EADS seeks growth in Asia

EADS has big plans for the Australian market as part of a wider push into the Asia-Pacific region.
European aerospace and defence giant EADS believes the Asia-Pacific region will be one of the engine rooms for its future growth, according to co-Chief Executive Officer Thomas Enders. And in the defence sector Australia is one of its key markets.

The company reported revenue of ?31.8 billion in 2004, Enders told an EADS executive seminar at February's Asian Aerospace show in Singapore. Of this, some ?4.9 billion, or about 15 per cent, was generated in the Asia-Pacific region, more than doubling the region's 7 per cent contribution to EADS's turnover in 2002. He told the seminar he wants the Asia-Pacific's contribution to EADS' revenue to double again by 2015 - and at the same time he wants EADS' total revenue to grow to as much as ?200 billion over the next 20 years.

"Our major achievements in the Asia-Pacific area in the civil and military aviation business are direct results of our partnership and investment strategy during the last 10 years," said Christian Duhain, head of EADS International, the company's global marketing organisation. "We will continue this policy because Asia Pacific is one of the key growth regions for EADS. In the next five years we'll see the Asia Pacific share of our turnover reaching 20 per cent and by 2015 we expect 30 per cent of our sales to come from the Asia Pacific."

Shortly after the seminar Enders and co-chief executive Noel Forgeard reported increased revenue for 2005 of about ?34.2 billion with EBIT up 17 per cent to ?2.85 billion. Some 23 per cent of that revenue was generated in the Asia-Pacific, an increase of 57 per cent compared with 2004 - but, significantly, some 43 per cent of the company's order intake last year, or about 40.2 billion, came from the region, bringing closer Enders' goal of generating 30 per cent of EADS' turnover in the Asia-Pacific.

"We are looking forward to developing further our ties with Asia for our mutual benefit," according to Christian Duhain. "Research and development as well as sourcing, manufacturing and after sales service are activities that we also want to strengthen in Asia."

Australia has been an important driver of the company's growth, particularly in the military market where EADS' subsidiaries EADS-CASA and Australian Aerospace have secured orders worth $3.7 billion over the past five years for the Army's 22 Tiger Armed Reconnaissance Helicopters and 12 MRH90 Additional Trooplift Helicopters and the RAAF's five A330-200 Multi-Role Tanker Transports (MRTT).

EADS's Australasian military order book will grow further when orders for a further 10 NH90s for the RNZAF and potentially another 34 MRH90s for Australia are factored in. At the time of writing it was looking increasingly likely that the Cabinet would approve the purchase of MRH90s in preference to new-generation Black Hawks to replace Army's existing Black Hawk fleet, and that the Sea Kings would be replaced early, also probably with MRH90

Further down the track, EADS still believes the Airbus Military A400M airlifter has significant market potential in Australia, while the RAAF's Project Air 7000 could open up potential markets for UAVs, manned surveillance platforms and surveillance and intelligence-gathering payloads.

And for every military platform the company sells, it expects to generate ongoing business providing through-life support to the operator. This, for EADS, is a virtuous cycle: the bigger its industry footprint in its target markets, the more likely it is to secure further sales of new platforms and equipment; and the more it invests locally, the more it aligns itself with the aspirations and ambitions of its customers, the more likely it is to win their business and grow its own.

It has to be said that not many other European companies, and even fewer American ones, have adopted this strategy. And it's starting to take effect just as the new defence minister, Dr Brendan Nelson, has initiated a review of Australia's defence industry policy.

For all that the ADF needs high levels of interoperability with its major allies, the US and the UK, it also needs a domestic industry base to support it in a self-reliant way. The more capable that industry is, the better able it is to sustain itself through exports or through access to foreign primes' global supply chains, the better chance it has of winning and keeping the ADF's business.

This is the defence market opportunity that is opening up for EADS in Australia.

The company's strategy in all of its major export markets is based on the three pillars of Internationalisation, Innovation and Improvement, according to Tom Enders. Taking the last first, he noted that EADS has a world record order book of ?210 billion, compared with Boeing's ?127.8 billion and BAE Systems' ?73.8 billion; the challenge for EADS is to maximise its profit on the business it has secured in a business environment characterised by high oil prices, a weak US dollar and an increasingly globalised aerospace business community, Enders said

Innovation will be vital, he said, especially in areas such as high-technology materials, sensors and IT and the development of systems design and engineering skills. The company spends about five per cent of its revenue on self-funded R&D and in April Jean Botti was appointed Chief Technology Officer to direct and shape this research. That investment won't decline, according to Enders, but EADS will increasingly be seeking synergies both internally and with external and international partners to develop new technologies and share the cost of bringing them to market.

