MC Explains: Why this might not be the right time for India to set up a final assembly line

MC Explains: Why this might not be the right time for India to set up an FAL

This year, Air India, Akasa Air and IndiGo ordered 974 aircraft from Boeing and Airbus. This number will increase as Akasa has said it will place a “three-digit” order for aircraft before the end of the year.

With India accounting for the bulk of aircraft demand in South Asia, should Boeing and Airbus, the two global manufacturers of civilian aircraft, look at setting up a final assembly line (FAL) to make planes in the country?

There is talk about an FAL in India as the government continues to focus on domestic manufacturing and making the country atma nirbhar (self-reliant). With India set to become the second-largest global aviation market soon, this sector is under attention.

While an FAL will no doubt bring cheer, is it the right time to have an FAL in India for the country and aircraft manufacturers? Moneycontrol explains.

What is an FAL?

An FAL is a factory where the nuts and bolts, painting and final assembly of a civilian aircraft are done. Airbus has a production facility in Toulouse, France, and recently opened one in the US. Boeing Commercial has FALs in Seattle and Charleston. Both companies also have a factory in China. In business terms, final assembly is estimated at 6 to 8 percent of the cost of aircraft production.

India’s role so far

India’s association with civilian aircraft dates back to the early 1960s, when state-owned Hindustan Aeronautics Ltd. started licensed production of Airbus helicopters. Thanks to the global position that Indian companies enjoy in research and development, they have grown to be an integral part of aircraft production for the two global manufacturers.

There are a host of Indian aircraft part suppliers. Dynamatic Technologies is one of the main suppliers of complex aeronautical parts, structures and designs for Boeing, Airbus and Bell Helicopters.

Karnataka-based Aequs is a key producer of parts used in commercial aircraft worldwide. Mahindra Aerostructures makes parts for commercial aircraft produced by Boeing and Airbus.

What will an FAL mean for part manufacturers?

As aircraft parts are produced globally, manufacturers will have to find a way to ensure they reach the FAL in India on time and to specifications.

There could also be the ticklish issue of transfer of technology – many manufacturers are not keen to hand over the expertise they have mastered in making precision parts for Boeing and Airbus.

What are the other hurdles?

Satyendra Pandey, managing partner of Aairavat Technology & Transport Ventures, said assembling aircraft in India is an aspirational goal. What is needed for an FAL are policies, people and processes that are aligned.

“Then there has to be sophistication across the supply chain. Everything from airports to roads to custom brokerage houses have to be aligned. For instance, aircraft engines require specialist transport with trucks that have exacting technical specifications. It requires roads that make for smooth transit, vehicles that limit vibrations, and transporters who are well-versed with the special handling that this requires,” Pandey said.

He adds that it also requires insurance companies that are aware of transport risks and can offer competitive premiums.

“These are issues that are slowly improving but the investment and expertise can only come if policy prescriptions propel these initiatives forward,” he said.

What an FAL in India will mean for global manufacturers

Starting an FAL will mean that aircraft manufacturers will require huge amounts of land. Normally, an FAL also has a runway to test new aircraft and take delivery of aircraft. Land acquisition could be troublesome in India, as seen in the past. Then there is the cost of setting up the plant and getting the machinery. There have to be proper access roads and easy accessibility to ports or airports in case large equipment needs to be transported to the FAL facility.

Is the time right for India to have an FAL?

There are various reasons why this might not be the right time for India to look at having an FAL. Firstly, to make aircraft production cost-effective, the building blocks need to be in place.

Boeing upped its forecast for the number of airplanes that will be required in South Asia over the next 20 years to 2,700 this year from 2,200 in last year’s Boeing Commercial Market Outlook. About 90 percent of this demand is from India alone, which translates to about 2,400-2,500 aircraft, a large chunk of which has been ordered already. This includes orders from Akasa, Air India, and IndiGo (for Airbus planes).

If demand in South Asia is the key consideration, the question is whether it is large enough to make a financially viable business case for an FAL.

If an FAL in India is to import 90 to 95 percent of aircraft components, then the economics of aircraft production in India might not work for the global market. While Indian manufacturing units are making progress in aircraft part delivery, they are not yet at a stage where the country can boast of being self-reliant in creating a civilian passenger jet in-house.

China recently started delivery of the COMAC C-919 narrowbody commercial passenger jet to airlines. But the only customers are Chinese airlines and the production line has been heavily cross-subsidised by the government.

India can perhaps look at having an FAL in the next decade or decade and a half.

What aircraft manufacturers say

A Boeing spokesperson said, “Volumes required for final assembly of commercial airplanes are far greater than that required for defence and a business case would require a large regional market.”

The spokesperson said Boeing is already the top foreign aerospace and defence company in India when measured by the more than 5,000 engineers and skilled staff it employs in India, and the 13,000 people employed by its suppliers.

“Our supply chain footprint extends to over 300 local companies and $1 billion spent annually on local sourcing,” the spokesperson said.

Airbus sources said close to $750 million of goods and services come from Indian vendors in the civil aircraft space annually. An Airbus spokesperson said the company is already building an FAL in India for C295 military aircraft. The C295 FAL and related manufacturing activities will lead to the creation of 15,000 skilled direct and 10,000 indirect jobs over 10 years.

“We already have a strong industrial presence in India, which is not just a market for Airbus aircraft but also a strategic resource hub. Airbus is constantly expanding our local supply chain, component manufacturing, design, innovation and training capabilities,” the spokesperson added.

“Airbus has put ‘Make in India’ front and centre of its business strategy here.”

The Airbus supply chain in India generates more foreign exchange value and jobs (7,000+) for the country than modern assembly does.

“Airbus will further contribute towards deepening the aviation value chain in India by increasing its component and services sourcing from India, including manufacturing A320 cargo and bulk cargo doors,” the spokesperson said.

As Remi Maillard, president of Airbus India and South Asia, told Moneycontrol in August 2021: “Today, every commercial aircraft or helicopter that Airbus manufactures has parts, design or technology coming from India.”

Every one of our commercial aircraft today is partly made in India: Airbus’s Rémi Maillard (moneycontrol.com).
Given this, perhaps India would be better off concentrating on supplying and increasing sales of aircraft parts before it looks at starting an FAL in the country.
(EOM)