Locatory.com: Does India have the potential to challenge China’s MRO market?

India and China – the two giants with 1,2 billion and 1,3 billion population respectively – are situated side by side and share the predicted GDP growth rates that are 3-4 times higher than those expected in the advanced economies. Both economies can be characterized by booming aviation industry which naturally triggers the rapid development of the aircraft maintenance markets. But do these neighbouring MRO markets compete with each other for the MRO hub title?

They are not, just yet, though different sources predict that in the near future the Indian and Chinese MRO markets will see the annual growth of 8% to 11 %. In order to at least reach the current MRO market value in China, India should double the scope of its activities. But even in ten years’ time the latter has minor chances to exceed the $3 billion limit, and it would be naïve to expect that the former will flounder.

Table 1. MRO market forecast according to TeamSAI and AeroStrategy.

According to Zilvinas Sadauskas, the CEO of Locatory.com, though China and India share similar potential and growth rates, their aviation markets differ a lot. Recently, according to the Civil Aviation Administration of China, the country’s air passenger traffic has reached 620 million. At the same time India's Minister of Civil Aviation has noticed that in 2011 the national passenger traffic slightly topped 140 million only. The disparity in passenger traffic rates naturally promotes the disparity in the expected demand for new aircraft in the nearest future. According to Airbus, in 20 years’ time the global aircraft delivery market is predicted to be valued at $3,5 trillion. The European manufacturer states that India will require more than 1000 new aircraft while in China the demand will exceed 4000. Airbus counterparts in the USA are even more optimistic and expect the global aircraft delivery market worth $4 trillion.

Table 2. New aircraft deliveries by 2030 according to Airbus© and Boeing©.

Although in the near future the increasing middle class in India is expected to triple (thus promoting the growing popularity of air travels), unfortunately it will still be unable to raise the national aviation (and MRO) sector to the same level as in China. Today the Indian aviation industry faces a considerable number of obstacles which decelerate its development. For many years local players were limited in their means to expand the business. International airlines are still restricted from making foreign direct investment (FDI) into the India-based airlines, some of which are eager to attract additional cash flows.

Moreover, the MRO market suffers from the high spare parts taxation which is being criticised by many Indian aviation market players for many years. According to the President of the Society of Indian Aerospace Technologies & Industries (SAITI), Indian custom’ duty for the aircraft spare parts and related equipment may be up to 100%. Such policy triggers MRO outsourcing outside the country, primarily to the Middle East. Some studies note that the volume of Indian airlines’ MRO services conducted outside of India may reach half of the total India MRO market.

‘No wonder that the volume of the MRO services provided to the Indian airlines outside of the country has been increasing during the recent years. High taxes along with some logistical issues force airlines not only to seek maintenance centres in other countries, but also to keep their inventory stock abroad. Other countries also have similar taxation issues. For example in China the fees for importing used spare parts can sometimes make them as expensive as the new ones’, comments Zilvinas Sadauskas.

However, in spite of their protectionist policies both India and China still remain the most promising MRO markets. Leading aircraft manufactures either have an assembly line or manufacture components in the region thus promoting a localised spare parts supply chain. Moreover, they participate in the aircraft maintenance business through different joint-venture companies. Other global aviation players, e.g. P&W and GE, also actively participate in the regional aviation industry by cooperating with local aviation-related companies.

Despite the insufficiently developed infrastructure and high taxation, the Indian MRO market remains a pool of opportunities for the industry players. Recently Indian officials have decided to exempt aircraft spare parts and training equipment form basic Custom duties. In addition, they have made some significant steps towards deeper market liberalization by allowing airlines to make external commercial borrowings up to $1 billion with only 5% interest withholding tax. The issue of foreign airlines’ FDI is also being intensively discussed within the Indian government institutions. These new policy changes backed by relatively cheap workforce will keep up the high Indian MRO market growth rates. Unfortunately, in short and middle term India won’t reach the volumes of China’s MRO industry. On the other hand, there are some factors which may provide the Indian market with extra benefits considering the long term perspectives, first and foremost - labour force. According to Wedbush Securities, today the Chinese authorities are promoting higher wages. This results in average salary increase of 17% per year. Such policy has already made the Indian workforce a bit cheaper thus indirectly contributing to the Indian MRO market competitiveness.

The next ten years will show if the Indian aviation industry is capable of competing for the title of the international MRO hub. During this period the region will have to achieve crucial milestones which will shape the future (layout) of the aviation market. Also, one must take into account the fluctuating oil prices which can suspend the aviation development around the world.