A disaffected view within the company runs like this: “Boeing has gone from a technology-driven culture to one driven by schedules and budgets,” says one experienced engineer. “But the need to rely on the same kind of people for competence and attention to safety is no less. Can you run the systems integration process after you’ve outsourced the store? It’s easier to integrate if you have a clear knowledge and feel for the pieces.”8 Stated differently, there is a concern that as Boeing “demanufactures” in the Puget Sound area, it could be squeezing out the U.S. aircraft industry’s capacity to compete with other suppliers.
The engineers feel, probably correctly, that the highest form of technology transfer is people-to-people. In 1978, Japan’s three heavies helped to create fuselage sections of Boeing’s 767, and as many as 133 of their people traveled to Seattle to work on the program. These Japanese companies produced about 15 percent of the 767. In the early 1990s, the same companies had more than 260 people involved in building about 22 percent of the 777. Now a similar number are in Seattle working on the 787 program.
The 777 was the first computer-designed (“paperless”) airplane. The system, known as CATIA, that made it possible was designed by Dassault Aviation in France. Japanese engineers sat side by side with Boeing counterparts in the mammoth plant in Everett. Other Japanese engineers in Japan had CATIA workstations connected to other CATIA workstations in Everett and in Seattle. This all-electronic system made possible a free flow of information between engineers and the factory floor. That was a first, one that saved a lot of time.
In 2003, a group of Boeing engineers circulated an unsigned, strongly worded memorandum of ten pages on their company’s alleged “brain drain.” Although the bias of the writers was obvious, parts of what they wrote reflected a point of view shared by numerous industry figures and analysts. It cited Phil Condit’s definition of Boeing’s “core competency” as “large-scale systems integration” and posed two questions: “How can Boeing hope to successfully be a ‘large-scale systems integrator’ if they don’t have enough experienced, qualified engineers to do the integration? If Boeing’s engineers no longer understand the technical aspects of the airplane’s design and manufacturability, how can they integrate?
“Integration,” the memorandum said, “takes place at the individual engineer level, which is where Boeing is cutting. The front-line engineer is where the rubber meets the road, but Boeing has made it clear that engineers are merely ‘costs’ to the company, not assets.”9
Apart from assembling major components, Boeing and Airbus integrate black boxes and computerized flight decks with fly-by-wire components. Many experienced aircraft industry executives with engineering backgrounds do not doubt that Japan, too, could learn this black art. It currently manages the world’s most integrated transportation system, a seamless network of high-speed and local trains, public and private rail and subway lines.
Other equally experienced people are skeptical. “It’s hard to become what Boeing is,” says a former vice president of GE’s aeroengines group. “It’s known as ‘systems know-how.’ Here’s an example. The navy once wanted to hang a Pratt engine on the F-18, which had only GE engines. The navy wanted to see some competition, and so we were instructed to turn over the blueprints and all relevant documents to Pratt. Pratt tried and could not produce a good enough engine. They had everything that was needed except the know-how.”10 And so goes the discussion.
Since the mid-1980s, if not before, the Japanese have wanted to make the wing for a Boeing airplane. They tried and failed to persuade Boeing to let the three heavies build the wing for the 777. They are widely thought to put aerospace at the top of the industrial pyramid—ahead of electronics and automobiles—because it is judged to have the largest potential for benefiting other industries.
Within and beyond Airbus there is an awareness, as distinct from an immediate concern, that an Asian Airbus might one day emerge. A senior U.S. government bureaucrat who specializes in commercial aircraft agrees. “Japan would be the integrator,” he says, “and South Korea would take a large role. There would be other players and one day China.”11
Pierre Chao, one of the most carefully listened to among industry analysts, takes a balanced view.
Japan, theoretically the biggest of the potential competitive threats, has been constrained for the last two to three decades because Boeing has simply co-opted its industry. For years, various parts of the Japanese bureaucracy have wanted to develop an indigenous commercial aircraft product line, but industry has refused to go along because of their lower risk and more lucrative role as subcontractors to Boeing. There is certainly some danger of an Asian Airbus down the line that brings together China, Japan, Korea, and, who knows, Taiwan or even the Russians.
Russia certainly has all the technology needed, and China could produce the aircraft very cheaply. Boeing and Airbus absolutely do not want to see an Asian-based competitor exploding onto this market, especially if one accepts that commercial aircraft are becoming commodities in a mature marketplace.12
A fellow analyst, an Asia watcher, professes to see “a combination of Japanese technology and low-cost Chinese productivity producing an Asian Airbus.” He can, he says, “envisage an alignment of Fuji and Kawasaki with Honda,” which “is doing serious things with [aircraft] engines.”13
Among Airbus people, one hears little concern, at least so far, about outsourcing jobs, but there are executives in Toulouse who do see their company as running a risk of helping to create an Asian competitor. No one used to think that China, despite having planned a regional jet airliner (the ARJ), had the technology or know-how to do more than contribute its low-cost production to a major joint venture. And talk of a Sino-Japanese arrangement still sounds far-fetched, given the demons in their relationship that would have to be silenced. In Washington, the prevailing view is that strategically Japan is very vulnerable. For Japan to compete with the United States in the world airline market—Boeing turf—would carry the risk of harming relations with its only reliable ally.
