EUROPEAN COMMISSION
Brussels, 15.09.2009 C(2009)6874 final
Subject: State aid N 357/2009 — United Kingdom Individual R&D aid to GKN ASL
Sir,
1. PROCEDURE
(1) The aid measure under assessment was pre-notified on 21 November 2008. Two meetings took place between the Commission and the UK authorities during the pre- notification phase, the first on 25 November 2008 and the second on 28 April 2009. The UK authorities notified the measure on 16 June 2009, and it was registered on the same day.
(2) On 10 July 2009, the Commission sent electronically a request for information to the UK authorities, to which the UK authorities replied on 4 August 2009.
(3) The Commission sent a request for a delay extension on the basis of Article 4(5) of Council Regulation (EC) No 659/1999 on 10 August 2009, which the UK authorities accepted on 17 August 2009.
2. DESCRIPTION OF THE MEASURE
2.1. Legal basis
(4) The legal basis of the notified measure is Section 1 of the 1982 Civil Aviation Act. It enables the Secretary of State to exercise a general duty of ‘organising, carrying out
The Rt Hon David MILIBAND Secretary of State for Foreign Affairs Foreign and Commonwealth Office King Charles Street London SW1A 2AH United Kingdom
Commission européenne, B-1049 Bruxelles – Europese Commissie, B-1049 Brussel – Belgium Telephone: 00 32 (0) 2 299.11.11
and encouraging measures for (…) the designing, development and production of civil aircraft’.
2.2. The beneficiary
(5) The beneficiary of the measure is GKN Aerospace Services Limited.
(6) GKN group is a global engineering business operating in the automotive, aerospace and off-highway sectors. The activities of the group in the automotive sector account for around 68 % of the group’s revenue and comprises GKN Driveline, Powder Metallurgy and other automotive companies, which supply a variety of components to the global car and light vehicle markets. The activities of the group in the aerospace sector account for around 21 % of the group’s revenue and comprise activities concentrated on structural components, propulsion systems and special components for both military and civil aerospace markets. The activities of the group in the off- highway sector account for around 11 % of the group’s revenue and comprise the design and manufacture of steel wheels and driveline systems for the global agricultural, construction and industrial machinery markets. The GKN group has operations in over 30 countries with 36 500 employees in subsidiary companies plus 3 500 in joint ventures. In 2008 it achieved sales of £4.6 billion and a profit of £167 million.
(7) The beneficiary of the aid, GKN Aerospace Services Limited, is a fully owned subsidiary of GKN plc. An acquisition programme in the late 1990s began to transform GKN into an international first-tier supplier to the world’s major prime contractors with participation in some of the world’s most advanced programmes, including the Airbus A380 ‘Superjumbo’.
(8) GKN Aerospace Services Limited supplies composite aircraft structures and is an active player in the design and manufacture of complex metal alloy structures and special products such as canopy systems, aircraft transparencies and de-icing systems. Approximately […]∗ % of GKN’s revenues are derived from the defence sector. The business operates from technology, engineering and manufacturing facilities in the US, Mexico, UK, Germany, India and Australia.
2.3. Context and description of the project
(9) On 19 December 2007, GKN was selected by Airbus as the preferred bidder for the wing component and assembly manufacturing facilities at the UK Filton site, and for the A350 XWB contract to design, develop and manufacture the rear spars and fixed trailing edge work packages (R&D project). On 14 September 2008, GKN signed the contract with Airbus for the R&D project. GKN’s acquisition of the site was completed on 5 January 2009.
(10) The R&D project under assessment consists of research and development activities on part of the A-350 XWB. The A-350 XWB family consists of three types of airplanes, the A 350-900 (which should be available from 2013), the A 350-800 (which should be available from 2014) and the A 350-1000 (which should be available from 2015). The A350 XWB is of conventional airliner appearance with a double-lobe (ovoid)
∗ Business secret. fuselage cross-section that gives a greater internal cabin width than previous Airbus types, uses significantly more new materials (with around 52 % composite compared to 26 % on the A380), flies faster than A330 Airbus aircraft that the A350 XWB complements and replaces (around Mach 0.85), offers the latest generation of engine technology (the Rolls-Royce Trent XWB) and improved fuel efficiency due to the increased use of light-weight composites. In order for these airplanes to be capable of flying long ranges, faster than previous Airbus aircraft and offer the latest generation of new engine technology, the necessary and significant weight reduction will be mainly achieved by introducing new all-composite wings and fuselage based on new materials.
(11) GKN will be responsible for the design, development and manufacture of the following components for the A350 XWB wings:
- Composite [...] rear spars; - [...]; - [...]; - [...]; - [...]; - [...]; - [...]; - [...].
(12) GKN will integrate the pre-manufactured spars with the fixed trailing edge components and assemble them into a complete trailing edge assembly. GKN will then be responsible for delivering the complete trailing edge structure for further integration into the wing structure.
(13) GKN will conduct industrial research (into material and design innovation process) and experimental development activities (regarding fibre placement manufacturing process, spar tooling, fixed trailing edge tooling, flexible assembly cells, one-way assembly, paint and sealant improvements, determinate assembly and metrology) from 2008 till 2015.
(14) GKN has developed strong wing capabilities, with an emphasis on composites. It became a design and build partner on the Airbus A380 Wing Trailing Edge that now has direct applications in propulsion systems such as the General Electric GenX fan case planned to power the B787. GKN expanded the scope of its deployment of composite technologies for the A400M composite wing spar programme which was the first use of composites on this scale on a primary wing structure. As an immediate follow on GKN Aerospace also secured the design and build full wing trailing edge programme.
(15) The A350 XWB will allow continuing development of technologies directly derived from the developments utilised in the A400M. However, the A350 XWB wing spars demand significant additional critical technology development compared to that of the A400M1 military airlifter spar package. The utilisation of composite materials for the A350 XWB wing structures will require significant engineering and manufacturing technology to meet the requirements laid down by Airbus for the A350 XWB
1 The Airbus A400M is a four-engine turboprop military transport and tanker, designed and built by Airbus Military. The first delivery is expected for 2012. programme. The formulation and materials development are specific to the A350 XWB and not based on any existing knowledge.
(16) The project will further enhance the knowledge of applying composite technology in the aerospace sector. This has several advantages. It has a smaller environmental footprint since composite components are much lighter than metal ones, leading to lighter aircraft which are more fuel efficient. It gives the airplane better structural integrity for equivalent weight and the ability to produce more complex shapes, which is important because of demanding design criteria for new aircraft. It also has advantages in terms of corrosion resistance, fatigue resistance and reduced life cycle costs due to low maintenance requirements.
(17) The project comprises ten work packages, whose main features are presented below.
Work package 1: Materials
(18) GKN is responsible for developing the requirements and processes specific to the A350 XWB of a composite material, called M21E, whose formulation is developed by Hexcel (Hexcel M21E). The chemical properties of the material present challenges in terms of the lay down and forming processes required.
(19) The composite material has been through several iterations and GKN has worked with Hexcel to maximise its processability at all stages of manufacture. This has included developing water jet cutting techniques as well as cutter development for machining and drilling.
(20) In addition to the composite material, GKN will install a new fastener system requiring new methods of installation to be developed and integrated into the manufacturing process. In order to fully optimise their design and manufacturing processes, GKN will need to undertake extensive coupon testing and development trials to fully evaluate the limits of the material properties and features.
Work package 2: Fibre placement manufacturing process
(21) The various stages of the composite manufacturing process for the A350 XWB rear spar will draw on the experience gained from shorter spars as part of A400M, but it has been further streamlined by an ever higher use of automated equipment, especially during the part-to-part jigless assembly stage. The challenge of this work package is that the gull wing profile of the wings, their length and weight require finding new fibre placement manufacturing processes. The gull wing profile of the wings results in highly curved inboard spars, which will provide a challenge for the production and fibre placement processes. The A350 XWB wing span is 50 % longer and much heavier than the A400M wing, which requires finding a technical solution to establishing the key parameters for the fibre placement machines and programming software. Wing loading rate improvement is needed — the A400M has a 140 tonnes maximum take-off weight, against 250 to 300 tonnes for the A350 XWB.
Work package 3: Spar tooling
(22) Mould tools must be made thinner than ever before to improve efficiency and achieve the specified high production rates. Thinner mould tools will reduce the time taken to heat them up and the overall heat burden. Though innovative in approach, the tooling concept selected for integration with the MTorres state-of-the-art AFP equipment has been developed by GKN in recent years and tested as prototype concept as part of the Automated Tape Layer equipment installed in GKN’s Composite Research Centre on the Isle of Wight. However, the pre-cured part handling and tool loading are new to this programme.
(23) The integration of a rotating mandrel with a high performance automated tape layer head allows the deposition of composite material tapes at very high rate on very complex geometries on both left- and right- hand components, at the same time reducing the machine’s setting up time and improving machine utilisation rates.
(24) The mandrel concept moves away from traditional metallic tooling philosophies for composite manufacture to that of a more efficient and lighter weight composite tooling structure built around a foam core. This gives a number of advantages. First, [...]. Secondly, the modular design of the mandrel allows GKN to build it in sections that can align with the desired spar design as and when design data is released. This philosophy then flows down into the cure tool and reduces lead times for all tooling, as well as protecting the programme against late changes through flexible design.
(25) A further challenge posed by the project is due to the exceptional length and taper ratio of each of the spar components. The mandrel for lay-up of these components represents the result of collaboration between GKN and […] to achieve a lightweight and high stiffness composite tool design for high-speed composite manufacturing. To achieve the required tolerance, […] has used for the first time in this type of application Ultra High Modulus fibres, which have been pre-pregged in their latest tooling resin system to produce a composite material system that delivers the required performance. Although analysis of the tooling material and the actual manufacture of the tools have been subcontracted to […], GKN is responsible for developing and specifying the design requirements.