'Internationalisation' is not another term for industrial offsets, Enders emphasised: genuine partnerships are essential, along with investment in partner nations - EADS will not achieve its growth targets otherwise. Companies like Boeing and Airbus understand the strategic and tactical imperatives of globalisation and how they shape the business realities of the aerospace industry. But this is still a conceptual challenge for EADS's home governments who, understandably, wish to keep jobs and investment in Europe, he noted.

Christian Duhain of EADS International told the seminar the company made 63 per cent of its revenue in 2004 outside its domestic markets of Spain, France and Germany. Nevertheless the company has reorganised itself to face the ongoing challenge of globalisation with a new Chief Operating Officer (COO) for Marketing, International and Strategy, Jean-Pierre Gut, heading separate teams responsible for global industrial development, strategic coordination and corporate business development.

The Asia-Pacific is firmly in the new appointee's sights: "EADS has already a long track record of cooperation with Asian countries, which are becoming major players in the world of aerospace, defence and security," says Gut. "We want to bring real added value to this region. Asia Pacific is not only a market for sales."

So where will this growth come from? Commercial airliners and Defence, according to Duhain.

EADS has long been a player in the regional military helicopter market, both selling aircraft and teaming with local industry partners such as Hindustan Aeronautics Ltd (HAL) in India, Kawasaki in Japan and IPTN in Indonesia.

Notwithstanding EADS Eurocopter's lengthy association with HAL on license production of the Alouette and development of HAL's Advanced Light Helicopter, the liberalisation of India's economy is throwing up other opportunities also, Duhain said. The company has a regional support centre in India and its Astrium satellite subsidiary is eyeing teaming agreements with local telecommunications and satellite companies.

Similarly, Airbus is talking with potential partners in China about opening a final assembly line there for the A320 airliner; and Eurocopter accounts for more than 40 per cent of the civil and para-public turbine helicopter fleet in the region, the company says. EADS is now developing the EC175 helicopter family in partnership with China.

Significantly, EADS was chosen late last year by Korean Aerospace Industries (KAI) to become its partner in the US$7 billion Korean Helicopter Program (KHP). This is Korea's first venture into the 8-tonne transport/utility helicopter market, according to Eurocopter sales vice president Norbert Ducrot. The KHP will be a military aircraft capable of carrying 11 troops with two pilots and two gunners. Some 30 local companies will work with EADS and KAI on the US$1.3 billion development program, including KARI who will be responsible for the rotor system and engine and ADD who will provide the avionics and electronic warfare systems. First flight is scheduled for 2009 and it will be certified in 2011. The production program is expected to be worth some US$5.6 billion.

This represents a new way of doing business, Duhain told the seminar: making customers into partners, as it has with Malaysia where CTRM manufactures composite structural components for the A380 and the A400M military airlifter, for which Malaysia is the region's launch customer. Airbus now sources metal and composite components from suppliers in Japan, China, Korea, India and Malaysia.

The company has a growing portfolio of young but maturing products, Duhain said: the Tiger and NH 90 helicopters, the A400M airlifter and the A310 and A330 Multi-Role Tanker Transports (MRTT). While Malaysia launched the A400M in the region, Australia has been the launch customer for the Tiger, NH90 (dubbed MRH90 locally) and the A330-200 MRTT; these sales were secured on the back of EADS significant investment in local assembly and in-service support facilities, Duhain observed.

The military rotary wing market is also buoyant, believes Ducrot - in 2006 the company has 14 separate sales campaigns under way across the region, from New Zealand to Japan.

These, along with guided weapons and military command and control systems, will help generate much of the company's defence-related business growth in the region. In particular, there is growing demand for tankers in the Asia-Pacific and now that EADS has managed to break Boeing's tanker market monopoly, the company expects to win a significant proportion of regional sales.