A former Boeing CEO who declined to talk on the record about a competitive threat from Asia feels strongly that Japan will not step up to the challenge but that China will: “The risk-averse Japanese culture will discourage that temptation,” he said. “But the Chinese will eventually be there.” He disagreed that China couldn’t overcome the technological barriers. “They have twice put a man in orbit, and some of the best aerodynamicists in the world are Chinese.”14
In discussing a potential threat from Japanese industry, most Boeing people are dismissive, contending that the business of reading the airline market, selling airplanes, and providing after-sales service globally is another and even trickier black art, one that Japanese companies are unlikely or reluctant to learn. Airbus, they say, mastered the art (and did so with disparate companies), but it took them thirty years.
Along with numerous other skeptics, the Boeing people, like their former leader, note that Japan has a risk-averse business culture, and making airliners is a high-risk business—one that can do ruinous damage to a balance sheet, and one where the financial benefits are fugitive. Japan’s Ministry of Economy, Trade, and Industry (METI), according to one of its officials, “would like to see the aircraft industry become a big player in this business, partly because of budgetary pressures on the defense side. So we see the commercial side as the way to go. But there are big obstacles. You cannot compare selling consumer products to selling airplanes. That involves one professional dealing with another professional. It’s very difficult to establish trust.”15
For now, the conventional wisdom supports the skeptics. Risk-averse Japanese suppliers do have a very good deal with Boeing, and they might be content to await a new cycle in technology, one that showed signs of moving industry toward a cost-effective supersonic airliner. “We have to decide whether to take a bigger part in engine development, or whether to leapfrog the current generation [of aircraft] and jump ahead to the superso
nic technology, since the U.S. and the Europeans are ignoring this sector,” said one industry executive.16
Suppose that Boeing, for whatever reason, ended its privileged association with Japan. Would Airbus abandon one or more of its “centers of excellence” so as to acquire similar arrangements with Japan’s aircraft industry? We are unlikely to know, since it’s unlikely to happen and hard to imagine, unless, that is, Japan should elect to develop a supersonic airliner and choose a partner, like Airbus, that can draw on direct financial help from partner governments. Meanwhile, Airbus will continue to do what it has always done—outsource a huge array of components and subsystems, many of them to American and Chinese suppliers.
Until recently, the received wisdom was that Airbus, unlike Boeing, wouldn’t outsource core competences, partly because of the jobs that would leave and partly because of a reluctance to help any supplier become a competitor. But the dynamic and overarching importance of the Asian airline market has altered a few basic assumptions. China is a huge market, and demands technology in return for granting access to it. Airbus is not outsourcing just work to Chinese industry but an increasingly big share. The scale of the outsourcing doesn’t compare to what the three Japanese heavies are currently doing for Boeing, at least not yet. But the pattern so far appears to be roughly similar.
Four Chinese manufacturers are making a wide range of wing components for Airbus aircraft. According to an Airbus “backgrounder,” dated September 2005, the company “has undertaken to transfer to China the technology required for the manufacturing of the complete wing of the A320 family aircraft.” Two Chinese companies were already producing the leading and trailing edges of that aircraft’s wing. Six such companies are making landing gears, a major component, for the A320. In June 2006, Airbus disclosed its plan to build an assembly plant for A320’s in the coastal city of Tianjin.
The same document reported a joint venture between Airbus and China Aviation Industry Corporation I (AVIC I) establishing an engineering center adjacent to the offices of Airbus China. The center is described as intended “to develop a close relationship between Airbus and the Chinese aerospace industry, with a view to China becoming a full risk-sharing partner in a future Airbus program for new-generation aircraft. A risk-sharing partner takes complete responsibility for a part of a program, from design to manufacturing, including the corresponding investment and profit sharing.”
In late 2005, Airbus served notices on suppliers that it had tightened its criteria for contractors with whom it works—including a requirement that major suppliers (known as tier-one suppliers) outsource a minimum amount of work to companies in Asian countries such as China and India. “Those who don’t comply will face ‘significant penalties,’” said Claude-Henri Hereus, the company’s vice president of procurement strategy. The mandate was described as part of a broader global “action plan” in which Airbus is seeking partnerships in China, Russia, and elsewhere, specifically for development and production of the A350.17
In pondering what lies ahead, the aircraft companies can’t take much for granted. Their industry may change direction abruptly. The companies—Boeing and Airbus now—may confront dilemmas of the kind occasionally churned up by the marketplace. For example, neither wanted to venture into the market for regional jets; it didn’t impress them as viable. So two other companies, one Brazilian, one Canadian, jumped in with aircraft of sixty to eighty seats built around stretched business jet fuselages. Now they dominate a segment of the market that may grow.
