The Boeing 787 Dreamliner is aptly named. When it lifts off the runway at PAE Paine Field in Everett, Wash. for its first test flight this summer, it will carry the dreams of more than 900 small subcontractors that helped create it. With 584 copies on order as of June, it's the fastest-selling new plane in the history of commercial aviation and will keep Boeing and its suppliers busy for a decade or longer.(The original article has several examples of the smaller subcontractors taking expanded roles in the R&D of the mighty 787.)
For some subcontractors, catching a ride on the 787, which rolled out Sunday, will be their big break. Missing the flight has already put one would-be contractor in peril: Thermion Systems International (See "Iced out of a deal with Boeing?"), which thought it had a deal to supply de-icing equipment, says it was elbowed out of the program and is struggling to survive.
The 787, a midrange cruiser, is packed with technological firsts, including the pioneering use of composites in a commercial liner's airframe. Equally remarkable is the way in which Boeing has structured its manufacturing process, bestowing unprecedented opportunities on small suppliers and ushering in a new era for the aerospace industry.
Boeing says 70% of the 787 has been outsourced; rival Airbus is relying on subcontractors for about 50% of its A350 plane, now in development. "This farming-out of the airplane's construction is revolutionary," says Richard Aboulafia, vice president at Teal Group, an aerospace consulting firm (tealgroup.com).
For decades, Boeing has outsourced a portion of the work on its planes, and its reliance on sub-contractors has risen with each succeeding generation of aircraft. But with the Dreamliner program, the aerospace giant has reached a point where its role has changed. It now functions less as a manufacturer than as a project manager, supervising its first- and second-tier subcontractors, each of which may rely on scores of more specialized subcontractors. Boeing handles final assembly, marrying the cockpit, fuselage, wings, and tail sections, which are completed elsewhere and delivered to its plant. "Boeing's objective is to get these 'supplier partners' to do as much heavy lifting as possible," Aboulafia says. "That gives small businesses more responsibility."
Boeing says it can't supply a full list of subcontractors that are working on the project, but industry analysts estimate that their numbers are greater than the 900-plus that contributed to the 777, which began construction in 1990. Boeing spokesperson Loretta Gunter confirms that the processes used to construct the two planes are markedly different. "We have fewer first-tier subcontractors on the 787 than we did on the 777 because each is providing bigger components," she says. "Likewise, many of them are contracting out bigger jobs to their subs."
Boeing's new manufacturing template has captured the imagination of the aerospace industry. Recently officials from Airbus told analysts that the company will up its outsourcing to become more competitive. "For any company that wants to be successful in aerospace manufacturing, Boeing's new strategy is the way forward," says Aboulafia. "Which is ultimately good news for small business."
It's already good for Kreisler Manufacturing in Elmwood Park, N.J. Kreisler started out as a jewelry manufacturer, but when things got tough in that business, management decided its metal-finishing skills could be transferred to the aerospace industry. To cut costs and get into the European stream of the global outsourcing system, it invested in a new 52-employee machine shop in Kraków, Poland. "Our presence in Poland made us competitive from a global standpoint," says Brad Barnes, 53, Kreisler's director of sales and marketing.
Kreisler became part of the Dream-liner program through Rolls-Royce, which was hired to develop engines for the plane. Rolls contracted with multinational conglomerate Parker-Hannifin to make the fuel and hydraulic-flow systems. Parker-Hannifin hired Western Filter Group, a company based in Valencia, Calif., to supply the filtration equipment for the 787's hydraulic system, and it gave the order for fuel-manifold and associated tubing for the engines to Kreisler. As part of that agreement, Kreisler received certification from Rolls-Royce for various types of welding work. Having demonstrated its expertise on the 787, Kreisler is prepared to take on more projects for Rolls-Royce, which would become the company's first European customer.
Not only is Boeing pushing responsibility out to more subs, it is also demanding more from them. Many have created new systems and products, rather than simply filling orders to Boeing specs.