Work package 4: Fixed Trailing edge tooling
(26) The A350 XWB Trailing Edge will be the first moving line assembly deployed for a complex trailing edge structure. There will be no static jigs — the spar assembly jigs are moved through the process. It is imperative that the jigs have a high level of stiffness to prevent the components from bending and inducing harmful stress into the aircraft components. Because of the effects on components of environmental conditions, temperature compensation must be built into the jigs, and tool construction will take into account the control of thermal variations. One solution is to use […]. Because the A350 XWB has three aircraft variants, GKN will deploy tooling concepts based on flexible designs that will eliminate large inflexible tooling suites currently deployed that take up space on the shop floor.
Work package 5: Designed innovation tooling
(27) The challenge is to apply new design processes and techniques to composite materials to enable the maximum benefit to be derived from the material’s strengths and to be able to work efficiently around its weaknesses. The A350 XWB rear spar will need to use new design methods, processes and engineering tools to develop the solution needed to meet the exacting requirements of the wing architecture. GKN will develop the engineering techniques to enable them to size the rear spar and the associated structure around it. (28) The methods and analysis will be purpose-derived for this aircraft application and material. This will be the first commercial application of placing fibres at varying angles in different parts of the same structure. The tools for dealing with the basic analysis of strength and stiffness will have to be reworked and it will affect the downstream optimisation of analytical tools determining the overall efficiency of the structure.
(29) Key to meeting this challenge will be to develop automated processes in the engineering activities that can fully evaluate the loading requirements and apply them to a model of the rear spar and determine the sizing requirements along its full 30m length. GKN will work closely with Airbus to develop, verify and validate a tool known as ICAD that will enable them to [...]. ICAD provides a considerable reduction in the overall lead time to size a spar and brings cost benefits to both businesses.
(30) The engineering solutions used today to design major structures are based on co- located teams working closely together, developing their own methods and taking an analytical approach to solving problems […].
Work package 6: Flexible assembly cells
(31) GKN will introduce a fixed trailing edge assembly flow line as part of the A350 XWB production process. This will be a step change away from the current assembly methodology of fixed assembly jigs with dedicated machinery, tooling and equipment.
(32) To achieve this it is necessary to devise, design and develop a manufacturing jig that will move around the manufacturing process on an automated handling system. These jigs will include automation to aid manual handling / positioning of the aircraft components and be able to reach manual work stations, five axis machining centres and robotic drilling equipment. They will also be able to lock together to form a complete trailing edge assembly.
(33) GKN will develop all the cutter technology and development to produce these parts, which have a [...], exceeding present experience and capability. Included in this process development will be the drill break out and positional control to maintain overall wing geometry.
(34) GKN will also develop a process that automatically scans the spar joint area and is able to automatically produce CNC programmes for machining the scanned components.
(35) Work will be required following first entry into service of each variant until the end of the project to bring in the final pieces of equipment to fully automate the factory floor rate. The way equipment is moved around the factory will be altered as the production rate increases.
(36) More automatic vehicles will be used to move the jigs between the machining centres and assembly bays. Developing the jigs to support the industrial solution will continue to the end of the project. In addition, there will be expansion into the full-sized factory layout and, to align it with all full lean processes, further work will be required on the layout and system controls, particularly with regard to the varying product mix. Work package 7: One way assembly
(37) GKN will work to develop key enablers to simplify the process to enable components to be sealed at initial positioning, drilled and then assembled (avoiding breakdown activity). No other product of this type is known to complete these operations in a single step. Key enablers to be developed are:
[…]
(38) GKN, as part of the project, will undertake further development and testing of drilling and reaming composite materials with the objective of cutting machining time by more than a half, reducing the number of tool changes required and producing the hole in one shot, eliminating the need for the machine to visit the hole twice, or for a change in the ream tool.
Work package 8: Paint and other sealant improvement
(39) The size and geometry of the spar components do not lend themselves to conventional robotic application, but that does not preclude the use of mechanical ‘scanning’ application, or mechanical aids to manual application.
(40) Paint thickness contributes to aircraft weight and is a key area to control the dry film thickness to within the specified range of [...]. When components are assembled, there is also a need to touch-up individual fasteners, as global spray-over impacts adversely on paint thickness and weight.
(41) GKN is working with Airbus to identify the optimum types of paint, both in terms of aircraft integrity and the environmental impact of the painting processes as part of the A350 XWB project.
(42) The work consists of development and improvement. Development is being undertaken to improve the task of oversealing internal areas, to reduce the risk of in- service leaks, to speed up the process, improve the ergonomics and minimise the weight of sealant to be applied for effective sealing.
Work package 9: Determinate assembly
(43) The challenge remains to bring together parts with final-size fastener holes, so that the tolerances on hole positions and fits actually define the relative location of the assembled parts - referred to as Determinate Assembly - while keeping reliably within the design requirements.
(44) Three key advantages of this are removal of match-drilling on assembly, removal of expensive and specific tooling to co-locate parts and removal of the need to confirm locations by subsequent measurement.
(45) GKN is investigating the design tolerance requirements of this work package and the methodologies that can be used to produce parts that meet the close and fundamental tolerance requirements for the Determinate Assembly process targeted for the A350 XWB project. The gap that remains to be closed to fulfil this aim is in the order of [...]. Work package 10: Metrology
(46) Most metrology, or measurement, processes required on the A350 XWB rear spars and fixed trailing edge package are to confirm that the parts meet design requirements or that they will be capable of assembly at later stages with no delaying mismatches.
(47) GKN is working to desensitise the manufacturing process and remove the need to take any measurements that do not have a direct bearing on structural integrity and manufacturing confidence.
(48) In parallel, metrology systems and component location techniques are being targeted to achieve the required accuracy with an appropriate capital cost and operating costs and level of operator skill, to minimise the impact of such ‘non-value-added’ activities.
(49) Integrating a rotating mandrel with a high performance automated tape layer head allows deposition of composite material tapes at very high rate on very complex geometries on both left- and right- hand components, whilst reducing the machine’s setting up time and improving machine utilisation rates.
2.4. R&D categories and eligible costs
2.4.1. R&D categories
(50) The project can be split into industrial research and experimental development activities. Industrial research represents 44.4 % of the total eligible costs of the project and experimental development represents 55.6 %. The work packages to be undertaken, and the categories of research into which they fall, are described in Table 1 below.
Table 1: Work packages by Research Category Work packages Research category Materials Industrial research Fibre placement manufacturing process Experimental development Spar tooling Experimental development Fixed Trailing Edge tooling Experimental development Design innovation process Industrial research Flexible assembly cells Experimental development One way assembly Experimental development Paint and sealant improvements Experimental development Determinate assembly Experimental development Metrology Experimental development 2.4.2. Eligible costs
(51) Out of a total of £[…] million of non-recurring development costs for the R&D project, eligible costs amount to £185.8 million. The UK Government deducted as ineligible £[…] million relating to instruments and equipment costs and building and land costs to ensure that only depreciation costs corresponding to the life of the research project based on good accounting practises were included.
(52) Eligible costs will be broken down according to the cost categories shown in Table 2 below:
Table 2: Eligible Costs by R&D Category (£ million at current prices) Eligible costs for the project by R&D category Industrial Experimental Total research development Personnel costs […] […] […] Costs of […] […] […] instruments and equipment Costs for building […] […] […] and land Cost of […] […] contractual research, technical knowledge and patents bought or licensed from outside sources at market prices Additional […] overheads incurred directly as a result of the research project Other operating […] […] expenses Total […] […] 185.8
* Personnel costs include direct engineering manning costs (salary, national insurance and any other payroll costs) together with overheads. Overheads include the engineering computing system, engineering management/administration and engineering facility/infrastructure costs. Overheads are converted into an hourly rate based on the total of direct engineering hours. ** ‘Other’ costs comprise mainly materials and consumable supplies for the design and development phase. They also include project-specific computer equipment, tools and software, training and costs relating to customer/supplier visits and meetings. 2.5. The aid instrument
(53) The aid will be granted by the UK to GKN in the form of a repayable advance of £60 million. The UK authorities intend to transfer the amount of the repayable advance to GKN in instalments […] starting in 2009-2010 and ending no later than […]. Any under-utilised amount in any year can be carried forward but not beyond […].
(54) The method of repayment is not over a specific period of time, but upon deliveries of ship sets (i.e. a set of rear spars and trailing edges for a single aircraft) from GKN to Airbus.
(55) The UK will start receiving repayments on the delivery of the […] ship set since the UK authorities recognise that GKN will need to reinvest the proceeds of the first […] sales to fund production.
(56) In case of partial success – that is, sales of ship sets exceeding […] but less than […] – the UK Government will apply a reduced return rate calculated according to the total number of transfers that has actually occurred. The break-even point of return for the UK Government occurs on the […] transfer.
(57) In the event that the […] forecast is achieved, 100 % of the repayable advance will be reimbursed with interest by the end of […], achieving a return of […]% nominal, which corresponds to […]% real. The […]% nominal interest rate was calculated on the basis of the current three-year UK HMT GDP inflation forecast and on a forecast sales profile of […] ship sets, irrespective of shipment timings. For each sale over […], GKN will pay the Government a levy (at a reduced royalty rate of £[…] between the […] and the […] sale, £[…] between the […] and the […] sale and £[…] from sale onwards.
2.6. Aid intensity
(58) The repayable advance is not expressed in gross grant equivalent but as a percentage of the eligible costs. It represents […] of the eligible costs of the project for industrial research and […] of the eligible costs of the project for experimental development. On average the repayable advance represents 32.29 % of the eligible costs of the project (£60 million out of £185.8 million of eligible costs).
