Aerospace Suppliers Feeling Squeeze of ‘Vertical Integration’

 - February 27, 2018, 11:06 AM

Aerospace suppliers face new challengers as Boeing reverses an outsourcing trend established during development of the 787 and, along with rival Airbus, moves into aftermarket sales. After years of pushing suppliers for price concessions, the OEMs have assumed a new tack, threatening to hollow parts of the aerospace supply chain and driving further consolidation in the industry.

After aggressively outsourcing design and production work in the early 2000s, Boeing has now turned its focus toward doing the work itself, giving it what it considers more control over its supply chain and opportunities to make money in aftermarket sales.

Boeing recently announced a joint venture with seat manufacturer Adient. Meanwhile, it now makes 737 Max nacelles in South Carolina; it produces actuators in the United Kingdom and Portland, Oregon; it has established its own avionics unit; and it makes much of the 777X’s advanced wings itself.  

Boeing sees plenty more opportunities for so-called vertical integration, said aerospace analyst Kevin Michaels of aerospace consultancy AeroDynamic Advisory. 

Four key questions should drive the aerospace giant’s strategy, he told delegates at the recent Pacific Northwest Aerospace Alliance annual conference in Lynnwood, Washington. Whether or not the work is critical to making future aircraft designs competitive constitutes the first consideration. The others center on ensuring so-called value creation for Boeing’s customers, moving Boeing closer to its $50 billion services revenue target, and assuming an acceptable level of risk.

Potential areas for further integration by Boeing on aerostructures include engine pylons, fan and exhaust cowls, thrust reversers, doors and windows, and forward and nose fuselage sections, Michaels said.

On aircraft systems, possible areas include slides and rafts, fuel management, and the flight control computer, he said. “Is controlling the envelope of your aircraft core or not?” he asked.

Airbus has more consistently defined what is core to its aircraft designs, he said, while Boeing still suffers a hangover from its aggressive outsourcing on the 787 program.

“I think the days of mega work packages we saw on the 787 program are over,” Michaels told AIN.

While vertical integration can reap big windfalls in good times, it can mean more liability in lean times, he warned.

It also can put Boeing in direct competition with suppliers, many of whom already feel squeezed by cost-cutting campaigns at Boeing and Airbus in recent years. Tier 1 suppliers appear the most vulnerable to Boeing’s push for vertical integration, as the strategy results in more consolidation in the industry.

In the last year, Rockwell Collins bought B/E Aerospace. Then United Technologies agreed to pay $23 billion to buy Rockwell Collins in September. In December, the European Commission approved the merger of Safran and Zodiac Aerospace.

“Even though it’s creating this tremendous stress and angst and uncertainty in the supply chain, if you’re a Tier 2 [supplier] with really good products and components, and haven’t been able to sell it to that Tier 1, you might have an opportunity to sell direct on the middle of the market aircraft,” Boeing’s next new aircraft, Michaels said.

Boeing’s shift in strategy is not necessarily permanent, said Ron Epstein, an aerospace analyst for Bank of America Merrill Lynch.

“You would expect—it’s just human behavior—that they’ll overshoot, that they’ll go back and say, ‘Hey, you know what? Actually, that Tier 1 thing wasn’t too bad,'” he said.