United Technologies’ bid to win India

THE U.S. NAVY AWARDED A $1.2 billion (Rs 7,369 crore) contract to Sikorsky Aircraft Corporation for six S-92 helicopters this May. By 2023, 23 of these four-blade twin-engine choppers will replace the Marine One fleet—aircraft used by the President of the U.S. Normally, this wouldn’t make news in India. But thousands of miles away from Virginia, in Hyderabad, Ashish Saraf was tuned in. It’s up to Saraf, Sikorsky-Tata Joint Venture India manager at Sikorsky Aircraft, and his team, to deliver the S-92’s largest component—the 6-ft.-high, 20 ft.-long, and 6.5-ft.-wide cabin. Deliveries start in 2016.

The Hyderabad plant makes cabins for the S-92 globally. A cabin is the most valuable component—nearly 20% of an aircraft’s cost—after engine, rotary, and avionics. Since 2012, Sikorsky has sold 80 cabins out of here. The S-92 is Sikorsky’s bestseller after the marquee Black Hawk. Worldwide, it is favoured for ferrying workers to oil rigs, medical evacuation, and search and rescue. About 10 heads of state use the India-made cabins to travel in their S-92s.

Sikorsky is the only private player to have a helicopter factory in India. The company is not new here. From 1953 to 1957, it provided the Air Force’s first six helicopters. United Technologies (UTC), the $63 billion (FY13) industrial conglomerate that owns Sikorsky, has been one of the oldest U.S.-based multinationals in the country, around since 1892. It built the first Otis elevator for Raj Bhavan, Kolkata (1892, still working); the first air-conditioner in Rambagh Palace, Jaipur (1936); and the engine for the first 707 Boeing that Air India flew (1960).

UTC’s businesses other than Sikorsky are engine maker Pratt & Whitney; components, controls, and sensing systems maker UTC Aerospace; elevators and escalators maker Otis; and UTC Climate, Controls & Security, which makes the Carrier heating, ventilation, air-conditioning, and refrigeration systems. The aviation businesses—Sikorsky, Pratt, and UTC Aerospace—contribute nearly 50% of UTC’s operating profit. UTC globally employs more than 212,400 people (as on December 2013), of which 7,000 are in India. The Connecticut-based company ranked 45 in this year’s Fortune 500.

In 2008, when the Tatas announced a Rs 1,000 crore investment to start helicopter manufacturing, UTC took a 26% stake to create the Sikorsky-Tata Joint Venture. India was not yet a big aerospace market for it to tap. The Kelkar Committee report a few years earlier had just opened up the country’s defence procurement to private sector, capping FDI at 26%. A number of deals were around the corner and India was tipped to be a $22 billion helicopter market by 2024. The U.S.-based Bell Helicopter formed a joint venture with public-sector Hindustan Aeronautics. At the same time, Anglo-Italian AgustaWestland bid for a Rs 4,000 crore chopper deal. Sikorsky, too, was evaluating the same deal. (AgustaWestland is now accused of paying kickbacks to supply the 12 helicopters for ministerial transportation.) Japan’s Mitsubishi Heavy Industries, which was making S-92 components and cabins, had just parted ways with Sikorsky. It wanted to graduate to making full-fledged aircraft and had floated Mitsubishi Aircraft Corporation. Sikorsky offered India the S-92 for the chopper deal, and at the same time, UTC engaged the Tatas as Mitsubishi’s alternative. It saw potential in India’s engineering talent and a low-cost market for backend work. “It [the joint venture] was done in anticipation of the market opening up. India is promising and strategic for such a plant even to serve regional requirements,” says A.J.S. Walia, Sikorsky’s business head for India and South Asia. Sikorsky has a similar JV for its Black Hawk components in Turkey, another low-cost destination.

But the real UTC story unfolded in India when it acquired North Carolina-based components maker Goodrich for $16.5 billion in 2012. It was UTC’s biggest buyout, and gave the company access to an obscure components-making facility in the heart of Bangalore. Goodrich had started the facility in 1997 with 12 people as India’s first manufacturing and maintenance, repair, and overhaul (MRO) centre for inflatable evacuation chutes and emergency rafts. It tapped into India’s engineering talent pool and took a bet on the country with low-end work, supplying components to Airbus and Boeing. At that time, fewer than 90 commercial planes operated here. When UTC took over, India had around 400 aircraft circulating but was fast emerging as a low-cost aviation haven. Even as more and more Indian airlines ordered Pratt engines, UTC’s components business flew. Today, it has developed a second centre, for design and engineering, with 2,500 people working on five categories from its global portfolio in the two centres.

