Study on internationalisation and fragmentation of value chains and security of supply

Within the Framework Contract of Sectoral Competitiveness Studies ENTR/06/054

Case Study on Aeronautics

17 February 2012

Danish Technological Institute In cooperation with Ecorys Cambridge Econometrics

Title: Study on internationalisation and fragmentation of value chains and security of supply This report has been prepared in 2011 for the European Commission, DG Enterprise and Industry under the Framework Contract of Sectoral Competitiveness Studies ENTR/06/054.

Abstract: The overall objective of the study is to analyse the degree and consequences arising from the internationalisation, fragmentation and security of supply of value chains for European industry. The focus is predominantly on the supply side (i.e. upstream) as opposed to the demand, downstream, side. While globalisation can indeed be a positive development for Europe, there are also risks involved.

Key subjects: Value chains, supply chain management, risk mitigation, industrial policy, competitiveness, globalisation, EU, aeronautics, electric vehicles, mobile devices, semiconductors, space

Publisher: European Commission, DG Enterprise and Industry

Performing organisations: Danish Technological Institute (Peter Bjrn Larsen, Jeremy Millard, Kristian Pedersen, Benita Kidmose Rytz) with Ecorys (Jan Maarten de Vet, Marc Vodovar (Decision), Paul Wymenga) and Cambridge Econometrics (Graham Hay, Jon Stenning)

Project leader: Jeremy Millard, Danish Technological Institute Email: jeremy.millard@teknologisk.dk, phone: (+45) 72 20 14 17 Kongsvang Alle 29, 8000 rhus C, Denmark,

Reference: Millard, Jeremy; Peter Bjrn Larsen, Kristian Pedersen, Benita Kidmose Rytz, Jan Maarten de Vet, Marc Vodovar, Paul Wymenga, Graham Hay & Jon Stenning (2012) Internationalisation and fragmentation of value chains and security of supply. Published by the European Commission, DG Enterprise and Industry. Framework contractor: ECORYS SCS Group P.O. Box 4175 3006 AD Rotterdam Watermanweg 44 3067 GG Rotterdam The Netherlands T +31 (0)10 453 88 16 F +31 (0)10 453 07 68 E fwc-scs@ecorys.com W www.ecorys.com Registration no. 24316726

Table of contents

1 Case study Aeronautics 1.1 Introduction 1.2 The competitive situation of the value chain 1.3 Critical factors 1.3.1 Justification of the critical factors 1.3.2 Assessment of the critical factors 1.3.3 Critical factor 1: Input needs Resources 1.3.4 Critical factor 2: Supply chain configuration Structure (supplier capacity) 1.3.5 Critical factor 3: Localised risks Socio-political 1.3.6 Critical factor 4: Global risks - Macroeconomic (currency exchange risks) 1.4 Critical regulatory framework conditions 1.4.1 Industrial cooperation agreement and IPR/patents 1.4.2 Trade policy 1.4.3 REACH and environmental legislation 1.5 Strategic outlook 1.6 Comments for further analysis 1.7 Annex 1: interviews 1.8 Annex 2: Data issues 1.9 Annex 3: literature

5 5 12 18 18 19 20 23 28 32 34 34 35 35 36 38 39 39 41

1 Case study Aeronautics

1.1

Introduction
This case study will investigate the risks and impacts of four critical factors in the European composite applications value chain for the aeronautics sector, focusing on composite materials and components used in the industry. In order to fully understand the value chain it is important to identify and investigate the developments, trends and drivers in both the aeronautics and composites industries, with the latter focusing on aeronautics suppliers. However, first a brief introduction of the value chain will be provided. Overview of the selected value chain Figure 1.1 shows a sketch of the aeronautics composites value chain and the chosen critical factors. Later in the case study the critical factors will be explained and analysed in detail.

Figure 1.1:

Sketch of value chain for composites applications in the aeronautics sector and the selected critical factors
Materials (carbon fibres, glass fibres) -

Raw Materials Specialized Chemicals

Composite Materials (prepegs, etc.)

Composite components

OEMs Civil Defence

Input needs:: Resources Supply chain configuration: Structure Global risk: Macroeconomic : Localised risks: socio politicall

Even though the number of direct suppliers has gone down over the last few years, the aeronautics value chain remains extremely large and complex, exemplified by the Airbus A380 with approximately 180,000 different components and 18,000 suppliers. Therefore, we have chosen to look into a specific part of the value chain, the composite materials application value chain, the importance of which has risen with the increased use of composite materials in the latest aircraft programmes of both Boeing and Airbus. For this study we have divided the value chain into five main segments for the composites application value chain for the aeronautics sector: OEM: Original Equipment manufacturer. The main companies at global level are Boeing and EADS/Airbus. Component suppliers and system integrators: The first tier of suppliers (Tier 1) has the majority of contracts directly with the OEM. They supply parts directly to the OEMs and are often responsible for system integration. They include companies such as, 5

Aerolia, FACC, and Premium Aerotech. However, not all component suppliers provide parts directly to the OEMs, but instead provide composite components to the Tier 1 system integrators. These Tier 2 suppliers produce mainly components for the fuselage, wings, tail, doors, and interior. Composite material suppliers: The composite components suppliers need composite materials to manufacture their products. The main material used in aeronautics is preimpregnated carbon fibres (prepregs) but other types of composite materials are also used. The main European supplier is TenCate, but most other material suppliers are nonEU companies. Carbon Fibres/Glass Fibres suppliers: In order to make composite materials (including prepregs) fibres are needed. The aeronautics industry uses mainly glass and carbon fibres with the market dominated by a limited number of non-EU suppliers. The majority of these companies also make composite materials and therefore cover several steps of the value chain. Precursor (pre-product for carbon fibres), Raw materials and specialised chemicals: Precursors and specialised chemicals are important input materials for producing carbon and glass fibres.

Some companies cover several segments in the value chain. The large carbon fibre producers also manufacture composite materials and precursors for the aeronautics industry, whilst producers of composite materials, such as TenCate, also produce some components sold directly to the OEMs. It is therefore difficult to place particular companies only at one point in the value chain. One other factor which adds to the complexity is that many suppliers also operate in sectors other than aeronautics. Basically, the further down the value chain, the larger the diversification of the client base. The majority of the companies interviewed had contracts directly with Airbus or other OEMs, even though they are defined as Tier 2 or even Tier 3 suppliers. The Tier 1 companies interviewed for this case study are Aerolia and FACC. (See section 6.7). The following briefly provides an overview of the trends and drivers in the aeronautics and composites industries. Trends and drivers of the aeronautics sector There is no official statistical aeronautics industry definition. The main standard statistical classification is encompassed within the broad NACE (Rev.2)/ISIC (Rev.4) code of economic activity 30.30 Manufacture of air and spacecraft and related machinery. There are two sources making it possible to define the sector in sub-categories. One is the production codes in PRODCOM (2010), where the sector can be split into engines1, avionics2, and aircraft3, although data are only available for the civil aircraft industry. The second is the COMEXT database4 which combines both military and civil aircraft activities, but does not separate them.

1 Production codes: 30301100- 30306030 2 Production codes: 26511150- 26521300 3 Production codes: 30303200- 30305090 4 http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/EDCNRP_-_Eurostat_COMEXT

No statistical definition is used for composite materials/components in the aeronautics industry. In order to describe trends and drivers on a statistical basis, the above Eurostat data sources have been used together with data from non-official statistical sources such as the sector organisation ASD-Europe, market reports from private industry analysis companies, as well as market forecasts from Boeing and Airbus. The annual turnover in the aeronautics (civil and military) industry increased steadily between 2005-2009, from 81 billion to just over 100 billion, whilst the number of employees has remained constant at approximately 460,000, which demonstrates increased labour productivity. Turnover per employee in the aeronautics industry has increased by 50% over the period from 1991-2009, peaking in 2007, with a small decline in 2008 and 2009. Overall R&D expenditure in the EU remained stable in 2009 at 12% of turnover; 65% of which came from companies and 35% financed by European governments. The sources of R&D spend, however, differed between civil aviation with 79% coming from companies, compared to 60% of military R&D funding coming from public expenditure. In the past two years, R&D expenditure by companies has slightly decreased, whereas the share of government support increased5. The production value of Europes aeronautical sector (both civil and military) was approximately 84 billion in 2008, not including maintenance and repair or the value of avionics (which would add at least 23 billion for civil activities only). The global financial crisis has, according to ASD Europe6, not had a major impact on the industry, mainly due to a backlog in orders, but also effective cost saving strategies by companies along the whole value chain. Orders have also remained relatively constant between 2003-2008 as highlighted in Figure 1.2, which shows the value of production between 2003 and 2008.
Figure 1.2: Production value, export/import share of aircraft components7, 2003-2008

Source: Eurostat, 2011, DTI

Source: ASD-Europe: Fact and figures 2010. 6 Source: ASD-Europe: Fact and figures 2010. 7 Engines, propellers and rotors, other air structures

In 2008, just below 30% of aircraft components (engines, propellers and rotors and other aircraft structures) were imported from outside Europe, of which 73% came from the US and 1% from China. About 50% of European aircraft and aircraft components were exported out of Europe, of which 30% went to the US and 11% to China. Figure 1.3 shows that the vast majority (90%) of the turnover in 2009 was generated in the US (52.6%) and Europe (37.4%), whilst the only other countries with a significant turnover at the global level were Japan and Canada. It is clear, that at present the emerging markets still have a very small share of total aerospace turnover, yet his is likely to change in the future with the aeronautics industry becoming increasingly globalised as new markets and suppliers appear.
Figure 1.3: Aerospace Industry turnover - development from 2005-2009

Source: ASD-Europe: Fact and figures 2005-2009.

