Services vs. Recession

It would be easy—but wrong—to conclude from recent events in the aerospace industry that its globalization efforts have gone too far. To be sure, both Boeing and Airbus have discovered, in developing their new aircraft, that involving suppliers from around the world creates complex management, coordination, and design integration challenges. Nonetheless, McKinsey research indicates that the industry’s globalization remains in its infancy. China, India, and Russia are likely to emerge as significant players over the next two decades, a development that will give Western companies major short-term cost-reduction opportunities that they must capture.

Over the longer term, however, these changes could promote the emergence of new players representing a novel form of competition for today’s incumbents. In addition, further specialization in design, manufacturing, and assembly is likely among both suppliers and existing original-equipment manufacturers (OEMs)—such as Airbus, Boeing, and Bombardier—in areas where they have unique value to add or a compelling cost edge. Specialization will go hand in hand with more extensive collaboration, placing a premium on an organization’s coordination and integration capabilities.

These conclusions are drawn from scenario-based modeling of the industry’s future. The modeling was rooted in an analysis of the current capabilities of about 120 suppliers in China, India, and Russia—as well as from interviews with senior executives at OEMs and suppliers in developed countries and from a historical perspective on the circumstances in which nascent aerospace industries thrive or struggle. The result is a road map for aerospace OEMs and suppliers, in both developed and emerging markets, that seek to navigate the changes ahead.

Surging demand and compelling cost advantages . . .

Demand for aircraft in emerging markets is surging. China, India, and Russia are expected to purchase more than 3,500 planes (roughly 15 percent of global demand) over the next two decades, according to consensus industry estimates. Naturally, those countries also want a piece of the action as suppliers of higher-value components—and eventually as assemblers of aircraft.

Currently, the chief attraction of these nations, especially China and India, as suppliers is lower labor costs. Our work with OEMs and suppliers indicates that even after accounting for transportation, the complexity associated with coordinating management and supply chains, and the expense of mitigating supply disruption risks, the cost of manufacturing typical aircraft structures (such as body panels or fuselage sections) can still be roughly 20 to 25 percent lower in these emerging markets than in more developed ones (Although Brazil also affords significant savings, this article doesn’t focus on it, because it already has a significant aerospace OEM—Embraer—in the regional-jet market.) The cost of labor, which on average is three to five times lower in these countries than it is in the developed world, also makes emerging markets attractive for labor-intensive maintenance and repair services (Exhibit 1).

*Source Mckinsey & Company