2.7. Duration
(59) The planned investment will be made over […] financial years starting in 2009-2010 and ending no later than […]
(60) As already mentioned above, the repayable advance will be paid by the UK to GKN in instalments of £[…], starting in 2009-2010 and ending no later than […]
(61) The repayments will be based upon deliveries of ship sets, not on a specific time period. (62) Concerning the sale forecasts, the UK produced its own forecasts of sales2 taking into account existing aircraft demand and supply forecasts. Those forecasts result in a success scenario of […] ship sets delivered from […] till […] and an upside scenario of […] ship sets delivered from […] till […]. However, since previous Airbus programmes have remained in production for 25 – 30 years, it is possible that the production of A 350XWB could run beyond the […] years forecast.
2.8. Cumulation
(63) The aid can not be cumulated with other public aid in respect of the same eligible costs.
3. ASSESSMENT
3.1. Existence of aid
(64) The notified measure consists of a repayable advance granted by the UK to GKN ASL. The resources involved are State resources, as they will be provided directly by the UK Government. The measure is selective as it favours explicitly only one undertaking, GKN, to which it confers an advantage by financing part of its R&D costs. Since GKN is a large enterprise involved in trade with other Member States, a financial advantage favouring it compared to its competitors distorts or threatens to distort competition and affects trade between the Member States.
(65) Therefore the measure constitutes State aid according to Article 87(1) of the EC Treaty.
3.2. Legality of aid
(66) The UK authorities announced the support to GKN on 15 September 2008 but have not yet granted the aid. The UK intends to implement the measure only after authorisation by the Commission and, therefore, the UK fulfils the obligations imposed by Article 88(3) of the EC Treaty.
3.3. Basis for analysing the compatibility of the aid
(67) The aid under assessment is an individual aid which is not based on an aid scheme.
(68) Taking into account the objectives of the measure and the nature of the activities supported (industrial research and experimental development activities), the Commission has analysed the compatibility of the aid measure on the basis of Article 87(3)(c) of the EC Treaty, especially with regard to the Community Framework for State aid for R&D&I3 (hereafter the R&D&I Framework). The Framework provides for two levels of analysing aid.
2 For the time being, the A 350 XWB benefits from 478 orders from 29 customers, with 187 options and letters of intent. Source: Ascend aircraft database as at 16 February 2009. 3 OJ C 323, 30.12.2006, p. 1. (69) Chapters 5, 6 and 8 lay down the formal conditions for the compatibility of R&D aid measures. This corresponds to the first level of analysis.
(70) Chapter 7 sets out a methodology for analysing the compatibility of R&D aid when the aid is above a certain threshold. This threshold is set at €7.5 million if the project is not predominantly fundamental research or industrial research (predominantly meaning that more than half of the eligible costs are incurred through activities which fall within the categories of fundamental research or industrial research). The purpose of this assessment is to ensure that high amounts of aid for R&D&I do not distort competition to an extent contrary to the common interest, but actually contribute to the common interest. This happens when the benefits of State aid in terms of additional R&D&I outweigh the harm to competition and trade. The detailed assessment is proportionate, depending on the distortion potential of the case. The Commission analyses the positive and negative aspects of the aid described in Sections 7.3 and 7.4 of the R&D&I Framework. This corresponds to the second level of analysis.
(71) The project under examination consists predominantly of experimental development since this accounts for 55.6 % of eligible project costs. Since the repayable advance to the project exceeds €7.5 million, it is subject to a detailed assessment.
3.4. Market failure
(72) According to the R&D&I Framework4, market failures may prevent the market from achieving optimal output, and State aid may be necessary to increase R&D&I in the economy only to the extent that the market, on its own, fails to deliver an optimal outcome. Depending on the specific market failure addressed, the Commission takes into consideration the following elements: knowledge spill-overs, imperfect and asymmetric information and coordination failure. For State aid targeting R&D&I projects or activities located in assisted areas, the Commission also takes into account the specific problems related to these areas. In this case, the Commission found that the relevant elements are knowledge spill-overs and imperfect and asymmetric information.
3.4.1. Knowledge spill-overs
(73) R&D&I often generates benefits for society in the form of knowledge spill-overs, namely with reference to the level of information dissemination foreseen, the specificity of the knowledge created and the availability of IPR protection. Spill-overs are particularly high from R&D implemented in the aerospace industry.
(74) GKN will seek to maximise the project's profitability by managing the intellectual property rights of the project. GKN will identify valuable innovation and assess the most appropriate form of IP, file patents where commercially appropriate for GKN to do so, recognise the value of all types of IP including non-registered rights such as ‘know how’ (trade secrets), copyright and design rights, and ensure effective IP transfer from its suppliers.
4 See points 1.3.2 and 7.3.1 of the R&D&I Framework. (75) GKN’s investment in the development of the high-volume, cost efficient technologies required for the production of the A350 XWB composite wing structures will create new technologies that will yield benefits for other business sectors. However, as demonstrated by the UK, these positive externalities cannot be fully appropriated by GKN because the overall balance of private risk and reward to GKN is too small relative to the wider benefits to the economy as a whole.
(76) Knowledge spill-overs were widely substantiated for the UK economy and its implications for productivity of the aeronautic sector at large in a study by Oxford Economic Forecasting.5 Furthermore, the UK authorities provided information substantiated by the National Composites Network (NCN) report on how the research on composite by GKN could benefit other sectors than the aeronautic sector.
(77) GKN will provide its suppliers with technical, logistics and programme management support and share technical know-how with suppliers. This will result in technology spill-over to other sectors. In addition to the aerospace market, knowledge spill-over from the project will improve understanding of composite materials which could be applied to areas such as renewable energy, for example in wind turbines6 and wave power generation. Other potential sector uses include pressure vessels, the offshore industry and ground and marine transportation, where high fuel prices and environmental regulations are encouraging the move to light-weight vehicles. Some spill-over has already occurred in the automotive premium section with carbon fibre parts in use for high performance weight saving.7
(78) GKN must disclose aspects of the technological results of R&D work to its partners and suppliers on normal commercial terms. Each of the parties will develop their own foreground intellectual property which they will then use to develop the range of materials, machinery and services within their own domains. Creating these devices and services will then prompt other competitors in the supply chain to achieve similar results through different innovative means, thereby creating knowledge spill-overs. Some suppliers operate in other business sectors and will also improve their own products and processes on subsequent projects and programmes. GKN provides its suppliers with technical, logistics and programme management support which can involve engineers working at the supplier’s facilities to resolve technical issues and share technical know-how with suppliers. This will result in technology spill-over to other sectors.
(79) GKN participates in the NCN, which embraces the entire UK composites industry and supply chain. It is divided into Regional Centres of Excellence that provide support to SMEs by making expertise available to them and by helping to solve their specific technical problems. GKN has strong experience of knowledge transfer and technology dissemination through its role in the NCN, which is jointly funded by Government and industry. NCN technical support and know-how has helped develop composite-based products in other sectors, such as the automotive, construction and marine sectors.
5 Assessing the Economic Impact of Aerospace Research & Development, provided to the Commission by the UK authorities. 6 A factory of Vestas, a global manufacturer of wind turbine blades, is located close to the GKN plant on the Isle of Wight. As part of the National Composite Network activity (see Section 8.2A), the companies have worked together to evaluate aerospace materials and manufacturing technology application to this market. . 7 The use of composite structures in other sectors was also acknowledged in case N 657/2008 Aid to Short Brothers. GKN’s Composites Research Centre on the Isle of Wight is a major technical resource for the UK’s composites industry. It is recognised for its pro-active and professional approach benefiting SMEs in a range of industrial sectors. The provision of help and assistance to SMEs by that regional centre of excellence has been substantiated by the UK authorities, in particular specific assistance to businesses across sectors, such as equestrian equipment, sailing, engineering equipment, renewable energy and defence systems.
(80) GKN is committed to nurturing research by universities with the aim of it leading to commercial applications and the formation of spin-out companies. This could be across all sectors and could focus particularly on environmental technologies. The universities of Bristol, Bath, West of England, Plymouth, Bournemouth and Exeter are examples of academic institutions with strong capabilities and opportunities to create new world-class enterprises that can grow from high-quality research.
(81) GKN is involved in a number of key pan-European projects and industry-wide programmes. It participates in the EU TANGO (Technology Application to the Near term business Goals and Objectives) project. Funded at €84.6m and split equally between the EU and Europe’s aeronautics industry and research centres, it explores ways to create stronger and more simplified assembled airframe structures and sub- structures to achieve fuel efficiencies. GKN participates in ‘Advanced Low Cost Aircraft Structures’ (ALCAS), whose objective is to maintain and enhance the competitive position of the European aerospace industry in the face of significant challenges from strong global competition. Its specific objective is to contribute to reducing the operating costs of relevant European aerospace products by 15 % through the cost-effective full application of carbon fibre composites to aircraft primary structures, taking into account systems integration. GKN also participates in the Society of British Aerospace Companies Supply Chain for the 21st century programme (SBAC SC21). This is a change programme designed to accelerate the competitiveness of the aerospace and defence industry by raising the performance of its supply chains.
(82) The Commission therefore concludes that the project will entail significant knowledge spill-overs and the dissemination of technical knowledge to the benefit of the aeronautics sector, other industries and eventually to the EU as a whole. It is also very likely that some of the results of R&D will have industrial applications outside of the aerospace sector, in other complex manufacturing industries.
3.4.2. Imperfect and asymmetric information
(83) The main market failure cited by the UK is due to asymmetric information. The UK claims that the market would not provide all the requested financial resources, nor could GKN alone afford to self-finance the entire project, given its capital-intensive nature and the technical and commercial risks involved.
(84) The Commission, on the basis of its previous decisions, has assessed the asymmetry of information with specific reference to the company’s ability to obtain financing on the market and its need to do so. These variables are also affected by the very nature of the project underlying the request for funding. Projects targeting the development of new products, with high up-front investment and long delays for the return on capital encounter more difficulties in obtaining financing on the market due to the higher risks involved in successful completion. Therefore, the characteristics of both the project and the company were considered when assessing the asymmetry of information.
