Competition at home is threatening Malaysian aerospace companies
Malaysian aerospace companies are looking overseas and at the commercial sector to fuel growth, but at the same time are threatened by new competition at home.
National Aerospace Defence Industries (NADI) for years has been the dominant aerospace player in Malaysia, benefiting from government offset requirements and enjoying monopoly status in the military maintenance, repair and overhaul (MRO) market. But its subsidiary companies – which include military MRO and upgrade provider Airod, commercial aircraft MRO start-up Subang Aviation Services (SAC) and component manufacturer SME Aerospace – face intensifying competition just as it prepared for an initial public offering (IPO).
Kuala Lumpur last year broke NADI’s monopoly in the military MRO market by appointing DRB-HICOM subsidiary Defence Technologies (DefTech) the service provider of the Malaysian army’s new fleet of Agusta A109 light observation helicopters. The government is promising to tender all future military aircraft maintenance and upgrade contracts, which are also eyed by government-owned Composite Technology Research Malaysia (CTRM) and privately owned start-up Aetron.
CTRM is a fast-growing supplier of aircraft components that is trying to diversify its business by expanding into the maintenance and military sectors. Aetron was established late last year with subsidiary Piertrade vying for military MRO and upgrade work.
“The government wanted us to come in, stir things up and introduce some competition,” says DefTech aviation division head Nasir Ramly.
“It’s good for the government to mature the business, but I advocate competition,” says CTRM chief executive Rosdi Mahmud.
Airod chief executive Kamil Aziz, however, warns: “I don’t see Malaysia being so big a market you can have multiple players doing the same thing. If it’s a free-for-all I think everyone will lose out a bit... The time will come that local industries will need to be rationalised again.”
Airod already is reeling from the delay and cancellation of several local upgrade projects. For years it has been pursuing an upgrade contract covering Malaysia’s Northrop F-5 fleet and in 2004 upgraded one prototype with avionics supplied by the UK’s Caledonian Airborne Services and signed memoranda of understandings with Northrop Grumman, Smiths Aerospace and Thales. But last year the project was put on hold after a lawsuit was filed by Langkawi R&D Academy (LARDAC), which originally was awarded the upgrade contract with Caledonian in 2001. “We understand it’s still on,” says Kamil. “But the lawsuit by LARDAC has put a damper on the programme. It’s up to the government to decide.”
Airod was also selected in 2003 to install Western avionics on 10 Mil Mi-171 search and rescue helicopters that were to be acquired by the air force. But the government has not yet finalised the deal and Kamil says it is unclear when a decision will be made. Airod and sister company SME Aviation were expecting to assemble the helicopters in-country, but Kamil acknowledges a proposal to reduce the buy to four or six Mi-171s would make this uneconomical to pursue.
Opportunities
Airod was also expecting to win a contract to extend the service lives of Malaysia’s fleet of Pilatus PC-7 Mk I primary trainers. But in December Kuala Lumpur instead decided to phase out its 26 remaining Mk Is in favour of new PC-7 Mk IIs. Malaysia, which already operates nine Airod-maintained MkIIs, has agreed to purchase nine more and is expected to buy at least another seven within the next few years. Kamil says Airod still sees potential opportunities to partner Pilatus and may help Malaysia dispose of the Mk Is.
But Airod faces a challenge from Piertrade, which has partnered Aermacchi in a campaign to sell Malaysia new MB339CD trainers. Piertrade would also benefit if Aermacchi succeeds in selling a service life extension package for Malaysia’s existing M339As.
Airod’s traditionally strongest business, C-130 MRO and upgrade work, including the Rolls-Royce T56 engine, also is struggling. Kamil says Airod has not been able to find any foreign customers for its C-130 tanker and stretch modifications, which were launched earlier this decade for the Malaysian air force, and has had to put on hold its avionics upgrade project. Airod completed in early 2004 a limited avionics upgrade on three Malaysian C-130s, which was required for the aircraft to operate internationally under new global air traffic management standards. Malaysia was planning to launch last year a broader avionics upgrade covering its entire C-130 fleet, but the programme has not yet started. Kamil acknowledges Malaysia is reconsidering the need for a C-130 upgrade following the purchase last year of four Airbus Military A400M transports, but says “we believe it is more a funding issue” and the programme will eventually be restarted.