“We have developed the capability to design, manufacture, and service components from here. If not in the region, certainly in India there is no other MNC components supplier like UTAS Bangalore,” says Chris Rao, vice president, UTC Aerospace Systems. Between FY10 and FY13, despite tough economic conditions, UTC India more than doubled revenues to around $1 billion. About $700 million came from aviation. (UTC includes exports in its country revenues, but officially doesn’t announce local numbers.) For it, a confluence of factors since the Sikorsky JV has demonstrated how India, once primarily a low-cost talent destination, could turn lucrative.

This is in line with UTC’s global growth ambitions. Louis Chênevert, 56, who became CEO in 2008, pledged at an investors’ meet this year to raise sales to over $100 billion by 2020—an annual gain of 8%. To meet the lofty target, he has expanded aerospace businesses, as well as Otis and Carrier. Over the past few years, he has also exited the windmills, industrial turbines, and window air-conditioner sectors that made UTC an Industrial Revolution relic. (See story on page 164.)

Chênevert’s ambition faces powerful headwinds in his top two markets, the U.S. and China. In light of Washington’s drawdown in military spending, last year Sikorsky’s sales fell 7.9% on lower orders and servicing revenues from Black Hawk. The other troubling factor: decelerating growth in China. Making elevators and HVAC systems for the shining skyscrapers sprouting in numerous Chinese megacities gave UTC $4.8 billion in sales from the country last year. But Chinese construction is slowing.

With 1.2 billion population, a $16 billion civil aviation industry carrying 450 million passengers a year, and the Narendra Modi government announcing 100 smart cities in 20 years with Rs 7 lakh crore outlay, India becomes UTC’s natural port of call. Chênevert has said that the two growth markets for UTC are in China and India. In the last three to four years, Otis’s Bangalore plant has doubled capacity to 10,000 units per year, and the engineering staff strength at the Hyderabad design and engineering centre for the commercial business (Otis and Carrier) has gone up from 100 to 250.

UTC'S INDIA AEROSPACE BUSINESS has taken off. Sikorsky leads the race for a $1 billion deal for 16 helicopters from the Navy, with an option to add eight. The Coast Guard, too, has evaluated Sikorsky helicopters for 14 of its units. India needs an estimated 1,200 rotary-wing aircraft as there are just 300 operational in defence and civil airspace. The two helicopter deals, which are expected to be finalised by March 2015, will add around $2.5 billion to the order book. If VVIPs, Air Force, and the army jump in, Sikorsky’s prospects brighten further. Sikorsky is also likely to pitch for search-and-rescue helicopters for the National Disaster Relief Force, given the frequency of natural disasters hitting the country. All this is in addition to orders from oil and gas, and private companies.

The new government is pushing the “Make in India” policy, and the Sikorsky-Tata Joint Venture with its plant in Hyderabad is an early mover. “If we have India orders, it will be an incentive to make the entire aircraft here. And a toehold gives us the confidence to do it faster,” says Saraf. He adds that the integrated plant has been designed to make components as well as assemble any model (not just the S-92) in the Sikorsky portfolio. Read: Fast turnaround.

While making an aircraft will be a milestone, cabins are no less complicated. It takes 5,000 components, and high-precision engineering, to put together the shell alone. Aircraft-grade metals like titanium are imported for the mould. Each part needs to be certified flightworthy, which means going through 12 to 15 rounds of FAA (Federal Aviation Administration) tests and approvals. It can take anything between 24 months and 30 months for one FAA clearance for one part. Sikorsky India, however, is a step ahead. It has cleared all the regulatory hurdles, and in less than four years shipped fully indigenous cabins to the U.S.

Says Saraf: “In 2010, a roadmap was drawn to build capability for producing full aircraft here. If things go right, we should be able to deliver a made-in-India fixed-wing aircraft by 2021.” The plant churns out one cabin every week, which can be accelerated by adding shifts and production lines. (As of now it is running full capacity, with 100 confirmed orders till 2016.)

Manufacturing here also has its benefits with defence deals. Under India’s Defence Procurement Procedure (DPP), any purchase from a foreign supplier in excess of $70 million requires a reinvestment of 30% of the total amount in India, mainly to buy local components and services as part of an offset policy. UTC India, by virtue of its ongoing manufacturing, generates value that accrues as credit. During a defence deal, this can be used to offset the import of a high-value product, or to make a nominal component to bridge the 30% gap. Simply put, it’s like reward points in credit card transactions. The more UTC makes in India, the more it can gain and redeem.