(85) On the basis of its past decisions, the Commission further notes that, when assessing market failure in the form of asymmetric information, it needs to take into account the fact that risks related to the aircraft sector are both of a general and specific nature, the latter relating to the type of projects carried out.
3.4.2.1. Risks linked to the aircraft sector
(86) The UK authorities indicated that the inherent risks of commercial aircraft programmes assumed by aircraft manufacturers are numerous and very significant. They include extensive research and development requirements and related significant up-front investment and general risks (such as higher costs and delays) associated with the introduction of new technologies and materials and their certification. Furthermore, competition and market access, including downward price pressure from amortised legacy aircraft programmes and national purchasing preferences, as well as aircraft market cyclicality, make it a particularly competitive and tough environment for new innovative products.
(87) Another important feature of the sector that introduces significant risks to aircraft development projects is that there are significant penalties and/or liquidated damages for late delivery. Product liability, warranty claims and aircraft performance guarantees are often important factors of risk. Exposure to foreign currency fluctuations, (which is in US dollars, even though costs will be incurred in multiple currencies) also impact the profitability forecasts. Lastly, it is a highly regulated environment and associated risks of changes to regulations are heavy for aircraft companies.
3.4.2.2. Risks and complexity of research project carried out by GKN
(88) Developing next generation technologies for large composite aero structures requires GKN to design a new manufacturing process, new tooling and moulds and new machines for the Airbus A 350 XWB aircraft. The project is capital-intensive with high technical and commercial risks, and a very long pay-back period ([...] unit sales are expected to be reached only by [...])
(89) There are significant technical risks associated with this project. The main technical risks concern the maturity of the technologies to be deployed on the aircraft. The spar is a completely new structure, which will require significant engineering and manufacturing technology to meet the requirements laid down by Airbus for the A350 XWB programme. Similarly, the demands for the development and assembly of the fixed trailing edge will drive the need for high levels of automated processes requiring research into new technology and capital investment. The particular technological challenges that GKN face are as follows, in comparison to the current state of the art in composite wing production (A400M)
- working with a new material, M21E, which has a much lower resin flow than the resins with which GKN is familiar and has only very recently been certified for use on aircraft, the A350 XWB being the first. The chemical properties of the material present challenges in terms of the lay down and forming processes required; - the inboard rear spar has many more features than the A400M, for example, the gull wing profile of the wings results in highly curved inboard spars, which will provide a challenge for the production and fibre placement processes (only low-level maturity); - the A350 XWB wing span is 50 % longer and much heavier than the A400M wing; - finding a technical solution to establishing the key parameters for the fibre placement machines and programming software will be a challenge and research is needed to develop the technology; - the spars will require high production volumes of up to 13 aircraft sets per month, which is higher in comparison to the rates required for the A400M ; - improvements are needed to the wing loading rate — the A400M has a 140 tonnes MTOW (maximum takeoff weight) compared to 250 to 300 tonnes for the A350 XWB.
(90) In addition to the technical risks, the project faces market and commercial risks. The sales of GKN depend on the sales of Airbus. Airbus has secured firm orders for 478 aircraft and has letters of intent, commitments and options for a further 187 aircraft.8 By comparison, the A350 XWB has received more orders at this stage of development than the A330. This represents a good launch base with subsequent re-orders anticipated by GKN from these customers over the life of the A350 XWB.
(91) Even though for the next few years the aerospace industry is expected to feel the impacts of a deep and globally synchronised recession, , according to forecasts, there still appears to be high demand for new aircraft programmes in the long term from emerging markets, replacement demand due to older aircraft needing to be replaced and old stock being rendered obsolete from new technologies. . Market forecasts by Airbus, Boeing and Rolls Royce are all predicting continuing robust growth in world passenger traffic in the range of 4.8 – 5 % per annum over the next two decades, with a consequential requirement for large numbers of new large civil aircraft. The ‘middle of the market’ sector for aircraft with seating capacities in the 250 – 375 seat range is particularly important as it will require substantial numbers of high-value aircraft. Aircraft manufacturers have competed in this market in recent years with twin-aisle aircraft types that include Airbus A300, A310, A330 and A340 and the Boeing 767 and 777 products (see below). Demand for new aircraft in this period is forecast to lie in the range of 5 200 – 5 800. When demand for new freighter variants is included, this increases to 5 944. The total value of this market sector is estimated by Airbus and Boeing to lie in the region of $1.1 – 1.3 trillion.
(92) Nonetheless, with entry into service of the A 350 XWB 900 in 2013, Airbus may struggle to maintain its order intake momentum in the downturn, which is expected to impact aircraft deliveries in 2010. Neither Airbus nor Boeing are particularly well positioned to soften the impact of the downturn on large suppliers, given the financial and industrial relations pressures both companies face. As a consequence, there is likely to be a strong downward pressure on profit margins from all customers as well as high capital expenditure requirements on GKN. A deeper and longer recession
8 Source: Ascend aircraft database as at 16 February 2009. impacting aerospace sales harder in combination with a serious decline in aerospace deliveries could negatively impact GKN’s revenues and profits.
(93) These technological and commercial risks affect the ability of the companies to attract investment from the markets, particularly for a research and development project.
3.4.2.3. External financing constraints: the aircraft sector
(94) The analysis of market failure takes into account the capacity of the market to deliver the project taking into consideration the behaviour of a fictive private investor. It is difficult to determine in abstracto, since the decision-making process of a company is based on several elements, including the number of projects that the company is carrying out and allocation of its resources, which are independent from the project.
(95) However it is possible to approach an in abstracto solution by comparing the internal rate of return (IRR) of the project and the weighted average cost of capital (WACC) of companies in the sector. If this WACC is above the IRR of the project, it means that the project, whichever company in the sector carries it out, would not have been financed by the market. If this WACC is below the IRR of the project, the risk margin has to be added to the WACC to estimate whether or not the project could have been financed by the market.
(96) On the basis of a PricewaterhouseCoopers (PwC) study of June 2008, the UK authorities gave the Commission some examples of WACC of companies active in the aeronautic sector (hereafter ‘the Comparators’). For instance, according to the broker HSBC Global Research, the WACC of BAE aerosystems, a global company engaged in the development, delivery and support of advanced defence, security and aerospace systems, amounted to 8.9 % in August 2007. In addition, according to the broker Credit Suisse, Finmeccanica, a major Italian industrial group operating globally in the aerospace, defence and security sectors, had the same WACC of 8.9 % in July 2007. According to the PWC Study, an appropriate hurdle rate might be in the range of 12.5- 14.5 %.
(97) The IRR of the project under assessment is [9-10,5] %, which is above the […]. However, considering the hurdle rate commonly applied to the sector, the IRR is insufficient for the project to be financed by the market and it is therefore possible to conclude that there is indeed a market failure.
3.4.2.4. External financing constraints: GKN
(98) Prior to its application for the repayable advance, GKN explored other possible sources of external funding and risk-sharing partners. However, GKN was unable to secure any external risk-sharing funding in the quantity and form needed to undertake the project in the UK.
(99) At the end of 2008, GKN had £675m outstanding in the Sterling debt capital market but given the fact that the Sterling market is closed, it is now highly unlikely that GKN could successfully issue in the Euro market, given the company’s revised credit rating by Moody. In the last quarter of 2007, investment grade issuers at BBB or below have only been present in the US market and there was little issuance of BBB or below corporate bonds in 2008. In addition, marketing an issue using the A350 XWB project as the need for funds would be difficult for a single issuer given the risks involved. In January 2009, GKN’s credit rating went from BBB- to BB+ because of the rapid and steep decline in global automotive volumes (with a ‘stable’ outlook reflecting the credit agency’s view that the countermeasures the company was putting in place would allow GKN’s credit metrics to recover from a trough in 2009 and return back to investment grade thereafter).
(100) Therefore from January 2009 on, bank borrowing facilities, debt capital market and private investments were not available to GKN for this project because of the economic and financial situation, the subsequent downgrading of GKN’s credit rating in January 2009 and the level of risk of the project.
(101) Concerning risk-sharing partners, GKN made direct approaches to […]Bank and […] Bank, […] known to have participated in risk-sharing financing arrangements for Airbus and suppliers in the past. However, they were unwilling to take any risk until the main programme had achieved commerciality. Since most of the risk is in the development period, and risk sharing at this stage is the main motivation behind risk- sharing finance, this arrangement was not pursued.
(102) As regards risk-sharing partners, […] was not in a strong enough financial position to offer viable risk and revenue-sharing support. GKN held discussions with the […] the suitability of the A350 XWB project for risk-sharing finance, but the […] which was not of interest for GKN because it did not solve its financing needs. GKN is now in discussions with [...] on additional funding on a commercial basis [...].
(103) Therefore, the need for public risk-sharing funding for the project can be explained by the fact that, due to the absence of commercial risk-sharing partners in the project, the GKN Group alone would not choose to undertake the project for the financial and risk arguments outlined above.
3.4.2.5. Internal financing constraints
(104) As explained in Chapter 7 of the R&D&I Framework, imperfect and asymmetric information may be due to the characteristics of the aid beneficiary in receiving external finance. The UK authorities provided the Commission with documents showing that, given the risks mentioned above, the GKN Group would be unlikely to finance the project on its own without the aid.
