It’s Complicated: The Global Relationship between Boeing, its Customers, and its Supply Chain

Boeing has depended on a network of suppliers across the globe to fuel decades of growth, now those suppliers threaten to begin producing their own aircraft, upending the Boeing-Airbus duopoly.

“We know as we’re investing there we’re also creating a competitor.”

-Dennis Muilenburg, CEO of The Boeing Company [1]


Few companies in the world have benefited more from and done more to enable globalization than Boeing, the US-based manufacturer of commercial and military aircraft. Boeing derives about 70% of aircraft revenue from international customers in more than 150 countries [2]. Accordingly, their supply chains increasingly reflect the prevailing geographies of their airline and military customer base.

One driver of this global supply chain diffusion is the use of offset agreements in contracts for aircraft sold to state-owned airlines and militaries. Offset agreements are stipulations included in contracts that require the seller to manufacture, procure, or invest resources within the buying country equal to a percentage of the value of the contract. Although terms are not always disclosed publicly, offset credit requirements typically vary between 30% and 100% of the final contract value [3].

While this mechanism has helped both Boeing and Airbus to establish a customer base in international markets, as these markets have matured and demanded more aircraft their governments have required further domestic commitments from Airbus and Boeing.

Although Boeing and Airbus have had a well-defended position in the commercial aircraft industry, the fact is that their size and technological advantages are eroding rapidly. Countries such as Japan and China have steadily gained know-how through decades of manufacturing contracts and joint ventures with Boeing, enabling them to design and build their own aircraft [4]. The state-owned Chinese aircraft manufacturer, COMAC, will soon produce an aircraft similar in size and capability to the Boeing 737 and Airbus A320, the best-selling aircraft at each manufacturer. Additionally, Mitsubishi, a long-time Boeing supplier, will begin producing a smaller passenger jet that could be a launchpad for development of future products that could allow it to compete directly with Airbus and Boeing.

Realizing that competitive pressure from new entrants is increasing, management at Boeing is attempting to react to this situation in a few ways.

There has been a concerted push by Boeing to cross-sell services products to its customers that could provide even more attractive unit economics to airline operators in these countries [5]. This tactic should further increase the value that Boeing products provide making it more difficult for airlines to switch to or integrate new equipment.

Further, Boeing is bringing some work that had been done in Japan back to the United States as automated manufacturing and new designs provide attractive opportunities to do so. The latest variant of the Boeing 777 will have wings that are entirely produced in the US, as opposed to partially supplied by suppliers in Japan.

Looking farther out, Boeing is developing an entirely new commercial aircraft that possess greater technological and cost advantages over existing products. Offering a higher level of service and capability to airlines that can act as a further competitive advantage. Just as Boeing broke new ground in airline operations with the 787, the next anticipated Boeing plane, tentatively named the 797, is expected to have a passenger capacity and range that could significantly differentiate it from competitors’ offerings [6]. The prospect of an entirely new airplane program and the revenue that comes with it is understandably attractive to Boeing’s current supply chain, however, not decisions have yet been made about where the plane will be produced [7].

In trying to sell more aircraft into rapidly expanding international markets, Boeing should consider renewing or even expanding current supplier contracts for current aircraft in China and Japan. Increasing the volume of existing production would not necessarily transfer as much know-how or intellectual property as expanding supplier production to new aircraft products would.

Boeing could also allow Chinese or Japanese suppliers to bid for components supplied at the lower tiers of the supply chain. Again, this could shift production volume and revenue to those countries, but not risk transferring valuable intellectual property.

However, Boeing’s current emphasis on developing advanced manufacturing capability within the US could provide an alternate solution. If manufacturing processes can be sufficiently automated, it may be feasible to produce a larger portion of a new aircraft domestically and at lower cost, enabling Boeing to pass those savings onto airline customers in China and Japan.

What should management at Boeing do when deciding on supplier arrangements for an all-new airplane, the 797? Should it engage further with existing suppliers despite the risk of aiding their domestic aerospace industry, or should it dial back international manufacturing and produce the new plane primarily in the US?

 

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  1. Moss, Trefor. 2017. “China Aircraft Exports Cleared For Takeoff Under FAA Deal”. WSJ. https://www.wsj.com/articles/china-aircraft-exports-cleared-for-takeoff-under-faa-deal-1509947425.
  2. “Aerospace Offset Opportunities In India”. 2017. Lucintel.Com. http://www.lucintel.com/lucintelbrief/aerospaceoffsetopportunityinindia.pdf.
  3. “Boeing Eyes Opportunities In China’s Surging Services Market – Xinhua | English.News.Cn”. 2017. News.Xinhuanet.Com. http://news.xinhuanet.com/english/2017-11/04/c_136727640.htm.
  4. “Boeing Overview”. 2017. Boeing.Com. http://www.boeing.com/resources/boeingdotcom/company/general_info/pdf/boeing_overview.pdf.
  5. “Boeing’s Key Suppliers In Japan Want An Upgrade”. 2017. The Seattle Times. https://www.seattletimes.com/business/boeing-aerospace/boeings-key-suppliers-in-japan-want-an-upgrade/.
  6. Cameron, Doug. 2017. “Boeing Eyes Twin-Aisle Design For New Jet”. WSJ. https://www.wsj.com/articles/boeing-eyes-twin-aisle-design-for-new-jet-1488940878.
  7. “China Sets Its Sights On Breaking The Boeing-Airbus Duopoly”. 2017. The Conversation. https://theconversation.com/china-sets-its-sights-on-breaking-the-boeing-airbus-duopoly-34181.

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6 thoughts on “It’s Complicated: The Global Relationship between Boeing, its Customers, and its Supply Chain

  1. I see the pros for keeping production overseas as maintenance of existing relationships, which could lead to a higher number of future purchases from those clients. In addition to the risk of intellectual property loss, it also leaves Boeing exposed to possible future trade restrictions with China, which could increase if American trade policy becomes more isolationist. US production, on the other hand, offers possible cost savings due to increased automation (for now, Asian manufacturers will doubtlessly acquire the same technology soon) and better protection of intellectual property. If I were Boeing, I would favor the US option. It protects against shifting trade policy, protects Boeing’s competitive advantage with intellectual property, and only isolates state owned foreign customers. Lower supply chain tiers could potentially still be sourced from overseas in a relationship preserving move.

  2. Very interesting look at Boeing!

    I think the decision whether to replace Boeing’s Chinese and Japanese suppliers really depends on two key factors. First, Boeing needs to assess the cost and feasibility of building a state of the art, automated production facility domestically. Second, Boeing needs to assess the significance of recent increases in protectionist policies in the United States and globally. The challenge for Boeing is how to mitigate perceived future risk by insulating their supply chain from receding globalization. You describe a market to supply Boeing, but considering the strict quality controls and testing requirements in the aviation industry, there is a large frictional cost associated with switching suppliers. These frictional costs would be further exacerbated by an increase in protectionist policies. Whether Boeing could produce these parts domestically using increased automation remains unproven. On the other hand, Boeing would be able to assume the risk of domestic production if it thought the probability of the US engaging in a hypothetical trade war was high. What isn’t hypothetical, is increased price sensitivity for airplanes brought on by new entrants to the market. Given their current situation and the risks they are facing, I feel their best strategy would be to continue to use their suppliers in China and Japan.

  3. Chris, a great question which is becoming ever so relevant as the Boeing – Airbus duopoly becomes more under threat. My opinion is that Boeing should only ring fence very few specific parts of their process that they want to keep in house in order to protect their intellectual property. I think that by not sharing knowledge on these few most complex parts of the process there will be sufficient protection going forward. I have this view because of the rapid rate that innovation and product improvement that has occurred in the industry. By allowing China and Japan relying of reverse-engineering rather than innovating new designs Boeing will be able to stay significantly ahead of the competition.