According to an interview with the German Aerospace Industries Association, in 2009 78% of the Airbus programmes work share came from Europe, 20% from the US and 2% from the rest of the world. This shows that, although the industry is highly globalised, the most recent data for Airbus indicate that the non-EU work share is limited. In the near future, however, the emerging markets, especially in the Asia-Pacific region, are expected to grow significantly in market terms. This is likely to have a major impact on the internalisation of the European value chain; not at least due to industrial cooperation agreements and industrial return within these countries, such as China. Figure 1.4 shows that, according to Boeings predictions, the Asia-Pacific region is expected to be the source of more than a third of global aircraft orders in the coming 20 years, and in terms of market value is predicted to be almost the same as Europe and North America

combined. This trend is also highlighted in the Airbus Market Forecast8 showing that in 2010 emerging traffic flow accounted for 45% and mature traffic flow (North America, Europe and Japan) 55%. By 2029 emerging traffic flow is expected to account for 68%, the majority being in Asia Pacific.
Figure 1.4: Boeing forecast for new airplanes by number and region 2011-20309

Composites industry in the aeronautics sector The composites components in the aeronautics sector are mainly used in the fuselage, wings, tail, doors, and interior. Safety has always been a key factor in the aeronautics industry. With increased pressure on developing advanced technologies to make aeroplanes lighter and safer, such as the use of structural composite components, and because of the increasing globalisation of the value chain, it has become both more important but also more complex to secure quality and to control the supply chain. Examples of the increased importance of composite materials in the value chain are the Boeing 787 Dreamliner and the Airbus A350XWB, both of which consist of 50% or more fibre composite materials aiming to reduce both weight and fuel consumption in order to lower costs. The success of the Dreamliner and the A-350 will ultimately show whether the composites technological revolution will be able to retain or increase this share of composites in the coming years. Figure 1.5 shows the evolution of the application of advanced composites by weight in aircraft from 1965 until today. It is clear that the two OEMs Airbus and Boeing have a clear dominance and that there has been a sharp increase in the use of composite materials in the last decade, from approximately 15% in 2002 of the overall weight to 50% in 2007 (Boeing 787).

8 Source: Airbus GMF 2010 9 http://www.boeing.com/commercial/cmo/pdf/2011_Paris_Presentation.pdf

Figure 1.5:

Application of Advanced Composites in Aircraft10

According to a strategic study from 201111, the global composites market in 2010 represented 68 billion in value and 7.9 Mt in volume. Of this, the aeronautical sector in 2010 represented approximately 23% (15 billion) in value and 6% (0.4Mt) in volume. These data include all costs. The composites industry as a whole has in the past three decades experienced long-term growth because of global economic development and its increasing penetration into key markets, such as construction, wind energy, aeronautics and the automotive industry. Between 2002 and 2010, the composites market grew at 4% to 5% per year in value (3% in volume)12, with lower growth in the developed countries (USA and EU15) at 4% between 2002 and 2007, compared to emerging countries at 8% per year in value between 2002 and 2007. According to JEC Composites, the largest growth is expected in industrial applications, but there is no indication whether this is expected in advanced or emerging economies. Recent trends, as highlighted below, only show that emerging economies have experienced the greatest growth in the composites industry in recent years. The recent financial crisis has had an impact on the composites industry. Between 2007 and 2009, the worldwide market volume reduced from 8.1 Mt in 2007 to 7.6 Mt in 2009 (i.e. a 3% decrease per year over the period). This decrease in the overall market should, however, to be differentiated as follows: North America, with an 8% per year decrease, representing 38% of the overall market in 2007 dropping to 34% in 2009;

10 11 12

http://ec.europa.eu/enterprise/sectors/aerospace/files/aerospace_studies/aerospace_study_en.pdf Source: Overview of the worldwide composites industry 2010-2015 (2011 release) JEC Composites Source: Overview of the worldwide composites industry 2010-2015 (2011 release) JEC Composites

10

Europe, with a 7% per year decrease, representing 23% of the overall market in 2007 maintaining a 22% share in 2009; Asia, with a 5% per year increase, representing 32% of the overall market in 2007 increasing to 37% in 2009; The rest of the world, with a 3% increase per year representing 6% of the overall market in 2007 maintaining a 7% share in 200913.

According to Lucintel14, the main growth trend to 2016 is expected to be in Asia, whilst Europe is only expected to experience moderate growth. There are no data showing the number of companies working with composites in the aeronautics sector. However, this question was put to all interviewees, and JEC Composites, a company which organizes events for composite producers in the aeronautics industry and undertakes industry analysis, estimates that this number would be in the region of 300 if all manufacturers were included. If the whole value chain is taken into account, however, the number would be far higher, as companies involved in manufacturing with mould, ancillary products, raw materials, autoclaves, CNC machines, CND machines, laboratory equipment, etc., would have to be included. Input materials The composite materials applied in the aeronautics sector are mainly fibre-based, with the structural reinforcement held in place by a matrix. In the case of fibre-reinforced polymer (FRP) composites, structural fibre is surrounded by a matrix adding rigidity. Often this matrix is a thermoplastic or thermosetting resin. Therefore raw materials (such as oil), precursors (specialised chemicals) and other materials (carbon/glass fibres) are purchased by generic composite materials processors. Composite materials are then used to make components for the fuselage, wings, tail, doors, and interior of aircraft. Access to especially carbon fibres is important to the aeronautics value chain as they are the main ingredient in the structural composite material used in aircraft manufacture. Although the aeronautics sector at 23% is the largest single industrial market for the composite material producers, the demand for carbon fibre is much lower than for example from the combined energy and industrial sector. According to a market report15, the share of the overall demand for carbon fibre from the aerospace sector is approximately 20-25% in 2011 and this share is expected to decease to 15-20% in 2019. The majority of demand for carbon fibres comes from industrial applications with approximately 50-60% in 2011 and this share is expected to rise to 75-80% in 2019, as shown in Table 1.1. This is also similar to the estimates provided by the interview with JEC Composites.

13 14 15

Source: Overview of the worldwide composites industry 2010-2015 (2011 release) JEC Composites Source. Growth opportunities in the Global Composite industry, (2011), Lucintel. http://www.compositesworld.com/articles/carbon-fibre-market-cautious-optimism

11

Table 1.1:

Total Global Carbon Fibre Demand (metric tonnes) 2009 Aerospace Consumer Energy and Industrial 5,800 6,420 21,210 2010 6,410 7,000 25,870 2011 7,010 7,660 29,620 2015 13,090 9,410 66,760 2019 18,100 11,120 105,060

Source: http://www.compositesworld.com/articles/carbon-fibre-market-cautious-optimism

According to two market reports16, Toray (Japan), Toho (Japan), Hexcel (US), and Cytec (US) account for 95% of the total carbon fibre utilized in the aerospace market. Toray is the largest producer, with just under half of the world market share of aeronautics-related carbon fibres. Carbon fibre producers have a high degree of upstream and downstream integration. Almost all the large non-EU players are integrated into precursor17 production, on the one hand, and into composite materials (prepregs)18 production on the other. In addition, several of these companies are integrated into the production of finished components, but this is still very limited19. A very good example of the large share from non-EU producers is that Hexcel and Cytec (both US) are leaders in supplying glass prepregs and carbon fibre prepregs to the aerospace industry with 80% of market share. The largest European prepreg composite material producer is TenCate. The supply of both carbon fibres and composite materials are dominated by a few large nonEU companies, even though they are present in Europe. An example is Hexcel, which was awarded the contract to provide the primary structural composite materials for the Airbus 350 XWB, and expects the 350 programme to generate USD 4 billion in revenues through to 2025. Hexcel runs two production sites in Spain. Also, large Japanese carbon fibre/composite material producers are present in Europe, exemplified by one of the leading producers of carbon fibre Toho Tenax with two plants in Germany20 The market share for both the carbon fibres and composite material prepregs markets is clearly dominated by a few very large non-EU companies in the aeronautics sector. This issue related to supply of carbon fibres will be discussed in the critical factor resources.

1.2

The competitive situation of the value chain

In the 1990s, the European aeronautics industry was mainly driven by cost reduction considerations within the supply chain, which led to the first outsourcing trend, although at that time this was mainly to Central and Eastern European countries, which later became EU New Member States. One recent example is Romania where the company Premium Aerotec has opened a factory.

16 17

Source: Aerospace Industry Outlook: Implications For Composite Demand; AeroStrategy management Consulting, 2008 T he precursor is the raw material used to make carbon fibre. About 90% of the carbon fibres produced are made from polyacrylonitrile. The remaining 10% are made from rayon or petroleum pitch. 18 A Prepreg is the finished composite material ready to use for composite components. 19 http://www.bis.gov.uk/assets/BISCore/corporate/docs/C/09-1535-composites-carbon-fibre-study 20 http://ec.europa.eu/enterprise/sectors/aerospace/files/aerospace_studies/aerospace_study_en.pdf

12

Today, however, outsourcing/offshoring has moved beyond Central Europe, mainly to countries in North Africa, China, Japan and the US, although this is not only due to cost savings, but also encouraged by skills, local support policies and especially emerging markets. The aeronautics value chain has been global for a long time, e.g. Airbus21 has outsourced part of its production for several decades. However, as highlighted in Figure 1.2. Eurostat figures shows that the import share has remained constant over the period from 2003-2008. There are no official data for the period after 2008, and data prior to 2003 are not comparable to the product definition used after 2003. The recent trend by the OEMs to increase their number of international suppliers (Airbus: non-EU or Boeing: non-US) is starting to change the different tiers in their supply chains. There seem to be two main reasons for outsourcing/offshoring activities for the OEMs, and especially their Tier-1 suppliers. One is cost savings and the second is to gain market access to growing and emerging markets, especially Asia-Pacific. Access to (raw) materials is, according to the interviews, not a major issue yet, but there are issues related to production capacity and possible delays when it comes to input materials such as carbon fibres.
Figure 1.6: Regional distribution, global procurement and objectives (from EADS 2020 strategy)

Source: http://ec.europa.eu/enterprise/sectors/aerospace/files/aerospace_studies/aerospace_study_en.pdf

As Figure 1.6 shows, cost advantages are found both within the EU (New Member States) and in non-EU countries in North Africa, Asia and South America (Brazil). This group obviously has an impact on the value chain, but, as the advantage is mainly limited to cost, the risk is limited. This trend is seen in many other industries and low cost/easy to copy products/components are likely to go to these countries, of which some are within the EU. Whereas the first group represents low cost countries only, the second group, with China, India, Russia and the US, also represent key and growing markets, plus access to specialised markets. In addition, although not included in the figure, the oil-economies exemplified by the United Arab Emirates are diversifying their economic base resulting in heavy investments in aeronautics, and especially composite materials, and should therefore also be seen as part of this group.
21

Airbus was founded in 1970 as Airbus Industrie, a consortium of European aerospace manufactures and in 2001 it became Airbus SAS a joint stock company between EADS (80%) and BAE Systems (20%), but in 2006 BAE Systems sold it share to EADS.