A MORE PREDICTABLE AND definitive boost to UTC’s goals, however, comes from Pratt’s new Geared Turbo Fan engines. The GTF is a technological leap forward, which Chênevert has been championing and nurturing for nearly two decades.

Pratt was the world leader in wide-body twin-aisle long-haul aircraft engines. That was until the 1980s, when the world moved to narrow-body single-aisle fleets—the Boeing 727 and Airbus A320. GE and Rolls-Royce snatched the market from under Pratt’s nose. Then in the early 1990s, Chênevert decided to invest in R&D for a new engine. The GTF is said to be 16% more fuel-efficient and 50% quieter than the existing ones.

In India, Pratt has around 30% market share in the operational fleet of commercial airlines—again, mostly in the wide-body family. But that game is about to change. Starting 2015, IndiGo and GoAir will take deliveries of Airbus A320neo aircraft—about 100 engines every year. By 2022, some 650 of these engines will power aircraft in India. Air Costa, a regional airline from Andhra Pradesh, will receive 50 Embraer E2 aircraft by 2018. They all ride the GTF. Globally, the success of GTF has spurred Airbus to re-engineer the A320 and launch the next-generation A320neo.

“The GTF engine powering the A320neo family has been successful, and there is a healthy backlog of orders. Pratt is now preparing for its entry into India,” says Palash Roy Chowdhury, country manager (India), Pratt & Whitney.

The huge stake in GTF also shows how crucial India is for UTC’s growth. Pratt leans heavily on partners, like Cyient, a Hyderabad-based IT company that focusses on engineering, networks, and operations for design and modelling engine components. “It was a leap of faith. More than 27% of the work on GTF was done by us,” says Krishna Bodanapu, managing director, Cyient. Pratt also has an R&D centre at the Indian Institute of Science, Bangalore, that works on high-end research on turbo machinery.

Separately, UTC Aerospace’s Bangalore design and engineering centre works on the nacelle system—an aerodynamic structure that houses the engine, including its cowlings, thrust reverser, and exhaust system. That apart, it designs and develops components for Boeing and Airbus, which also means improving and maintaining equipment of competition that are used in their aircraft.

Engine sales open up yet another lucrative market for UTC—the MRO ecosystem. It is expected that the new government will reduce a prohibitively high 40% tax it levies on the MRO market. The MRO business is almost non-existent in India because of such high taxes, and every year India loses business of around $700 million to countries like Singapore. In the past, Hindustan Aeronautics tied up with private companies but failed to sustain the partnerships. Air India has an MRO in Mumbai, and is building another in Nagpur in pact with Boeing. Hyderabad-based infrastructure major GMR and Chennai’s Ramco Aviation have tried their hand at MRO, but are struggling to stay afloat.

In the aircraft business, just like with automobiles, unit sales are not profit spinners. It’s after-sales service and spares that form the bulk. For instance, a single-aisle engine costs around Rs 30 crore, but the actual sale price varies, and depends on the configuration and negotiations between an airline and the aircraft manufacturer. It’s the after-sales business that generates four to eight times the engine value in its lifespan of typically 20 to 30 years.

As a step towards setting up an MRO business, UTC is building an engine-training, repair, and maintenance centre in Hyderabad. As of now, it has only two engine-training centres globally—the U.S. and China. So, another one in India affirms yet again how serious UTC is in taking forward its aviation business here. For India, this will be the first by any private player. GE has an R&D centre in Bangalore, which works on composite materials used in engines, and Honeywell does a lot of backend monitoring and support for its aviation business. But none has shown any interest in setting up training centres.

AS A MATTER OF pride, UTC Aerospace’s Rao shows me the lighting system for the Boeing 787 Dreamliner being made at the facility. Though the highlight is the Dreamliner’s glamour value, there are also 16 evacuation chutes being made for the Airbus A380. They look low-end, but Rao explains the sophistication. “These chutes have to inflate and get deployed in less than seven seconds. Imagine they do not work during emergency; there is no margin of error here.” While he adds that even a missing nut can ground a plane, he points towards the sensors without which no plane can take off.

From collecting weather data to indicating engine condition or temperature in the aircraft, UTC has climbed the value chain in India. Now if orders flow, it will truly mark the return of UTC after more than five decades. The sky’s a lot clearer.