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Alliance
STRATEGIC ALLIANCES
Prof. Amita Mittal
BOEING-TASL
Contributors:
PGP 31129: Ajay Rathore
PGP 31327: Rachana Kanikarla
PGP 31389: Musadhiq Yavar
PGP 31395: Paridhi Shrimali
PGP 31405: Rohit Banka
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Table of Contents
BOEING Analysis of the organization .................................................................... 3
History ..................................................................................................................................................................... 3
SWOT Analysis ..................................................................................................................................................... 3
Strengths ................................................................................................................................................................ 3
Weakness ............................................................................................................................................................... 4
Opportunities ....................................................................................................................................................... 4
Threats .................................................................................................................................................................... 4
Favorability of Alliance ........................................................................................... 5
Environmental Characteristics ..................................................................................................................... 5
Strategic Uncertainty in current Boeing market & new markets ................................................. 5
Dispersion of Knowledge (Low) ............................................................................................................... 5
Company Characteristics ................................................................................................................................. 6
Resource Endowment ....................................................................................................................................... 6
Financial Strength ............................................................................................................................................. 6
Social Capital ....................................................................................................................................................... 6
III. Transaction Characteristics ................................................................................................................ 7
Behavioural Uncertainties ............................................................................................................................. 7
Economic Synergies ........................................................................................................................................... 7
Social Capital ....................................................................................................................................................... 7
Need Gap Analysis .................................................................................................. 7
Infrastructure ....................................................................................................................................................... 7
Human Resource and Technology ............................................................................................................... 8
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History
SWOT Analysis
Strengths
Boeing has the history of having a strong market presence. Boeing has a leading
position in the aerospace and defense market. It is one of the two major
manufacturers of the airplanes with 100+ seating capacity and also one of the
largest defense contractors in the US. The company recorded a total of $96,114m
in Revenues during FY15, which was an increase of 5.9% over the previous year.
In the business segments, commercial airplanes segment contributed a total of
68.2% of the total revenues. The majority of the revenues (40.9%) came from the
US alone. China accounted for around 13.1% of the total revenues. Asia, other
than China accounted for 14% of the revenues and showed an increase of 12.9%
over the last year. In FY 15, the company added around $83b in new orders. The
company also received an order for 768 new commercial planes, which
increased its backlog to a record high of 5,800 planes valued at around $432b.
Apart from this Boeing maintained the defense backlog at $58b in FY15.
Boeing as a company always has had a strong focus on Research & Development
activities. The other business segments include Engineering, Operations, and
Technology. This segment provides technical and functional capabilities to the
company and also includes R&D, IT, test and evaluations and IPRs. Boeing has a
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focus on increasing the product and services offerings and to meet the demand
from the emerging markets like India. It is currently focusing on some
development efforts for enabling analytics-driven operations, advances in
natural laminar flow, which will help to improve the fuel efficiency and a
stronger and lightweight material that will reduce the airplane weight.
The CAGR for Boeings revenue has been around 5% for 2013-15 periods. The
primary reason for this growth has been the number of new plane deliveries
across different segments. The operating profits CAGR is around 7%.
Weakness
Boeing is largely dependent on the US government for the majority of its sales.
27% of the contracts were through the US government. Long-term government
contracts are subject to modification or cancellation due to changes in the
government policies.
Boeing also relies on other companies, subcontractors as well as suppliers to
provide raw materials, sub-components. If one of them faces issues related to the
delivery delays or any performance problems, it will also flow to Boeing as well.
Opportunities
The current prospects of the global aerospace and defense market are growing
strong. The global market is growing at a CAGR of 3%.
The demand for the commercial planes is also increasing because of increasing
market opportunities and challenges. Commercial airplanes fleet of the world is
expected to double in the next 20 years. The company has forecasted that the
strong economic growth in the Asia-Pacific region would be the key driver for
the growth of this demand. Similar opportunities are also expected to be present
in the Middle East and Latin American region.
Boeing has also been witnessing a growth in its backlog orders. It set a record of
762 commercial airplane deliveries during FY14. During FY15, the total backlog
of the company was $489.3b. This enhances the incremental growth of its
production, which in future will boost the revenue and profitability.
Boeing has expanded a lot in the recent years and also acquired many
businesses. In July 2015, an alliance was announced between Boeing and VietJet
Air to expand the fleet. In May 2015, the company expanded a new avionics
center in the Daegu-Gyeongbuk Free Economic Zone. In April 2015, Boeing also
acquired 2d3 Sensing for motion imagery processing.
