United Technologies’ interest in acquiring Rockwell Collins reflects increasing pressure on even the largest suppliers by top-tier manufacturers seeking cost reductions, several analysts concluded.

“We believe at least part of the motivation for [UTC] is the incremental pressure on the supply chain from Boeing, both from a price and economics standpoint,” said Canaccord Genuity analyst Ken Herbert. “We expect the supply chain to continue to look to get bigger, both to potentially increase leverage in the marketplace, and also to provide additional opportunities to take out cost and realize synergies.”

A UTC-Rockwell Collins combination “would also be more challenging to bully” into cost-reduction agreements, such as those behind Boeing’s Partnering For Success, "whereas smaller suppliers are easier to push around,” said Vertical Research Partners analyst Robert Stallard. UTC generates about half of its $57 billion in annual sales from its Pratt & Whitney and UTC Aerospace units. Rockwell Collins generates about $5.3 billion in annual revenue.

News of talks between the companies, first reported by Bloomberg and Reuters on August 5, comes amid pressure at UTC to deliver on major programs while reducing costs. UTC subsidiary Pratt & Whitney is working to accelerate geared turbofan production and address in-service performance issues. Meanwhile, UTC is looking for ways to streamline.

“As we think about 2018, one of the things that we are focused on is structural cost reduction,” UTC president and CEO Greg Hayes told analysts on a late July earnings call. “It's organization. At the same time, the need to continue to reduce factory footprint remains. We're going to continue to go by the playbook of taking out high-cost locations for low-cost locations where the markets are moving.”

While a Rockwell Collins acquisition would not create a simpler organization, it could bring other benefits. 

“We believe UTC has sought greater scale in its aerospace business for some time, and [Rockwell Collins] enjoys leadership positions in many segments of the aircraft market, including avionics, interiors and connectivity,” Herbert said. “We would not be surprised if Boeing was not warm to this acquisition, as the [combination] would have a very large presence on the 787, for example, and would be clearly the largest systems supplier to Boeing.”

Suppliers' ability to push back against aircraft OEMs could become useful as supply-chain strategies evolve. Hayes has been outspoken about the challenge that stronger OEM aftermarket pushes, such as Boeing’s new dedicated avionics business, presents for suppliers.

“One of the fundamental strategic issues…is who gets to participate in the aftermarket,” Hayes said last month. “And the model has always been that the [OEMs] take big risks and invest big dollars, along with the first-tier suppliers, to develop all of these innovative products and solutions. I think we need to have these discussions—as we have started to do with the big [OEMs]—about partnership risk revenue-sharing arrangements. But clearly, you can't continue on with the current business model if the OEMs are going to demand a bigger and a much more significant chunk of the aftermarket.”