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Sunday, February 25, 2018

MRCA - The Big Picture

With the Indian MRCA seeing conclusion with the selection of Rafale contract and Indonesia selecting to purchase 11 Russian-made SU35 , eyes are now back on Malaysia.  The Malaysian MRCA programme has yet to be concluded despite being evaluated since 2002.

So what is delaying the Malaysian MRCA programme?  Is it because Malaysian Government do not have the money for the programme?  Or are there other underlying reasons which has resulted in the programme having a very slow start?

I've been writing about this MRCA programme quite a few times.  But as much I would like to think I understand the issue, I'm no expert when compared to some of my peers.  Even considering these friends as peers is already stretching it. 

To understand the stakes in the Malaysian MRCA programme, I've decided to 'interview' my friend, Mr. Shamsul Anwar Hussein on the MRCA programme.  The 'interview' was an impromptu interview, held in a very informal setting, ie via Whatsapp.  So do bear with me if the article does not flow smoothly, as it would be following the flow of our discussion.

Mr. Shamsul Anwar, or Sam Pasha Kaplan as I would call him, is an aerospace industry consultant with Frost and Sullivans.  He has a wide background in banking, finance, and defence industry of more than 20 years.

Wordings in italics are my questions while those in normal fonts are Mr Sam's response.  For a clearer context, the interview questions are basically premised on the possibility that the Government wants to use the purchase to jumpstart our aerospace industry in view that the National Aerospace Industry blueprint was launched by DS Hishammuddin some 3 or 4 years ago. 

Any idea on our internal capacity and quality? Do we have the capacity to assemble our MRCA?
We have no quality problem. Let me take you through one by one.

ACM in Bukit Kayu Hitam and CTRM in Melaka have been manufacturing components for world renowned Boeing, Bombardier and Airbus for many years now. Meanwhile SME Aerospace has been manufacturing weapon pylons for Hawks. UMW has a manufacturing facility in Serendah manufacturing engine casings for Rolls Royce engines. 

In terms of designing, Strand Aerospace which belongs to MARA has been involved in designing components for Airbus, Boeing and even for Rafale. They're based at Damansara Perdana and Cyberjaya, with offices in Europe.

Does that mean if we buy our MRCA, we can get them to be assembled in Malaysia? Can the MRCA be the precursor for our own aerospace industry?
Yes, we are more than capable of doing full production. For that, we need System Integrators. CTRM - SI has such facilities in Subang and Melaka for this.

However, things look different if we look at the finance closely. The initial investment is very high. It will take years before we can recoup our investment. It will be very much dependent on the offsets offered by the manufacturers and this in turn is highly dependent on how many aircrafts that we are willing to buy.

What are the possibility that we get the manufacturers to open factory lines in Malaysia? So that they can meet their production requirement faster?
Unless out of the blue, the manufacturers are willing to relocate their whole manufacturing facilities to Malaysia.

Would that be viable to the manufacturers to move their production line to Malaysia? That would only be possible if we procure sufficient units.
The thing about the manufacturers are these.

It is easier to negotiate with D'Assault Aviation as they alone produce Rafale. From a commercial and business standpoint, it can be much easier to negotiate with one party.

Now let is look at the Typhoon. The UK is very serious to rekindle close relationship with Malaysia. The Typhoon itself is manufactured by 4 countries. You will be surprised to know that from experience, it can be easier to negotiate with an entity with multiple partners. Whatever you cannot get from Germany, you can bypass and negotiate with Spain, UK and Italy.  More offsets here.  Imagine when you're a child.  What you can't get from Daddy, you try to get from Mummy.

In terms of quality, you can't based on the quality of Rafale alone. Typhoon is also undergoing massive evolution currently.  Look at the overall big picture.  The offsets that we can get are massive as these implies technology transfers in many areas.

Another thing to note is at the total lifecycle cost.  Initial purchase price can sometimes be 20% to 40% of the total lifecycle cost.

