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Market brief for U.S. exhibitors at Asian Aerospace 2004, Singapore.
Section I: Narrative
The Malaysian economy continues to grow despite geopolitical tensions and the outbreak of Severe Acute Respiratory Syndrome (SARS) in the region. Growth in the first half of 2003 was significantly stronger at 4.5% compared with 2.6% during the corresponding period in 2002. Growth momentum should continue in the second half of 2003. Overall GDP growth for 2003 is estimated at 4.5% (4.1%, 2002).
The tourism industry started the year 2003 on a positive note with over a million tourist arrivals for January 2003. However, the war in Iraq and the outbreak of SARS towards the end of March severely affected the industry. Tourist arrivals plummeted 58.6 percent on an annual basis to about 457,900 in April, recovering somewhat to 826,234 in August, though still down by 29 percent compared with 1.16 million in August 2002.
Now there are signs that the East Asian travel trade is making rapid recovery. Airline and tour package bookings in Malaysia have returned to pre-SARS levels recently, the Malaysian government expecting the number of tourist arrivals to reach previous levels of at least one million visitors a month by December 2003. This will lead to demand of commercial aircraft in Malaysia and in the region. Also, the need for security has generated high demands for new technologies and products for screening air passengers and luggage, as well as freight.
There was a string of major defense contracts signed by the Malaysian government in the past two years, especially during the recently concluded Langkawi International Maritime & Aerospace Exhibition (LIMA), September 30 - October 5, 2003. Modernization of Malaysian defense is a continue process. In the Air Force sector, Malaysia continues to make purchases to increase air mobility, to add some airborne early warning platforms, and to improve the command and control system.
The Malaysian market size for aviation/aerospace equipment/products in 2002 was about US$1.1 billion. More than 95% of that total market demand came from imports. The U.S. import market share in 2002 was 40%. Prospects for Malaysia's aviation/aerospace equipment market remain bright and the sector should experience a healthy annual growth rate of about 5% for the foreseeable future.
Market Overview and Outlook
In August 2003 Malaysian Airlines (MAS) passenger load returned to its pre-SARS level. The turnaround is much faster than anticipated, putting the airline on firmer footing. MAS is undertaking a major program to upgrade 32 long and medium haul destination aircraft in its fleet. This investment is estimated at US$184 million. First & Business class cabins and in-flight entertainment systems will be entirely revamped, introducing cutting edge design for "the ultimate in global in travel." Seventeen B747-400 aircraft and fifteen B777-200 aircraft are scheduled to be retrofit, to be back in service by November 2004. The product vendors for this program are B/E Aerospace Inc. (USA) and Matsushita Avionics Systems Corporation (Japan). The work will start in mid 2004.
European plane maker Airbus SAS is close to finalizing a Malaysian order for six Airbus A380-800 super-jumbo jets. Penerbangan Malaysia Bhd, which is a subsidiary of the Ministry of Finance Inc. and the parent company of MAS, agreed in early 2003 to buy the 555-seat aircraft which will then be leased to MAS. Aircraft delivery is scheduled to begin in 2007. The catalogue value of the Malaysian purchase is around US$1.5 billion, but discounts are common.
The Engine Alliance - a 50/50 joint venture between GE Aircraft Engines and Pratt Whitney - will be competing with Rolls-Royce to be the aircraft engine supplier for the proposed A380s for MAS. Potential value of this project is about US$600 million for the engine sale and plus long term services contract.
There is good growth potential in the no frills and low cost airline business in Malaysia. Malaysia has its own low cost airline, AirAsia, which appears to be doing very well. AirAsia, currently the sole "no frills low fare" airline operator in Southeast Asia, is buying 11 Boeing aircraft from General Electric Company with new safety and security technologies. Of the 11 aircraft, two will be delivered in October 2003, one in November, two in December, and subsequently, one each per month. This will bring AirAsea's total fleet to 18 B737-300 by the end of 2004. AirAsia is currently operating seven B737-300s, for which it is also spending US$100,000 for new cabin furnishings. .
To ensure coastline and territorial waters security, Malaysia has built a series of radar stations along the west coast of Peninsular Malaysia to oversee traffic along the Straits of Malacca. Malaysia has also recently employed more patrol boats and aerial surveillance. The Government of Malaysia (GOM) is also planning to install radar stations along the Sarawak and Sabah coasts in East Malaysia (on the Island of Borneo). An air base will soon be built in the coastal town of Tawau in Sabah in support of security efforts.