Green Hills Software of Santa Barbara, for example, won the assignment to write the operating system for the on-board flight-control computers. That's the kind of critically important work usually reserved for tier-one contractors. Green Hills was hired by tier-one contractor Honeywell, which specified Green Hills as part of its work for Boeing on the flight-control system. "Honeywell doesn't specialize in operating systems," says Dave Chandler, senior vice president of sales for Green Hills. "It's easier for us to handle because that's the only thing we do."
American Panel, based in Alpharetta, Ga., is another small company entrusted with critical technology and another small player whose product was identified specifically by a larger contractor when dealing with Boeing. It supplies LCD displays that go into instrumentation systems built by Astronautics Corp. of America. "Being able to create a display that's readable in bright sunlight is a very narrow niche," explains Jim Niemczyk, vice president of business development for American Panel. He's convinced that riding in the 787 is just the start: "Once our screen is on the latest, greatest plane, Boeing is going to want to retrofit it on all of them," he says...
Nest up is a more arcane note in the FT on how some dastardly CEOs and CFOs are coming up with elaborate hand signals to pass financial information to their pet analysts to defeat new legislation on insider trading:
US executives have been able to secure more favourable research ratings for their companies from investment banks by bestowing professional favours on Wall Street analysts, according to new academic research to be published on Friday.
The study found that by offering analysts favours, ranging from recommending them for a job to agreeing to speak to their clients, executives sharply reduced the chances of a downgrade in the aftermath of poor results or a controversial deal.
The unprecedented research, carried out on some 1,800 equity analysts and hundreds of executives, suggests that the radical regulatory reforms of the past few years have failed fully to eradicate conflicts of interests on Wall Street.
“Favour-rendering to analysts is evidently widespread and . . . it seems to be compromising the value of the guidance these experts provide to investors,” said Michael Clement of University of Texas, who co-authored the study with James Westphal of University of Michigan.
Analysts’ representatives said that accepting favours such as those described in the study – which also include putting analysts in touch with executives at other companies and advising on personal matters – was unethical.
“Activities such as these are in clear breach of our code of conducts and standards. Analysts should guard against both actual conflicts and the perception of conflicts,” said Kurt Schacht, director of the Center for Financial Market Integrity at the CFA Institute, which represents more than 80,000 analysts and fund managers.
But, according to the study, conducted between 2001 and 2003 and to be presented to next month’s annual meeting of the US Academy of Management, nearly four out of six Wall Street analysts admitted receiving favours from company executives.
The frequency of favours increased in line with the shortfall between the company’s earnings and market expectations – a crucial determinant of analysts’ stock ratings.
The favours were instrumental in securing better treatment from analysts. Analysts who received two favours were 50 per cent less likely than colleagues to downgrade the company after poor results, the academics say.
The most popular favour, mentioned by nearly a third of respondents, was putting an analyst in touch with an executive at a rival firm, followed by the offer of career advice, and agreeing to meet with the analysts’ clients.
Southern Europeans have long had a reputation for accompanying their talk with theatrical hand gestures. But Italian and Spanish chatterboxes could be facing competition from an unlikely quarter: US corporate executives.
Wall Street observers say there is anecdotal evidence that some chief executives and chief financial officers have begun using coded hand movements to pass on additional financial information to particular analysts.
The trick, akin to the covert advice given to tennis players from coaches in the stands – and just as illegal – could be designed to get round a ban on the selective disclosure of price-sensitive information to “favoured” analysts.
Known as Regulation FD – for “fair disclosure” – the rule was introduced seven years ago by the Securities and Exchange Commission to clamp down on insider trading.
“We have heard of the use of hand signals and gestures to get round Reg FD,” says Kurth Schacht, director of the Center for Financial Market Integrity at the CFA Institute, the professional body for analysts. Mr Schacht declined to name specific instances. But if he is right, regulators will soon have to police the hands, as well as the lips, of corporate executives.