Tuesday, August 09, 2011

Building aircraft engines in Asia

P Raghavan

Three companies dominate production of large civil aircraft engine markets globally. They are Rolls-Royce PLC of the United Kingdom, Electric Engines/GEAE and Pratt & Whitney, both of the United States. Though Rolls-Royce, GEAE and P&W manufacture civil aircraft engines for most Boeing and Airbus models as well as Bombardier and Embraer regional jets, they largely confine their manufacturing facilities to their home countries or their neighbouring markets in advanced economies.

Rolls-Royce is giving a go-by to this trend, and is now expanding its Asian operations with new investments, including training facilities. It has plans for manufacturing and assembling engines in Singapore. The significant strides made by Rolls-Royce in boosting the local aerospace industry in Singapore provides an interesting blueprint for boosting the aerospace industry in other aspiring economies like India.

The company’s moves towards building aerospace engine facilities in Asia is a significant development as the aerospace industry at the global level is an oligopoly with the three engine manufacturers broadly having similar characteristics. All are highly diversified corporations, with engine sales contributing to less than half of their corporate revenues.

However, the oligopolistic power of the engine suppliers is limited due to the market specifics. Since the number of potential buyers of new aircraft are low, it ensures that the buyers of aircraft engines are essentially price makers. The selection of one engine type can lead to a domino effect, with other competing buyers following the same selection. Using their market power, airlines are now also increasingly seeking lifetime cost of ownership guarantees and reduced repair costs. The power of buyers has further increased in recent years as many airlines have become ‘global carriers’.

Global changes are making engine manufacturers open their eyes to new realities and to seek innovative ways to improve production and services. This is because the aviation industry has seen substantial changes in recent times. For instance, the number of air travellers had gone up from just 950 million a decade back to almost 2.5 billion in 2009. And estimates show that almost a half of the world’s manufactured exports are transported by air, a sharp rise from their one tenth share two decades back. To top it all, the Asian markets have burgeoned, making them the new growth pole and the focus area of most aircraft makers.

Adding to the momentum is the fast globalisation of the aerospace supply chain. More and more of the manufacturing is moving to such low-cost regions of America, eastern Europe and eastern Asia, giving original equipment manufacturers (OEMs) a richer portfolio to choose from. Apart from China, which has leveraged its huge demand for civilian aircraft to boost it aerospace industry, the other leading contender in Asia is Singapore, which has striven hard to build an aerospace hub, which has surprisingly achieved a record total output of Singapore $7.2 billion in 2010. With business confidence improving companies such as SIA Engineering Company (SIAEC) and Singapore Aero Engine Services (SAESL) opened new facilities.

One of the early major engine makers to invest in Singapore is Rolls-Royce PLC, which employs around 1,400 people together with its various joint venture partners, and has a 15% share of the country’s aerospace output. Today Singapore serves as the regional headquarter for procurement, communications, training & development and environment functions of the company.

An important landmark of the Rolls-Royce operations in Singapore was the establishment of the Singapore Aero Engine Services Limited facility at a cost of S$185 million for the repair and overhaul of Trent aero engines in 2001. By mid-2009 the facility had already delivered its 1,000th engine, motivating the company to further extend its facilities to increase overhaul capacity to 250 engines each year.

The opening of the Advanced Technology Center in collaboration with the Agency for Science, Technology and Research of the Singapore ministry of trade and industry, and the Nanyang technological university under the ministry of education in 2004 made the nation state an integral part of the Rolls-Royce global network for technology research. Adding to the muscle now is the recently inaugurated regional training centre, which is to be mainly used to train in-house personal that the company needs to service its Asian customers, who now account for around half its order book for new engines and for the Trent aero engine assembly, test and manufacturing facilities that are soon to be set up.

The writer has recently visited the Regional Training Facility in Singapore at the invitation of Rolls-Royce PLC


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