Today, the Royal Malaysian Air Force (RMAF) operates a mix of Western and Russian-made aircraft which include F/A-18D Hornet, MiG-29/NUB, Hawk Mk108/Mk208, Aermacchi MB339A, F-5E Tiger II/RF-5E, C-130H-30 Hercules, CN 235-220M, Beech B200T King Air, Eagle 150 ARV (Airborne Reconnaissance Vehicle), Sikorsky S-61A-4 Nuri and S-70A Blackhawk from bases in the cities of Alor Setar, Butterworth, Lumut, Sungei Besi, Subang, Kuantan, Kluang, Kuching and Labuan.
On August 5, 2003, Malaysia signed a contract to procure 18 Sukhoi Su-30MKM jet fighters from Russia under a package deal worth about US$900 million. The aircraft will be delivered in stages between June 2006 and end of 2007. The payment for the aircraft will be stretched until 2009. In return, Russia will purchase Malaysia's palm oil, provide transfer of space technology, and train a Malaysian cosmonaut. The Su-30 MKM will be fitted with Western avionics. The government plans to expand Gong Kedak Airbase (an old World-War 2 airbase) into a modern major airbase to house this new acquisition. The base will be complete with new extended runways and advanced air control systems. The Su-30MKM combat aircraft will form a squadron of dedicated multi role combat aircraft to complement the RMAF's present war-birds -- the MIG-29/NUB, F/A-18D and Hawk MK 108/208.
In addition to the Su-30MKM, Malaysia is currently in discussions with Boeing for the purchase of U.S. Navy's state-of-the-art F/A-18F Super Hornet two seat multi-role combat aircraft. Under negotiation are F/A-18F Super Hornet fighter aircraft to replace the present batch of F/A-18D Hornets. Boeing is offering a comprehensive package to seal the deal, which would include investments in the Malaysia's Multimedia Super Corridor, transfer of technology, and Boeing's highly-rated leadership program to Malaysians.
Malaysia will be buying 11 A109M Light Observation Helicopters from Augusta Westland for US$75.34 million. The letters of offer and acceptance for this deal were exchanged between the Malaysian Government and Augusta Westland, respectively, on October 2, 2003, during the recent Langkawi International Maritime & Aerospace Exhibition (LIMA '03). To be used by the Army Air Wing, the helicopter is capable of carrying light armaments and can be used as an attack helicopter. Under the deal, Augusta Westland will also provide support equipment, training and technical services. The helicopters will be delivered between 24 and 36 months from the contract's effective date.
Several other deals were concluded during LIMA '03 between the Malaysian Defense Ministry and several local and foreign companies to improve and complement RMAF and other government aircraft. Among the deals was a US$4.2 million contract with Airod Sdn Bhd (Malaysia) for maintenance services and technical assistance for its Boeing Business jet aircraft. Also signed was a US$65.8 million deal with 23 companies selected as the panel stockist of non-proprietary replacements for RMAF. Another contract was a US$5 million deal with Russian company, Federal State Unitary Enterprise Rosoboronexport, to integrate the avionics equipment for the Sukhoi Su-MKM aircraft that the Defense Ministry is purchasing. The Ministry also signed a US$2.76 million contract with Talent global Sdn Bhd (Malaysia) for maintenance and replacement services for its Sling and Lifting Tackle cables on RMAF aircraft. Also signed was an amendment to an existing contract with Sapura Technologies Sdn Bhd (Malaysia) to maintain the ministry's simulation equipment and computer based trainer system -- an additional US$15.8 million to meet the training requirements of the Hawk 208, MiG 28N, F/A-18D and Beechcraft B200T aircraft that makes the Sapura's contract worth US$29 million.
Malaysia is planning to acquire an early warning and control (AEW&C) platform. RMAF is in the process of finalizing the report of the physical evaluation carried out on the various AEW&C aircraft. Its acquisition remains a priority for the RMAF's capability development program in order to meet the national surveillance requirement. Boeing, Northrop Grumman, Lockheed Martin, Embraer of Brazil, and Saab/Ericsson of Sweden are main contenders for this project.