The Brazilian company, Embraer, has become the fourth-largest airplane company in the world, and is prospering, although it used to be said that Brazil could not build an airliner. Embraer was initially established by the government as an aeronautical engineering school, grew into a private company, and is now listed on the New York Stock Exchange. It is Brazil’s largest exporter. JetBlue, as noted, bought one hundred of Embraer’s latest aircraft, the E-190, which seats one hundred passengers, and has options for another hundred.
The next big battleground will be the market for single-aisle aircraft. The two big players will replace their current models—Boeing’s 737 and Airbus’s A320—with new aircraft that are expected to be built around the new technologies being used for the 787 and the A350. A large question turns on whether Embraer and its Canadian competitor, Bombardier, will join the fun and develop aircraft of, say, 125 seats or larger versions of existing models.
Someone has compared what may happen to a regatta, with two boats tending to worry about each other, behaving accordingly, and then watching the other boats sail by them. In this case, the regatta analogy is not likely to stand up. Embraer and Bombardier won’t be building new airplanes—at least, not for a long time—with the new lighter-weight materials that Boeing and Airbus are using, because they don’t have the technology. Also, in any aircraft pricing war with Boeing and Airbus, these smaller companies would be swiftly subdued.
All parties will be closely watching the Chinese airline market. The bulk of the growth there is likely to be in the small, single-aisle aircraft. If an Airbus Asia should actually lie ahead, this market could hasten its arrival.
WHEN JACK WELCH was running GE, he accelerated the trend toward outsourcing major technology-centered products. Transferring the heavier costs of production by moving down the supplier food chain appeared to be much the simplest solution to the rising problems of making these items at home. For Harry Stonecipher, who had worked for him, Welch’s business model was the one to emulate.
In the mid- and late 1990s, Boeing sharpened the pace of shifting production and design work abroad. While trying to widen market access for its airplanes, Boeing Commercial’s leadership had to clear away, or go around, various labor-management disputes, the most serious of which was a strike called against the company by the International Association of Machinists (IAM) in September 1995. It lasted sixty-nine days and ended with groundbreaking job security provisions, including a formal “make-buy” process whereby the IAM would have the opportunity to review all significant outsourcing and make proposals to keep the work in-house.
The settlement’s other effects included the start of formal offset arrangements between China and Boeing Commercial Airplanes group; six Chinese factories began churning out parts for Boeing commercial aircraft. Offset arrangements with Japan that had begun twenty or so years earlier were more informal until the 787 arrived, at which point the role of the three heavies changed from being suppliers to risk-sharing partners, and Boeing gutted most of the make-buy process.
In the year following the terrorist attacks of 9/11, with Condit and Stonecipher at the helm, Boeing laid off nearly thirty thousand people. BusinessWeek commented that if Condit “can use the window of opportunity opened by the layoffs, Boeing could be transformed into a global enterprise that’s much less dependent on the U.S. for both brawn and brains.”18
Struggles with the two key unions—IAM and SPEEA (Society of Professional Engineering Employees in Aerospace)—drove the outsourcing process into higher gear. The unions argued that globalization would do a lot more harm than good, mainly by draining the company of the skills and resources it needed. They also complained about a company decision to spend $10 billion on repurchasing shares instead of investing that money in a new aircraft. This opinion was widely shared within the industry and a source of puzzled speculation within Airbus, which had built two new models and several derivatives in a period when Boeing did little other than upgrade its 777.
Within the Puget Sound area discordant feelings ran high. Even elements within Boeing’s management were troubled by a change of direction that appeared capable of seriously weakening the company in the middle or long term. By outsourcing so many systems, would Boeing also be outsourcing the markups? While it was absorbing overhead, would the profit margins be created by the suppliers? If a supplier marked up parts by, say, 20 percent, how could the company do likewise?
In building the wing and much of the fuselage of
the 787, the Japanese companies will refine the manufacturing process by coming down the learning curve. The curve develops on the factory floor. There is very little money to be made on the first airplane, or unit, or even the next few. The margins develop with the units that follow, because by then the factory floor has “learned” how to make and assemble the parts, or core components, with greater competence and in less time.
The aircraft industry is especially captive to the learning curve dynamic, because the cost per unit is high and comparatively few units are produced. Other products—running shoes, automobiles, televisions, and countless more—are turned out in large quantities, so the curve flattens out quickly. With airliners, the curve remains steep for much longer, unless or until the airplane is selling briskly.
A few years ago, a case against outsourcing was made by Dr. L. J. Hart-Smith in a paper delivered at a Boeing symposium in Saint Louis. Dr. Hart-Smith, it’s worth noting, was and remains a Boeing senior technical fellow. Drawing on thirty-five years of experience in the industry, first with McDonnell Douglas, he said, “It was the suppliers who made all the profits on the extensively outsourced DC-10, not the so-called systems-integrating prime manufacturer. The same thing,” he added, “has happened on aircraft assembled by Boeing, in Seattle.” By comparison, Douglas’s more successful DC-8, according to Hart-Smith, “was manufactured and assembled almost entirely within the Long Beach plant.”
Boeing Versus Airbus Page 20