Threats
The commercial market remains competitive as the growth rate is increasing.
The company is facing competition from international competitors like Airbus,
E&B, and several other entrants from Russia and China. The markets where
Boeing operates are also highly competitive.
Boeing also faces issues from its fixed price contracts. More than 72% of its
revenues come from fixed price contracts. Hence there are risks of reduced
margins if the company is not able to meet its cost and revenues.
The company has plans for the next 100 years to build the worlds largest
aerospace company. To achieve this the company has two strategies: first to
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accelerate the pace of growth to achieve full potential. And second to deliver on
existing commitments and improving them.
Favorability of Alliance
Environmental Characteristics
Strategic Uncertainty in current Boeing market & new markets
Risk of reduced margins if manufacturing costs increase
Fixed Price Contracts account for 72% of Boeing revenue. Hence these long
term contracts would not be able to sustain increased manufacturing costs,
increasing the need of reducing costs by either improving processes or
exploring new manufacturing hubs.
Risk of Adhering to Delivery of existing commitments
During FY15, the total backlog of Boeing was $489.3bn. It is already lagging
on current commitments and requires to rapidly scale up capacity.
High growth & demand in developing countries uncaptured.
Being the global market leader, Boeing needs to feature in the developing
markets to sustain its competitive advantage.
Dispersion of Knowledge (Low)
The technology and expertise in aviation manufacturing is non- existent in
developing countries like India.
The India Advantage
#5 in Defence Spending - $53.2 bn annual spend by Indian Govt
Low cost of manufacturing
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More than 30% of Defence budget spend on asset acquisition
Investment Allowance 15% deduction on new manufacturing plants;
weighted Tax deduction of 200% under Section 35(2AB) under Make in
India initiative
Government is also in favour of in-house manufacturing to curb big ticket
corruption existing in current contractual processes
Company Characteristics
Resource Endowment
Functional & Technical expertise in the domain along with the product and
the process patent provide Boeing the competitive advantage along with the
intangible assets like brand value in aviation industry.
Firm resources are
Tangible
Intangible
Capital
Product patents
Process Innovation
Lean Manufacturing
High Quality
Low transaction costs
Technology
Research & development systems
Brand value
Organisational culture
Financial Strength
Capital is one of the key resources available to the firm, stated by its highest
Arms sales profit in the industry ($4.5 mn annually). Further presence of Boeing
Capital Corporation with $3.4 bn portfolio adds to the financial muscle power of
Boeing to help its expansion. Supporting 1,5 mn supplier related jobs further
adds to the social capital of the firm increasing the trust in the partners about
resource and capital commitment. It has till date paid $50 bn to support 13,600
auxillary businesses of the firm.
Key financial indices of the firm are
Liquidity Ratios
Profitability Ratio
Cash Ratio 22.42%
Social Capital
# 87 Forbes Global, 2016
#1 Aerospace 25, 2015,16
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Required Capabilities
Manufacturing
Technology
Design Capabilities
Local manufacturing
facility
Maintenance, Repair
and Overhaul (MRO)
Gap
Local manufacturing
facility
Current Capabilities
Manufacturing
Technology
Design Capabilities
Maintenance, Repair
and Overhaul (MRO)
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Required Capabilities
Technical skills
Industry expertise
Local skilled Labor
Strong R&D and IP
Cheap Labor
Gap
Cheap Labor
Local skilled Labor
Current Capabilities
Technical skills
Industry expertise
Strong R&D and IP
Financial Resources
Required Capabilities
Gap
Capital
Current Capabilities
Capital
Market Strengths
Required Capabilities
Global presence
Innovation
Industry Relationships
Timely Delivery
Strong ties with
supplier base
Strong ties with Indian
government
Gap
Current Capabilities
Global presence
Innovation
Industry Relationships
Timely Delivery
Strong ties with
supplier base
Others
Required Capabilities
Experience in alliances
Low cost production
Local Suppliers
Gap
Current Capabilities
Experience in alliances
We have identified the following six gaps based on Need Gap Analysis:
1. Local manufacturing facility
2. Low cost production
3. Local Suppliers
4. Cheap Labor
5. Local skilled Labor
6. Strong ties with Indian government
Partner Selection
TASL
Most trusted brand in
India
Existing supplier
contract
Reliance
Presence in defence
sector
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History of alliances
Mahindra has a strong alliance with Airbus as its first alliance partner in India.