A plan is still ongoing for purchasing attack helicopters, although currently low on the priority list. Boeing Apache, Eurocopter Tiger, Bell SuperCobra, Kamov Black Shark, Danel Rooivalk and Agusta have expressed interest in this opportunity. This purchase is closely linked to the country's short and medium term economic health.
The Royal Malaysian Navy has a Maritime Patrol Aircraft (MPA) requirement as part of the navy's future fleet, to be procured probably in the next Malaysia Plan (2006-2010) and subject to affordability.
The defense-related market in Malaysia is very competitive. Countries such as Russia, UK, France and Italy actively compete in this market on a joint public/private sector basis. High-level officials, including cabinet ministers, from competing countries make regular representations on behalf of their firms. And it is generally necessary to make an offset proposal on major tenders for defense equipment/projects.
Despite the advanced technology and vast experience of U.S. firms, Malaysia has proven to be a quirky and difficult market. To begin, there is plenty competition, not just from among the American players but also from third-country companies as well. In addition, major military equipment purchases in Malaysia are particularly political. Decision-making considerations are extremely complex and not limited to "best product, best price". As a result, some U.S. firms become discouraged. Nonetheless, U.S. companies that can show long-term commitment and learn to influence the key decision-makers within the government of Malaysia stand to gain potentially lucrative contracts.
U.S. firms have an excellent reputation in the area of technology transfer. Firms should highlight this aspect when bidding on defense projects.
There are no tariff or non-tariff barriers to U.S. aviation, avionic or defense products in Malaysia. Malaysian end-users are quite loyal to existing suppliers, so it is crucial to get established on the ground floor of any new system or project. Historical buying patterns are also key, giving some countries -- particularly the UK - an advantageous position over the years.
Sales of defense-related equipment in Malaysia are typically made with the assistance of a well-connected agent or "consultant". The importance of finding an effective agent or consultant cannot be over-emphasized, and the appointment should only be done after careful research. We strongly urge interested American firms to make use of the Embassy's Commercial Office for assistance in locating potential agents or consultants. Our contact information is listed below.
U.S. firms interested in exporting aviation, avionic and defense equipment to the Malaysian market, please contact us in the Commercial Office of the U.S. Embassy, Kuala Lumpur, as we have several programs, ranging from market research to contact facilitation, tailored made to meet the specific requests of American international traders.
U.S. Embassy, Commercial Office
Kuala Lumpur, Malaysia
Mr. William Zarit, Senior Commercial Officer
Tel 60-3-2168-4869 (direct line)
Mr. Desmond Cheng, Senior Commercial Specialist
Tel 60-3-2168-4868 (direct line)
Section II: Specific Questions from ODO Clients
1. The prospects for general aviation aircraft (business jets, turboprops and piston aircraft) still remain weak since the economy meltdown in 1997-98. Businesses, though once again earning high profits, are careful in their spending. As the economy grows further, we expect this market segment to improve.
2. Malaysia has always spent a healthy proportion of its federal budget on national security. According to the Ministry of Finance Economic Report for 2003/2004, the 2004 budget allocation for security - which includes both defense and so-called "internal security" - was US$723.62 million, or 2.5 percent of the total 2004 development expenditure of US$28.9 billion. According to the GOM's Eighth Malaysia Plan (2001-2005), US$2,829 million is earmarked for the security development expenditure during the five-year period. Despite having already committed to spend more than US$2 billion on defense purchases in the last three years (2001-2003), Malaysia is still in the market for more equipment. Among the items on the list are maritime patrol aircraft, AEW&C and several other electronic systems.
The Ministry of Defense is not the only decision-maker in the procurement process for defense equipment. Chief among the decision-makers in this process is the Prime Minister (PM). The PM's involvement may be more visible on big-ticket items such as fighter jets and helicopters for the Defense Ministry, and also commercial airplanes and jet engines for MAS. But the fact remains that the PM's blessing is vital for just about any significant GOM purchase. Aside from the PM and his office, the Ministry of Finance (MOF) is another important player in the decision-making process. As holder of the country's purse strings, the MOF is officially required to give approval for government procurement. In general, the higher the cost of the product, the higher the level of ministry official is needed for the approval.