To offset a reduction in its domestic business, Airod is banking on contracts from Middle Eastern C-130 operators. Airod also needs to offset the 2004 loss of a US Air Force C-130 maintenance contract to rival Singapore Technologies and a reduction in business with Asian C-130 operators because MROs in the Philippines and Thailand have recently established their own C-130 overhaul capabilities.
Kamil says Middle Eastern C-130 operators continue to outsource MRO work and a few are interested in stretching their aircraft. But he warns it generally takes three to four years for air forces to approve new upgrade projects and “you can’t sell a modification internationally overnight,” he says.
“The Middle East is now the market,” says Aziz. “But you don’t want to go overseas to find out your in-country work is being outsourced. You need to find the right balance... to protect your domestic market share and go after international business too.”
Malaysia’s selection of DefTech as maintenance provider for the new A109LOH fleet was a blow to Airod, which is already an AgustaWestland service centre and maintains the Malaysia fire department’s fleet of A109s. DefTech will begin work this year on Malaysia’s new fleet of 11 A109 LOH aircraft, the first of which was delivered in December, and is aggressively pursuing new contracts, including the lease of two more A109s to the army for pilot training. “The government will have us in mind for future opportunities,” Nasir says.
To give it a hangar to initially service the A109s, DefTech last October purchased Dnest, a small general aviation MRO firm at Kuala Lumpur’s Subang airport. Dnest’s two hangars “will become a centre for MRO activities until we set up a larger facility in Bertam in the northern part of this country”, says DRB-HICOM Group managing director Saleh Sulong.
“To be in the aviation business we must have something physical to show. We thought [buying Dnest] is a jump start for us.” Saleh says the 23.5Ha (58 acre) Bertam facility will open late this year or next year and will initially house a $25 million to $30 million MRO business. A second stage of expansion envisions “the possible assembly of helicopters”, Saleh adds.
DefTech plans to sell and maintain all models of AgustaWestland helicopters, including potentially EH101s, which are being offered to the air force as replacements for its fleet of Sikorsky S-61s. DefTech is also proposing to operate A109s on behalf of the Malaysian Maritime Enforcement Agency and expects this agency to also consider acquiring Bell/Agusta AB139s. But Saleh stresses DefTech’s partnership with AgustaWestland is “non-exclusive” and DefTech aims to also maintain helicopters from other manufacturers, as well as fixed-wing aircraft. DefTech has retained Dnest’s business, which includes maintaining Piper and Bombardier Learjet aircraft, and has signed collaboration agreements with ATR and Russia’s Irkut, as well as AgustaWestland. “DefTech has been appointed the MRO for those 11 [A109] units and that’s just for now,” Saleh says.
DefTech, however, is not alone in chasing new contracts that historically would have automatically been awarded to Airod or other NADI subsidiaries. Eurocopter established a subsidiary in Malaysia in 2002 and opened in 2004 a maintenance facility at Subang. Last year it added a second maintenance facility at Miri and is planning to open additional facilities in Kota Bahru, Kota Kinabalu and Kuching.
“We’ve created 100 jobs in only three years. We’ve invested 25 million ringgit ($6.6 million) in the same period,” says Eurocopter chief executive Fabrice Bregier. “I think we can double those numbers in terms of investment and employees within the next few years.”
Eurocopter Malaysia’s business so far has primarily been limited to civilian helicopter sales and maintenance. But Bregier says Eurocopter Malaysia will also pursue military business over the next few years and will assemble the AS332 Super Puma should it be selected over the EH101 and Sikorsky S-92 in the air force’s S-61 replacement competition.
