Aviation: A ‘Scorpio’ For The Sky

After ruling the tractor and the fourwheeler market in India, Mahindra is now ready to take the aerospace by storm with its whole gamut of offerings starting from parts manufacturing to MRO services to aircraft making

No one saw it coming. Mahindra’s rise in the Indian automobile market was unexpected and quite. It was inconceivable that a tractor and farm equipment maker could replace Indian auto heavyweight and long-time market leader Tata Motors. But it did, and how. Mahindra’s Scorpio, one of the most successful sports utility vehicle (SUV) brands in the country, and its several other variants ruled the Indian roads for the longest time, and are still in great demand.

Now the company is all set to do a ‘Scorpio’ in the Indian sky. If all goes well, Mahindra will launch its Airvan-10, a ten-seater turboprop plane, all over the world including India, by the second half of this year. This utility aircraft, designed, developed and assembled fully in-house, is just awaiting certification from the civil aviation regulator. Currently manufactured in the company’s Australian unit, it has almost finished its approval process by the Australian authority, and is expected to receive its US licence by June. That should expedite the process in India as quality standards for aviation sector are universal.

Airvan-10, however, is just one of the aces up Mahindra’s sleeve. The big game is a true integrated play. The group has built an entire value chain in the aerospace industry, including the original equipment manufacturing (OEM) business for global aviation majors, MRO (maintenance, repair, and operations) for the whole aviation industry, and simulator training for pilots among others.

At a time when India’s general aviation is experiencing exploding growth, especially with the government’s regional connectivity plans, Mahindra’s aircraft launch has been very well timed. The country would potentially need at least 500 small planes to successfully implement the Regional Air Connectivity Scheme (RCS), which is aimed at serving un-served and under-served areas in the country. Under the scheme, planes will serve a network of at least 200 existing and new regional airports in small cities and remote regions across the country. Small 8 to 20-seater aircraft will be ideal for these routes, which are unlikely to witness heavy traffic.

Already assembling 5-, 8- and 10-seater planes at its Australian facility, Mahindra plans to make an 18-seater plane going forward. All these models are equipped to land on small runways, water and snow.

Mahindra’s ambitions are commendable, but the fact is, it is a high-risk industry. Growth in general aviation market depends on the overall economy and regulatory changes, and both can be erratic. So the question is, can Mahindra replicate its auto success in this big investment, zero error and low-volume aerospace industry?

Covering All Bases
Mahindra’s aerospace business comprises all essential blocks in the entire aerospace value chain. Starting from parts and components making, semi and complete assembly for the general aviation industry, to military helicopters to radars and surveillance platforms, the group’s aerospace and defence businesses have built complete capabilities in-house since the government of India opened up the industry for private sector in 2010.

“Mahindra views the aerospace sector as an exciting opportunity for growth in the coming years and decades,” says chairman Anand Mahindra, expressing his strong commitment to this sector, in an interview with BW Businessworld.

Mahindra Aerospace (MAPL), a wholly owned subsidiary of Mahindra and Mahindra, is currently the largest Indian OEM supplying parts and semi-assembled units to the global aerospace industry. It is also selling utility aircraft, manufactured in its Australian unit, in the global market; 8-seater Mahindra Airvan-8 is already in service in over 30 countries. The company, in which Kotak Private Equity has a minority stake, expects to assemble these aircraft at its Bangalore facility for the Indian market.

Being an integrated player it has built all round capabilities in the aerospace sector for parts, aero structures, electronics, simulators for training, MRO and even pilot training.

And as a trusted OEM partner to global aircraft makers, including Boeing and Airbus, and an approved supplier to defence, Mahindra has already established a strong revenue base. This will ensure the company’s sustainability as a long-term player in this high-risk sector.

Immense Opportunity in India
India is poised to become a large commercial and defence aircraft market. With rising passenger traffic and increasing military and defence expenditure, the demand for aircraft (for both civil and defence aviation) is expected to increase. The regional connectivity push in India, in particular, will give a very big boost in the general aviation area.

According to a recent study by industry lobby Confederation of Indian Industry (CII), Boeing expects a demand of between 900 to 1,000 commercial aircraft worth $100 billion approximately in the next 20 years. Going by those figures, a significant portion of business opportunity could accrue in India too.

CII estimates a total spending of around $25 billion (assuming uniform demand) for commercial aircraft and $100 billion as defence expenditure in the next five years. Out of the defence expenditure, approximately 15-20 per cent ($15-20 billion) is expected to be spent on military aircraft.

After a consecutive decline in expenditure from 2012 to 2014, revenue growth for the global aerospace and defence sector is expected to take a positive turn globally, says an industry report by Deliotte. “Stable growth in global gross domestic product, lower commodity prices, especially crude oil, and strong passenger travel demand, portend continued growth in the commercial aerospace subsector,” predicts the report.

The resurgence of global security threats and growth in defence budgets in many countries are all likely to promote global defence subsector revenue growth over the next few years, the Deloitte report added.