(105) The UK Government ordered an independent analysis by PwC of GKN’s application for aid. PwC looked in detail at GKN’s financials, credit metrics and analytical report, taking into account GKN’s financial position in early 2008. The PwC report confirms that given the risks mentioned above, the GKN Group would be unlikely to finance the project on its own without the aid. In particular it concluded that:
- the proposed investment in a single aerospace project (the R&D project as well as the acquisition of the Filton site, given that GKN would not proceed with the acquisition of Filton Operations without the A350XWB composite wing work packages as part of the deal) would involve much higher levels of investment and concentration of risk in a single project than is the norm with typical GKN projects and create an unacceptable imbalance of risks between GKN’s aerospace and non-aerospace businesses; - it would be difficult and possibly inefficient for GKN to use its existing cash and facilities. GKN is exposed to […]seasonal (c£[…]m) and intra- month (c£[…]m) swings in cash flow; - GKN had done all it could to generate capital through its restructuring programme; - in the prevailing market conditions, shareholders would be unlikely to support a significant rights issue for a very long-term aerospace project.
3.4.2.6. Conclusion
(106) The Commission has come to the conclusion that the market could not have financed the project alone without State aid, given the responses of the financial market to these types of risky projects, with a significant long-term return perspective and high initial investment. In particular, taking into account the nature of the project and its financial implications, the Commission can accept that GKN’s internal financial constraints made it too risky for the company to undertake the project without a risk-sharing partner. Finally, the Commission has received sufficient evidence that imperfect and asymmetric information have resulted in the company being unable to secure external financing.
3.5. Appropriateness of the instrument
(107) State aid for R&D&I can be authorised under Article 87(3)(c) of the EC Treaty when it is necessary to achieve an objective of common interest, as an exception to the general prohibition of State aid. An important element in the balancing test is whether and to what extent State aid for R&D&I can be considered an appropriate instrument to increase R&D&I activities, given that other less distortive instruments may achieve the same results.
(108) The UK has considered tax credits, the purchase of preference shares in the company and grants as alternatives for the support instrument.
(109) It was considered that the A350 XWB project did not apply for to funding via R&D tax credits, which are a general measure in the UK to stimulate private-sector investment in research and development by reducing business’ corporation tax liability. According to the UK, the existing scheme would not have been able to deliver the intended outcomes because of the inability to assist with the cash-flow investment requirement, and because of the higher cost of that instrument for the taxpayer compared to the repayable advance.
(110) The purchase by the UK government of preference shares in the company, in order to provide GKN with an income stream to fund the A350 XWB project, was not considered appropriate primarily since it runs counter to normal UK Government policy. This approach was only considered to be consistent with stated UK Government policy in the context of bank recapitalisation objectives to address market failure in the financial markets following the financial confidence crisis.
(111) A repayable advance was considered to be the most appropriate instrument taking into account the high level of funding required, the long timescale and complexity of the project, and the high level of commercial and technical risks involved. The UK government has chosen this aid instrument because it is significantly less distortive than a direct grant, with repayments at a real rate of return in the case of success, and additional royalties if the project exceeds the sale forecasts.
(112) The Commission also considers that the repayable advance is an appropriate instrument.
3.6. Incentive effect and necessity of aid
(113) State aid must have an incentive effect, i.e. result in the recipient changing its behaviour so that it increases its level of R&D&I activity. Analysing the incentive effect of the aid measure is the most important condition in analysing State aid for R&D&I. Identifying the incentive effect means assessing whether the planned aid will induce undertakings to pursue R&D&I which they would not otherwise have pursued.
(114) Chapter 6 of the R&D&I Framework lays down formal criteria to determine whether the aid has an incentive effect. As laid down in Chapter 6 of the R&D&I Framework, the aid does not present an incentive for the beneficiary where the R&D&I activity commences prior to the beneficiary applying for aid to the national authorities.
(115) GKN made the draft application for aid on 26 February 2008 and the final application for aid on 20 March 2008, before signing the contract with Airbus on the A350 XWB work packages on 14 September 2008. Therefore GKN did not commence the R&D project before applying for aid. Considering that the A350 XWB work started after the application for aid, the formal condition of Chapter 6 of the R&D&I Framework is fulfilled.
(116) When the Commission undertakes a detailed assessment of an individual measure, the indicators mentioned in Chapter 6 of the Framework may not be considered sufficient demonstration of an incentive effect, and the Commission may need additional evidence. In its analysis, the Commission takes into consideration the following elements mentioned in Point 7.3.3 of the R&D&I Framework: specification of intended change, counterfactual analysis, level of profitability, amount of investment and time path of cash flows, the level of risk involved in the research project and continuous evaluation. The UK authorities have provided all elements required under Point 7.3.3 of the R&D&I Framework enabling the Commission to assess the incentive effect of the aid.
3.6.1. Counterfactual analysis
(117) The aid has a strong incentive effect on undertaking the project since in a counterfactual scenario without aid, the notified project would not have been undertaken for the financial and risk arguments outlined above. According to the notification, the approval of the aid was a decisive factor for the GKN Board to decide whether to proceed with the A350XWB project.
(118) The chronology of the events shows that the company signed the contract with Airbus on the A350 XWB work packages only after having received a principle agreement from the UK government on public support, Table 3 – Sequence of events Milestone Date
Airbus announces details of its ‘Power 8’ restructuring plan including disposal of its facilities February 2007 at Filton Airbus identifies GKN and Spirit as the front runners for the acquisition of the Filton facilities June 2007 and the A350 XWB project GKN selected by Airbus as its preferred bidder for the Filton facilities and the A350 XWB work 19 December 2007 packages GKN submit a draft application to the UK Government for a repayable advance on a risk sharing basis to part-fund research, design and 26 February 2008 development of the rear spar and fixed trailing edge for the A350 XWB GKN submit final application to UK Government 20 March 2008 Following period of negotiation on the Letter of Intent UK government agree in principle to support 11 September 2008 GKN with £60m repayable advance GKN sign contract with Airbus for the A350 XWB 14 September 2008 work packages Agreement reached between Airbus and GKN on acquisition of the Filton facilities (subject to 14 September 2008 contract) UK Government announces support for GKN 15 September 2008 Airbus and GKN complete the sale of the Filton 5 January 2009 facilities
(119) According to the notification, the most likely alternative strategy would have been bidding for smaller A350XWB work packages relating to edge and rear spars from its existing US based facilities that have composite and other relevant technological capability.
3.6.2. Specification of intended changes
(120) Compared to the counterfactual situation where the project would not have been carried out without aid, the change brought about by the aid can be summarised as follows:
- the effect of the aid on the increase in the total project costs is an increase in the project costs for GKN of up to the total non-recurring costs of the project i.e. £[…] million; - the effect of the aid on the increase in the number of people assigned to R&D&I activities, is, on average over eight years of R&D&I, […] people a year; - the effect of the aid on the increase in the scope of the project is the entire scope of the project, which would not otherwise have been undertaken; - the effect of the aid on the increase in the amount spent on R&D&I in the framework of the project amounts to the total non-recurring project costs of £[…] million. In 2008, the first year of the A350 XWB project, GKN’s R&D spend increases to […]% of turnover in view of the additional £[…] million of R&D spent on the project, and peaks at […]% of turnover in 2009 due to £[…] million spent on the project.
3.6.3. Profitability
(121) Considering the risks involved and the scale of investment, GKN would not proceed with the project without the aid. This is because the A350XWB project would not provide the rate of return required by the GKN Group for this type of investment. In its report commissioned by the UK authorities to analyse the incentives of GKN in different scenarios, PwC analysed the viability of the profitability assumptions.
(122) The project's profitability should be compared to the return rate required by GKN for such investments (the hurdle rate). GKN estimates that this hurdle rate should amount to […]% given the high risks involved. However, the PwC report questions this hurdle rate using benchmarks of previous aerospace projects and concludes that a realistic hurdle rate should be in the range of […]%, based on […] for the A350XWB project (post-tax nominal) and a premium of 3% to 5%.
(123) Based on the financial projections prepared by the company, the report indicates that without aid the A350XWB project alone would generate an Internal Rate of Return (IRR) of [9 -10,5]% with a Net Present Value (NPV) of £[…] million (a […] % discount rate has been applied to calculate the IRR and NPV values), which is below the hurdle rate required for this kind of investment. The aid improves the profitability of the project to the IRR of […]% with a NPV of £[…] million, thus closer to the minimum hurdle rate.
Table 4: Profitability of the R&D project in a scenario of […] sales R&D project Without aid With aid IRR, % [9-10,5] % […] NPV, GBP million […] […]
(124) It has to be taken into account that the profitability analysis does not factor in important strategic advantages of the project for GKN. Through this project, GKN has the chance to become a long-term risk-sharing partner with Airbus for other future contracts. GKN could therefore be ready to accept lower returns for the project because the strategic and geographic advantage of being co-located with Prime (Airbus) at Filton offers a further benefit to GKN on this and future aircraft programmes. By bringing the IRR of the project sufficiently closer to the minimum hurdle rate, the aid would thus enable GKN to undertake such project. (125) The impact of the aid is even more evident when the risk-sharing is taken into account. In providing the repayable advance, the UK Government becomes a full risk-sharing partner with GKN. In the worst scenario that the project fails (sales below […]), GKN would not need to reimburse the repayable advance at all. In a downside scenario, the loss of sales compared to the sales forecasts of […] would be partially compensated for GKN by a lower reimbursement rate of the advance to the UK government. As a consequence, the repayable advance reduces the overall risk for GKN and increases the likelihood that the project will be profitable for GKN.
(126) To quantify the effect of the repayable advance in terms of risk-sharing, in a downside scenario ([…] unit sales, instead of […]) GKN would have to reimburse £ million to the UK authorities instead of […] million. In the downside scenario, without aid the R&D project would generate a negative NPV of […] million with an IRR of […]%, while the aid leads to a positive NPV of £ […] million and the IRR of […]%.
3.6.4. Investment amount and cash flow
(127) High start-up investment, low level appropriable cash flows and a significant fraction of cash flows arising in the very long-term future are considered positive elements in assessing the incentive effect.
