Going East

Skilled workforce and low costs tempt Western manufacturers

The lure of China and India – as low-cost manufacturing centres, technology hubs and burgeoning markets – is appealing to more and more aerospace companies. Several first-tier suppliers used Paris to talk about their expansion plans in the world’s two most populous countries. In China it is as much about gaining a political foothold and meeting “soft” offset requirements as about pushing down production costs or winning customers directly. In India, the growing middle-class pool of talented, English-speaking graduates and looming economic liberalisation are tempting Western investors.

Expansion plans

Equipment manufacturer Smiths is considering further expansion of its manufacturing site in China. The company recently began phase 2 manufacturing at its Suzhou plant in the Jiang Su province. Aerospace division president John Ferrie says: “We’ve doubled our facility in China and we’re contemplating doubling it again. We’re going to move on to composite components, more sophisticated aircraft structures, more sophisticated machining and actuation assemblies.”

Toulouse-based Latécoère is also forging closer links in the Far East, announcing at the show that it has signed a memorandum of understanding with China National Aero-Technology Import and Export Corp to bid for work on the central fuselage section of the Airbus A350.

Gareth Evans, of the UK-based AT Kearney consultancy, said in Paris that, as the trend grows, Western companies are having to offer “innovative offsets” in the form of skills and capability transfers as the price for accessing new Asian markets and capturing cheaper sources of supply. But he adds that companies increasingly run the risk of “cannibalising their core competencies” by shifting them to areas that may undercut them in years to come. Deciding now which core technologies and skills to protect is vital, he adds.

Airbus has already outlined its plan for increased Chinese involvement in its latest aircraft programme – in January it announced that it was offering China’s aerospace industry a 5% risk-sharing stake in development of the A350. Airbus chief executive Noel Forgeard said at the time that by 2006 outsourcing to China would have increased fourfold since 2000, and would double again by 2010. The company is opening an engineering centre in Beijing this year, which is set to employ 200 engineers by 2008.

The move east is not limited to manufacturing. “It makes a lot of sense to site MRO [maintenance, repair and overhaul] facilities near where aircraft will be flying so I can see big growth in the MRO sector in the Far East,” says one London-based analyst, who adds that the projected increase in domestic air travel in China and India is likely to provide business for the growing number of joint ventures between MRO providers and local airlines.

India’s boom

Snecma Services is looking at India as a potential location for an engine repair shop joint venture. Speaking at Paris, vice-president customer operations Pierre-Emmanuel Gires noted: “At this time our objective is to be closer to our customers. India is clearly a booming market and we are investigating the various possibilities.” Evans agrees that MRO facilities can offer “faster payback”, by avoiding the scale of initial investment required for manufacturing facilities.

The cost benefits available to Western companies looking east for their new facilities are clear: Ferrie says the company can achieve as much as a tenfold saving on manufacturing costs and a fivefold saving on the cost of employing qualified engineers in China.

But Evans emphasises that, given the time, effort and resources needed to establish joint ventures, partnerships and facilities, simply looking for cheap labour must not be the only reason for expanding eastwards: companies must also be looking to “create a strategic footprint” in the region and the challenges associated with this should not be underestimated.

The move east is not all plain sailing, although observers agree that the trend is growing: one analyst argues that technological capability will be a barrier to entry to the Asian markets for many. Although some areas can provide a highly trained workforce with significant cost savings, Western companies are likely to be limited to taking advantage of cheaper labour for component manufacturing. The transfer of work is unlikely to progress further up the supply chain given the political importance for Western governments of maintaining first-tier companies domestically.

And a “latent concern about intellectual property rights” may remain, says Evans.

HELEN MASSY-BERESFORD

Source: Flight International