Too many fish in the pond, too many electric birds not yet in the sky Blog View Points
With few exceptions, global markets are grappling with a possible new normal environment of elevated interest rates, diverging from the recent past of low interest rates and frothy tech valuations. Many electric aircraft makers benefited from a strong SPAC and venture capital market but will now be looking to new sources of funding because the road to certification for commercial operations requires comprehensive testing which will not only take years but is capital intensive. In business lingo, this means enormous upfront costs with no revenue for a significant number of years. With the allure of a CAGR of 15 to 20% until 2030, many competing electric aircraft manufacturers have entered the fray. With close to 200 electric aircraft concepts at play today, and assuming a very conservative US$500 million’ required to fund each concept into commercialization, we would need the electric aircraft market to be at US$100 billion by 2030 to accommodate all players. The truth is that the AAM market is now only forecasted to be around US$30 billion by 2030, which brings into question how much room there is for AAM manufacturers in the market. To answer this question, investors should consider the AAM industry’s long-term carrying capacity, bearing in mind the high cost of R&D, timeline to certification by EASA or FAA and commercialisation, and rising inflationary pressures in the manufacturing supply chain. The heat is now on for manufacturers and investors not only to develop and race to the finish line in certification and commercialization, but also look for acquisition opportunities within the market. The sum is not always greater than its parts Although there are significant challenges, the inventive fervor of the AAM sector has brought in a much needed potential for “blank-sheet” innovation of ground-up design thinking that provides a fresh alternative to the more iterative progress of more establish players who may favour a more incremental design change due to risk of loss of certification or cost in implementing changes to an already successful manufacturing process. This means that it is up to the entrepreneurs in the AAM sector to push the boundaries (while reaching safety certification and ensuring safe operations) in the design and technology surrounding flight navigation interface in the cockpit, innovative flight control systems, remote flight control, hybrid-electric power train and propulsion design, computing, Al, software user interface etc. A consolidation within the AAM market will see investors, manufacturers and players looking at each design element in an electric aircraft in separate parts to consider the purchase of each separate technology, while leaving behind the less successful and innovative segments. Additionally, regulations are coming to fore which will lead to reshoring and a new battleground for exclusive rights to materials in limited supply. The Carbon Border Adjustment Mechanism recently introduced by the EU will impact materials crucial for AAM manufacturing including steel and aluminum. This is part of the EU’s Fit for 55 package which aims to reduce its greenhouse gas emissions by 55 percent from the 1990 benchmark level by 2030. To achieve this goal, the EU has used a largely successful cap and trade system (the EU Emissions Trading System) for carbon that covers emissions from industrial production. Since European manufacturers are exposed to an increasing price of energy inputs, compared to other global players who are unaffected by such carbon pricing, the EU has now implemented BAM to level the playing field in energy intensive sectors. China is the world’s largest producer of steel and aluminum in the world. When CBAM is fully implemented, the price of steel and aluminum produced in China will likely increase and manufacturers may consider adjusting their supply chains. With European manufacturing capabilities of steel and aluminum still developing, there could be a rush towards securing supplies of steel and aluminum from Europe, and some level of consolidation could occur between manufacturers to secure such supplies. We saw similar consolidation activity between airlines due to a shortage of access to aircraft order books to meet projected increase in passenger and cargo demands, and it would not be surprising to see similar considerations driving consolidation within the AAM space in the coming years. Non-exclusive I would be remiss not to mention the issue of charging port infrastructure affecting the AAM space. This issue is one that has similarly permeated the EV sector and there are many learning points from the EV experience. Key of which is that governmental approval is the gatekeeper to commercialization, and since the technology in this space is […]
