing leading-edge components.
"We need to put something up for future growth before we go to privatisation," Iwan says.
Airod is looking at an IPO and is discussing a possible tie-up with BAE Systems that could result in it taking a 20-40% equity stake, or the forming of a joint-venture defence aircraft maintenance facility. BAE is now conducting due diligence and says a decision on whether to forge a deal should be made in the next two months. An infusion of funds from BAE or an IPO could help Airod push further into the international market.
Kamil believes Airod can compete internationally even against more established companies offering similar products, such as ST Aero. "Our focus is to meet customer needs and not just try to sell one package," he says. "It [the amount of competition] also depends on the type of upgrade. For example there are not many companies that do the [C-130] stretch. Only two other companies, Marshall Aerospace and OGMA of Portugal, have it."
But according to ST Aero's Tay, Airod's failure so far to export any of its C-130 upgrade packages is an "indication that while there may be a resolve do to something, it's not so simple.
"The question is are you able to retain the right mix of people and experience level? If not, you always will be nobody. Secondly, you must be able to gain international acceptance. That is a key thing because there are many other people offering the same job. The question is, who will you put your trust with?"
Tay says companies in the region generally have a lot of challenges to overcome: "They are trying very hard [to compete] and sometimes they may have a certain advantage of having committed work from the in-country requirements. But it's a long haul. It's not something you can decide to do tomorrow.
"The initial phase is to serve your national needs. Then the question is, are you able to expand to serve an external market? It's always possible, but there are a lot of considerations - among them political considerations and export licences - especially in the military business.
"Many countries build a defence budget based on commitments from OEMs because of industrial co-operation plans [ICPs] or programmes. My experience is it's never very successful. Most ICPs are wasted and that's why the Singapore government never had any ICPs in its programmes."
Source: Flight International
