The Aerospace Industry: Prospects for Co-operation Among the IBSA Countries

1. The Aerospace Industry: Prospects for Co-operation Among the IBSA Countries Dr Mills SokoDirector, Mthente Research & Consulting Services (Pty) Ltd. Senior Lecturer, University of Cape Town SAIIA Research Associate

2. Overview • Project rationale & methodology. • Global context. • SA’s vision. • Findings. • Way ahead.

3. Project Rationale & Methodology • Purpose of report examine strategies for strengthening cooperation among IBSA countries in aerospace sector. • Based on in-depth interviews with representatives of 5 SA aerospace companies. • Denel. • Aerosud. • Reutech. • Grintek. • African Defence Systems. • Interviews informed by semi-structured questionnaire.

4. Project Rationale & Methodology • Questionnaire covered 7 areas. • General. • IBSA economic relationship. • South-South cooperation. • Capabilities. • Value addition. • Role of government. • Threats. • Also collected statistical information about aerospace companies. • Number of employees. • Annual sales. • Annual exports and imports etc.

5. Global Context • Aerospace industry key generator of wealth and driver of technological and economic development in industrialised countries. • Also crucial source of employment. • E.g. In 2000, European aerospace industry employed 429 000 people. • Global aerospace sector poised to expand by 25% in real terms in next two decades to $250 billion per year. • Yet industry remains dominated by few economic powers.

6. Global Context Annual sales of selected aerospace companies, 2000 Source: Paul Hatty, cited in AStrategy for Sustainable Economical and Growing Aerospace Industry, Pretoria: DTI, 2003

7. South Africa’s Vision • To develop aerospace sector as sustainable and growing industry by 2014. • To this end, government has sought to position sector as high-value global manufacturing industry and regional African transport hub. • DTI has unveiled Aerospace Industry Support Initiative (AISI) to bolster SA’s aeronautical, space and defence industries and encourage their full integration into global aerospace supply chains.

8. South Africa’s Vision • AISI seeks to achieve its objectives by: • Improving global competitiveness of aerospace industry. • Providing an institutional platform for encouraging partnerships and innovation among government, industry and academia. • Identifying, developing and promoting the interests and capabilities of the SA aerospace industry.

9. Competitive Strengths • SA’s competitive strengths are in avionics, aerospace systems development, and production of airframes and engine components. • Other capabilities include inertial sensor systems, integrated logistical support and aircraft protection systems.

10. Findings: South/South Cooperation • Currently very little or no aerospace collaboration between IBSA countries. • Respondents agreed on need for coooperation, but important to clarify rationale for such cooperation. • Is the objective of cooperating to compete with Boeing and Airbus? Or to have a sustainable high-tech industry that can provide skilled employment while making available tailor-made products to global manufacturers at reasonable prices?

11. Findings: South/South Cooperation • Three areas of potential cooperation identified. • First, expansion of aerospace supply chains, based on commercial opportunities offered by diverse capabilities of IBSA countries. • Premised on prospects offered by Embraer, Brazil’s regional aircraft manufacturer. • From SA perspective, demand for regional aircraft in Africa expected to grow in the future, with commercial carrying capacity poised to double over the next 6 years. • Provides opportunities for provision of SA-based aircraft maintenance, modification and upgrade infrastructure to service regional African fleet. • Also potential to create employment and spin-off companies.

12. Findings: South/South Cooperation • Second, collaboration on aerospace systems in support of strategic defence needs. • Global trend towards industrialisation of defence production offers opportunities for integrating domestic defence industry with global supply chains via international srategic alliances. • SA engaged in discussions with Brazil with view to upgrading/replacing some of Brazil’s ageing airforce hardware – mainly fighter jets, but also supporting sub-sytems. • Grintek made progress in entering Indian defence market – supplies Indian fighter aircraft with self-protection systems.

13. Findings: South/South Cooperation • Third, collaboration around small and micro satellites. • Brazil and India have strong competencies in small and micro satellites, including launching capability. • SA has small but reputable small and micro satellite industry and ground support infrastructure. • Respondents called for more integrated approach in these fields. • Exchange expertise and technology platforms, and foster closer working relationships between public and private sectors in IBSA countries.

14. Findings: Capabilities • Scope for developing better technological capabilities in aircraft and aircraft components production. • SA aerospace industry could exploit its competitive niche areas to integrate SA manufacturers with Brazilian and Indian aircraft production sectors through, for example, risk-sharing development and government-supported marketing efforts. • Concern that although IBSA countries have infrasctructure to develop vibrant aerospace sector, there was a lack of funding, a lack of defence coordination, and uncertainty about markets prepared to buy from IBSA grouping.

15. Findings: Capabilities • SA’s infrastructure capabilities vary: • Skilled personnel. • SA universities offer useful courses. • Aviation baseload underpins appoinment of new engineers. • Companies determined to further improve industry’s skills base • E.g. Aerosud plans to increase staff from 200 to 700 within 2 years to meet contractual obligations, has been investing in skills training in partnership with DTI & DST. • R&D spending low, but growing thanks to AISI programme.

16. Findings: Capabilities • Insufficient investment in manufacturing facilities and capital equipment. • Some companies, especially Aerosud, have led the way in investing in modern production methods and in increasing production output. • Insufficient financial resources. • The IDC is willing to offer financial support, provided a viable business case is made.

17. Findings: Value Addition • Europe and US high-cost manufacturers. • This offers oportunities for emerging economies. • But important to note that aviation is a high-risk business requiring very large upfront investments with long-term break-even times. • Value addition instruments most likely to yield optimal benefits. • Boosting R&D. • Shared research. • Joint marketing arrangements. • Technological exchanges.

18. Findings: Role of Government • SA government’s approach to aerospace industry pro-active. • Government’s role is to: • Provide aerospace sector with strong direction. • Collaborate with IBSA countries on projects. • Address concerns around import duties, tariffs, manufacturing and investment incentives, and transaction costs. • Provide subsidies for collaborative investment and manufacturing programmes.

19. Findings: Challenges/Threats • Corruption allegations levelled at Denel by Indian government. • Competition vs. Cooperation – Can IBSA countries develop common interest? Need for ‘win-win’ focus projects. • Problem of over-capacity and declining defence expenditure in Brazilian and SA defence industries. • Indian/Brazilian attitudes to SA government’s BEE policy. • Can SA’s Airbus/A400M strategy be balanced against imperative of South-South cooperation?

20. Way Ahead • Clear interest in SA in proposed aerospace programme. • DTI offered to host preliminary meeting of aerospace players in IBSA countries to explore ideas, proposals, plans and strategies that can take aerospace initiative forward.

21. Thank You