Leveraging value chain competencies & resources on a global platform: the case of HAL.

AuthorDas, Malay Kumar
PositionHindustan Aeronautics Ltd


A news which came in all the major financial news papers in the world on 22nd October 2009 in absolute terms changed the image of an emerging economy state-owned aeronautics company. In the history of Boeing this was the first time when the company had signed to supply a very complicated part called flaperons for the Boeing's 777 series commercial jetliners. The 777 flaperon is a complex composite assembly that is instrumental in controlling the airplane's and maneuverability in flight, referred to as a 'control surface', flaperons work both as an aileron to control roll as a flap to control lift. Boeing had earlier signed a 10-year manufacturing contract ($1 billion or Rs. 4,650 crore) in December 2007 with Hindustan Aeronautics Ltd for making subsystems for its fighter planes such as F-18 Super Hornets and Apache helicopters. "HAL and Boeing share a very special relationship. Showcasing HAL's composite manufacturing capability on one of the world's premier long-haul commercial jets positions us for even greater opportunities at the forefront of technology," said Soundara Rajan, Director, Corporate Planning & Marketing, HAL (Boeing, 2009). Boeing's relationship with HAL dates back to 1991. Boeing India President Dinesh Keskar said "The composite 777 flaperon that HAL will produce represents a significant leap forward in technological capability, and supports Boeing's strategy to work in partnership with India's aerospace industry for the long-term". (Boeing, 2009)

It was a long way for a 100 % Government of India owned strategic defense industry company to achieve. As on 2010, HAL has 19 production units and 9 research and design centers in 7 locations in India. It has sold its products in more than 20 countries. The company has total 26 types of aircrafts. Out of which 12 types of aircrafts have been manufactured using in-house R & D and 14 types produced under license. By 2010 March, HAL had manufactured more than 3550 aircrafts, 3600 engines and overhauled over 8150 aircrafts and 27300 engines. HAL is the largest player in the Aerospace industry in India. HAL supplies its products to all the three major defence wings in India namely, Army, Navy and Air force. To maximize its resources usage, building synergies and minimizing risks and increase revenues, HAL entered Civil Aviation with launch of Dornier (14 seater) and civil versions of Advanced Light Helicopter.

How does an emerging economy company, which is in a strategic industry, chart its global strategy, why and how? We would be looking at the outside in approach (PEST and industry forces) and inside out perspective (resource and value chain perspective). We discuss how an emerging economy, strategic industry company has transformed itself and grew in the international arena. Government of India has defined all the institutions and government owned companies in Defence Department and Space Department as strategic institutions and allowed 26% FDI in the defence production space with some restrictions. There are around eight defence public units. As can be seen from table 1 HAL is the largest public sector unit (PSU) in terms of turnover and exports volume.

It is clear that HAL is the largest defense public sector and has exports turnover of 4365 Million Rupees. Other public sector units do not have any exports and even if they have some exports it is more of trading. The above are the reasons that we have taken HAL as the study point in industry international strategy in emerging economies.

Aeronautics Industry

In the commercial aircraft industry, the competition is immensely intensive even though it is mainly between Boeing and Airbus. Economies of scale in the commercial aeronautics industry comes from the ability to spread fixed costs over a large output. Boeing is spending an estimated $5 billion to develop its Boeing 777 jetliner. Boeing needs to sell around 300 aircrafts to get respectable amount of profit. The economies of scale here are significant, with average unit costs falling by $40 million as output expands from 100 units to 500 units.