CTRM is also looking to expand into helicopter and fixed-wing maintenance as part of drive to diversify its manufacturing business. CTRM’s first attempt to secure a military contract, a 2004 proposal with Eurocopter Malaysia to refurbish 10 Eurocopter BO105s, was rejected by the army, but the company is now looking at other military MRO opportunities.
“We’re going to MRO as a diversification,” says Rosdi. “The profit margin for manufacturing is quite low.”
Maintenance plan
CTRM’s MRO business is now limited to maintaining the Eagle 150 trainer and ARV UAV that it developed. But it is planning to add maintenance capabilities for both civilian and military aircraft and Rosdi is one of Malaysia’s main advocates for opening up the military MRO market to other companies. “I’m advocating competition to enhance the quality that can be delivered at a good price,” he explains.
Rosdi acknowledges the small size of Malaysia’s domestic market may not be able to support several military MROs, but says his “philosophy” will be also to pursue international business from countries that outsource their military aircraft maintenance. CTRM plans to add maintenance capabilities by taking over underutilised facilities, in particular at Subang.
Aetron has a different approach and is planning to build a new hangar at Subang for its Piertrade and Aermac subsidiaries. Aetron says it fears renting an underutilised facility is risky because it will not have control over the facility and in the end costs could escalate. It was established last year by a former executive of a Grouptech, another Subang-based MRO company, which now mainly maintains freighters operated by sister company Transmile, but also has been trying to expand into the military MRO market.
CTRM, Piertrade, Grouptech, NADI and DefTech are now all battling for several military MRO contracts. They say Malaysia has still not yet awarded a service contract for the navy’s new fleet of AgustaWestland Lynxs helicopters, although Airod has already received some maintenance training for the new fleet. An even bigger contract for the air force’s new fleet of 18 Sukoi Su-30MKMs, which will be delivered from 2007, is also up for grabs. NADI subsidiary Aerospace Technology Systems (ATSC), which currently maintains Malaysia’s fleet of RSK MiG-29s, is lobbying for the contract along with the start-up companies. In the longer term there is a potential maintenance contract for Malaysia’s new fleet of four Airbus A400Ms, to be delivered from 2013.
Preliminary discussions have been held between Airod, Airbus and the Malaysian air force over establishing a local maintenance capability. but an agreement is not expected within the next few years.
For now CTRM is the primary beneficiary of the 1 billion ringgit work package stemming from Malaysia’s A400M purchase. Airbus Military head of industrial benefits Arnaud Meziere says CTRM will supply several composite components for the A400M wing, nacelle and empennage. A400M component production already has begun at CTRM, which has re-opened a second factory in Malacca for the project.
Meziere says Airbus Military is also in negotiations with NADI subsidiary SME Aerospace, but a contract has not yet been finalised. SME chief executive Chee Eng Boon says the manufacturer has been offered to supply Sogerma the cargo door locking mechanism, but the programme’s schedule – first metal has already been cut in preparation for first flight in 2008 – will be hard to meet. “The trouble is they are giving it so late I’m hesitating,” says Chee.
SME, which was established in the 1990s to manufacture the indigenous MD3 basic military trainer, already has its hands full producing leading edge assemblies for the A320 and Boeing 777. Supplying BAE Systems with A320 parts is by far SME’s biggest contract, while deliveries of 777 leading edge parts will begin next month. SME is also beginning deliveries this month to Eurocopter for the vertical horizontal stabiliser and instrument console on AS350 Fennec and AS355 Squirrel helicopters. The 777 contract, signed last year, is SME’s first work for Boeing, but Boon also has submitted bids with first-tier supplier Kawasaki Heavy Industries for trailing edge components on the 787. Boon says he is also “looking at the A350” and has submitted several requests for quotations from first-tier suppliers on the Airbus A330 and A340.
“I’m being approached by several other companies. I just have to be careful not to overload the company,” Boon says. “The real attractive business for us is commercial aircraft parts – Airbus, Boeing maybe Embraer. There is a possibility to do a small amount of Embraer parts through Kawasaki.”
