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IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem www.pwc.com Strictly Private and Confidential 2 December 2013.

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Presentation on theme: "IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem www.pwc.com Strictly Private and Confidential 2 December 2013."— Presentation transcript:

1 IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem www.pwc.com Strictly Private and Confidential 2 December 2013

2 PwC 2 December 2013 Key Messages Government support is essential to build an aerospace industrial base Align policies for synergies eg eligibility of a WOS as IOP Rationalise indirect tax provisions for level playing field and encouraging MRO 1 2 3 Simplify and clarify export procedure 4 FDI Cap 5 2

3 PwC 2 December 2013 Key Messages Clarity on equipment that requires an industrial licence Strategically leverage Offset policy eg multipliers for FDI in manufacturing, credit for domestic sales Companies need to invest and build capability for the long haul 6 7 8 Collaborations with global players essential 9 3

4 PwC 2 December 2013 Indian defence aerospace market continues to offer significant opportunity IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem 4 IAF has completed the first phase of its 15-year modernization plan that began in 2006 IAF envisages that it will procure assets worth more than 38 billion USD over the next two plan periods, thereby completing approximately 75% of its modernisation programme by 2022 India ranks among the top 10 countries in the world in terms of military expenditure and is one of the largest importers of conventional defence equipment as it strives to modernize its forces and replace obsolete equipment

5 PwC 2 December 2013 Recent policy changes in civil aviation and market potential has attracted OEMs, foreign airlines and domestic operators IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem Indian aviation sector has continued to experience high passenger growth over last few years Total domestic passenger traffic in India grown at a CAGR of over 15.8% between 2010 and 2012 India estimated to be among the top three aviation markets in the world by 2020. Currently, six domestic carriers operate in the Indian aviation space with a total fleet of over 400 aircrafts. Challenges Volatility in fuel prices Steep depreciation of Rupee High taxes on ATF imposed by State Government (3% to 30%) High charges, poor infrastructure at airports Lack of promotion of Indian airports as transshipment hub MRO industry not taken off due to indirect tax structure Recent entry of foreign players Singapore Airlines (SIA) – Has partnered with the Tata Group to target Indias full-service airline market, servicing both domestic and international routes Malaysia Air Asia plans to enter the low-cost carrier space in India, in partnership with the Tata Group and Telestra Teleservices Etihad Airways is in discussions to buy a 24% stake in Jet Airways to target the market's growing potential 5

6 PwC 2 December 2013 The Aerospace market offers significant growth opportunities but each has its own set of challenges IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem Aerospace Value Chain Funding needs Very high Medium for virtual systems Low to medium Medium to high Very high Low to medium Medium to high Technical capability needed Very highHigh Very high HighLowMedium Medium to high Manpower availability Limited – but increasing Yes, but insufficient technical skill Limited – Training support needed No - high levels of training needed Yes. Training needed Yes. High levels of training needed Time till participation >10 years0 – 5 years 5 - 10 years>10 years 0 – 5 years5-10 years Conclusion Very difficult to participate EOS, IT participation potential. Participation potential exists but focussed efforts are required to succeed No participation potential until significant capabilities have been developed and integrated Medium to high participation potential. There are multiple advantages to opening Asia based MRO operations with relatively low investments needed R&D Engg. Design Manufacturing Risk Sharing Partners Assembly / Testing Sales / Leasing Aftermarket and MRO Line maintenance Airframe heavy and modification Engine maintenance Component maintenance Other Tier 1, 2 and 3 suppliers Integrators / OEMs 6

7 PwC 2 December 2013 Global OEMs are quite entrenched in the Defence and Civil Aerospace markets IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem Finmeccanica Aerospace and defence market landscape Civil Aviation NSO (e.g. ONGC), private Tourism, news, emergency 3. Civil / commercial market Ministry of Defence Army Navy and Coast G. Air force 1. Defence market MHA and state governments CRPF Border forces Others (CISF) State police 2. Homeland security market Central Police Forces Services Engg. Design MRO Products 4. Support market UAC* Lockheed Martin HAL Northrop BAE System EADS EU US India Russia C 130J TAS**M&M Hawk, Jaguar HAL AW 119 Tata DRDO, HAL A320, A330 EC135 MQ-4C An-148 HAL MIG, Sukhoi, A-50EI MIG Sea Harrier Tejas,Dronie r 228 AW101 Dronier 228, HJT Rudra, LCH Mi-17 Dhruv, Cheetah 1.Export market potential will be highlighted at a high level only; 2. Aero structure market potential has been illustrated based on end user potential for aircrafts and helicopters; *United Aircraft Corporation's **Tata Advanced System Note: The list of aircrafts is indicative. The list of players in Indian market is not exhaustive Boeing C-17 P-81 737, 777, 787 Partner: TCS, IIT 7

