Imminent changes in ownership at key suppliers are predicted for the fast-growing gas turbine components market in a survey by UK-based Counterpoint Market Intelligence.
Its study of 124 international suppliers finds that the upswing in the engine components market, which was worth $15.1 billion in 2004 and is predicted to grow at 6.5% annually to 2009, will result in some companies being sold as owners seek to capitalise on their interests. The overall gas turbine market, including industrial gas turbines, was worth $67 billion in 2004, Counterpoint estimates.
The report, World Gas Turbine Components Market, says that for those who remain in an “increasingly hierarchical” market, the desire of the prime engine manufacturers to deal with a smaller number of suppliers means “ensuring highly efficient management of lower-tier suppliers, gaining proprietary [industrial] processes, being prepared to invest in low-cost geographical areas, and either accepting risk- and revenue-sharing partnerships [RRP] or building a sufficiently strong position so that RRPs can be resisted”.
Counterpoint co-founder George Burton says: “We expect the trend towards consolidation will continue at all levels in the supply train.”
Economies of scale, the inability to trade profitably in an undifferentiated market, price pressure from above and the increasing complexity of technology, are all factors that will drive consolidation.
Changes of ownership are already in the wind, with Germany’s MTU having been floated by its private-equity owner KKR. Other major suppliers facing possible sale include Avio (majority owned by the Carlyle Group), Firth Rixson (also Carlyle) and Doncasters (owned by Royal Bank Private Equity). “We conjecture that the latter two are likely to be sold during the current upswing,” says Burton. “Many other companies are potentially on the market.”
Several reasons for the forthcoming migration of work from the West are cited: the need to reduce costs by finding new suppliers in countries with low labour costs, such as Mexico (where Doncasters, GKN and Goodrich already have operations); gaining access to new markets such as China, where Rolls-Royce, for example, is setting up manufacturing operations for some components; and the willingness of some governments to supply development capital so that local companies can take on the RRPs that many Western suppliers cannot accept.
The report estimates that the sector will grow by around 6.5% over the next five years, with profits expected to improve, “but only for those in the right position and with the ability to differentiate themselves from the competition”, says Burton.
JULIAN MOXON/LONDON
Source: Flight International