"In addition to economies of scale, learning effects also exist in this industry. Learning effects were first documented in the aerospace industry where it was found that each time accumulated output of airframes were doubled, unit costs declined to 80 percent of their previous levels. Thus the fourth airframe, typically 80 % of the second airframe to produce, the eighth airframe only 80 percent of the fourth, the 16th only 80 percent of the eight, and so on. This observation implies that the $80 million in per unit variable costs required to build a 777 will decline over time as output expands, primarily because of gains in labor productivity. Thus, while variable costs per unit might be $80 million by the time 100 aircraft have been manufactured, by the time 500 aircraft have been manufactured, they may have fallen to $60 million per unit" (FMBD 2000). "World demand is large enough to support only a limited number of aircraft producers at high output levels. Forecasts suggest that the global market for long-range aircraft with a seating capacity of about 300, such as the 777, will be about 1500 aircrafts between 1997 and 2008. If we assume that Boeing has to sell about 500 aircrafts to make a decent return on its investment, this suggests that the world market is large enough to support only three producers profitably!" (FAA, 2012).

Extensive aircraft portfolio is required to satisfy the requirements of customer airlines. Pressures from customers are forcing aircraft manufactures to develop products which can be run by only one pilot. An aircraft producer has to give leasing and financing services to customers over and above other requirements of customers. As airlines face financial difficulties, financing terms become a key selling factor. Alliances, joint ventures--especially with foreign government funded programs--and extensive lobbying, political posturing in national and international forums. "Some 45 businesses in 6 Asia-Pacific Economic Cooperation (Apec) economies provide Boeing with about 70 different parts and major assemblies ..." (Boeing, 2005)

As can be seen from a brief overview of the commercial aircraft industry, political, financial, customer forces effect the product development and sale of aircrafts. In defence aircraft sales the competition is more intense and political forces and costs are the major influencing factors.

Political, Economic, Social, Technological (PEST) Analysis

Political Factors

Political factors include government regulations and legal issues and define both formal and informal rules under which HAL must operate. HAL, being a public sector undertaking under the Ministry of Defence, there is a large impact of political factors on its strategies. Following are the examples:

* Government type and political stability: India is a democratic country with governments elected by the people. In recent years we have seen stability in the elected government. So the political scenario may be considered favourable for industries.

* Freedom of press, rule of law and levels of bureaucracy and corruption: In Indian democracy press has freedom of expression. As such it is a positive factor for any industry

* Regulating rules: HAL was created to provide services to defence services specially The Air Force. Because of high security involved, Government favors procurement of services for defence from a public sector company with its own control

* Employment laws laid down by the government which provide for minimum employment to the people and job security for its employees

* Environmental regulations that any company has to adhere to and the necessary certifications to be obtained from various government certified agencies like ISO, etc. For example HAL is ISO 14001 environmentally certified.

* India has a federal tax structure whereby both the Central and the State governments impose a range of taxes. The Central Government levies income tax on both corporate and individual incomes as well as indirect taxes such as customs duties, central excise and service tax. The State Government imposes other indirect taxes such as Value Added Tax (VAT) and the like. The complex and multi-tiered tax structure in India makes domestic manufacturing uncompetitive in a range of situations for example in defence sector some imported supplies of defence goods to MoD are subject to lower incidence of taxes than locally supplied goods.

* The civil aerospace industry is similarly disadvantaged. The tax incentives are available for R&D in only Special Economic Zones (SEZs) but these are limited and not broad-based enough to provide meaningful relief. Particular mention needs to be made of the indirect taxes on aircraft servicing in India. customs duties, service tax and VAT. This does not create a very conducive environment for competitive development of technology.

On the whole, the Government encourages private investment in both the civil and defence aerospace sector with the goal of encouraging technology transfers and achieving indigenization only. The Indian Government has significantly liberalized the civil aviation sector. It welcomes domestic private participation in manufacturing and R&D in the aerospace sector with 100 percent foreign direct investment (FDI) allowed on the automatic route in most areas, the exceptions being air traffic services. The defence sector has more restrictions: while 100 percent domestic private investment is allowed, subject to licensing, in the manufacture of defence equipment, there is a cap of 26 percent on FDI (which is also subject to licensing requirements, and there are other restrictions as well). (PWC, 2009)

Economic Factors

Economic factors affect the purchasing power of potential customers and the firm's cost of capital. The following are examples of factors in the macro-economy that affect the aircraft industry:

* Economic...

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