EADS's defence electronics sector currently turns over ?5.4 billion a year, of which some 26 per cent is derived from exports, according to Bernhard Gerwert, CEO of EADS Defence and Security Systems. The convergence between traditional defence and emerging homeland security markets will see them become virtually indistinguishable in 15-20 years time, he told ADM. Both are growth sectors in the Asia-Pacific and he is hoping to generate some ?2 billion-worth of business in the region between 2006 and 2010.

But to grow significantly outside Europe, Gerwert believes EADS must create partnerships and joint ventures in its target markets - an echo of CEO Thomas Enders' drive to internationalise the company.

The EADS defence electronics portfolio has three pillars: military avionics; sensors and radar; and Electronic Warfare (EW). All of the company's EW has been concentrated in EADS's recently created central EW House - Self-Protection, COMINT and ELINT, naval, air and ground. Gerwert's aim is to capture all the available EW synergies across the company - the EuroHawk UAV program was a wake-up call when EADS realised its ELINT and COMINT sensors were supplied by two quite separate business units.

The result of this consolidation has seen Gerwert's sector assume system-level responsibility for the EW Self-Protection (EWSP) suite on the A400M airlifter. Part of this suite will be a new EADS product, the world's first dual-colour Infra Red Missile Warning System (IRMWS). The dual-colour capability results in a higher detection rate but fewer false alarms. This was selected for the A400M against worldwide competition and will fly on the first production A400M in 2009.

The IRMWS won't replace the AN/AAR-60 MILDS in EADS's product portfolio - this is a good helicopter and transport aircraft missile warner, says Gerwert. It will equip ADF Tiger and MRH90 helicopters, C-130 Hercules transports and AP-3C Orion patrol aircraft. The MILDS has also been adapted for the F-16 fighter and the German Army's Puma armoured fighting vehicles.

The next step in the company's EW development is a Directional IR Counter Measures (DIRCM) system. It's essential to have secure access to this type of EWSP technology, to protect both platforms and the company's future business, Gerwert told ADM. EADS has been studying the problem for the past two or three years, he said, and is now negotiating with the French and German governments to develop a DIRCM demonstrator. This won't be available for flight trials until about 2011/12 so could become available as a 'Step 2' option for the A400M EWSP suite as an adjunct to the baseline suite.

Recent US, NATO and European military activity has highlighted the importance of threat detection systems, says Gerwert, and this is an area where EADS plans to focus. There are emerging opportunities in both the fighter and transport aircraft markets and the IRMWS will be important in opening these up.

Within Australia, EADS's has already kicked some goals in the platform EWSP market. An emerging opportunity, however, is in the ELINT and COMINT requirements for Project Air 7000. EADS has developed a comprehensive sute of ELINT and COMINT receivers and processors for the EuroMALE surveillance UAV program and Gerwert contends that these provide performance that's the same or better than anything currently available from American UAV manufacturers.

One of Europe's emerging advantages in the EW market generally is that some countries are reluctant to buy US EW equipment because it comes with too many restrictions and conditions. In any case, the US EW market is closed to EADS, but the global market is much more open and Bernard Gerwert wants to see the company become the leading European player in the global EW market outside the USA.

EADS is also keeping a weather eye on the manned patrol aircraft requirement in Phase 2 of project Air 7000, according to Jean-Georges Brevot, its senior vice president for defence affairs. The company developed a Maritime Patrol Aircraft (MPA) design based on the Airbus A320/321 airliner during the mid-1990s to contest the Italian and German MPA replacement programs. While the proposal didn't succeed (Germany is now buying ex-Dutch P-3C Orions and Italy is still considering its options) EADS hasn't lost faith in the concept.

The A320 MPA was equipped with the EADS-CASA Fully Integrated tactical System (FITS) mission system, which is now in its 4th development iteration and Brevot believes is the best integration mission system in service today. It currently equips Spain's AP-3Cs and a number of MPA and surveillance variants of the CASA C-295 and C-235 around the world.

Brevot believes the A320/321 platform offers a significant advantage over the Boeing 737 which is the basis for Boeing's P-8A. the Airbus' Fly By Wire (FBW) flight control system reacts better to turbulence than the traditional control system of the B737. Given the levels of turbulence likely to be encountered at low altitude over the sea on MPA missions, Brevot believes, the A320's FBW system will result in less airframe stress and therefore an improved fatigue index.

