Boeing, Airbus try to strike outsourcing balance

Farnborough Air Show » 2008
July 3, 2008, 5:11 AM

Boeing and Airbus are still looking for the right balance in outsourcing, or at least for the right way to run the massively outsourced production organizations on which they base their latest airliner programs.

Airbus had touted site divestitures as a means of limiting financial involvement in new programs but has not yet sold five of the seven sites that have been for sale since last year as part of its Power8 restructuring plan. Meanwhile, Boeing is endeavoring to regain control of its supply chain.

The success of outsourcing in car manufacturing may have inspired both aerospace giants, but some experts question the rationale for outsourcing. Others believe the point at issue is how to make outsourcing effective.

What Airbus and Boeing have in common here is their willingness to transfer part of their risks to partners, and they are doing so to a much greater extent than before. Boeing, for instance, has outsourced as much as 70 percent of the work for the new 787 widebody.

According to Bob Noble, Boeing’s vice president for 787 supplier management, another benefit of spreading design work can be found in skill management. “We design a new commercial jetliner only every 12 to 15 years, and our expertise is solely focused on aerospace. Suppliers around the globe are involved with new products on a more frequent basis and across other industries,” he told AIN. In his view, using partners to the extent it does gives Boeing a team with broader skills and greater ability to innovate.

By comparison, Airbus has outsourced 53 percent of the A350. Where there is no partner, Airbus wants to create one through a spin-off process. So part of Airbus’ Power8 restructuring plan is selling off French factories in Méaulte and St. Nazaire, as well as the German sites at Nordenham, Varel, Augsburg and Laupheim, and the Filton, UK facility. For the Laupheim factory, which specializes in cabin equipment, a Diehl-Thales partnership is now Airbus’ preferred bidder. It expects GKN to take over the Filton wing factory.

However, all the other attempts have dwindled to nothing. Discussions with Latécoère were well under way for Méaulte and St. Nazaire, until aborted. According to EADS CEO Louis Gallois, the reasons are “the financial crisis and the weak dollar.” He was speaking at a debate organized by the French association of aerospace journalists (AJPAE) in June.

Gallois explained that prospective buyers were supposed “to fully take charge of the currency exchange rate, after a transition period.” However, this plan had been worked out before the dollar fell to record low levels against the euro. In addition, Latécoère was having difficulties with securing financing for the deal because
of constraints in the credit market. In Germany, a similar scenario occurred with MT Aerospace.

The revised plan now calls for the remaining sites to become part of specially created subsidiaries. There probably will be one in France and one in Germany, and the parent company will be either Airbus or EADS. The latter is looking for investors to take stakes in the newly created companies. EADS could keep the stakes or sell them entirely. “We will take care of the initial investment to convert these sites to [the use of] composite material technology,” Gallois said.

The EADS boss also hinted at possible tie-ups or mergers between Airbus’ so-called Tier 1 suppliers. He mentioned EADS Socata (maybe with Daher becoming a shareholder), EADS Sogerma, Latécoère and the new entities. Evidently, Gallois wants to encourage these companies to get closer.

His approach could be a response to a concern about Latécoère’s sustainability. The Toulouse-based firm is a major partner for Airbus and there is concern at the European airframer that the failure of the aforementioned deal to take over its factories might weaken the smaller company. “We need Latécoère, its design office and its factories,” Gallois said. Talks are going on about further A350 design and production work.

Also in question is how disposing of a highly specialized facility such as that at Méaulte can be part of the solution. The northern France site has expertise in nose sections. Can it really increase productivity simply by changing hands?

Méaulte’s situation is different from that of Spirit Aerosystems in the U.S. The Wichita-based firm was formerly a Boeing facility and from the start was supposed to work with several OEMs. So, some have asked, is it worthwhile for Airbus to reduce its development risk in this way, if it jeopardizes the future of Méaulte? Again, consolidating Tier 1 suppliers may be an answer.

Meanwhile, Spirit Aerosystems may have reaped some benefits from this protracted reorganization at Boeing’s main rival. In May, Airbus awarded it a contract for the composite central fuselage section of the A350. 

“This is Airbus’ plan B–giving more work to Spirit. Politicians and unions can intervene on divestiture but they cannot intervene on subcontracting,” Teal Group analyst Richard Aboulafia told AIN. He was referring to strong suspicions of political intervention in the Airbus restructuring process, based on the fact that the final bidders in the failed divestiture process in France and Germany were, respectively, French and German. Among the main shareholders in EADS is the French government, with 15 percent; some German regional states hold minor stakes.

“Airbus’ plan B makes its factories gradually less valuable,” Aboulafia continued. For example, he said, in 10 years A330/A340 production will be over, but the A350 will not have replaced them [in terms of volume of work] in those factories. In his view, if politicians and unions want to avoid Airbus doing more outsourcing as envisioned by his so-called Plan B scenario, then they had better realize that their opposition to the proposed site disposals could actually jeopardize these facilities

Unions are concerned that working conditions will deteriorate in the factories that are to be sold. Gallois confirmed that the company will require employees to contribute to the cost-cutting efforts. “Just as they would if they were under the Latécoère’s control,” he insisted.

