The Implications of This Week’s Airbus Announcement
Earlier this week, European based aerospace manufacturer Airbus made an important announcement to a Wichita Kansas audience. The company stated that it will double the $12 billion it now spends with U.S. sourced suppliers.
A syndicated Associated Press article appearing on many supply chain media outlets provides a summary of this event, and this is obviously great news to U.S. based aerospace suppliers. The article notes that according to an Airbus executive, “40 percent of what his company uses to build its planes comes from U.S. companies” and that U.S. based suppliers have been a source of innovation.
Some may view this announcement as an “in your face” affront to U.S. based arch-rival Boeing where the majority of its production capability is located along with a similar high dependence on U.S. based suppliers. Airbus has recently announced its intent to open a major U.S. based assembly manufacturing facility as well. The AP article notes the significance of Wichita, because Boeing announced intent to close its defense plant in the area with the potential loss of over 2100 jobs, not to mention some political promises to the local area related to a previous Air Force tanker program. Put all of that aside for a moment.
Our Supply Chain Matters aerospace readers should focus on two very important revelations within this announcement. The first is the admission that current backlog is “disturbingly healthy”, noting that it is hard to sell more airplanes when potential delivery times extend out in years. Finally, we have an open admission that the industry has a capacity problem that needs to be addressed. As noted in the report, along with that comes the need for expanded supplier capability and increased investments in production capability. That is a very positive development.
The second revelation was that aerospace is a global business with a global supply chain. In many cases, suppliers support production needs of Airbus, Boeing and other OEM’s. Some readers will possibly think what you are talking about, Ferrari, we as suppliers know that! You may know that, but in our view, aerospace OEM’s have been acting in a contrarian manner, at least until a couple of months ago.
When today’s more technologically sophisticated aircraft were conceived and designed with their use of more innovative components and composite materials, OEM’s shifted major component assembly production further down the supply chain in hopes of reducing supply chain costs. That shift implied increased global supply chain supplier collaboration, coordination and supplier support. That did not seem to be the case in the early days of programs such as the Airbus A380 and A350, or the Boeing 787 Dreamliner. Airbus was able to land huge amounts of customer orders and time-to-market advantage for its newly announced A380-neo aircraft after certain aircraft engine suppliers actively collaborated on a new engine design that could deliver substantial fuel burn savings.
Now that the entire industry is stressed with multi-year backlogs, the reality of dependence is becoming clearer. Boeing and Airbus have initiated high profile audits of their major supplier base to insure that suppliers can ramp to industry unprecedented high production ramp-up needs. That leaves suppliers with the challenge of having to respond to increased daily demands from each OEM. More importantly, the building uncertainty and looming financial crisis involving Europe has suppliers uncertain as to how much additional capacity and resources to invest, and whether OEM’s will “have their backs”. We have read accounts that indicate Boeing is urging some of its larger suppliers to be prepared for the possibility of absorbing some stressed smaller suppliers. In essence, the supply chain masters are descending on the same targets, perhaps without sensitivity to overall industry implications. We suspect that ongoing negotiations will continue to be dynamic as individual OEM’s come to realize how much dependence they really have on a particular supplier and its capacity situation
The Airbus announcement this week was indeed a watershed with positive implications.