Knowledge Capital Writedown at Boeing?

According to a story from the Seattle Times, Boeing’s Dreamliner is bogged down in problems.

A top Federal Aviation Administration (FAA) official 10 days ago warned Boeing that without further proof of the plane’s reliability, it won’t be certified to fly the long intercontinental routes that airlines expect it to serve.

Meanwhile, on the production side, one veteran employee on the 787 said he’s witnessing “the perfect storm of manufacturing hell.”

The global supply chain is at a standstill, and outside the Everett factory the rows of partly finished jets will take many months to complete.

But really, what’s going on here is a breakdown of Boeing’s outsourcing strategy, and a possible breakdown of Boeing as well. As the story notes,

Boeing has bet its future on the 787, which made its maiden flight one year ago. The company aimed to reduce the cost and risk by outsourcing an unprecedented share of manufacturing and design work to partners around the globe.

It’s the first new Boeing jet in more than 15 years, and the first airliner built largely from light, tough carbon-fiber-reinforced composite plastic. And it’s been a marketing blockbuster: Despite a total of 120 cancellations, Boeing still has 846 orders.

Yet the 787 has run into more trouble than any previous Boeing jet.

The company’s original internal target for its own development costs was $5 billion. But with yet another delay, several Wall Street analysts estimate that fixing the litany of manufacturing problems, plus paying penalties to suppliers and airlines, has piled on an additional $12 billion to $18 billion.

In the short run, outsourcing may have increased the risks and costs rather than decreased them. Part of the problem is low quality of parts from partners who were supposed to shoulder a lot of the burden.

Horizontal tails poorly built by Alenia in Italy are still being reworked. With the workmanship on the tails varying from one plane to the next, mechanics have to painstakingly customize the fixes plane by plane.

These problems can all be fixed, at a cost.  In the longer term, the outsourcing strategy may be exposing Boeing to “knowledge capital writedown.”  In a long Harvard Business Review blog post about a year ago,  Dick Nolan, a professor at the Foster School of Business at the University of Washington  wrote:

But there’s a dark side to this story. In trying to keep down Airbus, Boeing may be creating a much more dangerous competitor, one that likely will come from Japan, China, or India — countries that will own the markets for new airplanes in the near future and are in various stages of building their own commercial-airplane-manufacturing industries.

To finance the development of the 787 and secure global orders, Boeing agreed not only to outsource an unprecedented amount of the plane’s parts to partners in Europe, Japan, and China, but also to transfer to them unprecedented know-how. Before the 787, Boeing had retained almost total control of airplane design and provided suppliers precise engineering drawings for building parts (called “build to print”). The only exception was jet engines, which have long been designed and manufactured by suppliers such as GE, Rolls-Royce, and Pratt & Whitney.

The 787 program departed from this practice. Boeing effectively gave Tier 1 suppliers a large part of its proprietary manual, “How to Build a Commercial Airplane,” a book that its aeronautical engineers have been writing over the last 50 years or so. Instead of “build to print,” Boeing provided suppliers with performance specifications for parts and components and collaboratively worked with them in the design and manufacturing of major components such as the wing, fuselage section, and wing box

The first shoe may have just dropped, as  Commercial Aircraft Corp of China has just taken the first set of orders for the C919, a potential competitor to the immensely profitable Boeing 737.

China’s new competitor to Boeing’s 737, the C919, landed 100 orders in the first day of the Zhuhai Air Show in China on Nov. 16, including orders from GE Capital Aviation Services, based in Stamford, Conn., as well as several Chinese carriers.

The Chinese carriers include Air China, China Southern, China Eastern and Hainan Airlines.

All of these have been customers for Boeing’s 737, with Air China ordering 20 of the aircraft during 2010. The fact that the C919 is now winning orders raises the question of to what degree the Chinese aircraft will now start replacing 737s and A320s for new orders.

Knowledge capital writedown.

Comments

  1. You’ve got it exactly backwards. Boeing outsourced construction tasks not because they were hard, but because they were easy. They felt that assembling wings & fuselages was a commodity business- and that they should focus on the high-margin aspects, such as designing an all-new plane, certifying it, selling it to airlines.
    The notion that Boeing has to worry about competitors because they helped build a fuselage, is as silly as suggesting that Apple has to worry about iPhone competitors in China because they assemble the iPhone circuit boards.

    • Mike Mandel says:

      Well, you certainly have the theory right. But the suppliers are not just assembling wings and fuselages–they are designing them, which is where the knowledge capital is created.

      • Perhaps I’m completely mis-informed, but AFAIK, Boeing has been a pioneer in terms of building a plane from large-scale composite components. They are years ahead of everyone in the industry in this, as well as other innovations, like more “liveable” plane interiors, quick-change interiors, interchangeable engines (from different suppliers). They also essentially invented the “large twin-engine” segment, which is much more fuel efficient than older designs like 747 and 380.

        If anything, Boeing has invested TOO MUCH, too early in R&D – composites and other construction techniques have proved more challenging than thought and should (perhaps) have been researched more before beginning large scale design/construction.

        The first 737 flight was in 1967. The basic technology for the building a modern passenger jet is widely understood. Boeing correctly understood that they had to move upscale to continue to extract rents from their knowledge capital.

        This same process has been going on for at least 60 years, as US companies continue to innovate and older, less profitable, commodity technology moves off-shore.

      • Mike Mandel says:

        Boeing has been running ahead of a roaring wildfire, and the fire is catching up.

  2. They can just go to all those governments they have made deals with to bail them out. I am not at all surprised. They should have been doing much more research and development investment on their own even before this. They don’t even develop concept planes before committing to a plan. Even easy tasks are not easy when undertaking a new material. Much of their knowledge becomes useless, because while they know what is necessary, they have little idea how to accomplish it.

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