Alliances & Acquisitions
Mahindra, an agro- to-auto leader, entered the aerospace sector in 2009, after it acquired two aircraft-manufacturing firms in Australia. It had picked up 75.1 per cent stake each in Aerostaff Australia, a component maker, and general aircraft manufacturer Gippsland Aeronautics, for Rs 175-crore, with plans to make aircraft and allied components to service the global market.

Parallely it set up aerospace components manufacturing unit in Bangalore for aerospace parts and aero structure production. This unit currently supplies aircraft parts to several of Mahindra Aerospace’s global clients, including its own Australian company.

Given the emerging opportunities, including in defence, not only in India but the world over, the company kept expanding its scope. It made a series of acquisitions and alliances to pursue growth opportunities in the industry, which is global in nature.

Mahindra was one of the earliest entrants into the defence supply in India. When it saw a business opportunity in manufacturing and selling larger MUVs to the armed forces, it started assembling Willy’s Jeep in India in 1950, and in no time established itself as the Jeep manufacturer of India.

It, however, didn’t find any other major opportunity in defence for a long time. Until recently, when it tied up with US-based Telephonics Corporation, a leading developer of integrated information, communication and sensor system solutions, to supply security radar and surveillance system. The joint venture, Mahindra Telephonics Integrated System (MTISL) — the first private sector company in the Indian defence sector to have 49 per cent foreign direct investment and the first private player to build airborne radars in India — currently supplies radar and surveillance systems, identification friend or foe (IFF) devices, and communication systems to Indian ministry of defence and the Indian civil aviation sector. It also supplies systems for air traffic management, homeland security and other surveillance requirements.

Mahindra was also the first company to sign a public–private-partnership deal with National Aeronautics Laboratory to develop a 5-seater aircraft through one of its technology units — Mahindra Plexion Technologies, in 2006.

The recent ‘Make in India’ drive also saw the worlds’ largest aircraft manufacturers Boeing and Airbus awarding key manufacturing contracts to Mahindra Aerospace. Besides, Airbus Helicopters and Mahindra Defence have also signed a joint venture to target India’s military helicopter programmes such as the Naval Utility Helicopter, the Naval Multi-Role Helicopter and the Reconnaissance and Surveillance Helicopter.

It also recently tied up with French technology company Segnere. This partnership will enhance Mahindra Aerospace’s technical expertise and expand its existing capabilities to produce hard-metal parts including titanium and aerospace steels.

Challenges For The Pioneer
While several corporate players are looking at aerospace as an emerging opportunity considering the expected growth in aviation market, as tempting as it is, it is not an easy space.

“The regulatory environment in India was never supportive of aerospace industry, especially for private players. The sole player Hindustan Aeronautical had a near monopoly in the market as far as India’s defence needs as well as export opportunities go,” says Venugopal Menon, senior executive officer of Society of Indian Aerospace Technologies and Industries, an industry body for Indian aerospace manufacturers.

And, though there was demand for components, air infrastructure and small aircraft, the heavy capital investment, long gestation period, and stringent quality requirements prevented the local industry from venturing into it, says Menon.

“As the first mover, we had to create most of the things, including industry standards and practices, training and education among others,” says S. P. Shukla, group president and the chief architect of Mahindra Aerospace.

“Availability of talent and trained people for the industry was almost nil in as there weren’t any institutions that produced skilled people. We had to train our people and fresh recruits at our foreign facilities. Most of them have undergone at least 150 man months of training,” Shukla, added.

According to Menon, licencing was the most difficult issue for Indian aerospace companies. “Since there was no competent body that could set the standards for the industry here, component manufacturing had to be mandatorily complied with US (FAA) or European (EASA),” he says.

Changing Scenario
As Indian manufacturing capabilities mature over the years, it is expected to capture a large share of the globally emerging opportunity in aerospace, says the CII study.

All segments in the aerospace industry, including civil and military aviation, are showing a significant level of growth. There are several factors driving growth in manufacturing in India’s aerospace industry. These include both macro and micro factors — strong economic growth that has resulted in rapidly growing domestic aircraft demand, the liberalisation of civil aviation policies, offset requirements, a strong domestic manufacturing base, cost advantages, a large talent pool, the ability to leverage IT competitiveness and a liberal Special Economic Zones law that provides attractive fiscal benefits to developers and manufacturers. Though there are still several challenges such as access to technology, funding, poor availability and high cost of raw material and certification processes, there is light at the end of the tunnel.

Additionally, the globalisation of MRO services, manpower cost competitiveness, locational advantages and the presence of specialist capabilities, together make India a potential global as well as regional MRO hub. India’s MRO segment is estimated to grow more than 10 per cent and reach $2.6 billion by 2021, says the CII survey.

Now Mahindra, has already paved the way for the domestic industry. So with India’s cost advantage and the global quality reputation, the under $1 million Mahindra Airvan (8-seater) is already a hot brand in the exponentially growing general aviation market.