Do Carmakers Have the Answer?
“Airbus’ management team makes it clear it wants to copy the car industry,” said a representative of Airbus’ CGT union in Toulouse. “Airbus wants to do this simultaneously with the development or production ramp-up phases in three programs [A350, A400M, A380] and the introduction of new technologies,” he said.
The union official added that production rates between aerospace and the automobile sector are significantly different. While Airbus and Boeing manufacture some 500 aircraft a year, a manufacturer such as France’s Peugeot makes twice that number of medium-size cars every day.

Following in the footsteps of car manufacturers is certainly not easy for the aerospace sector. In fact, the carmakers themselves haven’t always found large-scale outsourcing to be straightforward, even though it has eventually proved successful.

“Initially, some suppliers did not have the technical capabilities they claimed,” Oliver Wyman management consultant Rémi Cornubert told AIN. Therefore, carmakers now assess their suppliers’ capabilities. Moreover, “the way work was shared was relatively unclear,” he added. This led to shadow engineering, a situation where the OEM and the supplier duplicated design efforts. Moreover, there has also been a lack of clarity as to how projects are managed. “More than 10 years on, outsourcing in the automotive industry is not completely mature,” Cornubert argued.

One major advance has been to involve suppliers much earlier in the car development process. “Carmakers want to benefit from the suppliers’ good ideas,” Cornubert said. They also want to reduce lead time, so they now share technology road maps with them.

Airbus is going into that direction too. The OEM has not yet awarded Latécoère a share of the A350 work, but it already has engineers in Airbus design offices during the concurrent engineering phase. “We are talking to them about A350 design and production,” Gallois confirmed.

Meanwhile, Airbus is mulling additional measures to those contained in
the Power8 plan. “For example, we could increase the dollar content. We are also considering the establishment of production units in low-cost countries,” explained Gallois. “This is what Latécoère had envisaged in Tunisia and is already doing in Morocco.”

Obviously, this is another source of concern for Europe’s unions. They insist that in previous decades Airbus coped with weak-dollar periods without reducing the European content of its aircraft. But, according to Gallois, there was less pressure then. He pointed out that another major French aerospace firm, Safran, already has thousands of employees in Mexico and Morocco. “Previous hedging policies were wise and are now helping us,” he added.

The CGT representative challenged Gallois’ views on America’s beleaguered currency, however. “It seems the dollar is never at the right level; Airbus’ top executives have consistently blamed its weakness or strength, depending on the period,” he said. As of Dec. 31, 2007, EADS still had $51 billion hedged at an average rate of $1.26 to €1.

Boeing started massive outsourcing before Airbus. For example, one of its most significant moves was in 2005 when it sold off its Wichita, Kansas plant, which led to its rebirth as Spirit Aerosystems (Hall 3 Stand D11).

However, the way Boeing distributed 787 program shares maybe was, in hindsight, too optimistic, with the start of 787 deliveries now having been delayed by at least 15 months. The idea was not to have more partners, but to have partners taking on bigger workshares. “Basically, Boeing told its partners: These are the specifications, this is the timetable, sign here,” Aboulafia said.

Some partners like Italy’s Alenia appear to have realized too late that their workshare was too complex, given the timetable. Boeing saw the predicament late as well. The first reaction was accepting incomplete subassemblies at the final assembly line in Seattle.

This situation is similar to that which Airbus has experienced on the A380 and
it is no less serious. For instance, on the 787, it makes sense to have some sections manufactured in Italy only if they are shipped once fully wired. Airbus calls the work to be done later “outstanding work,” while Boeing terms it “traveled work.”

So what would Boeing do differently, if it were just now starting the program? According to Noble, there would be no fewer partners. However, in March Boeing bought Vought’s 50-percent share in Global Aeronautica, a Vought-Alenia joint venture in fuselage manufacturing. “It gives us more direct involvement in the integration of pieces provided by our partners and allows Vought to focus on its primary responsibility,” Noble explained.

Supply chain oversight has been a thorny issue for both Airbus (on the A380 notably) and Boeing. For the A350, Gallois has pledged that the airframer will have better information systems. In addition, A350 partners are supposed to be involved in the concurrent engineering phase as soon as designated or even earlier.

In January, Boeing said it would conduct a “comprehensive assessment of its supply chain and production system capabilities.” Yet, Noble downplayed the need for better supply chain visibility. “We have the necessary visibility on our supply base,” he said, arguing that what the company needs to address is “the unique training required for this product.”

Aboulafia insisted that Boeing would audit suppliers more thoroughly if it was starting 787 today. “They are auditing now: this is late,” he said. In addition, the initial approaches to partners would probably be different. “It would say: Here is what we plan to do. How do you think you can help us? What are your resources?” he said.

The analyst also maintained that Boeing’s program schedule for 787 was unrealistic. Under such time pressure, he said, “everything has to be done in a rush so you do not establish a proper production organization. You have to revisit afterward.”

In fact, in planning its 787 production process, Boeing took some inspiration from Airbus, which long had assembly lines in Toulouse and Hamburg putting together major airframe components coming from several places in Europe. Subsequently, in the planning of program risk management for the A350, Airbus was inspired by Boeing and its outsourcing strategy.

Can they take these ideas any further? Noble tried to define the right balance between outsourced and in-house production. “We have to look at what capabilities we consider fundamental to our business that we want to keep in house,” he concluded. “Then, we look at the remaining work and determine where it can be done with the highest quality, for the best value.”

Both Airbus and Boeing still have to prove the new model can work effectively in aerospace, as it has eventually worked in the automotive industry. Somewhat ironically, car manufacturer Daimler holds 15 percent of Airbus parent company EADS.  

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