3 (a) Malaysia Airlines' current aircraft fleet:
Aircraft Type No. of Aircraft Engine Type
B747-400 (passenger) 17 PW4056
B747-200 (freighter) 2 RB211-524D4
B777-200 15 TRENT 892 (RR)
A330-200 3 PW4168A
A330-300 9 PW4168
B737-400 39 CFM56-3C1
F50 10 PW125B
DHC6 Twin Otter 5 PT6A-27
(b) AirAsia is currently operating seven B737-300s. It will increase its total fleet to 18 B737-300 by the end of 2004.
(c) The RMAF today operates some 78 combat aircraft including: 17 MiG-29N/UB, 8 F/A-18 D, 14 F-5E/F which are being upgraded, 10 Hawk Mk108 and 18 Hawk Mk208, 11 Aermacchi MB 339A. It also operates C-130H-30 Hercules, CN 235-220M, Beech B200T King Air, Eagle 150 ARV, Sikorsky S61A-4 Nuri and S70A Blackhawk. Altogether, RMAF has nearly 200 aircraft of various makes.
(d) The Fire & Rescue Department Malaysia presently has four helicopters: two Agusta A109 (Italy) and two Mi-17 (Russia).
(e) Transmile Group Berhad of Malaysia has a fleet of 14 aircraft (six 727s, six 737s, two Cessna Grand Caravans) providing intra-Asian air-freight services. It should be buying two additional B727s soon.
4. Malaysia already has considerable experience in aircraft maintenance. The country's two largest overhaul companies are Aero Malaysia, owned by MAS, and Airod Sdn Bhd. Aero Malaysia performs heavy airframe maintenance and engine overhaul for MAS and other Asian carriers. Airod was initially set up to support the country's C-130 transport. The company has built one of the largest clear span hangars in the world, able to accommodate two Boeing 747s or eight Boeing 737s at one time. BAE Systems (UK) is considering taking an equity stake in Airod.
A high-tech center for aircraft composites has been established in the Composite Technology City in Malacca with Composite Technology Research Malaysia (CTRM) as the anchor. CTRM has received work packages from Airbus that cover wing sub-assemblies for A380, aero-structure sub-assemblies for Nimrod MRA4 by BAE systems, and the fuselage for the CRJ-700 by Bombardier Aerospace. CTRM also produces a range of general aviation aircraft such as Eagle 150B and the Lancair Columbia-300.
5. Airline companies and RMAF normally have direct procurement agreements with OEM equipment manufacturers. Non-proprietary equipment is usually purchased through local agents. RMAF also stocks float assets and keeps fast turnaround spares. Aerospace maintenance companies normally buy equipment as and when needed, mainly through local agents.
6. Malaysia Airports Holdings Bhd (MAHB), which is a public-listed company controlled by GOM, makes acquisition decisions concerning airport equipment. Local partners/agents are normally required in order to bid on airport contracts. Since its inception on November 1, 1992, MAHB has been the primary operator and manager of Malaysia's 37 airports, including one of the world's most technologically advanced airports, the Kuala Lumpur International Airport (KLIA). However, Senai Airport in Johor has been sold and is now operated as a private entity by Senai Airport Terminal Services Sdn Bhd.
7. Malaysia Airlines (national airline) and Air Asia (low cost airline) generally buy rather than lease aircraft. However, Malaysia Airlines recently leased three A330-200 for domestic and regional routes, bringing the total MAS A330 fleet up to 12 aircraft.
8. For foreign firms interested in supplying aviation and avionic equipment to the Malaysia government, it is essential to have an active locally-incorporated representative to follow the process, technical details, and timing of acquisition decisions. This is to ensure that the company's products are accurately and effectively presented to relevant decision-makers, and to assist in arranging timely contacts for home office visiting representatives. Ministry of Defense, government agencies, and airlines normally do not buy used avionic and aviation equipment.
Asian Aerospace in Singapore is one of the world's premier aerospace and defense technology events. Encompassing all civil and military sectors of the international aerospace industry, Asian Aerospace is the foremost platform for companies to showcase their products and services in the Asia-Pacific. In 2002, the show attracted 747 exhibitors and 23,433 visitors from over 70 different countries.
The U.S. Department of Commerce is pleased to bring to your attention to three powerful opportunities to participate at Asian Aerospace 2004, February 24-29. We are organizing/supporting programs for U.S. companies exhibiting, attending or just wanting a presence at the show. Please review the following for more information on the U.S. International Pavilion, Aerospace Executive Service and the Aerospace Product Literature Center: