Offshore manufacturing raises industry questions
Like it or not, we live in a global economy. While balance-of-trade issues are complex, a free-market economy opens up new sources for raw materials, goods and services and creates new markets for U.S. businesses.
Many executives of U.S. aviation corporations believe their ability to compete in the international marketplace depends upon their willingness to do business in both directions. As a result, it would be difficult, if not impossible, to find an aircraft made entirely in the U.S. out of parts and assemblies built exclusively in the U.S.
A Hawker Beechcraft spokesman told AIN, “Our customer base is global, so we feel [our airplanes] can’t be built one hundred percent in any one country. We’ve been international from the beginning, because we inherited our Chester, England facility with the Hawker.”
Airbus is building the Hawker 700/ 800/900-series fuselage in the UK; Fuji Heavy Industries builds the wing for the Hawker 4000 in Japan.
Hawker found itself embroiled in controversy when a company document titled “Project Pelican,” dated May 2007, surfaced publicly. The document proposed opening a facility in Chihuahua, Mexico, which would begin manufacturing small parts and move toward full aircraft assembly after 2012.
The document noted the move would hardly be without precedent, as Gulfstream, GKN, Parker Hannifin, Cessna, Bombardier and Honeywell were already established there.
In a June 24 PRNewswire story, Tom Buffenbarger, president of the International Association of Machinists and Aerospace Workers (IAM), said “Hawker Beechcraft shows no recognition of the damage [companies] do to our economy, our industrial base or our national security when they transfer sophisticated technology and production to countries that turn around and compete with U.S.-based companies.”
According to the spokesman, when Hawker Beechcraft became a private company in March 2007, the management assembled several internal teams to evaluate ways to lower costs and increase efficiency. “Project Pelican was the proposal of one of those teams,” he said. “It was never seriously considered, and we don’t have any plans in that regard at this time but the rumor keeps resurfacing from time to time.”
The company did announce a Chihuahua, Mexico plant in July 2007 but it is on a much smaller scale than the idea floated in Project Pelican. The Mexico operation is a light sheet-metal assembly facility in support of the Wichita operation.
Some manufacturers are reluctant to discuss opening facilities beyond North America’s borders. A spokesman for Pratt & Whitney Canada said, “It isn’t something we’re comfortable discussing due to the sensitivity of the subject.” Others are more forthcoming.
A spokesman for Bombardier Aerospace said, “We assemble our aircraft in Wichita, Toronto and Montreal with parts from all over the world. The Learjet 45 has a wide global footprint and all of our fuselages– with the exception of the Challenger 850– are built in Belfast.”
Bombardier owns facilities in Northern Ireland (previously the Short Brothers factory) and Mexico where, in addition to the 850 fuselage, the company builds the Q400 flight-control package, including the rudder, elevator and horizontal stabilizer, and
the aft fuselage portion of the Global line.
“In 2005 we decided to build a facility in Mexico to help reduce costs by transferring the electrical harness manufacturing process,” the Bombardier spokesman said. “By 2006 we started working on the Challenger 850 fuselage and the Q400 control package. This move allowed us to reduce our costs, which in turn helped us to invest in new programs and build a new facility in Montreal for the final assembly of the C Series. The savings resulting from the Mexico operation will create up to 3,500 more jobs at peak production in Montreal.”
Companies Look Beyond
North America To Cut Costs Ron Alberti, senior vice president for integrated supply chain at Cessna, said the company started major outsourcing with the Sovereign program in the late 1990s when it enlisted Fokker to build the empennage.
“We needed to gain experience sourcing major subassemblies. We didn’t really have to do it at that time, but looking forward it was obvious we wouldn’t always be able to do everything internally. Time has proved that to be a good decision,” Alberti said.
“Jack Pelton [Cessna’s chairman, president and CEO] believes strongly in the concept of the new category light sport aircraft and feels we have to be involved in that segment of the business,” Alberti said. “The problem was that the lower pricing necessary to make the Skycatcher program marketable would not bear a lot of internal investment. We couldn’t take it on without expanding, and that’s a fairly big investment for a product with a relatively low price. We realized we had to find a partner to whom we could outsource.”
According to Alberti, the company looked at a number of foreign companies and decided on the Shenyang Aircraft Company in China. “It allows us to bring that product profitably to market for about $110,000.”
Cessna has also opened a plant–Textron Aerospace de Mexico–in Chihuahua. “We started out with wire harnesses for the jets. The wire harness skill was already there with several companies doing wire harnesses for different applications,” Alberti said.
Cessna then began to look at the possibility of doing sheet-metal assembly in Chihuahua. Alberti explained that Cessna worked with local communities and helped develop the necessary training. The program was successful enough that the original 60,000 sq ft of space allotted has now grown to more than 85,000 sq ft and about 400 employees.
The list of aerospace companies that outsource work and/or open foreign facilities reads like an aerospace Who’s Who. Sikor-sky Aircraft has two suppliers on S-76 airframes: Aero Vodochody in the Czech Republic and Changhe Aircraft Industries in China, which began building airframes for the S-76 last June. PZL Mielec in Poland is building the cabin of the UH-60M Black Hawk.
Gulfstream uses Rolls-Royce engines from Germany for all of its large-cabin aircraft (G350/G450/G500/G550). The empennage for the G500 and G550 come from Stork (formerly Fokker) in Holland, the G200’s engines come from Pratt & Whitney Canada and both the G150 and G200 are delivered to Dallas, green, from Israel Aerospace Industries in Tel Aviv.
Ken Lackey, chairman of the Nordam Group, said, “Strategically located capacity will allow Nordam to serve our customers better across the globe. A geographically diverse, cost-effective supply chain will provide strategic growth opportunities.” The company recently announced the addition of a new manufacturing facility in Chihuahua, scheduled to open in the middle of this year.
