Seattle Times aerospace reporter Dominic Gates covers top industry events to bring you the latest news, highlighting how it impacts Boeing and its competitors.
June 18, 2013 at 1:58 PM
Paris Air Show: Airbus, Boeing both squeeze suppliers on costs
When Boeing chief executive Jim McNerney said last month that suppliers who didn’t work with Boeing to cut their pricing and reduce waste could go on a “no-fly list” and be barred from future contracts, his blunt language seemed inflammatory. But here in Paris, his suppliers see it as just business.
“For most of the major suppliers, it’s not new news,” said Kent Statler, executive vice president and chief operating officer of electronics supplier Rockwell Collins. “It got a lot of press because Jim made the statements. … Before, maybe it was done in the woodshed and you got your paddles.”
Walter Stephan, chief executive of Austrian composite parts supplier FACC, said that when a Boeing demand for cost cuts on one contract came in, “Naturally, the request was shocking to us.”
Nevertheless, FACC buckled down and worked with Boeing. “We are giving them cost reductions,” Stephan said. “It hurts. But it hurts more if you are on things like a ‘no-fly’ list.”
One investment bank analyst, who asked not to be named, said playing hardball with suppliers is the way business was traditionally conducted at GE, where McNerney started as an executive and where his warning at Boeing’s annual investor conference in May wouldn’t have been out of place.
“We have no-fly lists across the company,” McNerney said in May. “If a certain group is not working with us … they’ll be on a no-fly list. They’ll not be allowed to bid on new programs with Boeing.”
The investment anlayst noted that McNerney’s comments came as the contracts on many airplane programs must be renegotiated either because production rates are increasing to unprecedented levels, as on the 737, or because the original contract must be extended to cover a new block of planes or new models, as for the 787.
In the background, he said, many tough negotiations are going on with 787 suppliers as Boeing asks them to invest the capital necessary to go to rates even higher than ten planes a month.
Because the Dreamliner program was so delayed and riddled with supply chain problems for the initial years, the original contract demands were amended multiple times, generating disputes with Boeing over who would pay for the changes.
Despite McNerney’s tough words, the extensive outsourcing of work on the 787 means that the major suppliers have more leverage than ever over Boeing.
Without Mitsubishi, the 787 has no wings. Who’s on the no-fly list then?
Still, cost reduction is clearly a constant demand in the airplane business as Airbus and Boeing fight a bitter competitive battle where lower jet prices may win a sales campaign.
Rockwell Collins, headquartered in Cedar Rapids, Iowa, is a key systems supplier to both manufacturers.
On the 787 Dreamliner, it supplies all the cockpit avionics, including the displays and controls, “everything the pilot touches in the cockpit,” said Statler.
On the rival Airbus A350, it supplies an integrated package of communications equipment, an information management system and a control for trimming the horizontal tail.
Statler said the company has had “a lot of discussions” on leaning out manufacturing processes and reducing cost with both planemakers.
He said that in boom times such as the present, when planemakers are asking for much greater volumes of components, they have leverage to try to get better deals.
He said both Airbus and Boeing press for cost reductions. Rockwell’s response is to seek to partner with them.
“It doesn’t mean we give eveything that’s asked for, but we try to work hard to create situations where both of us can gain,” he said. “We’ve been doing lean electronics a long time in Rockwell Collins.”
FACC is a major supplier of aerostructures, sometimes as a tier one supplier, shipping directly to Airbus and Boeing, sometimes as a tier two supplying a tier one partner.
The company supplies structures such as complex pieces around the jet engines for Boeing on the 787 and similar parts for Airbus on the A350. It also makes the winglets for the 737.
Stephan said demands to cut costs come from all the major companies he deals with.
“Every major at the moment is coming out with cost reduction requirements,” he said. “Not only the manufacturers but also the people underneath.”
“If you have no contract, it’s worse than a contract with challenges,” Stephan concluded. “It’s our attitude that we can compensate with innovative ideas.”
Airbus clearly has the same cost cutting agenda, though in an interview in Paris, Charles Champion, Airbus executive vice president of engineering, expressed it more tactfully than McNerney did.
Champion said manufacturers and suppliers must each step up the pace to cope with unprecedented demand.
“Until now the supply chain was not organized to produce 500 to 600 airplanes a year. We’ve never seen so many new programs with such high production rates. … We were never prepared for that,” Champion said. ” The whole manufacturing setup, the supply chain down to tiers one, two and three, can improve.”
“It’s not just the cost,” he said, “It’s the way you work with the supplier in order to be more efficient.”
He said the Airbus seeks to engage with suppliers to identify, understand and resolve inefficiencies in their processes. In this way, he said, both sides can benefit.
Statler of Rockwell Collins said suppliers realize that striving continually to cut costs is how business is conducted now. He doesn’t see the demands from the planemakers as an existential threat because they cannot survive without the suppliers.
“Boeing and Airbus both say they want healthy, strong suppliers,” said Statler. “It does them no good to take our profits away and make us where we are not able to invest in next generation products.”