(128) As Table 5 below shows, the A350 XWB project has high start-up investment costs between 2008-2013 which far exceed revenues in the early years of the project. Revenues are forecast to ramp up gradually over this period to peak in the period 2014-2020.
Table 5: Profit and loss and cash flow with and without aid ([…] sales and £60 million aid)
[…]
(129) With the repayable advance, the A350 XWB project generates a cash inflow of £ […] million, although at the beginning of the project there are significant net cash outflows as a consequence of the high start-up costs and repayments on the repayable advance.
(130) In comparison, without the repayable advance, the project generates a higher cash flow of £[…] million (as there would be no repayments on the aid) but with higher cash outflows at the beginning of the project as a consequence of the high start-up costs and no repayable advance being provided during the peak years for the R&D phases.
(131) Over the lifetime of the project, cash flow without the repayable advance is around £[…] million higher than with the repayable advance due to the fact that GKN would not be making repayments on the advance.
(132) In addition, according to the information provided by the UK authorities, GKN does not have the necessary appropriable cash flow. At the end of 2008, GKN had approximately £350 million of liquidity primarily in the form of their revolving credit facility. However, since it is due to mature in 2010, it could not be regarded as a means of funding a capital requirement with a much longer payback horizon. GKN is also exposed to […] seasonal (c. £[…] million) and intra-month (c. £[…] million) swings in cash flow. (133) Therefore GKN needs the repayable advance to help finance the high level of investment required for the peak R&D phases in the early years of the A350 XWB project, even though this would reduce its profitability and cash flow overall against a hypothetical situation of no market failure. Without the repayable advance, the high start-up costs for the project in the early years would put a significant and unacceptable strain on GKN’s financial position.
(134) The level of risk of the project detailed above in Section 3.4.2.2. is substantiated by the UK authorities, including by the PwC report. The report indicates that a single aerospace project of this magnitude without the aid would create an unacceptable imbalance of risk between GKN’s aerospace and non-aerospace businesses. This shows that the project is not sufficiently profitable without aid, which supports the assertion that the aid has an incentive effect.
3.6.5. Continuous evaluation
(135) The Commission accepts the assessment of the incentive effect of the projects, which define well-specified milestones resulting in the project being terminated in the event of failure and provides for publicly available ex-post monitoring.
(136) The project under assessment is subject to continuous evaluation against the information GKN is required to provide under Schedule 5 of the Letter of Intent signed between GKN ASL, GKN holdings PLC and the Secretary of State for Business, Enterprise, and regulatory reform. It stipulates that the repayable advance will be paid in instalments corresponding to the progress of the project and following the submission by GKN of financial and reporting information detailing eligible expenditure (annual audited consolidated financial statements of the group and of GKN, quarterly management accounts of GKN etc.).
(137) The UK Government will also hold regular project review meetings with GKN to discuss both technical progress on the A350 XWB project (each work package having its own milestones) as well as progress on the A350 XWB project as a whole. As part of its de-risking strategy, the UK Government structured the offer so that GKN’s expenditure is at least three times greater than that of the Government at all times.
(138) The UK Government also requires that, before each draw down of funding by GKN, it needs to confirm that it remains in compliance with financial covenants under its banking facilities.
(139) The data provided by the UK authorities allow the Commission to conclude that the project under examination is subject to continuous evaluation.
3.6.6. Conclusion
(140) The data provided by the UK, in particular the fact that GKN waited for the aid agreement in principle from UK before signing the contract on the R&D project with Airbus, the conclusions of the independent analysis by PwC on the project, the level of profitability of the project compared to the hurdle rate revised by PwC, the time path of cash flow, all demonstrate that GKN would most probably not undertake the project in the absence of aid. Therefore it can be concluded that the aid has an incentive effect on the company. 3.7. Proportionality of the aid
(141) Section 5.1 of the R&D&I Framework sets out formal conditions for analysing the proportionality of State aid to R&D. Compliance with these rules is examined in Section 3.7.1 below, as regards research categories and eligible costs, in Section 3.7.2 for aid intensity and Section 3.7.3 for the modalities of reimbursing the advance.
(142) The R&D&I Framework states that additional information is necessary to demonstrate the proportionality of aid above certain thresholds. In accordance with Point 3.3.4 of the R&D&I Framework, the Commission analyses in Section 3.7.5 of this Decision the extent to which the aid to GKN is limited to the minimum necessary. Finally, compliance with the cumulation rules set out in Chapter 8 of the R&D&I Framework is set out in Section 3.7.4.
3.7.1. Research categories and eligible costs
(143) In accordance with Point 5.1.1 of the R&D&I Framework, the Commission referred to its own practice to check the breakdown of R&D activities between the categories of industrial research and experimental development. Examination of the description of the breakdown given by the UK authorities allows the Commission to conclude that the proposed breakdown complies with the definitions given in Points 2.2 f) and g) of the R&D&I Framework.
(144) The R&D activities of the work packages on materials and design innovation process constitute industrial research within the meaning of Point 2.2 f) of the R&D&I Framework. They constitute planned research or critical investigation with the aim of acquiring new knowledge and skills for developing new products and processes or for bringing about a significant improvement in existing products and processes. They do not include the design of prototypes.
(145) The R&D activities of the work packages on fibre placement manufacturing process, spar tooling, fixed Trailing Edge tooling, flexible assembly cells, paint and sealant improvements, determinate assembly, one-way assembly and metrology meet the definition of experimental development set out in Point 2.2 g) of the R&D&I Framework. These activities consist of acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills for the purpose of producing plans and arrangements or designs for new, altered or improved products, processes or services. These activities may comprise producing drafts, drawings, plans and other documentation, provided that they are not intended for commercial use.
(146) The Commission has also checked that the eligible costs proposed by the UK authorities comply with the eligible costs listed in Point 5.1.4 of the R&D&I Framework:
- personnel costs are included to the extent that researchers, technicians and other supporting staff are employed on the research project; - the only costs included for instruments, equipment and buildings are the depreciation costs corresponding to the life of the research project, as calculated on the basis of good accounting practise; - land costs are eligible to the extent and for the duration used for the research project. Costs of commercial transfers of actually incurred capital costs are eligible; - additional overheads included are incurred directly as a result of the research project. They cover the engineering computing system, engineering management/administration and engineering facility/infrastructure costs; - other operating expenses, including the costs of materials and consumable supplies for the design and development phase, as well as project- specific computer equipment, tools and software, training and costs relating to customer/supplier visits and meetings.
3.7.2. Aid intensity
(147) The modalities of reimbursement of the reimbursable advance also comply with the modalities set out in the R&D&I Framework. The repayable advance is expressed as a percentage of the eligible costs.
(148) A set out above in Paragraph 58 above, the repayable advance amounts to 32.29 % of eligible costs: [...]% for industrial research and [...]% for experimental development. The percentages are lower than the R&D&I Framework’s ceilings for repayable advances for industrial research (at 60 %) and experimental development (at 40 %).
(149) This therefore complies with the provisions of the R&D&I Framework.
3.7.3. Modalities of repayment of the repayable advance
(150) The R&D&I Framework sets out in Point 5.1.5 the modalities of reimbursement applicable to repayable advances in different scenarios of a project’s success.
a. In the event a project fails, the advance does not have to be fully repaid. b. In the event of partial success, the Commission typically requires that the repayment secured is in proportion to the degree of success achieved. c. In the event of a successful outcome, the measure must provide that the advance is repaid with an interest rate at least equal to the applicable rate resulting from the application of the Commission notice on the method for setting the reference and discount rates.9 Detailed provisions on repayment in the event of success and a clear definition of what will be considered as a successful outcome of the research activities must be sent to the Commission which will examine that the definition of a successful outcome is established on the basis of a reasonable and prudent hypothesis. d. In the event of success exceeding the outcome defined as successful, the Member State concerned should be entitled to request payments beyond repayment of the advance amount, including interest according to the reference rate set by the Commission.
9 OJ C 273, 9.9.1997, p. 3, replaced by the Communication on the revision of the method for setting the reference and discount rates adopted on 19 January 2008 which entered into force on 1 July 2008 OJ C 14, 19.1.2008, p.6. (151) As mentioned in Paragraph 55 above, in the event that the project fails, with sales below […] ship sets, there is no reimbursement at all from GKN to the UK Government, the later therefore taking the risk of a total loss of capital.
(152) In the event of partial success — that is, sales of ship sets exceeding […] but less than […] - the UK Government will apply a reduced return rate calculated according to the total number of transfers. Therefore the Government takes the risk of not recovering the full amount of the repayable advance plus interest in the event of a partial success.
(153) As mentioned above in Paragraph 57, the UK authorities consider a successful outcome for that project to be the sale of […] ship sets by […]. The UK Government’s forecast of […] ship sets was calculated to maximise the likelihood of success and a full return on its investment. It is less optimistic than GKN forecasts, which is [...] sales by […]. In the event that the [...] forecast is achieved [...], 100 % of the repayable advance will be reimbursed to the UK government with interest by the end of […] achieving a return of […]% nominal ([…] % real rate). The […]% rate payable on the amount of the repayable advance in the event of a successful outcome is above the rate resulting from the application of the Commission notice on the method for setting the reference and discount rates.
(154) The Commission notes that the UK authorities provided sufficient evidence that the forecast sales used as a reference for the reimbursement of the advance is prudent. It is lower than the forecast used by GKN itself and assumes that there is a […] years delay of entry into service of the airplanes, that there is a 10 % increase in non-recurring costs and a 10 % weaker dollar. The Commission considers those assumptions and the resulting number of […] of sales in […] as reasonable. Furthermore, the reimbursement mechanism will also ensure that GKN continues to pay a levy beyond the success scenario, in line with Point 5.1.5 of the R&D&I Framework.
