DOMINION GLOBALIZATION WORKSHOP Aerospace Dennis Encarnation Harvard University For more information, please contact me at www.encarnation.com MANUFACTURING Aerospace 1. Two Views of Globalization, Revisited a. A “Flat” World: The Rise of Asia-Based Companies & Topics: Asia-Based Operations b. A “Mountainous” World: Continued Trans-Atlantic Dominance 2. Aerospace Value Chain a. Downsteam: Sales & After-Market b. Midstream: Manufacturing & Systems Integration c. Upstream: R&D, Design, Engineering 3. Multi-Tiered Supply Chains a. Primes: A World of ‘Coopetition’ b. Tier 1: ‘Coopetition’ vs. Specialization c. Below Tier 1: Asia outside Japan TWO VIEWS OF GLOBALIZATION THE EMERGING CONCENSUS the world is flat it’s a borderless world where geography matters less and less with increased geographic dispersal of assets, capabilities and wealth where our choices-- business, cultural, economic, political, technological, social --are converging GARMENTS: A FLATTER WORLD the garment trade is highly segmented, with Asia generally competing for volume & Europe generally competing for price… ELECTRONICS: A FLATTER WORLD RANKING AMONG THE FORTUNE GLOBAL 500 COMPANIES, 2007 (revenues in US$ billion) 12. General Electric (US) 176.7 192. Tyco (US) 37.7 37. Siemens (Germany) 106.1 200. Motorola (US) 36.6 38. Samsung (Korea) 106.0 210. Mitsubishi Electric (Japan) 35.5 41. Hewlett-Packard 104.3 218. Cisco Systems (US) 34.9 46. IBM (US) 98.8 261. Sharp (Japan) 29.9 48. Hitachi (Japan) 98.3 292. Flextronics (Singapore) 27.6 67. LG (Korea) 82.1 325. Alcatel-Lucent (France) 24.6 72. Matsushita (Japan) 79.4 332. Apple (US) 24.0 75. Sony (Japan) 77.7 342. Schneider Electric (France) 23.7 88. Nokia (Finland) 69.9 344. Quanta Computer (Taiwan) 23.7 91. Toshiba (Japan) 67.1 363. Asustek Computer (Taiwan) 23.0 106. Dell (US) 61.1 375. Emerson Electric (US) 22.6 132. Hon Hai (Taiwan) 51.8 383. Sumitomo Electric (Japan) 22.2 136. Microsoft (US) 51.5 386. Onex (Canada) 21.9 149. Fujitsu (Japan) 46.7 436. Whirlpool 19.5 174. NEC (Japan) 40.4 438. Ricoh (Japan) 19.4 188. Intel (US) 38.3 459. Sanyo (Japan) 18.2 197. Philips (Netherlands) 37.0 489. Xerox (US) 17.2 189. Canon (Japan) 38.1 499. Lenovo (China) 16.8 Nearly half of the world’s largest electronics companies are based in Asia… TWO VIEWS OF GLOBALIZATION THE EMERGING AN ALTERNATIVE CONCENSUS PERSPECTIVE the world is flat a very “mountainous” it’s a borderless world world, with deep “valleys” where geography matters globalisation is about less and less making borders work with increased geographic where geography matters dispersal of assets, more & more capabilities and wealth with increased geographic where our choices-- concentration of assets, business, cultural, economic, capabilities and wealth political, technological, social globalisation means more --are converging choices, not less QUESTION: UPSTREAM VALUE ADDED WHAT INDUSTRIES HAVE A HIGH DEGREE OF INDUSTRIAL CONCENTRATION IN THE NORTH ATLANTIC REGION? WHY? PHARMACEUTICALS: TRANS-ATLANTIC CONCENTRATION RANKING AMONG THE FORTUNE GLOBAL 500 COMPANIES, 2007 RANK COMPANY NAME HQ LOCATION REVENUES (US$ billion) 1. JOHNSON & JONHSON USA 61.1 2. PFIZER USA 48.4 3. GLAXO SMITH KLINE UK 45.4 4. ROCHE GROUP SWITZERLAND 40.3 5. SANOFI AVENTIS FRANCE 40.0 6. NOVARTIS SWITZERLAND 39.8 7. ASTRA ZENECA UK 29.6 8. ABBOTT LABORATORIES USA 25.9 9. MERCK USA 24.2 10. WYETH USA 