Egon W. Behle, MTU Aero Engines
Release Date: 2009-01-23
What were the main reasons you accepted to offer to join MTU as CEO with a fixed three-year contract in January 2008?I'm an engineer with strong roots in aviation technology. At the same time, I have a sound record in the automotive and machinery industries. Aerospace technologies are not so different. When I was asked if I was interested to take the CEO position at MTU, knowing the strength of the company, the strong market position, the sound technology, and the very good financial basis of this company, I was very happy to join MTU.
You've been called a turnaround specialist. How could this skill be fully utilized at MTU?
What does turnaround mean? It basically means change management, and this is something that every company needs. In fact, it is going to be at the center of management work for the whole aerospace community for the next two or three years. We'll need a lot of change management due to the development in the market. In 2008, we have continued to strengthen our focus on cost reduction and optimization, and we have laid out another cost savings program that will come to its full use for the company in 2011. That is going to save us another €50 million. This is the portion of change management that I have specifically introduced into the company, because we all need to be more competitive through an improved cost basis. This is a very normal thing, but it requires a push and commitment from top management, otherwise it doesn't work.
You've joined at a time of immense challenges in the industry. Restructuring and consolidation will be a major theme as the credit crunch and weak sales figures affect the industry on many levels. At eh same time, government and the industry alike have quickly emerged with a shared vision of the 'greener', more efficient, aircraft of the future. Engines are a major part of this, perhaps the most challenging. What do you see as the MTU role to play in this area?
MTU has a very strong role in the creation of this engine of the future, because we partner in the so called Clean Air Engine Program, and we have launched two programs in 2008 as risk-sharing partner of Pratt & Whitney, which aim at new geared turbofan engine technology. The resultant engine will enjoy a 15% fuel burn reduction compared to the state of the art V2500 engine, 15% less CO2 emission, and about half the noise emissions of existing engines. These development programs, which we launched in 2008 together with Pratt, are focused on two aircraft initially, the Japanese Mitsubishi Regional Jet (MRJ) and the Bombardier C Series. Other aircraft will certainly follow; it's actually the basis for a complete engine family that we envision coming up in the next couple of years.
Is this engine family going to target regional jets? With 'rightsizing' of fleets being so important today, is that why you're focusing on that area?
Let's put it this way, we started this area, and there is no technical obstacle that prevents engines from moving into the aircraft class of aircraft that accommodate up to two-hundred fifty people. Our geared turbofan can be the engine of choice for all short and mid-distance regional jets. If we look at the next generation of single-aisle aircraft, beyond the A320 and Boeing 737, the geared turbofan is a very promising concept that fits into this size of aircraft.
Clearly your expertise spans the whole range of thrust and power. It might seem like a basic question, but why isn't MTU producing its own engine in its entirety?
Engine development is a very expensive endeavor. Developing one engine for one aircraft costs about €1 billion, so in today's world, this is something that companies do in a partnership. If you look at some other very important engines, the GP7000 engine for the A380 is a joint venture development between GE and Pratt & Whitney, with MTU having a share of 22% in this engine. At the same time, MTU has an 11% share in the V2500, which has been on the market for quite awhile, and which is built by the IAE Consortium. These engines normally come up with a teaming of the engine companies, so MTU is not trying to develop its own engine 100%.
In speaking with Marc Ventre, who is heading the Clean Sky Initiative on the European level and heads SAFRAN Propulsion, he mentioned there was no conflict of interest in bringing parties together to share their technology, but this seems counterintuitive. How important is the protection of intellectual property rights in your partnerships?
Of course, this is always a point, but these partnerships are normally made up in a way that each company brings in its specific expertise. For example, when you look at MTU, our specific expertise is the low pressure turbine, and when you look at all MTU partnerships in engine programs, you see that the low pressure turbine is always one of the important shares of MTU. In geared turbofan programs, we've taken an additional portion by bringing in another expertise of MTU, the high pressure compressor. This expertise comes from our participation in military programs, such as the EJ200, where we have the responsibility for the high pressure compressor as well. Now, we also have the responsibility for the first three stages of the high pressure compressor in the new civil geared turbofan engine. When we bring this into an engine program, there is normally no conflict of industrial property rights. We are now demonstrating the two main competencies of MTU.
Rolls Royce has committed massive funding to the open rotor concept. What are your thoughts on that - as opposed to the geared turbofan ?as the engine of the future?