Next, the financing package.  Who can give us the best financing or even the softest of loans?

We have to study in detail on the overall offsets offered by the manufacturers.  For example, setting up of aerospace companies doing design, manufacturing, assembly, MRO (Maintenance, Repair and Overhaul), system integration, general aviation (training, simulators, etc).  This in turn leads to new jobs being created.  This is what we need to look at, the offsets game.

And yes, even the US is also increasing their footprint in Malaysia via Spirit Aerospace in Subang, manufacturing Boeing parts, Honeywell and also General Electrics.  In this respect, BAe with Typhoon and Gripen wins.

Not Rafale?
Imagine what we can get from UK, Spain, Italy and Germany combined.  Sometimes, offsets can be non-aerospace related.

For example, Italy might want to set up a Fiat/Chrysler assembly plant in Malaysia as we have a strong automotive base for the region.

Then there's geopolitics.  There is this perception that the French did not do enough to assist when compared to the UK in the MH370 crisis.  The UK even sent a nuclear submarine to assist.  Another point on geopolitics is Russian involvement.  Some Malaysians are still hoping for additional Russian-made SU30 or even SU35.  But the fact is after MH17, this is no longer tenable as Russian assistance was not really forthcoming.

So it all boils down to which company which gets the strongest support from their home countries and can be backed by the best offsets programme to boost our own aerospace and non-aerospace related industry.  We have fishing, mining, agriculture, banking and finance, electronics, automotive, textile, wood-based industry, petrochemical, machinery, transportation, chemicals, the list is long.

You can get more from these four countries instead of one.

And based on our threat assessment, are we about to go to war soon?

This is not the purview of just the Ministry of Defence.  Prime Minister's Office, Ministry of Defence, Ministry of Finance are all in the picture.

Malaysia Airlines currently only flies to London.  Of course, they will have to fly to Paris too, but there are also money-making routes to Rome, Frankfurt, Munich, Madrid, Barcelona and Stockholm (Typhoon Gripen/BAe group) that needs to be considered.  So which country or countries that can give us the maximum landing rights at their respective airports to enable MAS to fly the Malaysian flag globally and making tonnes of money while ferrying passengers all over the world?  Profit for MAS means more tax income for Malaysia.

Now, let's look at France again.  They are already a very important supplier to Malaysian Armed Forces.  Should we be overly reliant on the French?  The answer can be yes if we are looking at minimising our logistical nightmare.  But at the same time, is it right for us to put all our eggs in one basket?

So why does these manufacturers still try to compete for Malaysian MRCA contract?  What is in it for them other than the contract?
If you scrutinise things thoroughly, Mexico is now one of the most important supplier of aerospace products globally.  Of course, being in close proximity with the US and Canada helps.  They get tonnes of outsourced jobs from US and Canada (Boeing and Bombardier). 

On a closer examination, Malaysia and Mexico share the same DNA.  Both countries have strong electronics and automotive industry that morphed into aerospace plants manufacturing components for airframe, engines and avionics.

Other countries know this and are closely looking at our capabilities and potential.  That is why we have a lot of suitors.

And geographically, it would be feasible for us to serve the European market in the similar capacity to Mexico to North America then.  What you have shared with me are powerful information.  Would you think if the Air Force will still be operating with a token MRCA unit supported by Tier 2 fighters similar to how the Hornets were supported by the MiG29?
Many people did not realise that in ASEAN, there are only two countries with Fitch A related ratings; Singapore and Malaysia.  All other countries in ASEAN are rated at B.  In fact, if you take into considerattion of the MRCA producing countries, even European countries like Italy, Spain and Russia are rated B by Fitch.

We are more than capable to build an air force with potent top of the line MRCA.  This is what the Air Force wants.  Not Tier 2 equipment or planes.  They want the best.

Will the Air Force be willing to accept lower than 1 squadron?
If you follow the MRCA development from the very beginning, it was mentioned that the requirement can vary anywhere between 22 up to 44 planes.  Our defence planners have established that we need 6 squadrons, with the fifth or sixth squadron to be formed by 2030.

