Aerospace Business Caselet

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Mahindra War Room 2014 Mahindra Aerospace Business Caselet

MAHINDRA SYSTECH SECTOR

AEROSPACE BUSINESS CASELET

Mahindra Systech, manages four businesses spread across five countries AutomotiveComponents, Engineering Services, Aerospace and Steel, with a business size of USD

950 Million. This caselet pertains to the nascent Aerospace business of the Mahindra

Systech Sector.

BUSINESS BACKGROUND

Mahindra ventured into Steel Trading in 1945, and subsequently started manufacturing

steel products with the incorporation of Mahindra Ugine Steel Company (MUSCO) in

1962. In 2004, Mahindra Systech Sector was created take care of the existing SteelBusiness and also to foray Mahindra Groups entry into the Automobile component

industry to capitalise on the opportunities presented by its growth as a result of

increasing domestic vehicle production as well as growing emphasis on Low Cost

Country sourcing for Global Automotive OEMs. With a series of acquisitions of

companies in Germany, Italy and United Kingdom, Systech sector today has art-to-part

capability in Forging, Casting, Gears, Stampings, Steel, Ferrites, Contract Sourcing,

Composites and Engineering Services. Systechs components are used in Industries

like Electrical, Medical Equipment, Power, Defense and Aerospace, beyond Automotive

and Farm Equipment Sectors. The Systech Sector is one of the most globalisedbusinesses of the Mahindra Group, with over 45% revenues generated outside India.

MUSCO made Alloy Steel using Electric Arc Furnace technology, which turned

uncompetitive over time. In 2012, MUSCO collaborated with Sanyo Steel and Mitsui,

both of Japan, to form Mahindra Sanyo Steel, owned 51% by Mahindra, 29% by Sanyo

and 20% by Mitsui. In June 2013, Mahindra Group entered into an alliance with CIE

Automotive of Spain, wherein Mahindras Components business was housed into

Mahindra CIE Automotive, owned 51% by CIE and 20% by Mahindra; in exchange,

Mahindra became the second largest shareholder in CIE Automotive, acquiring a 13.5%

stake in Madrid Stock Exchange listed company. The Systech Sector has shownsignificant ability to grow inorganically, and realise shareholder value through alliances

and acquisitions.

LIVE BUSINESS CHALLENGE: AEROSPACE BUSINESS STRATEGY

The foundations of Mahindra Groups Aerospace division was created in 2006, with

Mahindra Engineering Services acquiring Plexion Technologies, to expand its services

in Aerospace design. Plexion had partnered Australias Seabird Aviation, that had a

prototype of a 2-seater aircraft, which it looked to market in Asia. Plexion also had an

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agreement with National Aerospace Laborotaries (NAL), to develop a 5-seater aircraft

targeted at the private sector, codenamed NM5. Mahindra subsequently broadened its

vision, to aircraft unto 20 seats, and acquired Gippsaero of Australia, a successful 20-

year old player with experience in design and manufacture of general aviation aircraftswith less than 20 seats. GippsAero aircrafts had already been sold in over 30 countries,

with FAR 23 certification, signifying high standards of safety. GippsAeros 8-seater

Airvan aircraft which was a best seller, 10-14 seaters and the NM5 constituted the

product line-up of the Aerospace Division. Mahindra also acquired Aerostaff Australia, a

local supplier to GippsAero, which manufactured precision sheet metal parts and

assemblies for Aerospace and Defense Industries, enabling entry into the Aerospace

components market too. With manufacturing facilities in India and Australia, Mahindra

has significantly lower operating costs compared to traditional European and North-

American companies, with superior technology compared to other emergingmanufacturing locations.

GippsAero sells globally in critical markets like Australia, Southern Africa and USA, and

currently sells around 20-30 aircrafts a year. It faces brand and regulatory challenges in

key markets. For example, Indian regulations require twin engines for turboprop aircraft

with more than 5 seats, but GippsAero offers single engine turboprop with 8 seats. This

has prevented Mahindra from realising dormant opportunities to sell small aircraft that

can connect Indias numerous towns and cities. Indias low cost production strengths

have not been brought to the aircraft manufacturing business. There is not a singlemanufacturer of commercial aircraft in India today, with Hindustan Aeronautics Limited

being a defence aircraft manufacturer. Global majors such as Boeing, Airbus and other

larger players have not set up aircraft manufacturing plants in India. However,

Mahindras acquisition of GippsAero has had its benefits - Mahindra has gained

capability and confidence as a group in all aspects of aircraft development, production,

marketing, after-sales support and cultivating rich, long-term relationships.

Embraer of Brazil, founded in 1969, has gone on to become the market leader in

commercial jets unto 130 seats, producing more than 5000 aircraft that operate in 80countries. Mahindra dreams of being the Embraer from India in this classic Rise

setting, triggering a dream -Can Mahindra acquire one of the Top 10 global small

aircraft manufacturers, replicating their proven ability to realise shareholder

value through inorganic growth in automotive components? Is this opportunity

for real? Can Mahindra acquire one or more companies to make an inorganic,

quantum leap into small aircraft manufacturing beyond 20-seaters, with

international brand recognition? If so, which are the possible companies and

why? Conduct a detailed due diligence on 1-2 of the identified companies with

detailed analysis-backed recommended course of action. Evolve an inorganic



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entry strategy for Mahindra into the small commercial aircraft space, and a

roadmap to realise the opportunity to create shareholder value.

The following table lists the Top 10 small commercial aircraft manufacturers, and theirmarket and technological data, some of which seem to offer an opportunity for inorganic

growth in this space:


Aerospace Business Caselet

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