13

In the composite materials market, Japan should also be added to this second group of countries as it is gaining an increasing market share especially through close collaboration with Boeing. Collaboration between EU companies and Japan is, by comparison, at a much lower level. According to the interviews, although Japanese companies in some areas of the composite materials and components value chain are slightly ahead on technology, they work on almost the same cost level as EU based companies. Therefore, there is little reason to outsource to Japanese companies as cost reductions will be small or non-existent whilst the technological level is similar. However, the vast majority of carbon fibres and composite materials are sourced from Japan and the US. Japanese public policy has pursued a strategy of integrating the aeronautics industry into the global value chain. Participation in large Boeing projects has been purchased by public funds in Japan dedicated to R&D22. Japan has managed to focus on promising technologies and has become an important supplier in aircraft related composites. This second group has a great impact on changes in the European value chain as several critical factors, such as outsourcing/offshoring, exchange rate fluctuations, and technological development, are closely linked to the development and evolution of the aeronautics sector in this group of countries, as well as in Europe. Figure 1.7 shows where EADS (the European Aeronautic Defence and Space Company) sees the main potential for outsourcing activities. It shows what has been achieved to date and the potential for 2020. Overall, EADS aims to increase overall outsourcing of components to non-European countries from approximately 22% today to 40% by 2020. The target is also to have 20% of employees outside Europe23.
Figure 1.7: Global Sourcing Strategy for EADS by 202024

Looking at the composite applications value chain for the aeronautics industry, the two categories of aerostructures, on the one hand, and composite materials, on the other, have a
22 http://ec.europa.eu/enterprise/sectors/aerospace/files/aerospace_studies/aerospace_study_en.pdf 23 http://www.eads.com/eads/int/en/our-company/our-strategy/vision-2020.html 24 http://www.eads.com/eads/int/en/our-company/Our-suppliers/our-global-sourcing.html

14

potentially strong impact. Aerostructures, which include composite components suppliers, is one of the main categories where EADS sees a large potential for outsourcing (30%). It is however not clear whether this potential is for the composite aerostructures or other components made up of different materials, such as metals. For the composite material suppliers, the EADS sees limited potential for outsourcing, i.e. only 5%. This could be closely related to the fact there is only a limited number of qualified suppliers of carbon fibres and composites materials. As previously mentioned, the supply chain in the aeronautics industry is already globalised, exemplified by the Airbus A-380 with approximately 18,000 suppliers spread across 30 countries worldwide. Also, taking all programmes into consideration, approximately 22% is sourced to external suppliers outside the EU, of which the majority are US suppliers with 20% of the overall work share in 2009. The impact of outsourcing on the selected critical factors depends a lot on the type of component. According to the interviews, the main activities outsourced to non-EU suppliers are standard components, but over time they have increasingly become more complex components.
Dependence on non-local suppliers can be critical for the value chain exemplified recently for Boeing where 35% of the components for the 787 Dreamliner are designed and manufactured in Japan. The recent earthquake in Japan had a great impact on the value chain for the Dreamliner as they were dependent on one supplier not able to deliver because of the natural disaster. Boeing is therefore considering a new supplier system to minimise the impact of such critical factors by introducing the dual sourcing of critical component. http://www.reuters.com/article/2011/07/04/boeing-idUSL3E7HT07620110704

Boeing has increased collaboration with Japanese suppliers in the past decade and the transfer of knowledge has been evident as the latter have increased their market share, especially in composite materials and components. In the critical factors discussed below, the impact of the increasing internationalisation of the value chain in terms of the competitiveness of European suppliers will be investigated. EADS/Airbus is planning to increase internationalisation and this should create opportunities for both the company and its suppliers to source more globally. This has the benefit of cheaper labour costs and is also a strategy to hedge against weakening or fluctuations of the US$, which is the main trading currency in the aeronautics sector. The latter will be discussed in critical factor 3 (macroeconomic). However, the reason to move an increasing share of production to especially China is that this is the largest growth market where the demand for aircraft is expected to increase significantly in coming years. On the Chinese market, collaboration with local suppliers is a clear advantage. However, according to interviewees, agreements on industrial cooperation in many of the emerging markets, such as China and the United Arab Emirates, require that production, or parts thereof, takes place in the country where the contract is signed. According to ASD-Europe, this is common practice in most countries/contracts with large orders. In time this could have an impact on European suppliers if they do not have some type of presence involving local suppliers in the emerging markets. The capacity of local suppliers is an issue when European composite component suppliers are considering a 15

presence in China, the UAE and the US, and elsewhere. This issue will be discussed in critical factor 4 (socio-political). The new growth markets, combined with the global sourcing strategy of EADS/Airbus, will have a great impact on the European value chain for composite applications and the aeronautics sector in general. However, as highlighted above, 90% of production is still in Europe and the US, so changes will not happen overnight. One very important aspect is that companies have to qualify in order to become a supplier for the OEMs, so the whole supply chain needs to be qualified, which is both difficult and extremely expensive. According to a PMI Media report25 on growth in aerospace manufacturing in low-wage countries, the aeronautics manufacturers in North America and Europe are outsourcing an increasing share of work on sub-systems and structural work, but are retaining systems integration activities engines, avionics, fuel, hydraulics, aircraft controls, landing gear where the real value in an aircraft programme lies. The interviews showed that the main composite component suppliers follow the same strategy. The difference between the value of single components and systems is significant, so it is important for the European Tier 1 suppliers to keep system integration in Europe. The main issue is whether, and for how long, it will be possible to keep system components in Europe. This is important for both composite and other components of the aircraft, but to lesser extent also for material suppliers. As mentioned above, one of the new competitors are oil-based economies with diversification ambitions. The Abu Dhabi-based Strata Manufacturing aircraft composites factory was opened in late 2010 producing advanced structures for Airbus amongst others26.
STRATA27 is a composite aerostructures manufacturing facility in Abu Dhabi with a state-of-the art centre of excellence. Strata has already entered into several partnerships with leading aerospace companies to establish manufacturing programmes at a new plant in Al Ain. Contracts, worth more than US$ 1.3 billion have been signed with partners, including STRATAs first direct work package from Airbus. The UAE is investing heavily in order to become one of the leading global aerospace hubs, through long-term, capital intensive investments.

Another noticeable characteristic of this new era of aerospace globalisation is the growth of aerospace manufacturing in low-wage economies such as China and Mexico. There has been substantial investment by companies in low-wage economies into new aerospace structures and materials, especially composites. Brazil, the Czech Republic, China, Malaysia, Mexico and Turkey all have advanced composite manufacturing facilities28.

25 26 27

http://www.pmi-media.com/PMi2005-2009.lowcostmanufacturingstudy.pdf http://www.pmi-media.com/PMi2005-2009.lowcostmanufacturingstudy.pdf http://mubadala.ae/sectors/aerospace/assets/strata 28 http://ec.europa.eu/enterprise/sectors/aerospace/files/aerospace_studies/aerospace_study_en.pdf

16

Changes in OEM procurement policy Industry demand is ultimately driven by airlines and defence interests. Companies in countries such as Russia, China and Japan are producing aircraft, but at a much lower scale than Boeing and Airbus. The procurement policy of especially Boeing and Airbus is of utmost importance for their suppliers and the majority of them will have to adapt to the related requirements. The changes in strategy of Airbus and Boeing trickle down through the value chain for aeronautics as a whole, as it does in the composite application value chain. The changes in procurement policy, presented below, have an impact on how the value chain for new aircraft is shaped. Critical factor 2, which is related to supplier capacity, will discuss this issue. Some elements of these changes are characterised by the following changes: The important volume shift from metal to composite materials: Increasing focus on product integration for leading aircraft manufacturers like Boeing and Airbus (moving closer to a total system integrator and lifecycle value provider role); A reduction of suppliers to cut transaction costs and to consolidate suppliers, thereby to ensure a stronger financial backbone for financing necessary investments; A shift of responsibilities and risks to first tier suppliers; Exchange rate strategy Airbus strategy to sell aircraft and make contracts in US$; Internationalisation29. This supply chain has increasingly become the backbone of both civil and military large platform/systems. It comprises both large companies acting as prime system integrators and as Tier-1 suppliers of subsystems/components, as well as a vast number of SMEs in the airframe, engine and equipment sectors. These companies provide growing high-tech content along the whole value chain of all European programmes. One emerging trend is also that these companies now, to a larger extent than previously, act as partners/suppliers in international programmes in the US, Canada and emerging aeronautical countries such as China and Russia. This trend shows the globalised nature of the aeronautical business and the internationalisation of some European companies through the acquisition of industrial footprints in New Member States and North America, but also through the establishment of joint ventures in emerging countries30. One trend that could be important for keeping production of composite materials and components in Europe, and to make outsourcing less attractive, is increased automation of the production processes for composite components and materials. According to the companies interviewed, automation will decrease the wage gap between the low wage countries and the EU. This will result in a decreased focus on labour costs and increased focus on production efficiency and technologies, which is where Europe has a competitive advantage over the emerging countries. This section has provided an overview of the evolution and changes of the value chain and provides a basis for the analysis of the critical factors.

29 30

http://ec.europa.eu/enterprise/sectors/aerospace/files/aerospace_studies/aerospace_study_en.pdf ASD-Europe: Facts and figures, 2009.

