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Japan's Aerospace Industry

Part 1. Structural Analysis of Global Aerospace Industry

No other industry is more international than commercial aerospace. Yip identifies industry globalization drivers in four areas: market, competitive, cost, and government (1992, 31-65). The aerospace industry ranks first out of twelve industries (including automobiles, computers, and pharmaceuticals) in market and competitive globalization drivers and second for cost globalization drivers.

The commercial aerospace industry ranks highest for market globalization drivers because customers (mainly airlines) in different countries have nearly the same needs for the product and customers search the entire world for suppliers. Competitive globalization drivers are highest for commercial aerospace due to the industry's very high exports and imports and the large number of globalized competitors from different continents and countries. Cost globalization drivers in aerospace outrank almost all other industries because of global economies of scale where no single national market is large enough for competitors to effectively do business. The enormous cost of product development in the aerospace industry drives companies to amortize those costs across markets around the globe. The use of a single currency, the U.S. dollar, for virtually all commercial aerospace contracts also shows the extremely high level of internationalization in the industry.

The global commercial aerospace industry currently has very few prime contractors that manufacture aircraft and engines. The American firm Boeing has about 70% of the worldwide market for planes seating more than 80 persons. Airbus, a consortium of English, French, German, and Spanish firms, has been gaining rapidly and currently holds the remaining 30% of the large aircraft market. Airplane engines, which account for about 20% of the value of advanced aircraft, are manufactured by only three companies. U.S.-based Pratt & Whitney and General Electric run neck and neck for the market lead, and Rolls-Royce in England runs a strong third. There are more prime contractors involved in the smaller-size market for commuter and executive aircraft and engines, but the number of competitors is still quite small. In addition to the prime contractors, the global aerospace industry has numerous medium- and small-sized suppliers of components and subsystems.

Porter describes five forces—threat of new entrants, threat of substitute products, bargaining power of buyers, rivalry among existing competitors, and bargaining power of suppliers—that determine the nature of competition in an industry (1980 3-33; 1990, 34-37). These competitive forces determine industry profitability because they influence the prices firms can charge, the costs they must bear, and investment required to compete in the industry (Porter 1990, 35). The following sections analyze each competitive factor separately in relation to the global aerospace industry.

Threat of New Entrants
The threat of entry to the commercial aerospace industry at the aircraft or engine manufacturer level is quite low. New airplanes and engines require extremely high investments accompanied with great risk and the inability to get a positive return on that investment for many years. A new 100-seat airplane would cost $3-4 billion to develop; whereas a new 800-seat airplane Boeing and Airbus have recently considered would require an investment of $10 billion or more. General Electric spent $3 billion to develop the GE90 engine for the Boeing 777 plane (Garvin, Samuels, and Masterson 1994). The aerospace industry's economies of scale, where global sales are required to recover the huge investments, deter entry to the industry by forcing the entrant to come in at a very large scale in order to succeed.

The threat of entry at the aircraft or engine manufacturer level is further reduced by several other factors. Aerospace manufacturing has a long learning or experience curve due to its complex assembly and testing operations and its high content of labor performing intricate tasks. Companies can only go down this learning curve after many years of large amounts of continuous investment in research and development. Companies may require government subsidies, either directly through grants-in-aid or indirectly through military contracts, to enter the industry. It is estimated that Airbus received over $10 billion from European governments between 1970 and 1990 so it could get to the level today where the company can survive on its own (Yip 1992, 229). Now the worldwide aerospace industry has well-established firms with an abundance of resources to retaliate against any potential entrants.

The barriers to entry are less for potential manufacturers of components or subsystems, but they are still quite high in comparison to many industries. During the past decade the aircraft and engine manufacturers have been drastically reducing the number of suppliers, which makes it even more difficult to enter the industry even as a manufacturer of components or subsystems.

Threat of Substitute Products
Prime contractors (e.g., airframe manufacturers such as Boeing and engine manufacturers such as Pratt & Whitney) in the commercial aerospace industry face almost no threats of substitute products because of an airplane's uniqueness in speed and ability to travel over water. For short distances over land, airplanes may sometimes compete against automobiles and trains.

The threat of substitute products exists at the part/component level in the aerospace industry. For example, new material technology can make obsolete the materials previously in common use in the construction of airplanes and engines.

Bargaining Power of Buyers
Airline companies often force cutthroat competition between the aircraft manufacturers, Boeing and Airbus, and the engine manufacturers, Pratt & Whitney, General Electric, and Rolls-Royce. Airlines ordering a large number of planes or even entire countries such as China, who combines orders from state-run airlines, can press for extraordinary concessions from the prime contractors. These orders are a relatively large percentage of the aerospace prime contractors' total sales, so buyers are in an advantageous position to demand price reductions. The switching costs for aircraft and engines are very low, which increases the buyers' power. Airline pilots and mechanics can quickly be trained on other planes and engines. The huge losses of most airlines in the early 1990s made them more desperate to reduce costs, which had a direct impact on the airplane and engine prices demanded by the airlines.
Rivalry Among Existing Competitors
Although the aerospace industry has only a limited number of prime contractors, competition is fierce for the reasons discussed in the above section on 'Bargaining Power of Buyers'. Aerospace firms desperately seek to win large orders from airlines to try to recover their high fixed costs and their large investments required to develop new aircraft and engines. The industry's prime contractors are equally balanced and have very little differentiation in their product lines, which increases even more the intensity of the competition.
Bargaining Power of Suppliers
The bargaining power of aerospace suppliers is not that strong, but there are exceptions where a supplier may possess key technologies. In general, the prime contractors in the aerospace industry have several suppliers from which to choose.
 
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