With high GDP growth and government support, China's air passenger traffic and cargo traffic have increased by 16.1 percent and 26.4 percent respectively in 2010. China's air passenger traffic has maintained an average annual growth rate of 15.3 percent in the past ten years. According to the Civil Aviation Administration of China (CACC), China had a total number of 1,639 commercial aircraft in 2010 and plans to increase this to 2,890 units of aircraft in 2015. The scale of Chinese civil aviation has increased to be the second highest in the world in terms of turnover and passenger kilometers.

Expansion in China's commercial aerospace industry is creating a wealth of new opportunities for electronic manufacturing service (EMS) providers. Due to high product quality requirement, original equipment manufacturers (OEMs) are outsourcing and creating strategic partnerships with EMS providers. In the next five years, the large aircraft made in China is likely to get the first preference in the local market. The project of manufacturing C919 was launched in 2009 with the goal of initial production in 2014 and sales by 2020. An increasing number of contracts, such as C919, program have spurred OEMs to embrace EMS providers as strategic partners.

Opportunity Analysis

Cost benefits have been the key prime drivers for OEM outsourcing to EMS providers. Increasing price pressure has forced the necessity for streamlining efficiency throughout the supply chain. Supply chain complexity in commercial aerospace is anticipated to increase the OEM outsourcing. The industry has additional complex requirements, which include extraordinary high regulatory, quality, and safety requirements. The demand for high quality and flexible production has spurred OEMs to outsource to EMS providers. EMS providers’ successful foray into other high demanding verticals will be of prime importance to OEMs seeking to outsource. The ability of an EMS provider to emulate best practices gained from other verticals and apply them to commercial aerospace will become a key competitive differentiator.

While there are opportunities abound, EMS providers face a few major hurdles before they can benefit from increasing outsourcing. High OEM loyalty remains the major restraint, which slows EMS penetration. Other restraints are competition on price point lowers revenue growth and the OEMs reluctance to outsource manufacturing and key services like design. In addition, long product lifecycle and complex processes are likely to restrain fast EMS penetration.

According to the latest research, the commercial aerospace EMS provider market in China generated revenues of $1.32 billion in 2010. The Chinese commercial aerospace EMS providers have the opportunity and the expertise to experience a profitable and disciplined growth for the next 3-5 years. The market is expected to reach $2.97 billion by 2017 at a compound annual growth rate (CAGR) of 12.3 percent.

Chart 1 represents commercial aerospace EMS provider market revenues in China from 2007 until 2017.


OEMs will continue to rely on EMS providers’ manufacturing flexibility, for risk mitigation as well as for on-time order fulfillment. EMS participation in this market is likely to witness growth with constant demand for high quality level, supply chain, technology innovation, and flexibility.

Competitive Analysis

The key competitive factors in the Chinese commercial aerospace EMS provider market include financial stability, supply chain and procurement capabilities, manufacturing technology and flexibility, advanced design expertise, value-added services, and delivery performance. In addition, an increasing trend of merger and acquisition (M&A) activities is expected in the market.

As OEMs are pressured to function competitively in the current environment, they are embracing and adapting their business strategies to involve EMS providers as joint design manufacturers (JDM). As JDMs, EMS providers will take additional responsibilities to provide support for new product introduction, design engineering, testing, order fulfillment, etc. JDM model is expected to be a key strategy for boosting EMS provider market. Another trend appears to be emerging from the C919 program, where the commercial aircraft corporation of China, ltd. (COMAC) management clarified explicitly that foreign bidders should form joint ventures with Chinese partners. Many international EMS providers are expected to establish manufacturing joint ventures in China for new business opportunities.

Another important factor in the market is the boost of Chinese commercial maintenance, repair, and overhaul (MRO) market, which provides high demand for EMS providers. The total Chinese commercial MRO market size reached $2.32 billion in 2010, and accounted for 5.0 percent of the global MRO market. In 2015, it is expected to generate $6.75 billion. China has attracted many companies due to the price and cost of services provided. It is one of the leading MRO providers in the world with competitive pricing.

Conclusion

Despite the world economic downturn, China continues to be the country with the fastest GDP growth rate. The EMS provider market is being driven by strong demand for commercial aviation during the forecast period. EMS providers have to continue to be cognizant of industry and demand changes in order to sustain existing market share and ensure continuous growth. New opportunities require EMS providers to maintain high levels of product innovation, necessary certifications, and flexibility supply chain. Due to high customer loyalty, EMS providers need to obtain good services and relations with OEMs. The trend is expected to remain steady during the forecast period.