(155) As indicated in Paragraph 57 above, in the event of success exceeding the outcome defined as successful, that is exceeding […] sales, the UK Government will receive payments beyond repayment of the advance with interest according to the Commission Communication on discount and reference rates. In this case, GKN will pay the UK Government a royalty amounting to £ […] between the […]st and the […] sale of ship sets, £[…] between the […]st and the […]th sale and […] from the […]st sale onwards.
(156) The UK authorities provided sufficiently convincing data to allow the Commission to conclude that the definition of a successful outcome has been established on the basis of a reasonable and prudent hypothesis and that the conditions of the repayable advances comply with the R&D&I Framework.
3.7.4. Cumulation
(157) The aid cannot be cumulated with aid received from other local, regional, national or Community schemes to cover the same eligible costs. Therefore the conditions set out in Chapter 8 of the R&D&I Framework have been met. 3.7.5. Aid limited to the minimum necessary
(158) In addition to the proportionality check, under Point 7.3.4. the Commission assesses whether the aid is limited to the minimum amount necessary to implement the project in question.
(159) Firstly, the aid for the R&D project under assessment is granted in the form of a repayable advance. This tends to reduce the aid to the minimum necessary. Depending on the outcome of the project, the aid element is higher if the project fails and lower if the project is a success.
(160) Secondly, the UK Government rigorously appraised the request to provide a repayable advance for the A350 XWB project. Against eligible costs of £185.8 million (compared to GKN’s total non-recurring costs of £[…] million) the UK Government calculated that a maximum repayable advance of £74.3 million could be provided (40 % of the eligible costs) against GKN’s bid of £[…] million. This figure was then further reduced to £60 million, partly on the grounds of affordability and partly through negotiation. The UK Government has a policy approach of supporting only up to 33 % of the total non-recurring design and development costs.
(161) On that basis, the Commission considers the aid to be proportional and limited to the minimum necessary.
3.7.6. Conclusion
(162) , In conclusion, the Commission the aid is considered to be proportionate.
3.8. The distortion of competition and trade
(163) Section 7.1 of the Community Framework specifies that the purpose of a detailed assessment is to ensure that high amounts of aid for R&D&I do not distort competition to an extent contrary to the common interest, but actually contribute to the common interest.
3.8.1. The affected markets
(164) The project under assessment is research and development for the design and production of large-scale composite structures for the wing of the new A350 XWB aircraft. The impact of the aid has first to be examined on the market of aero structures, which is a global market covering aircraft fuselages, wings, nacelles, undercarriages, pylons and empennages.
(165) The global aero structures market is highly fragmented, both in terms of size and geography. According to the UK, there are 50 significant aero structures companies in the North America, 50 more in Europe and less than 20 significant companies in other regions. In addition, emerging suppliers in the Far East, India and Russia are increasing their efforts to secure major aero structures packages on a global basis and developing their capabilities through indigenous programmes (civil and military).
(166) The aero structure market is estimated to have been worth a total of $35.9 billion in 2008 and is expected to grow at a rate of around 2.5 % per year over the next ten years. - Almost half of the work in the overall aero structures industry ($15.9 billion) is performed in-house by the Prime manufacturers on their own programmes due to complexity and technology. Whereas historically aircraft manufacturers (hereinafter referred to as ‘Primes’) used to be vertically integrated and design and manufacture the aircraft in-house, over the last decade they have increasingly outsourced the manufacture of many aircraft component parts to external suppliers. Outsourcing concerns both manufacturing and design of aircraft components. This has led to the creation of an aero structures industry, competing with the in-house capabilities of the Primes. - Another important share of the market (worth $13.2 billion) is performed by suppliers who have proven themselves over time and are often closely tied into a relationship with one or two Primes (known as Tier 1 suppliers). There are some 60 Tier 1 suppliers. Within the category of Tier 1 suppliers, it is possible to distinguish suppliers that are capable of supplying the largest, most complex components for sub-assemblies and whose capabilities often overlap with those of the aircraft manufacturers themselves (commonly referred to as Super Tier 1 suppliers). Such Super Tier 1 suppliers include Spirit Aerosystems (US), Alenia (Italy), Goodrich (US), Mitsubishi (Japan), Vought (US), Aircelle (France) and now GKN, following its acquisition of the Airbus facilities at Filton. Their emergence has reflected aircraft manufacturers’ demands for higher levels of investment in both technology development and highly automated manufacturing capital and facilities. These Tier 1 and Super Tier 1 are the competent suppliers that could be risk-sharing partners in the design and manufacture of essential aircraft components. - The remaining share of the market (worth $6.8 billion) is accounted for by Tier 2 suppliers providing aero structures either to the Primes directly or to Tier 1 suppliers.
(167) From a demand-side perspective, within the aero structures market there is a wide range of capability and competence. Depending on the complexity of the component (with wing and empennage being two of the most complex), it is in the Prime’s interest to select the best supplier. Furthermore, aircraft manufacturers can choose a variety of materials from which to manufacture aero structures at the aircraft design and development stage. Traditionally, aero structures were made out of metallic materials (predominantly aluminium), however, increasing use is being made of composite aero structures, whose use is now growing faster than the use of metallic aero structures. In fact, much of the demand for composites is driven by improving performance to meet environmental requirements as well as cost of ownership and operational drivers. Composite materials offer better performances than metallic materials in terms of weight and therefore, the composite content of current and future Boeing and Airbus programmes is likely to exceed 50 % of the total content.
(168) From the supply side, all Super Tier 1 suppliers and some of the larger Tier 1 suppliers10 have the capability to design and manufacture aero structure components of different types. The market is highly fragmented along size and geographic lines.
(169) As regards the composite aero structure segment of the aero structure market, which accounts for $5 billion of the total aero structure market in 2008 with growth forecasts
10 Including SAAB and Stork, who also bid for the A350 XWB work packages. of 11 % from 2008 to 2018, no precise data are available on the market shares of companies in that segment.
3.8.2. Distorting dynamic incentives
3.8.2.1. Aid amount
(170) The repayable advance amounts to £60 million out of a total of £185.8 million and £[…] million total non-recurring costs. This amount is low compared to the total amount of R&D&I investment in the aeronautic sector: in 2007 the top 850 UK companies in the aerospace and defence sector invested £1.3 billion in R&D&I. Globally, the sector invested £11.1 billion split between the top 1400 global companies.
(171) The aid amount is therefore not likely to dissuade any aircraft component supplier to invest in research. Therefore the amount of the aid to GKN will not distort the incentives for aircraft suppliers to continue their activity and research in this field.
3.8.2.2. Closeness to the market
(172) Industrial research represents 44.4 % of the total eligible costs of the project whereas the experimental development represents 55.6 %. Industrial research is far from the market. In principle, experimental development is closer to the market and still represents 55.6 % of the eligible costs. However the aid is granted exclusively in the form of a repayable advance, which by nature has a less distortive effect than other forms of aid.
(173) The Commission notes that, given that GKN’s total costs for this project, including manufacturing, are estimated at £[…] m, made up of recurring costs of £ […] m and non-recurring costs of £[…] m, the investment required is very high before prod ucts can be commercialised and therefore the aid is very unlikely to have a crowding out effect.
3.8.2.3. Open selection process
(174) The Commission notes that the aid beneficiary was selected after an open selection process carried out by Airbus, not by the UK authorities. This is, however, to be regarded positively. Airbus, being the final buyer of the product resulting from the R&D&I phase, is in the best position to set the technical specificities of the project and to select the best offer from a technological, economical and commercial point of view.
(175) Therefore the selection process, even though it was not conducted by the authority granting the aid, is deemed to have encouraged competition between companies active on the market of aircraft aero structures and the aid subsequently granted to the winner of that process is not deemed to have distorted the dynamic incentives on the market.
3.8.2.4. Exit barriers
(176) Point 7.4.1 of the R&D&I framework indicates that the existence of exit barriers may reduce distortions of competitors’ dynamic incentives. (177) Barriers to exit from the aerospace industry are high, since aero structures’ manufacturing facilities require highly specialised engineering plant and machinery that cannot easily be applied to other products or sold to other industries.
3.8.2.5. Incentives to compete for a future market
(178) The aid is granted to the project described in Section 2.3 above. The Commission will examine whether it could discourage competitors to compete on the aero structure market in the future.
(179) In this case, the Commission estimates that there is no significant risk for at least three reasons.
(180) Firstly, as mentioned above, there are already a large number of Tier 1 and Tier 2 aero structures suppliers. GKN faces competition from Super Tier 1 suppliers (including Alenia, Goodrich, Mitsubishi, Spirit Aerosystems, Vought and Aircelle), a large number of Tier 1 composite and machine component sub-assembly providers (including Aircelle, Fuji, Hawker de Havilland Australia, Korean Air, Latecoere, Saab, Short Brothers, SONACA and Stork) and a number of other sizeable independent Tier 1 and Tier 2 suppliers (including companies such as ATK, CTRM, FACC and BHA (China)). In addition, emerging suppliers in the Far East, India and Russia are increasing their efforts to secure major aero structures packages on a global basis. Three of the major wing component providers, Spirit AeroSystems, Premium Aerotech and Airbus Spain, are also responsible for other A350 XWB structural components, illustrating that companies in the aero structures industry possess generic capabilities that allow them to bid and undertake a variety of work packages and that they are not specialised to the point where the loss of one package precludes their involvement in others.
(181) Secondly, even if the project increases GKN’s expertise and knowledge in both composite use and wing parts, the product resulting from the supported R&D will be specific to the A350 XWB. The next generation of airplanes is likely give rise to new technical specifications and therefore the incentive to compete for future market will not significantly be affected by the aid.
(182) Finally, as mentioned above in Section 3.4.1, GKN will not be able to appropriate all innovation generated by the R&D in the context of the project. The knowledge spill- overs of the project will allow the whole sector, and beyond it other sectors, to gain from GKN’s research, especially on the use of composite materials. The aid to the project may therefore contribute to the dynamics of the market.
