IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem Strictly Private and...

IACC's Indo-US Resurgence SummitStrengthening the Aerospace ecosystem

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Strictly Private and Confidential

2 December 2013

PwC2 December 2013

Key Messages

Government support is essential to build an aerospace industrial base

Align policies for synergies eg eligibility of a WOS as IOP

Rationalise indirect tax provisions for ‘level playing field’ and encouraging MRO

1

2

3

Simplify and clarify export procedure4

FDI Cap5

2

PwC2 December 2013

Key Messages

Clarity on equipment that requires an industrial licence

Strategically leverage Offset policy eg multipliers for FDI in manufacturing, credit for domestic sales

Companies need to invest and build capability for the long haul

6

7

8

Collaborations with global players essential 9

3

PwC2 December 2013

Indian defence aerospace market continues to offer significant opportunity

IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem4

• IAF has completed the first phase of its 15-year modernization plan that began in 2006

• IAF envisages that it will procure assets worth more than 38 billion USD over the next two plan periods, thereby completing approximately 75% of its modernisation programme by 2022

• India ranks among the top 10 countries in the world in terms of military expenditure and is one of the largest importers of conventional defence equipment as it strives to modernize its forces and replace obsolete equipment

PwC2 December 2013

Recent policy changes in civil aviation and market potential has attracted OEMs, foreign airlines and domestic operators

IACC's Indo-US Resurgence Summit • Strengthening the Aerospace ecosystem

• Indian aviation sector has continued to experience high passenger growth over last few years

• Total domestic passenger traffic in India grown at a CAGR of over 15.8% between 2010 and 2012

• India estimated to be among the top three aviation markets in the world by 2020.

• Currently, six domestic carriers operate in the Indian aviation space with a total fleet of over 400 aircrafts.

Challenges

• Volatility in fuel prices

• Steep depreciation of Rupee

• High taxes on ATF imposed by State Government (3% to 30%)

• High charges, poor infrastructure at airports

• Lack of promotion of Indian airports as transshipment hub

• MRO industry not taken off due to indirect tax structure

Recent entry of foreign players

• Singapore Airlines (SIA) – Has partnered with the Tata Group to target India’s full-service airline market, servicing both domestic and international routes

• Malaysia’ Air Asia plans to enter the low-cost carrier space in India, in partnership with the Tata Group and Telestra Teleservices

• Etihad Airways is in discussions to buy a 24% stake in Jet Airways to target the market's growing potential

5

Jan Feb Mar Apr May Jun Jul Aug Sep0

1

2

3

4

5

6

3.28 3.29 3.12 3.24

3.833.64 3.54 3.6 3.46

5.024.79

5.07 4.99

5.58

4.9 4.765.15

4.46

2009

2010

2011

2012

2013

PwC2 December 2013

The Aerospace market offers significant growth opportunities but each has its own set of challenges


Aerospace Value Chain

Funding needs

Very highMedium for

virtual systems

Low to medium

Medium to high

Very high Very high Low to medium

Low to medium

Medium to high

Medium to high

Technical capability needed

Very high High High Very high Very high High Low MediumMedium to

highMedium to

high

Manpower availability

Limited – but

increasing

Limited – but increasing

Yes, but insufficient

technical skill

Limited – Training support needed

No - high levels of training needed

No - high levels of training needed

Yes. Training needed

Yes. Training needed

Yes. High levels of training needed

Yes. High levels of training needed

Time till participation

>10 years 0 – 5 years 0 – 5 years 5 - 10 years >10 years >10 years 0 – 5 years 5-10 years 5-10 years 5-10 years

ConclusionVery

difficult to participate

EOS, IT participation

potential.

Participation potential exists but focussed efforts are required to succeed

No participation potential until significant capabilities have been developed and

integrated

Medium to high participation potential. There are multiple advantages to opening Asia based MRO

operations with relatively low investments needed

R&DEngg. Desig

n

Manufacturing

Risk Sharing Partners

Assembly /

Testing

Sales / Leasing

Aftermarket and MRO

Line maintenanc

e

Airframe heavy and

modification

Engine maintenanc

e

Component maintenanc

e

Other Tier 1, 2 and 3 suppliers

Integrators /

OEMs

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PwC2 December 2013

Global OEMs are quite entrenched in the Defence and Civil Aerospace markets


Finmeccanica

Aerospace and defence market landscape

Civil

AviationNSO (e.g. ONGC), private

Tourism, news,

emergency

3. Civil / commercial market

Ministry of Defence

ArmyNavy and Coast G.

Air force

1. Defence market

MHA and state

governments

CRPFBorder forces

Others (CISF)

State police

2. Homeland security market

Central Police Forces

Services

Engg. Design

MRO

Products

4. Support market

UAC*

Lockheed Martin

HAL

Northrop

BAE System

EADS

EU

US

Ind

ia

Ru

ssia

C 130J TAS** M&M

Hawk, Jaguar

HAL

AW119

Tata

DRDO, HAL

A320, A330

EC135

MQ-4C

An-148 HALMIG, Sukhoi,

A-50EIMIG

Sea Harrier

Tejas,Dronier 228

AW101

Dronier 228, HJT

Rudra, LCH

Mi-17

Dhruv, Cheetah

1.Export market potential will be highlighted at a high level only; 2. Aero structure market potential has been illustrated based on end user potential for aircrafts and helicopters; *United Aircraft Corporation's **Tata Advanced System Note: The list of aircrafts is indicative. The list of players in Indian market is not exhaustive

Boeing C-17P-81

737, 777, 787

Partner: TCS, IIT

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PwC2 December 2013

However, the Indian players are largely confined primarily to low end activities


DesignComponent

ManufacturersAssembly

Aftermarket

High

Low

Complexity

• Design of complex structures and components

• Mission-critical software, product life-cycle management

• Testing services

• CAD design and documentation

• Procurement assistance

• Other Eng. Services (IT)