    In addition, I think moving all production to the US is very risky from a political standpoint for sales. For example, Rolls Royce wins 80% of European order and 20% of US orders while GE wins 80% of US orders and 20% of European large engine orders. This shows how political orders can be given that every country wants to attract aerospace jobs to their economy. If Boeing takes a US only strategy I think Airbus will have an opportunity to become more competitive in Asia, which is a key growth market for aeroplane sales. Alternatively, this may have the effect of triggering an even more aggressive competitive response by the governments of China and Japan providing additional support for COMAC or Mitsubishi to develop their own planes more rapidly.

  4. Chris, interestingly, before I read your article, I posed the challenge you describe above to Maud’s article about Airbus. I fully echo Amar’s comment about ring-fencing the parts that provide competitive advantage to Boeing and this is something that Rolls-Royce is doing as well.

    Building on Amar’s comment on sales, when analysing the posed question about the supply chain of Boeing 797, a key aspect that needs to be addressed is where the demand for the so called “middle-market airplane” will come from. As it was revealed at the Paris Air Show earlier this year, one potential customer for the airplane is the Indian low-cost carrier SpiceJet [1]. Considering the “Make in India” initiative adopted by the Indian government as well as the fact that the Indian market is a growing one with a population of 1.3 billion [1], Boeing might not have a choice but to build supply chain and manufacturing capabilities in Asia if the company wants to keep winning orders against Airbus and stay relevant in the aerospace industry.

    [1] Jon Ostrower (2017), “World gets first peek at Boeing ‘797’” [online] Available at: http://money.cnn.com/2017/06/20/news/companies/boeing-797-paris-first-peek/index.html. [Accessed on December 1st, 2017]

  5. Very interesting lead on Boeing future growth strategy with the emergence of competitors!

    I do agree that Japan and China which have been the key suppliers for the airline industry as a whole have been reverse-engineering and could become a threat to the company like Boeing in the future. One interesting fact I found was that while Japan’s All Nippon Airways (ANA) will be the first customer that will start flying with Mitsubishi’s jet, 80% of the plane’s orders are from US regional airline companies including United, American and Delta. [1]

    If i think about how Mitsubishi will differentiate itself from the airplane giant like Boeing, the biggest pitch from Mitsubishi’s jet is that its airplane will save significant amount of money driven by 20% of less utilization of fuel. [1] This could potentially allow Mitsubishi to attract more customers who would continue to be very conscious about the operating cost. I would be very curious to know if Boeing is interested in innovating for more cost efficient jets to compete head to head against Japanese jet.

    One important factor to note is, however, that Mitsubishi only most likely start operating with the brand new jet in 2020. [1] Not only improving the financial structure, can Boeing really try to retain the key customers in the coming years? Can they also find the right suppliers with right capability to match with Boeing’s quality standard while driving cost efficiency?

    Jon Ostrower. “Sharp-nosed Japanese jetliner could be game changer for U.S. flywers.” CNN Money (Paris), Published June 20, 2017. URL (http://money.cnn.com/2017/06/20/news/companies/mitsubishi-regional-jet-paris-debut/index.html) Accessed on Dec 2017

  6. Really interesting read! One interesting dynamic here might be China’s interest in developing its own commercial aircraft industry for defense purposes. China recently created a commission to “increase integration between the nation’s military and industry”, with the apparent intention to “cultivate defence manufacturers in China similar to Lockheed Martin and Boeing in the United States.” [1] The gains from improving its commercial aircraft industry might also generate defense advantages, providing extra incentive for the country to develop direct competitors to Boeing.

    [1] Minnie Chan, South China Morning Post, “Can Xi Jinping’s arms production shake-up create China’s version of Lockheed or Boeing?”, http://www.scmp.com/news/china/diplomacy-defence/article/2065628/can-arms-production-shake-create-chinas-version

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