This leads to a conflict of interest with Mahindra. Reliance is a relatively new and
small player. Pipavav was acquired by Reliance Infra Ltd on 5 March 2015 and
was later renamed as Reliance Defence and Engineering Limited.
TASL, on the other hand, is globally renowned for its integrity and
trustworthiness. We also have an existing supplier contract with TASL and are
well versed with the functioning of the TATA group. Hence, we choose TASL as
the alliance partner.
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operating margin of 8%, while TASL has an operating margin of 22%. Thus an
alliance between TASL and Boeing can help to benefit both the companies
substantially. Advanced systems has a strong network of suppliers which can be
leveraged upon.
Tata Advanced Systems can also help supply cheap labor.
Tata group can also help Boeing in Indias defence procurement system for
future purchases.
Partnered with Indias armed forces for over half a century
Limitation of liability
Using the scope adjacency model, we identify the following scope for the joint
venture:
Geography
Business
Customer
Core
Channels
Products
Value
Chain
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3.
4.
5.
6.
supply to other South Asian markets. This would enable Boeing to reduce
its dependence on US for its top line, as approximately 27% of Boeings
current
contracts
are
from
the
US
Government.
Customer: The primary target customer shall be the Indian Air Force.
Products: The current scope is for the Apache AH-64 aircraft. The
product scope could be widened with future requirements to include
products
like
Unmanned
Ariel
Vehicle.
Value Chain: The scope of the alliance shall be limited to manufacturing of
aircrafts. Boeing wishes to manufacture aircraft parts in India, which has
huge opportunities in the field of aerospace manufacturing. Further,
Boeing can take advantage of the Make in India Initiative. The alliance
shall enable Boeing to learn about the development of a robust vendor
eco system, while staying within a competitive cost structure due to
reduced labour costs etc. At a later stage, Boeing could also set up a joint
R&D facility to take advantage of the tax deduction benefits granted under
the Income Tax Act, 1961. Section 35 (2AB) legislates that companies
engaged in the manufacture of an in-house R&D centre shall receive a
weighted tax deduction of 200% or both capital and revenue expenditure
incurred
on
scientific
research
and
development.
Channels: Direct selling conforming to the Defense procurement
procedure of the Indian Military shall be undertaken.
Environment Analysis
Political:
India is the biggest democracy in the World. The government type is a federal
republic. The political Situation in the India is relatively stable with no military
coup in its existence. But the current political party ruling the country is BJP-led
by Narendra Modi. The BJP is perceived to be center of left in its stance on a
majority of Issues. State politics dominated by several national parties including
the Bharatiya Janata Party (BJP), INC, TMC, AIDMK, CPI, and various regional
parties. India has a well-developed tax structure with a three-tier federal system,
comprising of the Central Government, the State Governments and the Urban &
Rural Local Bodies. The power to levy taxes and duties are distributed among
these three tiers of Governments, in accordance with the provisions of the Indian
Constitution.
India in the past has engaged its neighbors like Pakistan and China in armed
conflicts. The major wars that India has participated with Pakistan were in
1947,1965,1971,1999. Three of the 4 wars was on the disputed territory of
Kashmir and the 1971 war was with respect to the East Pakistan. India had lost
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the war with China in the Indo-Sino war of 1962 after which it pursued close
military and economic ties with Soviet Union which was the largest provider of
Arms to India for a very long time. The presence of such hostile neighbors and
the fact that India has a very weak industry-military complex provides the global
defense Industry with a unique opportunity in pursuing close ties the Indian
Government. The present government led by the Prime Minister Narendra Modi
have vowed to bring structural reforms to the functioning of the government and
improve the ease of doing business in India. They have also started a campaign
to attract global players in various fields of the manufacturing to set shop in
India under the Make in India initiative. Under the initiative the government
will provide significant support in setting up of Manufacturing plants and also
tax incentives. Defense procurement in India is perceived to lack transparency.
The evidence lies in the occurrence of scams like Augusta Westland Chopper
scam, Bofors scam. But there have been no major scams under the present
regime which provides us hope that the things might have changed.
Economic:
Indias GDP as of 2015 is around $2.08 trillion dollars which is 7th in the world in
the nominal terms. Its growth rate ~ 7%-8% is one of the highest for a large
economy. Indias defense budget is around $52 billion dollars which is 6th in the
world. India ranks 10th worldwide and 4th in Asia for the amount of FDI inflows
($44 billion in 2015, $35 billion in 2014). India is the largest importer of military
equipment. This provides global military equipment manufacturers to look at
India as the drivers for future growth. The current government is increasingly
looking at private players to fill in the void for its requirements by
manufacturing in India under the Make in India initiative. The FDI in defense is
approved through 2 routes. One is the automatic route for all FDI up to 49%. For
FDI above 49% the approval of the government is necessary.