22.4 11. BRISTOL-MYERS-SQUIBB USA 20.0 12. ELI LILLY USA 18.6 Source: Fortune, 2009. Not one Asian- or BRIC-based pharmaceutical company appears among the 500 largest companies PHARMACEUTICALS: TOP 10 TRADERS PHARMACEUTICALS TOP 10 EXPORTERS, 2006 TOP 10 IMPORTERS, 2006 (US$ billion) (US$ billion) 1. EU (25):INTRA 190.9 1. EU (25):INTRA 155.9 EXTRA-EU 73.0 EXTRA-EU 38.1 2. USA 25.9 2. USA 39.3 3. SWITZERLAND 25.1 3. JAPAN 8.2 4. CHINA 3.8 4. CANADA 7.8 5. CANADA 3.5 5. AUSTRALIA 5.5 6. JAPAN 3.3 6. RUSSIA 3.9 7. SINGAPORE 2.9 7. TURKEY 3.2 RE-EXPORT 0.6 8. INDIA 2.8 8. MEXICO 2.8 9. AUSTRALIA 2.5 9. BRAZIL 2.5 10. ISRAEL 2.0 10. CHINA 2.3 Source: WTO, 2008. AEROSPACE: TOP 10 TRADERS AIRCRAFT & SPACE VEHICLES PLUS ASSOCIATED EQUIPMENT TOP 10 EXPORTERS, 2005 TOP 10 IMPORTERS, 2005 (US$ billion) (US$ billion) 1. USA 49.8 1. GERMANY 19.4 2. FRANCE 24.5 2. USA 16.6 3. GERMANY 19.3 3. FRANCE 11.1 4. CANADA 8.0 4. CHINA 6.6 5. ITALY 3.4 5. CANADA 5.3 6. BRAZIL 3.3 6. INDIA 5.0 7. SPAIN 2.8 7. JAPAN 4.8 8. SINGAPORE 1.5 8. SINGAPORE 3.8 9. JAPAN 1.4 9. SPAIN 3.2 10. NETHERLANDS 1.1 10. ITALY 3.0 Source: UNCTAD/WTO, International Trade Centre, 2007. Sales, $B* Sales, 2007 How do you explain the continued geographic concentration Boeing AEROSPACE: TRANS-ATLANTICCONCENTRATION EADS Lockheed Martin TOP 20 AEROSPACE COMPANIES, 2007 Northrop Grumman BAE Systems in the aerospace industry? General Dynamics Raytheon commercial aircraft (including financing), components & subsystems. *Revenues for defense & space, government information services & United Technologies General Electric Finmeccanica Thales L-3 Communications Honeywell Rolls Royce Dennis J. Encarnation & Associates, 2008. Associates, & Encarnation J. Dennis Reports; Annual Source: Bombardier Goodrich Alcatel Dassault Mitsubishi Embraer MILITARY SPENDING: TOP 10 MILITARY SPENDING (US$ billion & % of US$1,367 billion, 2006) RANK COUNTRY MILITARY % GLOBAL BUDGET MILITARY (US$ billion) SPENDING 1. USA 644 47.5% US Alliances* 307 22.6 2. CHINA 122 9.0 3. RUSSIA 59.1 4.4 4. UK 55.1 4.1 5. FRANCE 45.3 3.3 6. JAPAN 41.1 3.0 7. GERMANY 35.7 2.6 8. SAUDI ARABIA 25.4 1.9 9. SOUTH KOREA 23.7 1.7 10. INDIA 22.3 1.6 Note: *Multilateral (NATO) and bilateral (Australia, Japan, S. Korea) alliances. Sources: International Institute for Strategic Studies, 2006; US Department of Defense, 2007. WEALTH & MILITARY SPENDING, 2007 2007 GDP AT PPP FX RATES 2006-07 MILITARY BUDGETS (US$ trillion) (US$ billion) WORLD 64.9 WORLD 1,367 EU 14.7 US ALLIANCES 307 1. USA 13.8 1. USA 644 2. CHINA 7.0 2. CHINA 122 3. JAPAN 4.3 3. RUSSIA 59 4. INDIA 2.8 4. UK 55 5. GERMANY 2.8 5. FRANCE 45 6. UK 2.1 6. JAPAN 41 7. RUSSIA 2.1 7. GERMANY 36 8. FRANCE 2.0 8. SAUDI ARABIA 25 9. BRAZIL 1.8 9. SOUTH KOREA 24 10. ITALY 1.8 10. INDIA 22 Source: IMF & World Bank, April 2008; US Department of Defense, 2007. The Geographic Concentration Of Wealth & Of Military Spending is Highly Correlated--8 Of The Top 10 Are The Same-- Suggesting that Military Security is Essential for Economic Growth MANUFACTURING Aerospace 1. Two Views of Globalization, Revisited a. A “Flat” World: The Rise of Asia-Based Companies & Topics: Asia-Based Operations b. A “Mountainous” World: Continued Trans-Atlantic Dominance 2. Aerospace Value Chain a. Downsteam: Sales & After-Market b. Midstream: Manufacturing & Systems Integration c. Upstream: R&D, Design, Engineering 