“As a result of Nordam’s recent contract wins on the Gulfstream G650 wing-to-body fairing program and the Cessna CJ4 program, we are in a position to expand capacity,” Lackey said. The expansion provides additional and back-up capacity for Nordam’s manufacturing operations in Tulsa, Okla.; Wichita; Brazil; and Italy.
Chihuahua has become a powerful force in the quest for the aerospace dollar in no small part due to a trained workforce. It can train specialized operators for the aerospace industry through the High Technology Training Center Cenaltec Campus. The facility prepares and certifies specialized technicians in the fields of machining, sheet metal, painting and other techniques and processes.
New businesses are building upon the ground broken by a handful only a few years ago. Both Mexican and foreign money has been invested in local area technical education and infrastructure. The University Technological Chihuahua (UTCH), for example, provides two- and four-year college degrees oriented toward the labor market with such programs as basic engineering and manufacturing. UTCH is eager to customize or develop entirely new programs to support the industry.
Under the terms of Nafta (North American Free Trade Agreement) a company does not have to pay customs duty on goods brought to the U.S. from Mexico. Building on Nafta, there is a Mexican corporation legal structure that allows the duty-free and tariff-free import of goods and equipment into Mexico to perform value-added work for subsequent export to the U.S. The net result of no customs duty and lower labor costs is tough to argue against.
The rise of Chihuahua and other foreign aerospace-specific manufacturing zones doesn’t surprise Bob Agostino, vice president of operations for LJ Aviation of Latrobe, Pa.
“The pressure on the industry is to make a product for the lowest cost with the greatest possible profit, and that’s exactly what’s happening. It’s a recipe for disaster if there is no oversight.”
Agostino added, “The important question for the aviation industry is how long it will take a given country to develop a workforce that understands not only quality and production issues but also that human life will be at stake.”
He acknowledged, however, that labor cost is the reason OEMs are moving plants to other countries. “The corporation’s obligation is to the shareholder, so there’s a warning there: the U.S. has got to be able to compete.”
Owen Herrnstadt, director of trade and globalization for the IAM, expressed concern about outsourcing and opening facilities in other countries.
“In general, outsourcing of aerospace work to other countries, whether it involves establishing a new facility, engaging in co-production or subcontracting to various other entities, poses a serious threat to the long-term health of the industry and our nation’s economy,” Herrnstadt said.
“Among other things, work that could be performed at home is lost. Moreover, technology and production is shifted to other countries, contributing to global competition as these countries develop their own aerospace industries.”
Herrnstadt pointed out that basic questions regarding outsourcing and U.S. jobs must also be asked. For example, what happens when the industry is in a downturn? Will the company lay off workers in its U.S. facilities or in its facilities in other countries?
Agostino also wondered how the FAA will handle the increasing flow of work out of the country. “Going offshore and making aircraft out of more exotic materials is going to put a huge burden on our regulatory system to maintain quality control. What are the regulators going to do?”
According to the FAA, the U.S. aviation industry has been using foreign suppliers and offshore manufacturing facilities for many years, and the agency has historically been involved in the management of such programs in its ongoing safety oversight capacity.
“All production approval holders [PAHs] are held responsible, through the regulations associated with their specific type of production approval, to ensure any products they or their suppliers produce conform to the approved design and are in a condition for safe operation before release,” said an FAA spokesman. “This fundamental principle also applies to PC [production certificate] holders who may have elected, and the FAA permitted, to extend their PC manufacturing sites to foreign locations, or have associate facilities controlled under their U.S. quality system at overseas sites.”
The FAA focuses its oversight directly on the PAHs, who in their manufacturing programs can elect to use suppliers both domestic and foreign. The FAA does not approve suppliers; rather, it approves the PAH’s quality system.
According to the spokesman, some of the key elements of a PAH’s supplier-control system would typically include procedures that describe how suppliers are:
• initially selected and qualified by the PAH for use;
• periodically audited to ensure continued compliance with the PAH’s quality requirements;
• subjected to receiving inspections and evaluations of their supplied parts at the PAH’s facility;
• required to implement corrective and preventive actions for supplied parts that are found to be nonconforming;
• disapproved from further use; and so on.
The FAA makes no distinction in its oversight of foreign and domestic suppliers.
“In light of the FAA’s limited resources, the agency has developed a safety ‘risk-based’ approach to its oversight functions,” said the spokesman. “All PAHs and their suppliers are screened and placed into varying categories related to the criticality and safety impact of the products, components, article, parts and so on that they produce. This categorization determines the level and frequency of audits and evaluations that the FAA will undertake at the PAH and/or supplier [both domestic and foreign].”
He added that in some instances the agency might call upon a partner civil aviation authority for assistance in supplier surveillance when that supplier is located in another country.
Agostino offered this analysis of the picture. “There have been 16,800 business jets delivered between 1964 and the present by all OEMs worldwide, and half have been delivered in the last 10 years,” he said. “If the U.S. has really priced itself out of the market, then you have to ask what we are going to do to protect it.
What happens if you’re building aircraft in a country that eventually becomes anti-American? How do you protect your investment, get parts, service and support?”
A Bell Helicopter spokesman said his company has grappled with that question as well. He suggested that the world is slowly moving away from armed conflict.
“No one is going to take on the U.S. militarily, but potential enemies can bring us to our knees economically,” he said. “One of the most serious concerns when we first heard that Boeing had lost the U.S. military tanker program to Airbus was a foreign company having such extensive control over the operational readiness of U.S. military aircraft. I don’t think it’s a good precedent.”