So means we still go for the 22 minimum and not the rumoured 8?
It can be purchased in batches of 8 per batch with follow on orders. 

So the short term might be 8 planes only, but the long-term be full order then?  I forgotten that we're no longer talking about Tun Mahathir's era of buying token quantity of jets.
Yes, Tun M messed things up last time.

Again to illustrate that the Air Force wants the best.  The Air Force had considered of requesting to procure second-hand Hornets.  But they considered the fact that the Hornets would be obsolete soon as they are at the tail-end of their technological development and would be out of production.  Assuming that we did procure X (censored) units of Hornets, in total we would have X+8 Hornets.  However, by the time the X units arrived, the 8 existing Hornets would have gained their maximum flight hours and no longer be fit to fly.  We would be back to square one only X planes.

Plus, during the first 10 years of operations, the US sanctioned various weapons and equipment for RMAF use.  We have had enough.

If we look at our neighbours, having 2 tiers of aircrafts are not doable nor acceptable.  We already have enough of those in the form of Hawk 108, 208 and Macchi 339.  We need to streamline like Singapore F35, F15 and F16.  We have to admit that throughout their existence, Singapore is the best benchmark on how to develop a powerful air force.

We can target for 18 Sukhois plus 36 Typhoons with follow up orders or 18 Sukhois with 36 Rafales with follow up orders.  These should be supported by up to 24 Aermacchi 346 for LIFT (Lead In Fighter Trainer).  We should target to induct our 5th or 6th generation aircraft by 2040 - 2045.

MAS has bought 6 A380, 6 A350, 15 A330-300, 6 A330-200, and 50 B737-800/Max.  Not to forget, PM DS Najib did intend to buy 8 Boeing 787 for MAS too.  Tony Fernandez's Air Asia is Airbus sole largest customer.  

So what is stopping us as an A-rated country from buying 44 Typhoons or Rafale over a period of 10 years?

Is our aircraft purchase being influenced in any way by Indian Air Force procurement?
Yes, our MRCA requirement was developed at about the same time as India's.  India had selected the Rafale.  But because of the big time lag for our MRCA programme, situation on the ground has changed and the previous conditions are therefore no longer applicable.

3 years ago, BAe did not offer an attractive enough financial package.  And now, the tranche 3 Typhoons can also mount a plethora of AA (air-to-air) and AG (air-to-ground) weapons. 

[The next couple of paragraphs includes some future suppositions that may happen if we choose either MRCA for our MRCA programme] 
Germany may now also wants to allocate more places at her universities for Malaysians to study.  France and Sweden has decided not to join the EU boycott on Malaysian palm oil. 

Not to forget, the Swedes are also part of BAe may also offer the AEW (Airborne Early Warning) platform together with the MRCA, which the offer still stands.  If you're thinking out of the box, why not mix and match?  With the Typhoon and the Erieye.  Either way, BAe wins and it will also be for Malaysia.

Behind all of these, despite the Americans no longer part of the game, they are still looking big at Malaysia.  Besides Spirit Aero, Honeywell and General Electrics (GE) are having plans for Malaysia.  Looking at the big picture of all of these, it is easy to understand why the main MRCA players are not giving up on the Malaysian MRCA contract despite the delays in our decision-making, and these can be made to work in our favour.

Currently, MIGHT, MITI and Matrade are also involved directly or indirectly with the MRCA programme for the planning and execution. 

There are many factors to consider, questions to ask and trade-offs to be examined. 

The conversation on the topic began to move away from the above topic as we are personal friends.  Well, in a way, Sam is more of a mentor to me when it comes to defence and even economy. 

So in all, it is not just about whose balls (the jet) are bigger, but which balls can give more returns (offsets and tradeoffs). 

To read this article in Malay, please click the link below:

MRCA - Gambaran Besar

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