Civilian Aerospace Industry in Germany - Case Study Example

Civilian Aerospace industry in Germany Introduction Aerospace industry is involved in manufacturing and services of aircrafts, aircraft systems and components; spacecraft, avionics and other related electronics and ground based infrastructures, which support the operations of spacecrafts and aircrafts. In Germany, aerospace industry is one of the most innovative and best performing industries (Abrams and Kleiner, 2003). It is predicted that in the coming twenty years there will be over 25,000 new aircrafts going into service to meet global demand (Fojt, 2006). The availability of both civil and military aircraft manufacturers in Germany presents an opportunity for investors in the industry (Baker & Hart, 2007). Manufacturers of aircraft in Germany are striving to comply with the vision 2020 through seeking new technologies and solutions to reduce emissions and noise while increasing capacity at the same time. The industry has been recording an average annual growth rate of 9% since the mid 1990s and recorded a EUR 20.2 billion in turnover in 2007. The Germany aerospace industry has over 88,000 highly skilled work force and over 155 companies and related institutions. Germany offers incentives for all investors in aerospace industry in terms of cash, labor, research, and development in spite of the country origin of the company. Out of the annual revenues, 15-20% is dedicated to research and development (Petrick, 2007). This report provides an analysis for civilian aerospace industry in Germany and provides advice for selection of the most appropriate form of market entry that can be used by Meggitt plc to enter Germany aerospace industry. Meggitt plc This is a leading British based engineering business, which specializes in aerospace equipment. It is headquartered in Bournemouth Airport in Dorset (Belobaba, Odoni, and Barnhart, 2009). The company provides aircraft braking systems, polymer solutions, fluid controls, theatric, thermal systems, safety system and Meggitt sensors and controls. The business derives its support from an evolving group infrastructure with strong functional leaders (Hirschel, Prem and Madelung, 2004). Thus the firm is able to combine talents, technologies, share services, and benefits from a range of centrally managed initiatives (McGuire, Fai, and Ozaki, 2010). The efficiency of operations at the firm is boosted by IT, strategic sourcing and low cost manufacturing (Fojt, 2006). The group has a high performance culture, which underpins the safe operations for its employees, a tenacious ethics program, and pervasive export compliance process (Delfmann, 2005). Porter’s Diamond Factor conditions The success of UK in aerospace market stems from investment in research and development. This has stimulated innovation and knowledge creation (Forsyth, 2005). It also supports research in universities and this has had spin off benefits into non-aerospace activities (Achrol and Stern, 1988). This investment continues to enable UK aerospace industry to attain sustained productivity growth and competitiveness (Capon, 2008). Research shows that investment in aerospace industry research and development in UK is only second to pharmaceutical (Beekun et al. 2008). It is estimated that the UK aerospace sector invests more than £2.5 billion in research and development each year. The growth in the sector stands at 5% currently. The aerospace industry of UK conducts 12.5% of all the research and development carried out in UK. Most of this works is heavily funded by the industry itself to the tune of £3 billion per year. Thus Meggitt plc has gained initial competitive advantage from which it can build on when it enters German market. The innovative work force found in UK can be utilized by Meggitt to initially establish itself in Germany with the help of the skills, which are available in Germany. Home demand conditions The UK aerospace industry is the third largest in Europe (Ehret and Cooke, 2010). The industry exports were about $27.7 billion in 2007. The growth in the industry between 2003 and 2007 averaged at about 8%. This was mainly due to continued growth in the maintenance, repair and overhaul (MRO) market. The market share of the UK’s aerospace industry accounts for 17% of the market share of a £40 billion global industry. The industry sells 18% of its products to its own government and 26% to other EU markets. Being an aerospace equipment business, Meggitt plc plays an important role in the MRO market. Thus the high home demand for Meggitt’s products implies that the firm will have an initial advantage as it plans to enter Germany markets (Belobaba, Odoni and Barnhar, 2009). Related and supporting industries The success of aerospace industry is dependent on the air travel industry. The demand of air travel in UK has been on the increase (Bourgeois and Brodwin, 1984). The trend is also the same in the global market (McGuire, Fai and Ozaki, 2010). In spite the growth, recent economic downturn affected negatively on the global air travel demand, which in turn affected negatively on aerospace industry in UK (Petrick, 2007). By 2008 the civil aerospace market experienced a growth averaging 5%. Due to high fuels and global recession airfreight started declining to -24% while passenger traffic declined by -2% by the end of 2008. Even though the airline industry is still facing some difficulties, the overall aerospace market has been reported to be recovering. Therefore recovery of global airline industry will subsequently affect positively on the aerospace industry, which the Meggitt can build on to enter German. Firm strategy, structure and rivalry Being members of EU, Germany and UK, have relatively similar management structures, working morale and interactions between companies. Meggitt plc has a competitive advantage in UK since it is a leading supplier of aerospace equipment (Wyckoff and Maister, 1977). The group has strong functional leaders, which enable it to combine talents and technologies, to share benefits, and services from a range of initiatives, which are, managed centrally (Capon, 2008). The firm has a strong financial performance due to balanced business across market segments and innovative products, which enable it to generate stable and long-term aftermarket income. The group is committed to safe operations for its employees, a tenacious ethics program and pervasive export compliance processes. Innovation at the firm will ultimately enable the firm to establish itself