Manufacturers in developing markets are already helping aircraft makers in developed ones to cut costs. That's just the beginning.
Christophe Bédier, Maxence Vancauwenberghe, and Wolff van Sintern
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).
but limited involvement to date
Despite these cost advantages, the aerospace industry’s push into emerging markets has been relatively slow. In fact, only about 3 percent of its output originates in these areas. By contrast, in the consumer electronics, automotive, and large-scale-equipment sectors, roughly 85, 33, and 18 percent, respectively, of all manufacturing takes place in low-cost countries.
Several distinctive attributes of the aerospace industry have caused Western OEMs in this sector to limit their involvement in emerging markets—for starters, the complexity of the industry’s technology; its extraordinarily high regulatory, quality, and safety requirements; the critical importance of protecting intellectual property in areas such as aircraft engine design or avionics; and the sometimes intimate relationship between military and civilian technology. Furthermore, aerospace manufacturing volumes are typically lower than those in other industries, and the level of design and production customization is higher than it is in many types of manufacturing.
As significant as these barriers have been in slowing the growth of emerging aerospace-manufacturing markets, counterbalancing forces have recently begun to turn the tide. These include offset requirements,1 particularly in India; significant government investments in China and projected investments in Russia; and sourcing and engineering partnerships (with Western OEMs) that have begun to accelerate the development of the capabilities of emerging markets. Chinese suppliers, for instance, now manufacture structural components for Airbus and Boeing and fuselage sections for Bombardier. Soon, they also plan to begin handling the final assembly of the Airbus A320. Indian suppliers provide engineering services for many industry players and also produce wing exit doors for the Boeing 757, landing gear boxes for the Boeing 777, and passenger doors for the Airbus A320. Russian and other Eastern European suppliers, too, work with Airbus and Boeing. Honeywell, GE Aircraft Engines, and Pratt & Whitney have been building plants and engineering centers in these countries as well (Exhibit 2).