CTRM is also nearly at capacity, designing and supplying components for the A320, A380 and now the A400M. Both SME and CTRM have benefited from recent increases in the A320 production rate and at times have struggled to keep up with demand. CTRM only began manufacturing Airbus components in 2000 and last year this business was worth more than 250 million ringgit. CTRM, which also supplies nacelles for the International Aero Engines V2500, is now discussing with Eurocopter supplying parts for the Super Puma and Tiger. But its Airbus business has been so big Rosdi has so far been unable to pursue any Boeing contracts.
Boeing venture
Boeing has its own joint venture facility in Malaysia, Asian Composites Manufacturing (ACM), which produces wing panels for several Boeing models. Last year ACM, which is owned by Boeing, Hexcel and two Malaysian companies, also took over 737 aileron panel production from Hawker de Havilland. “They provide parts for all our aircraft, typically secondary composite structures,” says Boeing.
While Malaysia’s aerospace manufacturing industry now generates about 300 million ringgit in revenues and is growing fast, the MRO sector is much larger and perhaps has more long-term potential. Last year the government unveiled plans to redevelop Subang, which served as the country’s main gateway until a new airport opened outside Kuala Lumpur in 1998, into an MRO hub called the Malaysia International Aerospace Centre. Subang already is home to Airod, MAS Engineering and Grouptech, but these MRO shops are tiny compared to their competitors in China, Singapore and elsewhere in Asia
Deputy prime minister Najib Razak told an MRO conference during the Langkawi air show in December that Malaysia aims for a 5% share of the Asian MRO market, compared to 1.2% currently. “Malaysia is preparing to be a major MRO player by 2015,” Najib says.
The Malaysian Aerospace Council says Malaysia’s MRO industry now generates about 3.5 billion ringgit annually in revenues with NADI, MAS Engineering and MAS/General Electric joint venture GE Engine Services accounting for about 80% of the business. The government is now trying to encourage further MRO expansion and Najib says the first step is to build the necessary infrastructure at Subang by the end of 2008. In the second phase, from 2009 to 2011, the government will improve secondary infrastructure and expects Subang-based companies to begin MRO work in new sectors. By the final phase of the plan, from 2012 to 2015, the government expects the companies will be aggressively pursuing international contracts and be competitive with other MRO players in the region.
NADI, which for years has unsuccessfully tried to expand Airod’s small commercial MRO business, has created SAC to pursue contracts from international carriers for overhauls and cargo conversions. Last year SAC unveiled plans to build seven hangars at Subang by the end of 2007. Kamil says SAC in the first phase will take over Airod’s commercial aircraft capability, which includes Boeing 737 and Fokker 28 maintenance. Only 1-2% of Airod’s business is currently commercial and Airod in future will focus exclusively on defence. “We need to stay focused. Our branding is military MRO,” Kamil says.
SAC’s ambitious start-up plans, however, may hinge on the outcome of NADI’s planned IPO. NADI, which is 90% owned by Malaysian businessman Ahmad Johan, has been seeking to hold an IPO since 2004, but has had trouble meeting Kuala Lumpur stock exchange listing requirements. NADI says it expects to soon meet these requirements, but declines to say when the IPO will be held or provide any financial figures.
SAC will compete against Aermac, which will begin Boeing 737 heavy checks later this year for launch customer AirAsia, and MAS Engineering, which over the last three years has grown its third-party business and is also looking to expand into cargo conversions. CTRM has also opened a maintenance facility at Subang with Goodrich and MAS as joint venture partners to overhaul composite components such as engine nacelles. MAS already operates similar joint venture component overhaul shops with GE, Hamilton Sundstrand and Honeywell. All these manufacturers have similar facilities in Singapore but Malaysia is keen to keep all MRO work in-country as part of a drive to grow the industry.
“Thrust reversers and nacelles should be a good business for us,” Rosdi says. “We’re not looking to take away business from Singapore. We’re setting up a satellite facility.” n
Source: Flight International
