At MRO Americas 2015 today, Kevin Michaels discussed the current trends in “right sourcing.”
Michaels explained that over the past decade, significant manufacturing and design infrastructure has been established in China, Russia, India and Brazil. Within China and India, there were particularly high levels of engineering investment from 2008-2011. A significant factor included the low cost of labor in the locations.
The commercial aviation corporation of China COMAC attracted a lot of western aerospace investment in China in the 2004-2011 period.
But over the past three years, there has been a shift. China has experienced significant increases in labor costs, as well as skilled labor shortages. Automation has continued to erode labor content for many aerospace parts. Higher oil prices made transportation costs a significant factor in offshoring during 2012-2014. Factors like these have resulted in more “right shoring” – in which value chain activities are sited in the best locations for long term competitive advantage and market access. Labor costs are no longer the only factor in locating business units.
This means at in the most recent years, aerospace investment dollars are returning to the US. The Southeast US has become a hot spot for the balance between labor costs, skilled labor availability, transportation costs, etc.
China seems to have a customs ‘firewall’ tat can make it much easier to bring product into China of it is assembled in China. To serve Asia effectively, many companies are getting into China because of the difficulty in bringing product into China.
What does this mean for MRO? More heavy checks that were going to Asia are coming back to North America as the asian labor rates increase. Lufthansa Technik will open a heavy maintenance Facility in Puerto Rico (other companies with significant engineering centers in Puerto Rico, include Lockheed Martin, and Pratt and Whitney). Other new heavy maintenance facilities are being opened in the continental US, including facilities for companies like ST Aero (by the way, Michaels predicted that the US would not be the hot spot for aerospace investment in four years, as industry trends continue to evolve).
But other maintenance still needs to follow the customer growth patterns. Michaels concluded that growth will still be led by Asia, China, and the Middle East (China will continue to be a separate market from the rest of Asia). So there is still a need for the MRO community to invest in those regions in order to support those customers.