3.8.2.6. Product differentiation and intensity of competition
(183) According to Point 7.4.1 of the R&D&I Framework, where product innovation concerns developing differentiated products related, for example, to distinct standards or technologies, and when there are many effective competitors on the market, competitors are less likely to be affected by the aid.
(184) As regards the project under assessment, the rear spar and fixed trailing edge are specific to the A350 XWB aircraft and are being developed to a specification laid down by Airbus. It will not be possible to use of the product resulting from the supported R&D project on other airplanes. Aero structures manufacturing facilities require highly specialised engineering plant and machinery that cannot easily be applied to other products or sold to other industries.
(185) Therefore, given that aero structures products to be developed by GKN for the A350 XWB aircraft are highly specialised and differentiated, and given the level of competition in the aero structures market referred to in Section 3.8.1, and the expected growth of the aero structures market (at an estimated CAGR of 2.5 % from 2008 to 2018), the Commission can conclude that the aid will not stifle the intensity of competition.
3.8.2.7. Conclusion
(186) Taking into account the amount of aid granted to GKN, the intensity of competition on the market of aero structures, the related incentives to compete for future markets, and the highly specialised and differentiated product that will result from the project, the aid will not have the effect of distorting the dynamic incentives of the market.
(187) Taking account of the size of the aero structures markets, its fragmented nature, expected growth and established supplier-prime relationships, the Commission does not find that the aid would lead to competitive disturbances on the market for aero structures.
3.8.3. Creating market power
(188) As mentioned in Point 7.4.2 of the R&D&I Framework, aid in support of R&D&I may have distortive effects in terms of increasing or maintaining the degree of market power in product markets. Market power is the power to influence prices, output, the variety or quality of goods and services, or other parameters of competition on the market for a significant period of time, to the detriment of consumers.
(189) The Commission is concerned mainly about those R&D&I measures allowing the aid beneficiary to transfer or strengthen market power held on existing product markets to future product markets. The Commission is therefore unlikely to identify competition concerns related to market power in markets where each aid beneficiary has a market share below 25 % and in markets with a market concentration with Herfindahl- Hirschman Index (HHI) of below 2000.
3.8.3.1. Market power of the beneficiary and market structure
(190) As regards the project under assessment, the market share of GKN in 2008, after acquisition of the Filton facilities from Airbus, amounted to 7 % of the Tier 1 aero structure supplier market. If all suppliers are considered, not only Tier 1 suppliers, GKN’s market share is even smaller.
The table below illustrates the sales share of Tier 1 suppliers in the sector in 2008:
Counterpoint, Aerostructures 2009 report
(191) While GKN is designing and producing the rear spar and trailing edge of the Airbus A350 XWB, GE is doing the trailing edge work packages (subcontracted to GKN) in Southampton, Spirit the front and leading edge in the US, Premium Aerotech the upper wing skin in Germany, Airbus the lower wing skin in Spain, Ruag of Switzerland the winglet, Sabca of Belgium the flap support structure, TAI of Turkey the ailerons and Zodiac (owned by Safran) of France is doing the ice protection system. Therefore there is no risk that GKN will achieve dominance on the aero structure market.
(192) Furthermore, several other companies (Spirit AeroSystems, Premium Aerotech, Airbus Spain) are providing Airbus with wing components for the A350 XWB. Given that GKN’s information is that its share of supply of wing structures in 2007 — excluding aircraft manufacturer in house supply — was […]% on the global market the Commission can conclude that there is no risk of distortion of competition.
(193) The impact of the aid could also be examined on the composite aero structure segment of the aero structure market, which is developing fast and accounted for $5 billion of the total aero structure market in 2008. While the aero structures market is forecast to grow at an estimated rate of 2.5 % from 2008 to 2018, the market for composite aircraft structures is forecast to grow at a rate of 11 % from 2008 to 2018.
(194) There is no data available on the market share of companies supplying the composite segment of the aero structure market, but since the utilisation of composites in commercial aircraft has steadily risen over the years, reaching around 25 % in aircraft such as the A380 and set to rise to 50 – 60 % for the A350 XWB, the probability of GKN having a market share higher than 25 % on the composite aero structure market is very unlikely.
(195) On the segment of composite aero structures, taking into account the level of GKN’s activities, the structure of the market and the fact that it is a bidding market means that GKN is very unlikely to have a dominant position.
(196) Given the size of the aero structures markets, its fragmented nature, growth dynamics and established supplier-prime relationships, the Commission does not find that the aid would lead to competitive disturbances by contributing to giving GKN a dominant position on the market of aero structure.
3.8.3.2. Level of entry barriers
(197) Aero structures’ manufacturing facilities require highly specialised engineering plant and machinery. The entry barriers are high due to the fact that the area of technology and manufacturing of the project has intensive investment and capital demands.
(198) Primes are actively trying to establish and expand a competitive range of suppliers that offer comparable capabilities and services. In the case of the A350 XWB, GKN competed against Spirit Aerosystems, SAAB and Stork to supply aspects of work on the programme. GKN is a new entrant among the Super Tier 1 companies and needs the necessary level of investment which will allow it to compete on a comparable basis.The demands of both innovative technology and investment capability were a prerequisite to compete and will remain the most significant criteria to continue to have access to this type of market opportunity.
(199) Therefore the Commission can conclude, that, given the high entry barriers the aid will encourage competition on the market.
3.8.3.3. Buyer power
(200) The customers for aero structures are major international aircraft manufacturers who are sophisticated purchasers, used to outsourcing aero structure manufacturing and a number of which have their own in-house and manufacturing capability. Conversely, on the supply side, the aero structure market is highly fragmented, with at least 130 companies who supply aero structures ranging from Super Tier 1 to Tier 1 and Tier 2 suppliers.
(201) The buyer power on the market is very high since Airbus selects the best technological offers from a range of suppliers. If GKN had a dominant position on the market, Airbus’s buying power would in any case limit GKN’s market power.
3.8.3.4. Conclusion
(202) Taking into consideration the very fragmented structure of aero structure markets, GKN’s position on that market as new Super Tier 1, the high buying power of customers, and the fact that the aid will help GKN invest in order to overcome the entry barriers and compete with established Tier 1 suppliers, the aid reinforces competition on the market and does not creating a significant market power in favour of GKN.
3.8.4. Maintaining inefficient market structures
(203) R&D&I aid must not support inefficient undertakings and thus contribute to maintain inefficient market structures.
(204) In the case under assessment, the aid is granted to GKN, a company with steady revenue and increasing profits in recent years. According to the information provided by the UK authorities, profit margins are highest in aerospace but all divisions have reported an overall gradual growth in margins. GKN Plc Annual Results for 200811 showed a pre-tax profit of £167m. Its trading performance has improved steadily since 2004 and it is expected to achieve a pre-tax profit of £[...] million by 2010.
(205) GKN is considered by leading financial rating agencies as an investment grade company. In January 2009 GKN Group’s credit rating was downgraded from BBB- to a BB+ because of problems in the automotive division of GKN as mentioned in Paragraph 99 above, shifting the company’s rating from investment to non-investment grade thus affecting its access to re-financing. However, Moody’s placed a ‘stable’ outlook on the rating, reflecting their view that the countermeasures GKN was putting in place would allow the rating to recover back to investment level.
(206) Therefore GKN cannot be considered to be an inefficient undertaking and as a consequence the aid does not contribute to maintaining an inefficient market structure.
(207) The Commission hence concludes that the aid is granted to an efficient undertaking and will contribute to increasing the dynamics of the sector. There are no indications that the aid would contribute to maintaining inefficient market structures. On the contrary, it should create the incentive for stronger competition on the market.
3.8.5. Balancing test
(208) Pursuant to Section 7.5 of the R&D&I Framework, the Commission balances the effects of the measure in light of the positive and negative elements assessed above and determines whether the resulting distortions adversely affects competition and trading conditions to an extent contrary to common interest.
(209) Following a detailed assessment, the Commission considers that the project suffers from market failure since the market would not deliver the product without aid because of imperfect and asymmetric information liked to the level of technological and commercial risks of the project and to a certain extent, to knowledge spill-overs, even outside the aeronautic sector. Being necessary for the project to be carried out, State aid has a clear incentive effect but nonetheless is limited to the minimum necessary and proportionate. The aid instrument chosen (a repayable advance) is the least distortive form of aid, the aid intensity is below the maximum ceilings allowed and the UK authorities reduced the amount granted by £ [...] million compared to the beneficiary’s request.
(210) Due to the number of players on the highly fragmented aero structure market, due to GKN’s position as a new Tier 1 supplier, due to the expected growth rate of the market and conditions of the aid measure, the negative effects of the aid are limited. The aid measure does not support the creation of a position of power nor maintain inefficient market structures. It might even boost competition between Tier 1 suppliers on the market of aero structures.
(211) Summing up, since the positive effects of the measure significantly outweigh the negative effects, the Commission concludes that the balancing test for the aid under assessment is positive.
11 http://www.gknplc.com/news/NewsItem.asp?NewsID=374. 4. DECISION
(212) The Commission considers the aid compatible with the EC Treaty on the basis of Article 87(3)(b) and has accordingly decided not to raise objections to the implementation of the notified measure.
(213) The Commission reminds the UK authorities of their obligations to submit an annual report on implementation of the aid.
(214) The Commission further reminds the UK authorities that, in accordance with Article 88(3) of the EC Treaty, all plans to alter or change the project must be notified to the Commission.
If this letter contains confidential information, which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: http://ec.europa.eu/community_law/state_aids/state_aids_texts_en.htm
Your request should be sent by registered letter or fax to:
European Commission Directorate-General for Competition Directorate for State Aid State Aid Greffe B — 1049 Brussels Fax No: +32 2 296 12 42
Yours faithfully, For the Commission
Neelie KROES Member of the Commission