Tier 1 Suppliers

• Power plant and propulsion devices

• Avionics

• Landing gear assemblies

• Critical firing control

Tier 2 Suppliers

• Hydraulic systems

• Electrical power systems

• Surveillance systems

• Display systems

Tier 3 Suppliers

• Castings and forgings

• Structural sheet metal components

• Wiring, cabling, etc

• Final assembly

• Body

• Solution design

• Spare parts

• Service and maintenance

• Inspections

• MRO

• Logistics solutions

Current positioning of Indian suppliers

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PwC2 December 2013

There are adjacent opportunities the global and domestic players can pursue in the Indian Aerospace market


Aerospace and defence market landscape

Civil

AviationNSOs1, PSUs2, private

Tourism, news,

emergency

3. Civil / commercial market

Ministry of Defence

ArmyNavy and Coast G.

Air force

1. Defence market

MHA and state governments

CRPFBorder forces

Others (CISF)

State police

2. Homeland security market

Central Police Forces

Services

Engg. Desig

nMRO

Products

4. Support market

Ad

dit

ion

al

/ A

dja

cen

t op

port

un

itie

s:

• Aircrafts: Significant planned procurement of military aircrafts over the coming years

• Missiles: India is strengthening its missiles capability - cruise, aircraft mounted, surface to air

• UAVs: Increasing focus on purchasing UAV’s for different wings of armed forces (recon, attack), and MHA (police, anti-Naxal operations, emergency)

• Passenger and cargo: Expected to grow significantly with increasing growth in air traffic / growing economy

• Helicopters: Apart from huge potential market in defence (attack, transport, recon), applications like emergency medical services, news coverage, fire-fighting and law enforcement present a tremendous opportunity. NSOs dominate the market with 75% of the civil market, followed by government and private

2. Apply defence technologies for home & civil applications

1. Penetrate with defence portfolio

• MRO: Growing Indian market, saturating international MRO facilities, need for low cost destination to offload work

3. Extend horizontal capabilities / partner

Priorities in India

• Integrated surveillance and security solutions: Borders, sensitive installations, cities / towns

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PwC2 December 2013

We see the Aerospace companies go through three stages of growth in India, which can be expedited with greater policy support


Phase I:Create Foundation

Phase II:Growth

Phase III:Home Market

• Ensure business sustainability

• Make functions and ops scalable

• Refine organization structure

• Brand & product strategy• Support global supply

chain

• Expand in the Indian market

• Manage talent and quality challenges

• Grow with customers, industries

• Focus on adjoining sectors• Focus on new products not

offered in India

• Leverage India capabilities as home market

• Service nearby countries using local supply chain to service global requirements

• Leverage India as a global R&D and design hub for global product development

Phase 0:Market Entry

Foundational Assets

Trajectory of growth

• Establish presence in India

• Develop organization structure

• Make choices supply chain• Develop functions to

support business (HR, Finance, etc)

Northrop Grumman, Rolls Royce, L&T, TATA, Mahindra, Walchand

GEAxelTech Dassault, EADS, HAL, BEL

Local Knowledge Government Relationships Licence to operate

New Wave‘Originate’

First Wave‘Export’

Second Wave‘Regionalise’

While the Indian Aerospace and Defence industry moves from an initial phase (onset of govt. support, complete reliance on imports), to a growth phase (supporting govt. policies, shift towards domestic production, technology transfer, entry of large private players, SMEs), it still has distance to travel to get to a mature phase (high indigenization, R&D, consolidation and a buyer’s market). While companies manage their own growth, they will have to keep pace with the industry and its changing nature

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PwC2 December 2013

Enhanced policy support: However, we need to work more to develop a synergistic policy regime


• ‘Indian enterprise’ not defined

• Lack of clarity on the eligibility of a WoS for offset credits

• ‘Defence equipment’ not defined

• No clarity on ‘dual-use’ items for civil and defence application

• Long and uncertain time lag for obtaining an IL

• 26% cap restricting investments

• Problematic conditions regarding ownership and control by resident Indian citizens of a listed company

• Conflicting views in GoI on the definition of direct and indirect FDI

• Lack of tax incentives to Indian vendors

• Taxes in the domestic supply chain adding to costs

• Indirect tax structure favouring export of goods and direct imports by MoD vis-à-vis local supplies to MoD

DPP 2011 Industrial licence

• Lack of clarity on whether export/import licence is required for a ‘dual use’ item

• Long and uncertain time lag for obtaining export/import licence

• Absence of list of ‘friendly countries’ for free export

FDI policy Export and import policy

Tax regime

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PwC2 December 2013

Conclusion – Govt support essential for building aerospace industry


At macro level Benchmark against other countries Create a clear demand profile and

streamline procurement Remove ambiguities in licensing and

export policies Bring clarity on the definition of

defence equipment Focus on limited platforms to build a

vendor base Policy incentive and clustering for

MSMEs Align policies to create synergies Procurement and governance

improvements Cost of capital to compete

At company level Build capabilities for the long

haul Build capabilities for the global

supply Chain Acquisitions and partnering to

enter and grow Lead with the engineering design

and IT areas to build Become a fabric of the industry

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The information contained in this document is provided 'as is', for general guidance on matters of interest only. PricewaterhouseCoopers is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

© 2013 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Thank you

Dhiraj MathurExecutive DirectorNational Leader, Aerospace and DefencePricewaterhouseCoopers Pvt. Ltd., India

Tel: +91 124 3306042Mobile: +91 9958419296Email: [email protected]

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