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October 14, 2009 (FinancialWire) (ValueNotes Outsourcing Watch: Insights for Investors) — In August 2009, Infosys Technologies (NASDAQ: INFY), Mahindra Satyam (NYSE: SAY), Capgemini were in news, as they were vying for a $200 m Bombardier deal for providing engineering services. Bombardier Aerospace has been in business in India with Capgemini and Mahindra Satyam since 2005.

Other top aerospace companies; Airbus and Boeing have also been outsourcing to India-based engineering service providers over past many years, so have auto majors Ford and Rolls Royce. Cost saving is an immediate as well as a long-term imperative to all these companies which has been significantly achieved through outsourcing.

Job-cuts and delays

Major aerospace manufacturers have been relying on retrenchment as a step to handle the near-term projected reduction in customer demand as well as the impact of global economic slowdown.

In January 2009, Boeing CEO, W. James McNerney Jr., announced 4,500 job cuts that will reach 10,000 by the year end.

The Canadian plane maker Bombardier axed a total of 4,360 jobs in Canada, US, Mexico and Northern Ireland by April 2009 in spite of revenue growth in fiscal year 2009 ending January 31. 

In September 2009, aircraft engine manufacturers Pratt & Whitney and GE Aviation, announced plans to close plants in North America within next one year, thereby reducing their workforce by 350 to 400 employees each.

French aerospace manufacturer, Latecoere, which manufactures doors for Boeing B787 aircraft, announced in September 2009 that it would cut up to 1,000 jobs.

Delays to Boeing’s 787 and 747-8 have pushed first deliveries up to 2010, while Bombardier’s CSeries is not planned to be in service until 2013 and Airbus’s A350 until 2014. Pratt & Whitney had an engine qualification test failure for Lockheed Martin Corp.’s F-35 fighter jet last month. Issues like fuel costs, order cancellations or deferred customer demand due to dried-up corporate profits, personal wealth and aircraft financing, erroneous supply-chain management, design flaws have been cited as the common reasons and concerns for these delays and failures.

The recovery

The aviation industry has been hit hard due to the global economic downturn with conflicting outlooks for recovery presented by world leaders in aerospace. Boeing expects a gradual recovery in the hope that global economy recovers in 2010, followed by airline traffic in 2011 that will record growth in 2012. Airbus, on the other hand is quite positive that the aviation industry will bounce back in 2010 itself and will show growth in 2011. This year, Airbus also revised their forecast for the period between 2009 and 2028 to sell 25,000 passenger and cargo planes with a total value of 3.1 trillion US dollars as compared to their previous forecast of estimated 24,300 planes to be sold over the period between 2007 and 2026.

Industry experts say that Airbus and Boeing are likely to slow production rates this year, but their new product plans might remain unaffected. Much to the relief of the suppliers, Boeing Commercial Airplanes has revealed in late September that it has commenced work on the stress point problem of the aircraft B787 and first aircraft, making way for the test flight later this year. Boeing also admitted that its supply-chain policy regarding parts and software for the B787 was flawed, and it would take necessary steps in future projects. However, it has reassured that it is still committed to the outsourcing production system. The company is also looking to bid for defense projects worth $31 b over the next 10 years in India after it signed a $2.1 b contract for eight P-8I warfare planes with the Indian government. As per Airbus projections, Asia-Pacific will be the largest aircraft demand driver in the next 25 years ensuring overall future aircraft demand.

Way ahead

Though the current state of the aviation industry appears gloomy, industry estimates for the short term as well as the long term appear optimistic. The current approach of most aerospace players is of caution in the hope to maintain stronger balance sheet, higher liquidity and spreading delivery backlog risk both in terms of products and geographies.

Apart from developing strong domain expertise, engineering services companies at this stage will need to partner with the buyers rather than just being service providers, as buyers seek to share business risks in the changing business environment. Despite temporary slack, given the fact that the overall demand for engineering services is expanding, outsourcing will still remain a significant contributor to overall growth and profitability for aerospace businesses globally.

ValueNotes Outsourcing Watch: Insights for Investors” is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing. The publication analyzes events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established U.S. companies, and emerging investment opportunities.

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