It's an alternative concept which has some pros and cons versus the geared turbofan solution. It's certainly not as advanced in its development. The open rotor engine will not be available for sale until 2018 or 2020, as far as we know. On the other hand, we are going to start sales and production of the geared turbofan in 2013. There are also a number of technological differences. The open rotor engine always requires a specific design of the aircraft, because you cannot mount it at the same point under the wing, for example, as you can mount a geared turbofan that could easily replace an existing V2500. You have to mount an open rotor engine to the rear end of the fuselage, and you have propellers that are milling in the wind, so from a security point of view, there is an additional concern that is not present with the jet engines we normally build, including the geared turbofan. Also, while data suggests that the fuel burn situation of an open rotor is at least on the same level as a geared turbofan, the open rotor has a big penalty on the noise side. At the end of the day, it's like a turboprop, from the noise generation point of view. Noise will be an even more important issue in the future for aircraft being permitted to land at specific airports. From these criteria, the open rotor has some big disadvantages versus the geared turbofan.
Despite intensified efforts to cut costs, MTU's activity is still by and large centralized here in the Munich area. This massive headquarters complex is home to 4,500 out of 7,100 MTU employees globally. It certainly seems like you haven't signaled any transition to distribution of activities to non-Euro zone areas despite cost pressures which you have been tasked with containing. How can you maintain a competitive advantage with so much activity concentrated right here in Germany?
We have a very strong technological basis, and when you look at the high end of technological products, it is possible to be very competitive out of high-cost countries like Germany. At the same time, in 2007 we launched a new production site in Poland, which will start production in the second quarter of 2009. We're going to move some of the relatively lower tech products out of Munich and into this Polish location. This will free up space for new high tech products from the new programs we have entered to come into Munich. We have not only signed the Pratt programs in 2008; we have also signed a large program with GE for a helicopter engine that goes into military application - the GE38, and a participation in the GEnx engine program for the future Boeing 787. There is a lot of new high technology business that is coming into the Munich location, so we needed space and therefore launched this low-cost production site in Poland. We also have a production site in North America, which we may or may not expand depending on where business and exchange rates go in the next couple of years. We are trying to fully utilize our global footprint, and of course, China will be an important piece of that strategy.
A recent global management consulting survey showed that of all companies with a global footprint and global activity, the ones that turned in the best financial results at the end of the day are the ones that also distribute their R&D capability ?not just manufacturing - throughout their global operations. What are your thoughts on this general observation?
Basically, there's no doubt that companies that generate good financial figures also have the capability to invest heavily in R&D and to enjoy organic growth into the future. It is especially true these days that the more financing a company can do on its own and with its own resources, the better off it is. In that respect, MTU has a very strong balance sheet. It does not need banks for investments or to finance its growth. This is a very important point.
Yes, to some extent we have a global footprint in R&D, because though our main headquarters for R&D is Munich, we have a North American R&D office with almost one hundred people and we are also currently building up an R&D capability in our Polish factory that focuses on those products that are going to be transferred there.
In the past, China was seen as a place for cheap and very low tech production. Now things have changed and the Chinese have improved so much technologically that they are producing and exporting products which are also seen as high quality. Right now, AVIC has announced a new aviation engine industry, and they're very deep into research on engines which should be in production sooner than what you mentioned as the 2013 timeline for the next generation which you're producing. How do you plan on maintaining your advantage with regard to the products you're producing in light of this development?
First of all, I can compare this evolution very well with what has happened in the automotive industry. Of course, China has built up a strong automotive industry with the help of companies from Europe and North America. Today, China produces more passenger cars than even Germany. While this is a huge development, it is important to put this into perspective: Chinese passenger cars have no importance yet on the global market. They are used almost exclusively in the Chinese market. When we look at the aviation industry and aircraft engine technology, the situation is many years back, compared to the automotive industry, and certainly China will need support from European and North American companies, as they did for the automotive industry, to get their aviation industry to grow and really come to products that can compete internationally. I understand that China wants to produce aircraft for its own market first. They have a strong need for additional aircraft - thousands of aircraft will be bought in the next twenty or thirty years for use in China. I can understand that China wants to produce a large portion of this volume in its own country and with its own people.