17

1.3
1.3.1

Critical factors
Justification of the critical factors The changes in the value chain in the aeronautics sector are driven by the strategy of the OEMs, but also by socio-political issues, such as industrial cooperation agreements in emerging countries and the rising demand for aircraft in Asia Pacific. These changes have resulted in increased pressure on suppliers in an increasingly globalised industry with new competitors. The critical factor analysis below will provide examples of some of the risks and impacts associated with this increased pressure on the supply chain. Europes competitive advantage in aeronautics is mainly due to its technological lead in the sector, especially compared to the emerging countries. However, some of the critical factors examined below could lead to a weakening of the European value chain due to increased outsourcing, foreign take-overs, and participation in aircraft programmes for OEMs outside of the EU, which might lead to loss of knowledge. The critical factors are therefore selected as a result of the above introduction and analysis. They were also validated as the most important in the initial interviews with experts from the sector organisations (European and national) and some of the major companies. The aeronautics case study focuses on four critical factors, as shown in Table 1.2. The first critical factor is Input needs - resources, which examines access to materials. The second critical factor is Supply chain configuration structure, which focuses on the supplier capacity issue of European suppliers. The third and fourth critical factors are classified as Global risks, macroeconomic and Socio-political, respectively, and examine the impact of sales/contracts trade in US$ in the aeronautics sector, and the possible impacts of industrial cooperation agreements and large public investments in state-of-the-art facilities.

Table 1.2:

Overview of critical factors in the aeronautics value chain Selected for further study

Generic critical factor Input needs Resources

Problems identified in literature Concern of production capacity of carbon fibre suppliers and a situation of oligopoly as there are a small number of suppliers facing a very large number of (potential) customers

Technology Supply chain configuration Structure OEMs procurement policy are reducing the number of suppliers and at the same time sharing risks along the value chain by creating larger work packages. This has re-shuffled the way the value chain is shaped and here supplier capacity becomes an important factor to respond to these changes.

Relations Localised Natural

18

Generic critical factor risks, high density problems Socio-political

Problems identified in literature Industrial cooperation agreements and increased competition from non-EU countries pose a risk to the European value chain as it might lead to transfer of knowledge to competitors Decreasing defence budgets in the EU Member States

Selected for further study

Security Global risks, ubiquitous problems Macroeconomic Changing currency rates a problem since the products are sold in USD, but production cost are paid in Euros

Global governance Competitive Source: DTI

1.3.2

Assessment of the critical factors Table 1.3 presents an overview of the selected critical factors in terms of risk, impact, mitigation and potential government role. They are analysed in more detail below.

Table 1.3: Critical factors summary Critical factor Input needs: Access to materials Risk - uncertainty whether supply will meet the rising demand - costly delays - currently no alternative to carbon fibres Impact Low- to medium Mitigation - dual sourcing strategy (have more than one supplier in order to reduce the chance of shortages) - Limit dependency on one sector and type of material by diversify into several sectors (industrial applications, automotive, etc.) Government role - support R&D for potential substitutes for carbon fibres (long-term) - support initiatives to increase recycling of composite materials - Support R&D projects aiming at finding recycling solutions for composite materials - RTD support to optimise production of composite parts Supply chain Structure: Supplier capacity - potential loss of market share - loss of competences Currently: Low/Medium Future: potentially medium/high - mergers/acquisitions - diversification into other sectors - increase R&D and training in fields relevant for the sector - help especially

19

Critical factor

Risk - risk of losing technological lead to non-EU companies - take-overs by non-EU companies

Impact

Mitigation - participation in nonEU aircraft programmes - maintaining innovative lead through increased R&D

Government role smaller companies working in non-EU programmes to protect IPR (patents) - support SMEs in internationalisation - support to internationalisation (especially trade rules, IPR, patents) - monitoring Chinese trade and investment policy - continuing investment in key technology areas where the EU suppliers have a competitive advantage - support for upgrading and investment in state-of-the-art production facilities

Localised risks: Socio-political

- industrial cooperation agreements could lead to relocation of key activities threat of losing knowledge - smaller suppliers not able/willing to relocate nonEU companies get vital knowledge through gaining larger share of EU work packages - loss of vital knowledge - increased competition - potential loss of EU suppliers in the European value chain

Short term: low-medium Long-term: Medium

- keeping key activities in Europe - Increase in R&D to keep technological advantage - diversification to sector where production can stay in Europe

Macroeconomic: Currency exchange risks

- $ exchange rate mitigation leading to increased global competition in the supply chain - additional constraints on smaller suppliers which have to accept contracts in $ and support part of the exchange rate risk - increased offshoring and outsourcing - non-EU companies (Chinese) supported by national/regional governments more likely to take the risk to gain market insight and knowledge

Mediumhigh

- offshoring /outsourcing - diversification into other sectors - acquisitions

- look into ways to support European suppliers in times with large negative exchange rate fluctuations especially for SMEs - at EU level allow hedging (OTC derivative)

- offer export credits to level out the change in exchange rates

1.3.3

Critical factor 1: Input needs Resources Only a very limited number of companies are producing carbon fibre, the vast majority of which are non-EU companies (US/Japan), although this input is vital for the European composite application value chain in the aeronautics sector. This critical factor assesses the risks of dependency on the production capacity of a few non-EU companies.

20

a) Risks: In the short term, access to carbon fibre is not seen as a major critical factor in the aeronautics sector. Carbon fibres are all derived from oil as the baseline for the pre-product of a carbon fibre, the so-called precursor. In a long-term perspective, the availability of oil might be a limiting factor, but for the time being the risk to the value chain is mainly the production capacity of the various suppliers. There are only a few carbon fibre manufacturers, including Toray, Hexcel, Cytec Engineered Materials, Toho-Tenax, SGL, Mitsubishi Rayon and Zoltek. The situation can thus be described as an oligopoly as there is a small number of suppliers serving a very large number of (potential) customers. The risk is that with increasing demand for carbon fibres from especially industrial applications, production capacity could reach 100% and thereby create a shortage of supply of carbon fibre for the aeronautics industry. This has, according to the composite material suppliers, already happened in the past causing delays and high extra costs for both suppliers and OEMs. For example, the interview with TenCate, the largest composite material supplier with European headquarters, described the complex supply chain situation. First of all, since 1998 there has been almost a constant situation in which demand for carbon fibre has been higher than available supply. The different users of carbon fibre must of course attempt to secure their supply channels, which has always been a trade-off between the various programs; including aerospace and industrial. Depending on the production capacity (in terms of different fibre types) of the carbon fibre suppliers, the composite material suppliers often have to act as mediator between their customers. TenCate mentioned that it is common that they cannot meet the requested delivery dates of their customers because of supply chain shortages. This naturally causes delays. The interviews did not reveal the extent of this problem, but it was mentioned that the problem could intensify with increasing demand. The same issue emerges from the Reds and Roberts31 assessment (see further down). The demand for carbon fibres in the aeronautics and other sectors is increasing. However, orders are not yet large enough to open a new carbon fibre line, as the investment required for a carbon fibre line is immense, apart from the fact that qualification costs for the equipment add further to this. Therefore, with the expected rise in the use of carbon fibrebased composite materials in the aeronautics sector for the Dreamliner and the A-350, shortage could become a major risk. The strategy, and especially expansion plans, of these few non-EU companies supplying the European aeronautics industry with carbon fibres is thus critical for both EU suppliers and especially OEMs, as there are currently no alternatives. It is extremely difficult, costly and time-consuming to change carbon fibre suppliers as the remainder of suppliers are smaller and will need to qualify to become part of the OEM supply chain.

31

http://www.compositesworld.com/articles/carbon-fiber-market-cautious-optimism

21

The issue of demand and supply was also highlighted by Reds and Roberts32 for the 2011 Carbon Fibre Conference held in Washington in December 2011. Their assessment shows that carbon fibre supply and demand are expected to reach equilibrium in 2014-2015. After that, demand is expected to quickly outpace supply, resulting in a capacity gap of 70,000 metric tonnes by 2019. They also state that it is assumed that the carbon fibre manufacturing community will fill the supply gap, but also highlight a chronic problem for this community. A real or perceived carbon fibre shortage can dissuade potential carbon fibre users who fear that the time and expense of developing carbon-fibre-reinforced products could be in danger. Reds and Roberts also mention that the challenge could be met, in part, by the successful development of a non-PAN33 precursor, which would boost the total carbon fibre supply and provide a less costly fibre alternative for developers of products, although this would not apply to aerospace-grade fibre. The European composite material and components suppliers, describe their plight as a sandwich situation, where they are dependent both on orders from the OEMs, but also on the production capacity and strategy of carbon fibre suppliers. This is a difficult situation for the companies, and diversification and focus on other markets is therefore necessary in order to minimise risks. For the OEMs and the suppliers, this issue is causing uncertainty and could cause delays in aircraft delivery, which is extremely costly. b) Impact: Much depends on the production capacity of the few leading non-EU carbon fibre suppliers. It is highly likely that they will react to rising demand in the aeronautics industry, but the size of demand from other sectors also plays a significant role in terms of supplier capacity and therefore availability of carbon fibres. As previously mentioned, the largest demand is from industrial applications with an expected share of 75% by 2019. The strategy of these non-EU carbon fibre suppliers is therefore extremely important - will they favour their own countries (Japan, US) or the sector with the largest demand (industrial applications) in times of shortage? The most likely outcome is, according to the interviews and literature that the carbon fibre suppliers will increase capacity, but it could cause delays in the whole production process for the aeronautics industry. Both the literature and interviews showed that recycling of composites materials is becoming an important issue in the industry, as demand for more composite applications continues to rise. If recycling of composites could be improved, the impact of dependence would be less critical. c) Mitigation One risk mitigation strategy for the European OEMs could be to get more suppliers qualified for the programmes in order to reduce the risk of lack of supply. However, it is costly and difficult to become a supplier, as the quality needs to be extremely high because of safety rules (testing) in the sector, and because there are only very few producers of carbon fibres to choose from. The fact that only few suppliers have a very large market share could also
32 33

http://www.compositesworld.com/articles/carbon-fiber-market-cautious-optimism PAN stands for polyacrylonitrile, which is the raw material for 90% of the precursors for carbon fibres. A non-Pan precursor is a precursor made up of different chemicals than polyacrylonitrile.