The A400M has a similar FBW system offering similar airframe life benefits. More pertinently for Australia, EADS hasn't closed the window on a meaningful level of local industry participation in Airbus' global supply chain on the back of an A400M order. The company believes that the replacement of the C-130H Hercules provides an opportunity to introduce the A400M into the RAAF's airlift inventory - the forthcoming DCP will tell them how realistic an aspiration that is.

EADS has been successful in selling products into Australia, and hopes to remain so. But its long-term strategy demands local investment and the creation of local partnerships. The helicopter market has seen most activity with local subsidiary Australian Aerospace establishing a new helicopter final assembly and support facility in Brisbane.

The company has based much of its strategy on the DMO's Aerospace Industry Sector plan whose objectives include he development of a sustainable Australian aerospace industry base that's able to support the ADF's rotary and fixed-wing aircraft fleets. The plan recognises that part of the key to achieving this is to support local industry efforts to become integrated into the global supply chains of overseas aerospace prime contractors.

More specifically, the Australian Industry Involvement (AII) targets for Projects Air 87 and Air 9000 are the establishment of an in-service support capability, especially for the helicopters' sensors, mission and EW system software and airframe, engine and mechanical repairs.

Except for the first four aircraft of each type, which will be built in France, the Tigers and MRH90s will be assembled by Australian Aerospace at its new Brisbane factory. This derives much of its critical mass from the co-located assembly line for Eurocopter's EC-120 Colibri light turbine helicopter.

Eurocopter has established partnerships with ADI Ltd, Haliburton KBR and Thales Training and Simulation. In addition, Australia is now the sole source of some components for the global Tiger program: ADI will provide electrical wiring looms, and Honeywell will build flight control components.

The only hiccup in this program was the unexpected disconnect between Phases 2 and 4 which saw Australian Aerospace and Sikorsky bid for both phases, only for Defence to order the 12 aircraft required under Phase 2.

Eurocopter's pricing and AII proposals had been predicated on a program of 40 aircraft, with the prospect of further orders from both Australia and New Zealand; reducing this to just 12 delayed jeopardised $60 million in local investment in new helicopter assembly and logistics support capabilities and up to 400 jobs at Australian Aerospace's Brisbane facility and elsewhere.

However, in April 2006 Australian Aerospace announced it would invest some $15 million establishing a state-of-the-art composite fibre manufacturing plant in Queensland. Due to come on stream in 2007, the new plant will initially produce fuselage parts and fittings for Australia's Tiger and MRH90 helicopters as well as carrying out maintenance and repairs. The new facility also will manufacture parts for the global supply chain and worldwide production of the Tiger and the NH90.

Another pointer to the style of EADS's future engagement in the region, and potentially with Australia, is the agreement that Enders and his co-CEO, Noel Forgeard, signed with Singapore's Minister of State for Trade, industry and Education, Mr Chan Soo Sen, in February.

Under the agreement, EADS has established a Singapore Research & Technology Centre (SRTC) to take advantage of Singapore's heavy investment in scientific and engineering research, development and education. This will be EADS' first R&T centre outside Europe and will employ 25 Singaporean scientists initially, with an annual budget of 10 million. Its initial research focus will capitalise on Singaporean strengths in secure communications and cryptography, wireless communication between sensors, biometric technologies for homeland defence, aerodynamic flow control and high performance computing for applications such as computational fluid dynamics.

The SRTC's principal customers will be Airbus, other parts of EADS (particularly the defence areas) and, for about one third of its output, the EADS Corporate Research Centre in Germany.

"The opening of the SRTC is a part of our global industrial development effort," said Forgeard. "EADS is developing international R&D capabilities in order to access new technologies and engineering resources in a more efficient way an close to our strategic markets."

Unlike Korea, China, India and Japan Australia has no plans to design, develop and build all-new aircraft and helicopters, so there are no prospects for the kind of 'heroic' industrial partnerships EADS has pursued in Asia. But Australia's aerospace and electronics industry sector plans, however they may be shaped by defence minister Nelson's defence industry policy review, clearly endorse the concept of partnering and integration of Australian industry capabilities into global supply chains.

EADS is setting itself up to offer win-win outcomes to the Australian defence community - both government and industry.

Disclosure: Gregor Ferguson attended the EADS Executive Seminar in Singapore as a guest of EADS.

By Gregor Ferguson, Adelaide and Singapore