in global market especially German. Government and Chances The government has employed the national aerospace technology strategy to take account of the technological developments in the UK’s aerospace industry. The governments also use repayable launch investment, which greatly supports the thriving aerospace sector in UK and has delivered substantial return to the taxpayer (Baker & Hart, 2007). This initiative has enabled UK to take leadership role in development of new technologies in aerospace industry (Plunkett, 2008). Thus Meggitt benefits from such repayable launch investment and this can enable it successful enter the Germany aerospace market. In addition, the UK government support export credit in the aerospace industry. This enables Meggitt to export its products in addition to skills and innovation. The UK government collaborates with French and Germany export credit agencies and thus Meggitt will be able to successful utilize its existing skills and knowledge when it establishes itself in Germany without facing any legal hurdles from home (Fidler & Johnson, 1984). The entry mode The mode of entry, which is best, fitted Meggitt plc to enter Germany aerospace industry is foreign direct investment (FDI) (Bourgeois and Brodwin, 1984). This will require Meggitt to transfer its resources including capital, personnel and technology. Meggitt may decide to acquire an existing firm or establish a new enterprise (Hirschel, Prem and Madelung, 2004). Using direct investment will allow Meggitt to have a high degree of control in the operations. It will also enable it to better understand the consumer and competitive environment. This method is favorable for Meggitt because Germany and UK are both members of EU community and hence their cultural distance is small (Drucker, 2006). In addition, the aerospace industry in Germany is growing very fast and hence Meggitt has the potential of making high volumes of sales. Furthermore, Germany is stable politically and thus there is low political risk by taking such venture (Domzal and Unger, 1987). Moreover Germany has a welcoming attitude toward foreign direct investment. Germany has an open market for foreign investment in almost all industry sectors. The existing law in Germany does not make any distinction between local firms and foreign firms about investment or the establishment of companies (Dwyer and Welsh, 1985). The legal framework that exists in Germany favors the principle of foreign trade and payment. Thus Meggitt will not face any legal constraints when it enters Germany market via foreign direct investment. By using direct investment method to enter Germany market, Meggitt will be able to have a greater knowledge of the local market (English, 2003). This will also enable it to better apply its specialized skills in the production of aerospace engineering equipments and will reduce cases of its knowledge spillover. In addition, this will enable the firm to be viewed as an insider rather than an outsider. As a result, the firm will be able to enjoy much of the investment in research and development in the aerospace industry that exists in Germany (Delfmann, 2005). Since Germany offers incentives for all investors in aerospace industry in terms of cash, labor, research and development in spite of the country origin of the company, Meggitt plc will benefit from such incentives when it enters Germany aerospace industry via direct investment. Conclusion In Germany aerospace industry is one of the most innovative and best performing industries. The industry has been recording an average annual growth rate of 9% since the mid 1990s. The Germany aerospace industry has over 88,000 highly skilled manpower and over 155 companies and related institutions. Germany offers incentives for all investors in aerospace industry in terms of cash, labor, research and development in spite of the country origin of the company. Meggitt plc is a leading British based engineering business which specializes in aerospace equipment. The company provides aircraft braking systems, polymer solutions, fluid controls, heatric, thermal systems, safety system and Meggitt sensors and controls. Michael porter diamond model can be used to analyze why some countries are more competitive than others and why some industries within countries are more competitive than others. This model suggests that the extent to which a firm is likely to attain advantage on a global scale is dependent on the national home base of the firm. The growth in the aerospace industry in UK between 2003 and 2007 averaged at about 8%. The success of UK in aerospace market stems from investment in research and development. The demand of air travel in UK has been on the increase. Being members of EU, Germany and UK, have relatively similar management structures, working morale and interactions between companies. This conditions favor expansion of Meggitt’s operations in the global arena including Germany. The mode of entry which is best fitted for Meggitt plc to enter Germany aerospace industry is foreign direct investment (FDI). Recommendation Meggitt should use direct investment to enter Germany market. This is because Germany and UK have small cultural distance, the aerospace industry in Germany is growing very fast, Meggitt has the potential of making high volumes of sales and Germany is stable politically and thus there is low political risk by taking such venture. Meggitt should employ some of Germany professionals when it enters the Germany market. This will make it utilize the rich human resources that are a result of heavy investment in the aerospace industry in Germany and will make it look more of an insider than outsider. Meggitt should continue utilizing the repayable launch investment provided by UK government to invest its manpower. This will enable it have sufficient workforce to help it to initiate its activities in Germany since it will require some personnel to transfer its skills to new plants to be established in Germany. Meggitt ought to invest more in research and development. This is because competition on global scale in the provision of engineering equipment is becoming stiff and only those firms which have continued innovation in its manpower and systems of production will be able to establish them1selves in the global market. This will ensure that the firm becomes competitive in Germany market, which is also known to be home for some of the best technologies in the aerospace industry. 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