22

prevent new suppliers for trying to enter the market and again especially in the aeronautics and space sector where qualification costs need to be counted in. The interviewees did not mention new suppliers as a likely option. The main risk mitigation strategy for composite materials and composite components companies (Tiers 2-3) is to diversify and focus future growth on other sectors such as industrial applications, which is the fastest growing market. The reason for this strategy is that some sectors do not require suppliers of carbon fibres or composite materials to qualify, so they will be able to use non-qualified suppliers, which widens their supply options. It is, however, important to note that the interviews with the companies did not envisage a situation where suppliers of composite materials or components would leave the aeronautics sector, but one simply of growing through expansion into other sectors as well, and not betting on one horse Again, this was mainly the strategy for composite material suppliers (typically Tier-3), but also some Tier-2 composite components suppliers. One could debate whether this is a risk mitigation strategy or not, but the companies mentioned that diversification into other sectors meant that they would not be solely dependent on one sector. Thus, if problems arose from shortages in the type of fibres used for the aeronautics sector, the impact on them would not be less significant with more clients. Another risk mitigation strategy is to increase recycling and life cycle management, but very little recycling is currently taking place. One company mentioned that it is only very small quantities (less than 500g) that can presently be recycled. Real recycling in the true sense of the word will be difficult. It will not be possible to separate the reinforcement (carbon fibre, glass fibres, fabrics, non-wovens, crimped fabrics, etc.) from the matrix (thermo-set or thermoplastic resins). This is the reason why recycling will only be possible as long as it modifies the previous product. d) Government role: Virtually all companies along the value chain mentioned that it is necessary to increase research into new materials as a possible substitute for carbon fibre in order to secure future supply. Support for R&D into recycling and life cycle management of composite materials, combined with R&D on alternative materials, could help the sector to lower the impact and dependence on a few non-EU companies. and possibly create new market opportunities at the same time if successful. 1.3.4 Critical factor 2: Supply chain configuration Structure (supplier capacity) This critical factor has become important as a result of some of the recent trends in the aeronautics sector. The main trend, which is causing concern for suppliers in the European value chain, is the fact that OEM manufacturers reduce the number of direct suppliers while sharing risks along the value chain by creating larger work packages. This procurement policy has changed the way the value chain is shaped and supplier capacity becomes an important issue in responding to these changes.

23

a) Risks: The change in procurement policy is related to the cyclicality of the demand for aircraft over long-cycles, with long-lasting upswings and respective phases of stagnation, or even reduction, which is a risk for the industry. This means that changes in OEM procurement policy have relatively long lasting impacts. This challenge has been met by OEM manufacturers through risk-sharing along the value chain. The procurement policy for the new OEM aircraft programmes is now to reduce the number of direct suppliers and increase the size of the work packages for each. According to the German Aerospace Industry Association there are some key trends behind the change in procurement policy. Investments in aircraft programmes are rising due to increasing demand, especially from the Far East. However, at the same time competition in the world market is becoming fiercer. Further to this, programme risks are rising due to the increasing technological complexity of the products, including composite components, which is relatively new to the OEMs. Added to this, the European value chain has to cope with a decreasing influx of technology input from, for example, military R&D. These programme risks put increasing pressure on the OEMs which are therefore eager to transfer as many risks as they can to Tier 1 suppliers, which in turn pass risks on to their suppliers Tier 2-4. The figure below highlights the main sourcing principles for Airbus.
Figure 1.8: Airbus sourcing principles.

Source: http://www.bciaerospace.com/toulouse/images/stories/forum/pdf_cauquil_olivier.pdf

24

The capacity issue is especially relevant for Tier 1 suppliers, which bear most of the responsibility. The risk here is that there are fewer large European suppliers than in, for example, the US as well as in emerging regions like China34. According to the interviews, it is not only Tier 1 companies that need to grow in size in order to handle the larger responsibilities, as they also require increased responsibility from their Tier 2 suppliers as well as further down the value chain. As capacity becomes an important factor, the fast growth in size and importance of, for example, Chinese suppliers could in time cause a risk to European composite material and component suppliers.
One example is the establishment of a joint venture, which is viewed as a result of Airbus' commitment to manufacture 5% of the A350 airframe in China. The joint venture was an agreement reached in 2007 with the Chinese government. The Chinese Government signed a letter of intent in 2006 to buy 20 A350s and Airbus had received 505 orders by the end of March 2011. The joint venture Harbin Hafei Airbus Composite Manufacturing Centre is expecting to have more than 600 employees within the next 5 years. The development of the centre and region as a composite manufacturing centre is supported by the Chinese government with the aim to introduce advanced technologies to provide industrial and management know-how and develop China's own products. This is to be accelerated by cooperating with foreign companies. http://europe.chinadaily.com.cn/epaper/2011-06/03/content_12637024.htm

According to the interviews, Boeings procurement strategy was the first to reduce the number of direct suppliers and increase the size of work packages. This led to a consolidation process where US Tier 1 suppliers bought up other suppliers in order to handle the larger work packages. A major consolidation process is now also underway in Europe35. The EADS/Airbus strategy to increase outsourcing to third countries by 30% (aerostructures) and 5% (composite materials) respectively, also adds to the critical nature of this factor The result of these developments is that numerous European suppliers, due to their relatively small size, face difficulties in meeting their clients requirements to take over larger work packages and become risk sharing partners in the new aircraft programmes36. Therefore, according to the interviews, many of them are re-establishing themselves at lower levels of the supply chain. The distribution of new work packages has changed and further reshuffled the value chain. Airbus previously allocated a certain percentage of the work packages to the so-called Airbus nations in Europe. Today, the process is much more competitive and market driven. As a result, involvement in a work package has become more difficult, and this has resulted in suppliers increasingly looking for aeronautics work packages with other OEMs outside the EU, especially in Russia and China. Here several EU suppliers have become part of the value chain.

34 35 36

http://ec.europa.eu/enterprise/sectors/aerospace/files/aerospace_studies/aerospace_study_en.pdf http://ec.europa.eu/enterprise/sectors/aerospace/files/aerospace_studies/aerospace_study_en.pdf http://ec.europa.eu/enterprise/sectors/aerospace/files/aerospace_studies/aerospace_study_en.pdf

25

The shoring up of EADS with Airbus as an integrated company has led to increasing competition among suppliers. Airbus and Boeing both started to create larger work packages for their Tier 1 suppliers. Whilst reducing complexity for the OEMs, this increases complexity for Tier 1 suppliers as they now have to deal with many more smaller companies supplying them. These companies need to look for an increasing niche role and business opportunities. Today, if EU suppliers participate in non-EU work packages, the risk exists that their knowledge could be transferred to non-EU companies working on the same work package. This risk depends on the demand in terms of industrial cooperation agreements (see also critical factor 3). This is especially an issue for smaller suppliers who miss out or are in danger of missing out on Airbus work packages or other EU OEM work packages. The relatively low supplier capacity in Europe could also result in the increased participation in EU work packages by larger non-EU companies. The risk is that the European value chain will become increasingly fragmented and that non-EU companies and programmes will gain vital knowledge from these key high technology companies. Participation in European and US packages has been a strategy for especially Chinese and Japanese aeronautics companies to obtain knowledge and increase market share. The reason for this is obviously that the work packages of Airbus and Boeing are where state-of-the-art technologies are being developed. b) Impact: The clear impact of this critical factor is that the European value chain will have to undergo the same consolidation process, as happened in the US following Boeings change of strategy, if the smaller suppliers are to be competitive in the long run. The larger composite components suppliers, such as Fokker, Aerolia, Premium Aerotec and FACC, all mentioned in interviews that growing in size is extremely important in order to stay competitive in a market with large risks, responsibilities and internationalisation. Increasingly large work packages lead to a consolidation process, with buy-ups of smaller EU suppliers by the European Tier-1 and also Tier-2 suppliers as a consequence. One strategy for growth is for composite components suppliers to take over smaller EU or non-EU suppliers to increase capacity. This could also be a strategic move to be present in the emerging markets. However, if the EU suppliers are taken over by non-EU companies there is a risk of losing vital knowledge that is strategically important for the European composite components suppliers. One example is the recent take-over of the Austrian company FACC by the Chinese Xian Aircraft Industry Company (XAC). According to FACC, this was necessary to allow them to minimize risks and also to enter new markets by using the facilities of XAC. This also means that the Austrian component supplier would be able to follow the Chinese OEM into new markets, due to the size and sites of XAC. This could enhance the chances for the FACC of securing a large market share, but on the other hand it could also lead to technology transfer of vital knowledge from Europe to China.

26

Ultimately, access to the know-how and corporate strategies of European companies by their non-European owners can potentially weaken the position of the European industry. This means that protecting the IPR of European companies working on non-EU work packages is extremely important for the overall competitiveness of European suppliers, especially in the case of small European companies. The interviews revealed one benefit for the smaller European component suppliers: they often produce niche and specialised products with little competition. New competitors will have to qualify to become a supplier for the OEMs, and this is both difficult and expensive. Therefore, the smaller suppliers with niche products can often negotiate conditions which fit their needs, e.g. contracts in Euro compared to US$ as highlighted critical factor 4. c) Mitigation Tier-1 and Tier-2 composite components suppliers are responding in several ways. One is to increase investments in innovation in order to ensure a technological advantage. A second strategy is to ensure a presence in emerging markets, which can both have positive and negative impacts. Positive as they gain market share, negative if they lose knowledge to competitors as a result of industrial cooperation agreements. The key is to retain system integration activities and state-of-the-art technologies in Europe and only outsource standardised technologies. This is a very fine balance to maintain, however, which in time will become even more difficult as the market in Asia Pacific is growing at a very fast pace. A third mitigation strategy is to diversify into other sectors, which seems especially to be a risk mitigation strategy for the smaller composite components and composite material suppliers in the lower tiers (Tier-2-Tier-4). This is not seen as a strategy to leave the aeronautics sector, but to expand and minimise risks by being less dependent on one or two clients. With the increased use of composite materials in many industries, such a strategy is seen as a natural development of the business strategies of composite components and material suppliers. However, in interviews some also mentioned it as a mitigation strategy for the critical factors examined in this case study. Tier-1 and larger suppliers in Tier-2 interviewed were very aware of this critical factor and had risk mitigation strategies in place. However, these suppliers are also of a size where they are able to respond. The lower level tiers working with composite materials and smaller composite components suppliers mainly responded by diversifying into other sectors, especially the automotive industry and other industrial applications. Some stated that these other sectors had larger profit margins and lower entry barriers, whereas others did not agree with this. However, even those who mentioned that profits are lower saw it as important to be part of the industry because of its innovative nature which can be used in other sectors. Also important is the fact that, even though profit margins are lower, a profit still exists. Surprisingly, the smaller suppliers (Tier-2 and Tier-3) did not mention consolidation as a possible risk mitigation strategy. They pointed out that diversification was a better strategy and to try to create a niche market where competition is limited. This means they have a chance to negotiate their contracts to fit their own business strategy, which is typically to 27

stay in Europe and to have contracts in Euros instead of US$. The latter is discussed in critical factor 4 (macroeconomics). The company Cotesa GmbH has managed to get a contract with Airbus without having to comply with all usual demands. This is due to its niche product, but also its technological advantage to other non-EU companies in this field.
COTESA GmbH is one of the success stories in the aeronautics composite materials supply chain. The company started in 2002 with the first Aerospace contracts with DASELL for the interior parts counting 5 employees. COTESA got the first contract with Airbus in 2005 and is today, with 200+ employees and expanding, one of the few companies globally manufacturing structural composite material components for the aeronautics industry. However, the company is increasingly focusing on diversifying the customer base, especially towards the automotive industry with larger profit margins and less testing. This diversification strategy is both an expansion strategy and a risk mitigation strategy. Managing Director Mr. Huesken pointed out that the company has no intention to move any production outside Europe as a result of pressure from industrial cooperation agreements in for example China. Either the clients accept that they are in Europe or they will have to find a new supplier. Complexity, cultural differences and a close relationship and commitment to their current employers are the main reasons for relocation not being a part of the business strategy.

