Thursday, July 31, 2008

EADS alliance bodes well for Mubadala

Original Article

By winning an EADS contract to service Airbus,
Mubadala has successfully gained entry into
the world of aircraft manufacturing. Bloomberg

ABU DHABI // In its foray into aircraft manufacturing, an industry with extremely high barriers to entry, Mubadala faces a formidable challenge.

But the Abu Dhabi investment fund hurdled a key obstacle when EADS, the European aerospace firm, saw in Mubadala a committed and cash-rich strategic partner, and last month awarded it a 10-year contract to build wing components for its Airbus unit.

The alliance was unprecedented in the history of EADS, said Jean Pierre Talamoni, a corporate vice president of international development. “I have no other examples where we started this kind of ambitious co-operation with a group without already having a strong industrial base,” he said.

But EADS is not alone, and already Finmeccanica, the Italian aerospace and defence giant, has also signalled its interest in Mubadala as a supplier of carbon fibre components. “There are talks going on, and one is for a facility for aerostructures,” said Carmelo Cosentino, the chief executive of Alenia Aermacchi, a division of Finmeccanica.

“We do believe Finmeccanica may be the ideal partner for Abu Dhabi, because they really have the strategy to grow an industry up from scratch.”

The Abu Dhabi fund is eyeing a much bigger prize than building components, however. It plans to move from a Tier Three to a Tier One supplier, which would see it build large structures for EADS and the world’s biggest aircraft firms, with the eventual goal of building an entire aircraft within the emirate.

The last time a new entrant into the industry accomplished such a feat was 48 years ago, when Embraer of Brazil began making corporate jets and small commercial aircraft, in 1960.

The initial contract with EADS is to produce flap track fairings and spoilers, and is worth an estimated US$1 billion (Dh3.67bn). As part of the deal, Mubadala will build a carbon fibre and composites plant in the emirate by 2010, and produce components for existing Airbus aircraft. Later, it will also build parts for the A350, which is slated to enter commercial service in 2013.

Carbon fibre components are now regularly incorporated into aeroplane design because they are durable and light.

Analysts say that if Mubadala successfully moves up the supply chain with its expertise in carbon fibre manufacturing, it can expect to multiply its earnings with contracts so large that they will require building a separate factory for each one.

“It could be worth several billion dollars over many years,” said Stephen Trimble, an aerospace supply chain expert at Flight International magazine. “Once you are in, you are in for the next 40 years, because as long as the aircraft remains in service, somebody will want to buy parts from you. But getting in is the challenge.”

Waleed al Muhairi, the chief operating officer of Mubadala, said Abu Dhabi was entering the aerospace industry as European manufacturers looked to offshore production to avoid increased costs from an appreciating euro relative to the dollar.

“EADS says ‘I want to expand my supplier network, I want to have some dollar zone manufacturing, because of where the euro has gone, it is killing them, and I want to go to a high-growth part of the world’. So we kind of tick all of those boxes,” Mr Muhairi said. “We know it’s not easy to become a supplier, and that is why we think this is such a game-changer.”

Aircraft order rates have accelerated in the past few years, putting intense pressure on the supply chain to keep up. With production delays proving costly from a financial and public relations standpoint, companies such as Airbus, Boeing, Bombardier and Embraer have begun making huge demands on their primary suppliers.

“Companies can’t just build structures and deliver them any more. You must be a mini-integrator, and what Airbus and Boeing want are fully assembled structures with all wiring, electrical and structural components fully assembled before they reach the final assembly centre,” Mr Trimble said.

In order to move up the supply chain, however, Mubadala will have to build its reputation gradually. When the major aircraft makers introduce designs for new aircraft, carbon fibre specialists such as Mubadala will then be in prime position to win large contracts.

“When the next programme comes along, such as the replacements of the current 737 and 777, Boeing will look for new suppliers, and it’s important that Mubadala have a track record,” Mr Trimble said.

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