One of the goals of MTU is that we can participate in this engine market to come. This was the same motivation for all the automotive OEMs and suppliers when they started to build joint ventures and more recently built 100% wholly foreign owned companies in China. We don't look at China as a country from where we could export parts to our European facilities. This is not the case for aviation or the aircraft engine industry. We do not produce commodities that can be sold across the globe, for which we need a very low cost production base. No; here we look at the market, and if we want to be able to take part in the market, we need a local industrial presence. This is certainly the case for us in China and our inaugural discussions with the people from AVIC aim to identify opportunities for enhanced collaboration.
These talks still have a long way to go, but MTU already has a strong footprint and a strong name in China with our Zhuhai factory. In fact, high-ranking visitors from Beijing normally visit the MTU factory when visiting Zhuhai. In my meeting with Major Dong from Zhuhai during my last trip there in November 2008, he confirmed this to me and said that he's very proud of having MTU in his city and in his free trade zone. We are just as satisfied with Zhuhai as a very good location for our MRO shop.
Actually, while MTU is #5 in the global engine MRO market, we are #1 in China. We have about five-hundred people in this 50/50 joint venture with China Southern, China's largest airline, and we overhaul a magnitude of about one-hundred fifty engines per year through a rapid ramp up. Our year-over-year growth from 2007 to 2008 was almost 40%. Growth will probably be a little more flat next year due to the entire economic situation. Nevertheless, we will still have by far the biggest MRO engine shop in China. There are some other engine MROs building up, but they are far away from our figures in engines overhauled per year, staff, and business turnover.
At Air Show China 2008 in Zhuhai, the top three airlines in China announced a collaboration on MRO. Where does MTU fit into this new picture?
Through our joint venture, all the China Southern engines are maintained at the MTU China Southern Zhuhai MRO shop. China Southern is a very important ally in China. I think there's no doubt about that, being number one, so we are quite well established. Of course, there are engines coming in from almost all the other airlines as well. We will certainly compete in the market for even more market share. MTU Zhuhai is the only shop in China to maintain the V2500 engine. There is competition in maintaining the CFM56 engine, and that's okay. We are prepared to be in competition and we'll certainly grow with CFM56 engines in the future.
One of the engines that you mentioned is specifically for the A320. How will the new Airbus A320 assembly plant here in China impact MTU's MRO prospects?
I think that's another opportunity because it means there will be more A320s flying in China and they can be fitted either with the CFM56 or the V2500, with an overall market share of 60% for the V2500 on Airbus aircraft, and we catch a lot of new business with the V2500 engine in the Far East. I have no doubts that we have a very good basis for further growth of our MRO business at MTU Zhuhai.
In global terms, many people think that even in this down economy, MRO companies can still generate positive returns in Asia; in fact, Asia is the only place to focus on right now. Does this opinion reflect your thoughts as well?
When we look back at the downturns in the aviation industry in the past, they have been sometimes extremely deep due to a simultaneous decline in Europe and North America. A reduction in passenger traffic is certainly the case in Europe and is even more pronounced in North America. Asian growth figures are declining as well, but growth is still positive. IATA and most other industry analysts say 2009 will continue this trend - Europe and in North America will certainly turn in negative growth, but there will still be at least single digit growth in China, which is the most important market for aviation in Asia. Asia as a whole has the highest possibility to be the growth motor that will bring the global economy out of recession. While the distribution of our €2.6 billion turnover is already distributed very well globally, I suspect that our future numbers will reflect this trend. Also, I trust very much that due to this fundamental change, downturns in the aviation industry will not be as painful anymore as they used to be in the past. Asia is helping the global industry to stabilize such a downturn to some extent.
That being said, just how important will China be to MTU's long term sustainable growth?
China is clearly very important to MTU, as can be seen through the size and success of our MRO operations in Zhuhai. We are now in the process of discussing with our customers and joint venture partner the matter of when and how we have to increase capacity in order to accommodate growth in the market and to meet the needs of our customers. Yes, we will support this process well into the future. At the same time, we have established communication with AVIC to see how we can possibly support and also take part in the Chinese market for aero engines through a possible collaboration on engine development.
What would be your final message to the 3.9 million readers of International Business Daily, including the leadership of AVIC and Zhuhai Province, on MTU's participation in the market?
We look forward to being able to make MTU even stronger in the Chinese market for our mutual benefit. Trust MTU.
| Company: | MTU Aero Engines |
| Position: | Chief Executive Officer |
| Country: | Germany |