d) Government role: There should be support to help especially European suppliers working for non-EU programmes and non-EU OEMs to protect IPR. Trade policy is also of major importance in relation to such rights when it comes to industrial cooperation agreements. According to the companies interviewed, there is a need to support R&D in the key high tech areas where the EU supply chain still has a technological lead and competitive advantage. This would put companies in a better position to negotiate rights with non-EU clients, but also to place work packages in Europe without major risks. Finally, supplier capacity can also be enhanced through access to qualified labour, so educational programmes should also be incorporated in a national/EU strategy to support the sector. 1.3.5 Critical factor 3: Localised risks Socio-political Europe has a leading position in the market, which is based on innovative high-tech companies. However, European suppliers are facing increased competition from especially Japan and the US, but also China and other emerging aeronautics regions, such as Brazil and UAE. The interviews with companies and sector organisations all highlighted the fact that the technological lead, especially over China, is the key to the sustainability of the European value chain. a) Risks: OEMs and many suppliers have already outsourced part of their production, typically in order to save costs, but mainly of those parts of the value chain where the technology is already known. For smaller European composite components suppliers, outsourcing destinations are mainly based in Northern Africa, whilst for larger Tier-1 suppliers it is the 28

US, Canada and Asia Pacific. OEMs have global presence, but mainly based on other parts of the production process than composite materials. However, the United Arab Emirates (UAE), Malaysia and China have now received investments in premises and orders for composite components (see the Chinese example in the text box in critical factor 2). There are two main risks associated with this critical factor, both closely related to and caused by the supplier capacity issue discussed in critical factor 2. The first is related to industrial cooperation agreements. European suppliers will have to either relocate or outsource key activities, and not just those with already known technologies. With a growing market it should be expected that more activities will take place in the Asia Pacific region. The risk here is that non-EU suppliers could gain vital knowledge and thereby threaten the European competitive lead in technology. The second risk is that if European suppliers, due to the above risk, decide not to go into the Asian Pacific market, non-EU companies will do so instead. This will lead to loss of market share as the future growth market is predicted to be in the Far East. The Tier 1 suppliers Aerolia and FACC are already present with premises in these markets and see this as extremely important in order to get a share of the work packages due to industrial cooperation agreements. If the lower Tier suppliers, especially composite components suppliers, do not follow them or are not able to secure an agreement to produce in Europe, non-EU suppliers will be involved instead and thereby gain increased knowledge by working on Boeing or Airbus work packages for the Far East market. Ultimately, the risk is that non-EU companies could gain knowledge in key technologies and thereby compete with EU suppliers for work packages in Europe. Japan is a good example of the benefits arising from participation in OEM work packages. The country has increased its technological capability through large public investments combined with close collaboration with Boeing, and now has large shares in especially the Boeing work packages. b) Impact: The literature does not provide a clear picture on how advanced composite material/components suppliers are in China; although it does show that Chinas aeronautics industry has advanced at an impressive rate over the past decade. While some of this progress can be attributed to rapidly growing government support for Chinas aeronautics sector, Chinas aeronautics companies have also benefited from increasing participation in the global commercial aeronautics market and the supply chains of the worlds leading aeronautics companies. According to a recent report (2011) from Rand, European and American companies are not transferring new technologies to Chinese companies, but only standard technologies. Therefore the Chinese Governments technology transfer strategy has not yet led to technological advancement enabling Chinese suppliers to compete with EU suppliers37. Another report38 by a US working group from 2006 shows that a combination of Chinese Joint Ventures and Chinese Enterprises are manufacturing composite components for
37

http://www.uscc.gov/researchpapers/2011/RAND_Aerospace_Report%5B1%5D.pdf 38 Composite Materials in the Aerospace Industry in China: AmCham Export Compliance Working Group, May 23, 2006

29

commercial aircraft using foreign supplied prepregs on a build-to-print basis. However, one Chinese company is designing, developing and manufacturing composite components for commercial aircraft completely on its own from start to finish. There is no doubt that these companies have developed further in the last 5 years. In the interviews, views on the impact of industrial cooperation agreements varied greatly. However, most thought it was more a question of when more than if the relocation/outsourcing of key activities would take place. Some companies stated that hightech processes within the composite application value chain are already taking place in China as a result of increased competence of the Chinese and other companies in the Far East. Below are two examples of recent work carried out in Asia: A350 XWB - Airbus signed a contract with Chinese partners to create a joint venture to make carbon composite components in China for its A350 XWB and A320 aircraft. Airbus' Chinese business will hold a 20% stake in the joint venture based in Harbin, and China's Harbin Aircraft Industry Group will hold a further 50% stake, while other local players HAI, AviChina and HELI will each own 10%. Fokker Elmo has set up a plant in China to build wiring for the Trent XWB. Airbus and Bombardier airliners - Composites Technology Research Malaysia (CTRM) has signed a $1.03 billion contract for 20 years with Goodrich to produce nacelle components for a range of airliners. And Malaysias government investment on Composites Technology Research Malaysia (CTRM) Incorporated has seen the company develop substantial business from Airbus, Boeing and Goodrich39. Asian participation in foreign (US and European) work packages and public investments in R&D and facilities have been important factors. It was especially the composite components suppliers who mentioned this as a real threat, whereas the specialised European composite material and components suppliers saw themselves as having a monopolistic status on the European market, and do not yet see relocation as a critical factor given that much production remains in Europe. No matter what the current (low) level of the Chinese aeronautics sector is, major Tier1composite components suppliers have already started establishing themselves in the country in order to get a large share of the work packages produced there, but this mainly implies standard technology components. The Tier-1 component suppliers strategy is still to have as much production as possible in Europe as producing non-standard technology components in China is seen as major threat. The precise impact greatly depends on the demands of the individual industrial cooperation agreements and how the companies are able to tackle these. Some of the larger companies mentioned the cost of relocating and setting up facilities as enormous. However, one Tier-2 company mentioned, that if an industrial cooperation agreement forced them to relocate a production line to the country where the contract was signed it has to be economically viable.

39

http://www.researchandmarkets.com/reports/1220387/the_growth_of_aircraft_manufacturing_in_low_wage

30

For smaller composite component suppliers (SMEs) the strategy is very different. One of the companies interviewed mentioned that relocating to China was not an option and also pointed out that this was the view of many smaller European suppliers. Reasons include the cost of relocation and protection of IPR, but the main issue is that they simply do not wish to work in China. Smaller European companies tend simply to hope that continuing investments in R&D and specialising in niche products will keep them in the business without having to relocate. Many of these companies have clients across many industries and are constantly trying to expand this client base, so if they were faced with relocation demands they would most probably leave the aeronautics sector altogether. It is extremely difficult to predict the likelihood of this happening, as company and sector organisation views on the likelihood and extent of the impact of this critical factor do not create a coherent or systematic picture. However, all agreed that the competition will become increasingly fierce and in time it will become difficult to keep all the non-standard production in the EU. Also, as the growth market is in the Far East, companies will need to be present in one way or another in order to get a share of this emerging market. c) Mitigation Companies are naturally aware of the increase in pressure for technology transfer to especially non-European companies. The response has been only to outsource the standardised part of production, whilst system integration and new developments remain in Europe. This is also due to complicated IPR/patent rules, especially in China. Furthermore, increased investment in R&D in areas where European companies have a technological advantage has also been a strategy, and is an area where companies suggest increased government support in order to keep up with non-EU R&D programmes in countries like the UAE, China and Japan. Diversification through the use of technology used in aeronautics to other sectors, such as the automotive industry, has been a risk mitigation strategy for especially composite material component companies, but also some of the smaller component suppliers. This is not only seen as a risk mitigation strategy, but also as an opportunity to increase market share and turnover in general. d) Government role Interviewees pointed out that it is vital to focus R&D projects, such as the EU Framework Programmes, on developing new technologies in areas where the European aeronautics industry already has a competitive advantage. Also, if companies are faced with a need to relocate, they will need to ensure that IPR rules are followed and understood, an area in which EU and national governments could provide support. General access to market insight, especially in China, is also seen as an area where support is needed. Pushing for a better match between the European regulatory system and global requirements is also seen as key for EU suppliers to gain competitive advantage. 31

Finally, all interviewees mentioned that EU trade policy must ensure fair competition, especially in relation to industrial cooperation agreements. 1.3.6 Critical factor 4: Global risks - Macroeconomic (currency exchange risks) One important topic for the European value chain lies in the reduction of the threat of currency exchange rate variations. The aeronautics market is, like many other globalized markets, based on the US$, given that most products are traded in this currency. However, a large fraction of the production costs of European firms (including wages) are paid in Euros, which exposes them to significant currency risks. It can be expected that this risk will not change in the foreseeable future. a) Risks: Particularly for composite components suppliers, exchange risks are large, whilst some of the smaller composite material suppliers did not see this as a major risk as they face little competition - at least in the short term. Some composite components suppliers have even managed to work on the basis of contracts in Euros. For larger companies with global presence this is easier to handle, but it is still mentioned as an unnecessary risk. The result of this critical factor is that when fluctuations arise they can lead to the increased outsourcing of activities, especially for the composite component suppliers, with a consequent impact on profit or losses. More strategically, knowledge potentially could thereby be transferred to competitors outside Europe. According to one Tier-1 composite components supplier, one of the major issues is not fluctuations in the exchange rate as such, but rather the nature of life-time contracts that are typical in the aeronautics industry. These contracts can last up to 40 years, e.g. the A-320 project started in 1982 and is expected to run until 2020. This means that companies are potentially caught in an unfavourable exchange rate situation for a long time. However, other interviewees mentioned that it is possible to undertake contract negotiations if these fluctuations occur, but not what this entails. b) Impact: Two major impacts on the value chain related to exchange rate fluctuations are increased globalisation and a risk that smaller suppliers will leave the aeronautics sector to work on industrial applications instead. Interviews with Tier-1 and large Tier-2 suppliers revealed that exchange rate fluctuations could either lead to increased use of already established offshoring facilities outside Europe, especially the US or China, or increased outsourcing to US companies or companies willing to take the risk that comes such fluctuations. The latter could be a problem as countries in the Far East and the UAE are focusing on increasing their aeronautics activities, and therefore provide significant support for their companies. This will encourage potential suppliers in these countries to take increased risks as these are minimised through regional or national support programmes.

32

The impact is that EU suppliers will not be able to produce at maximum capacity, and therefore lose profits, while non-EU suppliers are likely to gain vital knowledge and thereby become more competitive. However, the latter depends on the activities contracted to the non-EU suppliers and, according to the companies interviewed, this is not yet a major problem. For smaller suppliers which are unable to negotiate contracts in Euros, this has a very large potential impact. Such companies typically do not have the opportunity to offshore and could potentially lose critical knowledge as they can be forced to outsource critical activities. Another impact of the risk mitigation strategies discussed above is that smaller suppliers will focus on those sectors not demanding US$ contracts. This would have a serious effect on the European value chain as these companies are typically high-tech and a lot of knowledge is generated through the aeronautics OEM work packages. This could again mean that larger non-EU companies could potentially get a larger share of the EU aeronautics market. Finally, the example of FACC can also be applied to this critical factor, as the risk imposed by sales in US$ was a factor behind the decision to get foreign (non-EU) owners. In an interview, Dr. Bernhard Matzner, CFO of FACC AG, has pointed out that the partnership with XAC provides access to the huge Chinese market and at the same time offers opportunities to increase the share of US$ based manufacturing by outsourcing projects to China, which will also lead to a better hedge against exchange rate fluctuations between the US$ and the Euro40. In addition, the share capital increase provided by China is seen as a move that would significantly strengthen the company's position among Tier-1 suppliers in Europe. The danger for the European value chain is thus that this knowledge from one of the major Tier-1 suppliers could leak to China, which in the long run might threaten the European value chain and also the opportunity for EU suppliers to enter the growing markets of Asia Pacific. This risk seems likely as the target for Chinese investments in the sector is not only to become competitive, but also to reach a sufficiently technologically advanced level so the whole value chain can be present in China. This point will be further elaborated in the fourth critical factor. The complexity (testing, high tech, need to qualify) of working in the sector is positive for the smaller suppliers as it limits competition. However, this complexity can also have a negative effect on the European composite application aeronautics value chain, as other sectors (like automotive and industrial applications) offer easier working conditions, and, according to some of the smaller companies, larger profits. c) Mitigation The interviews and literature revealed three main risk mitigations strategies, which have already been mentioned above. These are offshoring, outsourcing to suppliers lower down the supply chain and finally diversification into other sectors.

40

http://www.chinadaily.com.cn/business/2009-12/04/content_9118826.htm

33

Offshoring is a risk mitigation strategy that is costly and requires a certain minimum company size, so for the lower tier suppliers this is an unlikely strategy. The interviews did not provide any examples of smaller suppliers following this strategy. Some companies interviewed, such as Fokker and Aerolia, have set up premises in Canada and China for a number of reasons, such as cost reduction, new markets, whilst the opportunity to hedge against currency fluctuations has also been an important but not the only factor. Access to markets and cutting costs has also been part of this decision. This strategy seems to be the preferred one as it can be combined with market opportunities in large and emerging markets. A second, but less frequent, strategy is hedging against current fluctuations. It can cover the risks of suppliers outside the US or in countries where the currency shadows the US$. However, hedging is expensive and this strategy demands either large capacity or additional costs, a problem for lower tier suppliers. The third strategy, especially for composite components suppliers with several sectors as clients, is to diversify the business base. According to some of the composite material suppliers, profit margins are quite low in aeronautics compared to, for example, the automotive industry. Lower profit margins have not, however, resulted in companies leaving the sector, and one reason for this is that the knowledge gained in the sector is advanced and allowing for opportunities in other sectors. d) Government role: According to the companies interviewed, government support to mitigate this risk is limited. One type of support could be to convince major customers, like airlines for example, to trade in Euros. However, given industry practise this is unlikely to occur. Another is to support relocation activities, but with increased focus on gaining market access and decreasing technology transfer of vital knowledge to non-EU suppliers. Finally, one option could be to offer export credits, such as loans on easier terms than are commercially available to offset price differences caused by exchange rate fluctuations. This would mean that there is no financial incentive to use non-EU suppliers and would also help smaller companies. The space industry is facing the same issues and in France there are examples of this type of support (see example in the space case). Another strategy could be to allow hedging within the EU using an OTC41 derivative.

1.4
1.4.1

Critical regulatory framework conditions

Industrial cooperation agreement and IPR/patents As described above, the industrial cooperation agreements made in the emerging markets affect the value chain. Such agreements will result in either the offshoring or outsourcing of production, and thereby affect the European value chain as smaller companies will find it difficult to follow larger companies and to compete on price.

41

Over the counter.

34

Another regulatory issue is connected to IPR where a foreign company in China must register its patents and trademarks with the appropriate Chinese agencies and authorities for those rights to be enforceable in China. Copyrights do not need to be registered, but registration may be helpful in enforcement actions42. This means that, in theory, patent rights are enough to protect a company. As well as affecting the value chain both upstream and downstream, it also has implications for European companies ability both to outsource and to enter the Chinese market. 1.4.2 Trade policy Mainly as a result of industrial cooperation agreements, there is a need to ensure that trade rules are imposed, understood and followed. For many of smaller suppliers, but also larger ones, this can be extremely complex, and support to help companies understand their rights is needed, which is often provided by the competent authority. 1.4.3 REACH and environmental legislation Furthermore, two of the suppliers mentioned REACH (Registration, Evaluation, Authorisation and Restriction of Chemical substances43) as a positive factor, as over time it should create a competitive advantage for EU suppliers complying with these rules, compared to emerging markets. The increased focus on environmental issues, especially in the EU, should create advantages for EU suppliers in EU markets, but possibly also outside the EU if/when environmental regulation becomes part of the global agenda The aeronautics industry is also affected by environmental policy initiatives and EU regulations. The implementation of REACH might mean that the industry could face significant adaptation costs and time-to-market problems if substances used for specific purposes in this industry are withdrawn as non-compliant, for example for composite materials. REACH is actually seen as an opportunity for European suppliers as in future there will be a match between the European regulatory system and global requirements. This will give European suppliers a competitive advantage as they will have already adapted to these requirements. Active participation of the European Community in international organisations such as ICAO (International Civil Aviation Organisation) is a positive step towards guaranteeing the worldwide application of common standards44. Other environmental legislation addressing airlines can also have an impact on aircraft manufacturers (e.g. the adopted proposal to include aviation emissions in the European Emissions Trading Scheme) if they result in a reduction of demand for air travel. This could encourage increased focus on foreign markets. However, this has not been mentioned as a having a major impact by the interviewees.

42 43 44

http://www.mac.doc.gov/china/docs/businessguides/intellectualpropertyrights.htm http://ec.europa.eu/environment/chemicals/reach/reach_intro.htm Commission Staff Working Document SEC(2009)1111 - "European Industry in a Changing World - Updated Sectoral Overview 2009

35

1.5

Strategic outlook
The assessment of impact and likelihood of occurrence of each of the four critical factors is extremely complex as several factors determine these issues. Nevertheless, based on input from the interviewees, an attempt has been made to rank the various risks in terms of probability as well as in relation to impact from a time perspective, as summarized in Figure 1.9.

Figure 1.9:

Impact and probability of risks (Impact and probability of risks: short-term (ST short term, < 3 years); and LT long-term)

Source: DTI

It is extremely difficult to quantify both the probabilities and the impact value. It was even difficult for companies to predict what will happen, as many are caught in what they describe as a sandwich between OEM strategies and material supplier strategies. Therefore, this graph is only meant to rank the risks in the short-term and longer-term, in terms of impacts as well as likelihood. Input needs - Resources: Difficulties in obtaining carbon fibres are increasing, but impact depends a lot on the large producers strategy to expand or not. Also, research into alternative materials and possibilities for recycling could reduce the risk and create competitive advantages in the long run. Supply chain configuration - Structure: The impact on the value chain is already evident. The need for consolidation is clear and seen through take-overs, both by European and nonEuropean companies. Especially the latter are a threat to the European value chain. Changes in procurement policy, described above, have resulted in a reduction in the number of direct suppliers, but could also lead to an increased share of EU-companies working on non-EU work packages and vice versa. Here the risk refers to a loss of vital knowledge, especially if 36

international cooperation agreements are taken into account. Impact has so far been limited, but the pressure, especially on smaller suppliers, mounts as competitors from outside Europe are getting stronger (and larger). The impact of the other critical factors also has an impact on supplier capacity, all leading towards larger responsibilities, protection of IPR and internationalisation. Global risks Macroeconomic: The trade in US$ is already creating large risks, which is causing suppliers to outsource, offshore or expand into other sectors. The impact could result in a decrease in the number of European suppliers, especially smaller ones, and also lead to take-overs. A more flexible approach is needed to ensure that the risk is not too high for smaller companies and to ease the burden for larger companies. Localised risks Socio-political: At the moment, European suppliers are in a very strong position and, even though emerging countries are gaining ground, knowledge transfer has not been severe. However, this is likely to increase as orders from emerging markets increase, and industrial cooperation agreements will eventually lead to more production taking place in emerging countries. The big question is whether European companies will have to relocate strategically important activities through either offshoring or outsourcing in order to obtain a share of growing markets, or whether it is possible to keep these activities in Europe and thereby increase the competitive edge they currently have through more advanced technologies and products. According to the interviews, a mix of the above seems to be the most likely. Also, increased competition could result in suppliers leaving the sector, which could lead to a dependence on non-EU suppliers for parts of the value chain. Recommendations for support measures From the interviews, several suggestions were forthcoming to support and strengthen the European value chain. To strengthen the European aeronautics value chain and increase its competitiveness the following are suggested: EU level: Increase the focus on R&D areas where the EU aeronautics industry has a competitive advantage and combine this with training/education; Increase research into alternatives to carbon fibres and recycling of composites; Work towards a match between the European regulatory system and global requirements especially in areas where the EU has a competitive advantage (e.g. in environmental regulation like REACH); Help both small and large companies understand how to protect themselves with respect to IPR, patents and trademarks; Continue and increase support to companies to enter new markets, monitor trade policy and industrial cooperation agreements. Member State level: Increase focus on R&D areas where the EU aeronautics industry has a competitive advantage and combine this with training/education (in line with what is supported at EU level) with a focus on training/education activities; Help both small and large companies understand how to protect themselves with respect to IPR, patents and trademarks; Continue and increase support to companies to enter new markets; 37

Ensure access to cheaper loans during period of large currency fluctuations.

Company level: Focus on offshoring key competences instead of outsourcing; Refrain from outsourcing key competences; Consolidation to retain market share in Europe and gain markets share outside Europe; Undertake continuous R&D activities to ensure and sustain technological advantage.
Table 1.4: SWOT for the aeronautics value chain Strengths Strong sector in Europe and globally Weaknesses Long testing periods and examples lower profit margins for suppliers (general for the sector globally) Opportunities Growth in air traffic markets in Middle East, China, India and Russia Threats Diversification of lower tier suppliers away from aeronautics in composite materials/components

Strong national support in especially Germany and France

Many strong suppliers in Europe

Lower supplier capacity than main competitors in US, Japan and Far East.

Mergers with EU suppliers to retain market share in Europe and mergers with non-EU suppliers to gain market share outside Europe

Increasing competition from both Asia-Pacific, US and UAE

Presence of EADS/Airbus compared to Asia-Pacific

Dependency on non-EU carbon fibre suppliers

Large fluctuations in exchange rate (/$) Increase R&D strengths in areas where the EU suppliers have an competitive advantage

Highly-skilled workforce Promote REACH and related programmes as a competitive factor outside the EU

Loss of knowledge as a result of increased relocation and/or takeovers

Technological competitive advantage

Difficult and expensive for new competitors to become OEM suppliers

For smaller suppliers focus on niche areas

1.6

Comments for further analysis

One issue encountered in this study is that there is very limited publicly available information on the lower level of the value chain, especially the carbon fibre value chain and the market. One reason for this could be the limited number of suppliers each of which attempts to protect their market knowledge. This issue has also been observed in other studies. A study45 carried out in 2009 for the UK Government on the UK carbon fibre composites industry mentioned that The carbon fibre suppliers are highly concentrated and for obvious reasons keep detailed market intelligence to themselves, barring a few industry overview presentations given at conferences. This means that from that end of the supply chain there is relatively little publicly available detailed information on the market. On the other hand the relatively large number of processors means that an overview of this industry sector is not available
45 http://www.bis.gov.uk/assets/BISCore/corporate/docs/C/09-1535-composites-carbon-fibre-study

38

One way to obtain information is to carry out a survey, which has been done in some studies, but in these instances it has been on very specific aspects of the sector and not solely related to the aeronautics value chain. In order to provide a detailed analysis it is necessary to obtain additional information through large scale surveys and long series of in-depth interviews. Both of these were not within the scope of this study, which has been based on 11 telephone interviews and review of publically available literature. One issue not covered in this case study is the on-going changes in defence procurement and the downsizing of EU defence budgets. As the established know-how in composites has, to a significant extent, been developed in the framework of defence programmes, the impact of this should be included as a critical factor in future value chain studies. It was not covered in this study as, firstly it was only mentioned as a critical factor by one interviewee, and second as these changes are on-going, the types and extent of impact and risk are not yet clear.

1.7

Annex 1: interviews
Name Arnt Offringa Jrg Hsken Dr. Stefan Berndes Title Research manager Managing Director Head of Air Transport, Equipment and Materials General Manager Transport Vice-president procurement & supply chain Head of Equipment and SMEs Deputy Air Transport Manager Organisation Fokkker COTESA GmbH German Aerospace Industries Association Gurit Holding AG Aerolia Country Netherlands Germany Germany

Kees Reijnen Raphael Duflos

Switzerland France

Javier Garcia Praxedes Jules Meunier Olivier LEMAITRE Rudolf Leitner Andreas Neugebauer Franck Glowacz

ASD-Europe ASD-Europe ASD-Europe

Belgium/Europe Belgium/Europe Belgium/Europe Austria Netherlands France

Head of Purchasing Sales Manager Technical Editor JEC Composites Magazine

FACC TenCate JEC Composites

1.8

Annex 2: Data issues

Relevant Data Used Primary data sources for this case study were: PRODCOM Eurostats PRODCOM database contains data on total production in current price Euros by 39

just under 3900 product codes, giving some scope to identify detailed products which form part of the Aeronautics sector, over the period 1995-2009 (although often there is missing data for some years). In this case study we have identified the following products as being relevant; This data provides detailed production for the EU (at an individual member state level) although does not include any non-EU countries. With respect to the Aeronautics case study, the data includes only civil aircraft, not military, and despite the detailed categories available some PRODCOM categories include spacecraft and other final uses alongside aircraft, making it impossible to separate out the production of products only for the aeronautics supply chain. COMEXT Eurostats COMEXT database contains data on trade (imports and exports) between EU member states and major trading partners, by value and volume, on a country by country basis across 1995-2010 (although some data points are missing), with data split across over 28,000 product codes. This data, unlike PRODCOM, does include military as well as civil aeronautics. The following product codes were used in the case study; The COMEXT data captures on a (relatively) consistent basis the trade between various states (and, more significantly, between the EU27 and major trading partners) across detailed product codes. However the product codes are not always specific to the final use in aircraft and it is not possible to separate out the trade in a product that relates only to the Aeronautics sector. The gaps in the data also lead to some inconsistencies, with certain years including some product codes but not others, which is not always apparent in the final aggregated data. UN COMTRADE UN COMTRADE includes data on imports and exports in value (US dollars) and volume (kgs) terms on a product-by-product basis, and provides a similar level of detail to the COMEXT database (albeit on a different classification system, which presents an issue of having to map from PRODCOM or Combined Nomenclature codes to the SITC or HS system used by UN COMTRADE) for non-EU countries, so helping to complete the global picture/comparison. However, data is only available for a very limited number of years (2007-2009). Data gaps and requirements Many intermediate products used in the aeronautics sector are also used in a variety of other final uses, and this is one of the key problems identified in the data collected above. The same problem (even more acutely) exists for data on raw materials, where aeronautics represents a tiny proportion of the final use of the materials collected. There has also been very little work done on examining the value chain as a whole (or even constituent parts) and as such it has proved very difficult to collect insightful data on any given stage of the chain (e.g. composite materials). The data that has been obtained has typically been from individual firms and as such there are problems in a lack of consistency (of approach and measurement) in comparing this data.

40

1.9

Annex 3: literature
Web pages AeroStrategy Management Consulting (2008), Aerospace Industry Outlook: Implications For Composite Demand. http://www.aerostrategy.com/downloads/speeches/speech_87.pdf Airbus, Airbus in China, http://www.airbus.com/company/worldwide-presence/airbusin-china/ Boeing, Current Market Outlook 2011, http://www.boeing.com/commercial/cmo/pdf/2011_Paris_Presentation.pdf China Daily, http://www.chinadaily.com.cn/business/2009-12/04/content_9118826.htm EADS, Our global sourcing, http://www.eads.com/eads/int/en/our-company/Oursuppliers/our-global-sourcing.html European Commission, REACH, http://ec.europa.eu/environment/chemicals/reach/reach_intro.htm European Commission Eurostat, Comext, http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/EDCNRP__Eurostat_COMEXT Lucintel (2011), Growth opportunities in the Global Composite industry, http://www.lucintel.com/LucintelBrief/OpportunitiesinGlobalCompositesMarketFinal.pdf.pdf Mubadala, Strata, http://mubadala.ae/sectors/aerospace/assets/strata China Gateway Home Page, Protecting Your Intellectual Property Rights (IPS) in China, http://www.mac.doc.gov/china/docs/businessguides/intellectualpropertyrights.htm Reports AmCham Export Compliance Working Group (2006), Composite Materials in the Aerospace Industry in China. ASD-Europe (2010), Facts and figures, 2009. ASD-Europe (2011), Fact and figures 2010. European Commission (2009), FWC Sector, Competitiveness Studies - Competitiveness of the EU Aerospace Industry with focus on Aeronautics Industry, Within the Framework Contract of Sectoral Competitiveness Studies ENTR/06/054, Final Report, http://ec.europa.eu/enterprise/sectors/aerospace/files/aerospace_studies/aerospace_study _en.pdf PMI Media Limited (2009), The growth of aircraft manufacturing in low-wage economies 2005-2009, http://www.pmi-media.com/PMi2005-2009.lowcostmanufacturingstudy.pdf Rand Corporation (2011), Ready for Takeoff, Chinas Advancing Aerospace Industry, http://www.uscc.gov/researchpapers/2011/RAND_Aerospace_Report%5B1%5D.pdf Commission of the European Communities (2009), Commission Staff Working Document, European Industry in a Changing World, Updated Sectoral Overview 2009, Brussels, 30.7.2009, SEC(2009) 1111 final. JEC Composites (2011), Overview of the worldwide composites industry 2010-2015 (2011 release).

41