8 PwC 2 December 2013 However, the Indian players are largely confined primarily to low end activities IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem Design Component Manufacturers AssemblyAftermarket High Low Complexity Design of complex structures and components Mission-critical software, product life- cycle management Testing services CAD design and documentation Procurement assistance Other Eng. Services (IT) Tier 1 Suppliers Power plant and propulsion devices Avionics Landing gear assemblies Critical firing control Tier 2 Suppliers Hydraulic systems Electrical power systems Surveillance systems Display systems Tier 3 Suppliers Castings and forgings Structural sheet metal components Wiring, cabling, etc Final assembly Body Solution design Spare parts Service and maintenance Inspections MRO Logistics solutions Current positioning of Indian suppliers 8

9 PwC 2 December 2013 There are adjacent opportunities the global and domestic players can pursue in the Indian Aerospace market IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem Aerospace and defence market landscape Civil Aviation NSOs 1, PSUs 2, private Tourism, news, emergency 3. Civil / commercial market Ministry of Defence Army Navy and Coast G. Air force 1. Defence market MHA and state governments CRPF Border forces Others (CISF) State police 2. Homeland security market Central Police Forces Services Engg. Design MRO Products 4. Support market Additional / Adjacent opportunities: Aircrafts: Significant planned procurement of military aircrafts over the coming years Missiles: India is strengthening its missiles capability - cruise, aircraft mounted, surface to air UAVs: Increasing focus on purchasing UAVs for different wings of armed forces (recon, attack), and MHA (police, anti-Naxal operations, emergency) Passenger and cargo: Expected to grow significantly with increasing growth in air traffic / growing economy Helicopters: Apart from huge potential market in defence (attack, transport, recon), applications like emergency medical services, news coverage, fire-fighting and law enforcement present a tremendous opportunity. NSOs dominate the market with 75% of the civil market, followed by government and private 2. Apply defence technologies for home & civil applications 1. Penetrate with defence portfolio MRO: Growing Indian market, saturating international MRO facilities, need for low cost destination to offload work 3. Extend horizontal capabilities / partner Priorities in India Integrated surveillance and security solutions: Borders, sensitive installations, cities / towns 9

10 PwC 2 December 2013 We see the Aerospace companies go through three stages of growth in India, which can be expedited with greater policy support IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem Phase I: Create Foundation Phase II: Growth Phase III: Home Market Ensure business sustainability Make functions and ops scalable Refine organization structure Brand & product strategy Support global supply chain Expand in the Indian market Manage talent and quality challenges Grow with customers, industries Focus on adjoining sectors Focus on new products not offered in India Leverage India capabilities as home market Service nearby countries using local supply chain to service global requirements Leverage India as a global R&D and design hub for global product development Phase 0: Market Entry Foundational Assets Trajectory of growth Establish presence in India Develop organization structure Make choices supply chain Develop functions to support business (HR, Finance, etc) Northrop Grumman, Rolls Royce, L&T, TATA, Mahindra, Walchand GEAxelTech Dassault, EADS, HAL, BEL Local Knowledge Government Relationships Licence to operate New Wave Originate New Wave Originate First Wave Export First Wave Export Second Wave Regionalise Second Wave Regionalise While the Indian Aerospace and Defence industry moves from an initial phase (onset of govt. support, complete reliance on imports), to a growth phase (supporting govt. policies, shift towards domestic production, technology transfer, entry of large private players, SMEs), it still has distance to travel to get to a mature phase (high indigenization, R&D, consolidation and a buyers market). While companies manage their own growth, they will have to keep pace with the industry and its changing nature 10

11 PwC 2 December 2013 Enhanced policy support: However, we need to work more to develop a synergistic policy regime IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem Indian enterprise not defined Lack of clarity on the eligibility of a WoS for offset credits Defence equipment not defined No clarity on dual-use items for civil and defence application Long and uncertain time lag for obtaining an IL 26% cap restricting investments Problematic conditions regarding ownership and control by resident Indian citizens of a listed company Conflicting views in GoI on the definition of direct and indirect FDI Lack of tax incentives to Indian vendors Taxes in the domestic supply chain adding to costs Indirect tax structure favouring export of goods and direct imports by MoD vis-à- vis local supplies to MoD DPP 2011 Industrial licence Lack of clarity on whether export/import licence is required for a dual use item Long and uncertain time lag for obtaining export/import licence Absence of list of friendly countries for free export FDI policy Export and import policy Tax regime 11

12 PwC 2 December 2013 Conclusion – Govt support essential for building aerospace industry IACC's Indo-US Resurgence Summit Strengthening the Aerospace ecosystem At macro level Benchmark against other countries Create a clear demand profile and streamline procurement Remove ambiguities in licensing and export policies Bring clarity on the definition of defence equipment Focus on limited platforms to build a vendor base Policy incentive and clustering for MSMEs Align policies to create synergies Procurement and governance improvements Cost of capital to compete At company level Build capabilities for the long haul Build capabilities for the global supply Chain Acquisitions and partnering to enter and grow Lead with the engineering design and IT areas to build Become a fabric of the industry 12

13 The information contained in this document is provided 'as is', for general guidance on matters of interest only. PricewaterhouseCoopers is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor. © 2013 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Thank you Dhiraj Mathur Executive Director National Leader, Aerospace and Defence PricewaterhouseCoopers Pvt. Ltd., India Tel: +91 124 3306042 Mobile: +91 9958419296 Email: dhiraj.mathur@in.pwc.com


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