When Boeing rolled out is 777, it decided that the best way to maximize profits was to recruit potential competitors to be risk sharing partners to minimize its upfront costs.
The net result was significant delays and a loss of technical know-how, and now, both Boeing and Airbus are looking to bring these capabilities, because it turns out that they outsourced their profits as well:
The world’s largest plane makers are testing a seemingly simple formula to smooth production, cut costs and fatten profits: Make more of the parts that go into their jets themselves.
In the wake of United Technologies Corp.’s proposed $23 billion deal to buy Rockwell Collins Inc., that push is taking on more urgency. The deal is the latest in a round of consolidation among the world’s biggest suppliers of aviation parts—something Boeing Co. and European rival Airbus SE have eyed warily.
Earlier this week, Boeing said it might cancel some of its parts contracts if the deal undermines competition further in the aerospace supply chain. Airbus had previously expressed its skepticism over it.
Worried about getting squeezed by the consolidation, Boeing and Airbus have moved to protect themselves by building more of their parts in-house. This month, Boeing will start construction of a new production facility in Sheffield, England, that will make some of its own actuation equipment—motors that help move a wing’s flaps. Airbus, meanwhile, is planning to build some of its own nacelles, the metal casings that house a plane’s engines. United Technologies is one of the world’s largest nacelle suppliers.
Boeing decided two years ago to make some of its own nacelles after years of buying them. In July, the company also said it is planning to develop and build some aircraft electronics, a market dominated by companies such as Rockwell Collins and Honeywell International Inc.
The wings for a revamped version of Boeing’s new 777 jetliner also will be built at a new plant near Seattle rather bought from a supplier. Boeing bought the wings from a supplier for its last big project, the 787 Dreamliner.
Bringing production in-house helps level the playing field.
Those parts makers have also traditionally been able to suck out more profit for their components than plane makers like Boeing and Airbus can extract for selling whole aircraft. Profit margins for plane and engine makers have averaged 9% over the past two years, compared with 14% for so-called “tier one” suppliers such as United Technologies and Rockwell Collins, which make finished parts directly for plane makers. Margins come in at 17% for tier 2 suppliers, which provide smaller components for those parts, according to Boston Consulting Group.
This is not a surprise.
The idea that drove the outsourcing of critical technologies for the 787 was that Boeing could be more profitable and efficient by doing and knowing as little as is possible about the underlying business.
This is classic MBA/High Finance type thinking, and MBA/High Finance type thinking unmoored from the underlying business has ALWAYS been a recipe for dismal failure.