3. Multi-Tiered Supply Chains a. Primes: A World of ‘Coopetition’ b. Tier 1: ‘Coopetition’ vs. Specialization c. Below Tier 1: Asia outside Japan AEROSPACE VALUE CHAIN Where do Asian & BRIC-based companies play in this value chain? Where do they hope to play in the future? DOWNSTREAM: ASIAN PROMINENCE Most aerospace products are sold commercially, where the Asia- Pacific region is emerging as the largest geographic market MIDSTREAM: MANUFACTURING In marked contrast to the electronics industry, very little aerospace manufacturing has moved to low-cost countries in Asia and elsewhere. MIDSTREAM: SYSTEMS INTEGRATION Value-Added outside the United States is limited, but growing…. BOEING: GEOGRAPHY OF CONTROL & LOCATION Boeing Commercial & Defense Products: Systems Integration & Final Assembly IN-HOUSE integration Boeing Commercial & Defense Products before 787: GEOGRAPHY OF CONTROL OF GEOGRAPHY Subassemblies, Parts & Components Boeing: 787 Subassemblies, OUT-SOURCE Parts & Components ON-SHORE distance OFF-SHORE GEOGRAPHY OF LOCATION UPSTREAM: INDIA AS A CASE STUDY Source: Dennis J. Encarnation & Associates, LLC, 2009. India hopes to leverage its large market downstream for more work upstream, especially in R&D, Engineering, IT, and Manufacturing MANUFACTURING Aerospace 1. Two Views of Globalization, Revisited a. A “Flat” World: The Rise of Asia-Based Companies & Topics: Asia-Based Operations b. A “Mountainous” World: Continued Trans-Atlantic Dominance 2. Aerospace Value Chain a. Downsteam: Sales & After-Market b. Midstream: Manufacturing & Systems Integration c. Upstream: R&D, Design, Engineering 3. Multi-Tiered Supply Chains a. Primes: A World of ‘Coopetition’ b. Tier 1: ‘Coopetition’ vs. Specialization c. Below Tier 1: Asia outside Japan A MULTI-TIERED SUPPLY CHAIN Where do Asian & BRIC-based companies play in this value chain? Where do they hope to play in the future? Only 1 Asian company and only 1 BRIC-based company figures Sales, $B* Sales, 2007 Boeing AEROSPACE: TRANS-ATLANTIC EADS prominently Lockheed Martin TOP 20 AEROSPACE COMPANIES, 2007 Northrop Grumman BAE Systems General Dynamics Raytheon in the global supply chain commercial aircraft (including financing), components & subsystems. *Revenues for defense & space, government information services & United Technologies General Electric Finmeccanica Thales L-3 Communications Honeywell SUPPLY CHAIN Rolls Royce Dennis J. Encarnation & Associates, 2008. Associates, & Encarnation J. Dennis Reports; Annual Source: Bombardier Goodrich Alcatel Dassault Mitsubishi Embraer GLOBALIZATION THRU LOCAL CONTENT: MHI Mitsubishi Heavy Industries FY2006 Financial Results (FY Ending 3/31/06) Executive Management Sales - $26.0B Kazuo Tsukuda, President Operating Profit - $627M Hideaki Omiya, President Ship-Building Aerospace Power & Ocean Systems Systems Development 2006 Sales – $3.9B 2006 Sales – $6.3B 2006 Sales – $2.0B • Defense Aircraft & Aeroengines • Tactical Fighters Machinery & Mass & • Helicopters Steel Medium-lot • Commercial Aircraft Components Structures Machinery • Aircraft Engines • Guided Weapon Systems 2006 Sales – $4.8B 2006 Sales – $7.1B • Space Systems • Launch Vehicles Other • International Space Station 2006 Sales – $608M Japan’s largest defense contractor for a half century GLOBALIZATION THRU LOCAL CONTENT: ALENIA Finmeccanica Executive Management 2006 Preliminary Financial Results Pier F.