The government has recently announced 100% FDI in defense with the
covenant that they should share their state of the art technology. India has also
improved its rankings in the ease of doing business from 134 last year to 130
this year. Indian Rupee is the official currency of India (20th most traded
currency in the world). It is managed by the Reserve bank of India through its
monetary policy. Rupee is relatively stable currency and has shown less volatility
in the recent past as it has been professionally managed by some very able
people like Dr. Raghu ram Rajan.
Social:
India has a population of over 1.1billion people which is the 2nd largest in the
world. This population is divided in the following age structure: 0-14 y 28.5%,
15-24 y 28.1% and 25-54y :40.6% ,55-64y :7%and 65 y above 5.8%. Hence it
has a relatively young population. India also has a huge supply of young
workforce which can be leverage by such global manufacturing firms.
Technology:
India has a vibrant IT industry which is its largest export sector. India has a
telecom penetration of ~82% which is very high for an emerging market. India is
at a brink of massive digitization movement thanks in part to the government
initiatives.
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Legal:
In this section we will concentrate on the legal framework and regulation with
respect to the defense sector. Defense procurement in India is governed by the
Defense procurement procedure (DPP) which was first enumerated in 2006 with
revisions in 2011. The government has decided to revisit the DPP every year to
factor in the changing business environment.
The categories of defense procurement are
- Buy: (Global): Outright purchase of equipment from a foreign vendor (Indian):
Outright purchase of equipment from Indian vendor with minimum local content
of 30% -
-Buy and make: Purchase from a foreign vendor followed by licensed domestic
manufacture through transfer of technology (ToT)
-Buy and make (Indian): Purchase from an Indian company or Indian JV with
minimum local content of 50%
- Make: Indigenous design, development and production of equipment
The TAS-BOEING JV comes under the 3rd category which is the Buy and
Make(Indian). The other regulations that are relevant in the context of the JV is
Benefits in-house manufacturing -
Investment allowance (additional depreciation) at the rate of 15% to
manufacturing companies Deduction of 15% of the cost of new plants and
machinery, exceeding INR 250 Million, acquired and installed during any
previous year until 31.3.2017
For companies engaged in the manufacture of an in-house R&D center, a
weighted tax deduction of 200% under Section 35 (2AB) of the Income Tax Act
for both capital and revenue expenditure incurred on scientific research and
development.
The above regulation provides the JV a platform for future expansion.
Boeing-TASL JV will be a 50-50 equity partnership with debt being raised by the
JV to reduce behavioural uncertainty. The cost and revenue sharing will be 50-50
as both the partners have capital as their strong point. The initial JV duration will
be 15 years with JV scope negotiations set every 5 years. The contract exit
clauses are clearly stated with the Jurisdiction disputes to be settled in High
court of Hyderabad and internal disputes and arbitration to be decided in
International Court of Arbitration, Paris.
The JV in initial stage will limit its scope to manufacturing AH64 Apache
Helicopter fuselages. The manufacturing facilities for the same will be setup by
TASL. Owing to its strong supplier relations & raw material procurement, Tatas
will supply the land and the required work force to start the manufacturing
operations. To facilitate the same we will provide workforce training by sending
operation executives and technical experts. They will also facilitate the setting up
of the manufacturing facilities and set in best practices.
Overall the Structure of JV will look like the following
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3 - Tatas
Joint CEOs
President
Chairman
CFO
COO
CTO
IR
Sourcing &
Procurement
Besides following the above structure, appropriate processes will be put in place
to reduce the Behavioral uncertainty and facilitate the successful
implementation of Boeing-TSALs strategies
Alliance Specific Investments Manufacturing facilities will be funded by
both TSAL and Boeing. The proposed Hyderabad facility has equal
investments by both the partners.
Systems
to
measure
behavioural
transparency
-
Quarterly JV performance meetings at management level
Monthly Operational effectiveness review Boeing Operation experts &
Tata-workers
Feedback mechanism at shop floors weekly review by Tata managers
Feature
Description
Nature
Duration
Capital
Financial
TASL
Contribution
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Boeing
Contribution
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Organizational
Structure
Current Scope
Exit Clauses
Court of
Arbitration
Future Scope
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