The sky is the limit: The aerospace sector’s performance continues to improve

One of the most evident examples of Malaysia’s ongoing push to build a high-tech economy is the development of its aerospace industry. The sector encapsulates a number of strategic areas outlined under the government’s national development priorities, including advanced manufacturing operations, research and development (R&D) and value-added services. The current distribution of the aerospace workforce, which numbers 65,000, is weighted towards the aviation industry, which accounted for 42% of aerospace employees in 2012, followed by 16% in maintenance, repair and overhaul (MRO); 10% in manufacturing; and 32% working in other aerospace activities. About half of these operations are based in Selangor, with Kuala Lumpur (KL) and the Federal Territory accounting for another 28%, while Penang hosts the other 17% of activity.

Bottom Line

The overall performance of the aerospace sector has improved steadily since the National Aerospace Blueprint (NAB) in 1997. In recent years the industry’s cumulative revenue has climbed from RM21.5bn ($6.7bn) in 2006 to RM32.7bn ($10.2bn) in 2013, according to the Malaysian Industry Government Group for High Technology (MIGHT).

By far the largest contributor is the commercial aviation sub-sector, which has seen its annual turnover rise from RM13.9bn ($4.34bn) in 2006 to RM23.2bn ($7.24bn) in 2013, as air travel continues to expand in the country. The second major sub-sector, MRO, also improved its annual revenue from RM3.9bn ($1.22bn) to RM5.5bn ($1.72bn). Meanwhile, aerospace manufacturing and avionics and systems integration saw revenues reach an all-time high of RM1.33bn ($415m) and RM1.37bn ($427.5m), respectively, in 2013.

Since 2010, Malaysia has secured new investments from international aerospace companies including Singapore Aerospace Manufacturing, RUAG, Messier-Bugatti-Dowty, SR Technics, BHIC Aeroservices and Airod Aerospace Technology.

Although the niche sector is so far limited in its export capacities – foreign sales of aircraft and associated equipment and parts accounted for 0.3% of all merchandise exports in 2013 – the industry has the potential to contribute to the high-tech domestic goods and services market should current trends continue.

Global

Exports for the sector totalled RM2.39bn ($745.9m) in 2013, up slightly from the RM2.24bn ($699.1m) recorded for 2012, according to data from the Central Bank of Malaysia.

Although exports have remained largely static over the years, ranging from RM2bn ($624.2m) to RM3bn ($936.3m) between 2008 and 2013, aerospace imports have continued to climb, rising from just over RM4bn ($1.25bn) in 2009 to around RM13.2bn ($4.12bn) by 2012, according to the Department of Statistics Malaysia. One of the sector’s ultimate goals is to address these discrepancies through the localisation of aircraft parts and components, including the production of aerospace-grade raw materials.

Investment and sales, meanwhile, are expected to go up substantially over the next decade, with the global aerospace sector projected to be worth $1tn by 2020, according to Malaysia’s Economic Transformation Programme (ETP), with to 40% of passenger aircraft sales in Asia by that time.

Strategic Vision

Malaysia’s NAB remains the primary strategic directive governing the development of the aerospace sector and should remain so until its completion in 2015. The strategy focuses on leveraging Malaysia’s domestic capabilities in order to foster expansion within four primary sub-sectors, namely parts and components manufacturing, MRO, avionics and system integration, and aerospace training.

Shortly after the NAB’s inception in 1997, the Malaysian Aerospace Council (MAC) was created in 2001 to steer the growth of the industry, establish policies and guidelines, identify priority areas and set up a think-tank for technology procurement. Another key development was the conversion of the country’s Sultan Abdul Aziz Shah Airport in Subang into the Malaysia International Aerospace Centre (MIAC) in 2005. Other recent programmes pursued by the MAC include Systems Integration Capability Development, preparation for the Next Generation Aircraft, LEADER Aerospace engineer training, as well as a new incentive package for the aerospace industry.

Priorities

Operating under MIGHT, the aerospace industry is also a priority growth area in line with the government’s ETP. This includes two entry point projects (EPPs) under the business services National Key Economic Area (NKEA), namely “growing aviation MRO services” and “growing large pure play engineering services”. In 2013, progress on these EPPs was focused on two strategic levers: to enhance existing capability and to improve market presence while becoming increasingly versatile in the country’s engineering capabilities. These areas of focus are designed to take advantage of current trends within the industry, specifically the movement of manufacturers towards increasing outsourcing of engineering work in order to reduce costs, as well as to refocus on core strengths.

In addition to the incentives afforded to key priority industries such as pioneer status, investment tax allowances, reinvestment allowance and exemption from duty and import taxes on machinery and raw materials, the aerospace industry is also benefitting from a mandatory offset programme. This is a compulsory scheme whereby firms that complete major sales of equipment such as aeroplanes must then invest a specified amount of capital into the destination country in order to foster technology transfer and innovation in the host nation. In Malaysia’s case, the offset is generally 100%, which means that for every dollar spent on aerospace purchases, seller companies must fund an equal dollar in domestic aerospace programmes. To this end, the transfer of technology, opportunity for partnership with global aerospace groups and access to capital presents key opportunities for future growth.

Wheels Up

The Aerospace Malaysia Innovation Centre (AMIC), established in 2010 as a joint venture between both foreign (Airbus’s parent company European Aeronautic Defense and Space Company, and jetengine producer Rolls Royce) and domestic companies (CTRM Aviation, MIGHT and Universiti Putra Malaysia), is a key partnership for supporting industry growth.

Complementing AMIC is the Malaysia International Aerospace Centre (MIAC), which serves as the country’s primary MRO hub and was created in 2005 to capture the growing military, commercial and general aviation MRO businesses, as well as the corporate and private air services market. The successful cluster of industries has already outgrown its home at the old Subang International Airport after a decade of service and is now expanding into KL International Airport to house its operations. This includes developmental centres catering to helicopters, general aviation, aerospace training, aerospace technology and business support, in addition to MRO activities. As of 2013 some major foreign MRO players operating in Malaysia included General Electric, Eurocopter, Hamilton Sundstrand, Honeywell Aerospace, Parker Hannifin, MTU, Lufthansa Technik and Agusta Westland.

While AMIC serves as a catalyst to facilitate cooperation between foreign and domestic companies, in addition to university-based research, the Majlis Amanah Rakyat (MARA) business park being built in Subang Jaya is targeting the sector’s lack of qualified personnel through the construction of technical colleges and Asia Aerospace City (AAC).

Aided by a government outlay of about RM250m ($78.03m) for MARA to develop a second campus for the University of KL Malaysia Institute of Aviation Technology, MARA is expected to turn out thousands of new engineers for the Malaysian aerospace workforce upon completion in 2016.

The AAC is designed as a smart city comprising a range of integrated facilities such as offices, R&D facilities, academic campuses, a convention centre and residential space, and is projected to generate 10,000 engineering positions worth RM1.5bn ($468.1m) for engineering services. UK-based consultancy group Atkins Global was signed on as lead planner for the project.

As a result of these incentives and linkages, Malaysia has managed to establish a number of successful homegrown aerospace operators. Two of the industry’s key players include Strand Aerospace Malaysia and DreamEDGE, which have both grown over the years from less than 10 engineers at their inception to nearly 200 each by the end of 2013. This is in addition to homegrown manufacturers CTRM Aviation and SME Aviation (SMEA). All four firms are now considered tier two companies for design engineering, with all also having had successful forays into the international market.