Boeing Co.'s Wichita production plant holds a proud place not just in Boeing lore but in American history. A week after Pearl Harbor, mechanics began building the production line for the B-29 Superfortress bomber, even as workers constructed the assembly hangar overhead.
The heroic effort set the tone for a sprawling Wichita operation that for years has built the cockpits, nose and fuselage sections for some of Boeing's best-selling airplanes.
So why is Boeing selling it?
Because the Chicago-based aerospace giant believes modern economics dictate a new strategic model, one that may point to how business will be conducted in a global marketplace in the coming decades.
On Tuesday, Boeing announced that it will unload its plants in Wichita, Tulsa and McAlester, Okla., for $1.2 billion as part of a wrenching effort to restructure itself into a new kind of competitor. Onex Corp., a Canadian holding company, will buy the plants and vows to make them grow more quickly by taking on work from military programs, smaller aircraftmakers and even Boeing's European archrival, Airbus SAS.
Wichita will continue to supply parts to Boeing, but Onex believes it can cut costs by filling up its plants with fresh business from other planemakers.
"It's counterintuitive," said Seth Mersky, managing director of Onex. "You might have thought Boeing's biggest concern would have been don't do business with Airbus. But in fact, it's quite the contrary. They want this factory full, because a full plant will lower the cost for everybody."
Boeing's move is part of a vast restructuring that will forever change the way it makes airplanes. Using its newest plane, the 787 Dreamliner, as a template, Boeing is moving away from its legacy as a wrench-turning manufacturer. The new Boeing will be a master planner, marketer and snap-together assembler of high-tech jetliners.
A sprawling team of suppliers will do the rest, from detailed design to heavy manufacturing. Working in production plants from Japan to China to Italy and France, they will assemble huge airline sections, stuff them with everything from electronics to seats, then airlift them to Seattle. There, the massive parts must fit to tolerances within thousandths of an inch.
"The globalization, sooner or later, asked for this sort of change," said Vincenzo Caiazzo, chief operating officer of the U.S. operation of Alenia Aeronautica, Boeing's Italian partner on the 787 and also a supplier to Airbus.
"The new way has to be about partners. Just one company cannot have the responsibility for developing an aircraft."
Boeing doesn't have much choice. Over the last five years, Airbus has soared past Boeing to take the lead in the $50 billion-a-year commercial airliner market. Created 35 years ago, in part as a giant European jobs program, Airbus has made a dramatic ascent that has transferred billions of dollars in wealth to Europe and eliminated tens of thousands of U.S. jobs.
Boeing is attempting to fight back with the 787, originally known as the 7E7 and the first plane to be made chiefly of carbon-reinforced plastic.
Enlisting the hearts, minds and pocketbooks of a global consortium of industrial partners, Boeing hopes to cut costs and improve design, and in the process become the world's biggest aircraftmaker again.
This isn't just the typical relationship between manufacturer and subcontractor. Boeing will hold the partners to strict, fixed-price contracts intended to slash costs and boost productivity. It wants to draw on their expertise while passing off big chunks of the project's risk.
The partnerships won't work if Boeing can't give up its command-and-control style. Boeing is trying to do that, even though it has not reached a final contract with several of its major partners, months after the first deadline passed. A deal is coming soon, all parties say, but the delay reflects the partners' ongoing concerns about the enormous financial risk of a development project estimated to cost $10 billion.
There is a longer-term risk too. Engineers working on the 787 program fear that the mass outsourcing of design work is causing a brain drain. Others fear the export of know-how might create a powerful new competitor one day.
Shake it up
Shaking up Boeing is exactly what Harry Stonecipher, the company's combative chief executive, has in mind.
Stonecipher has been frustrated by a lack of urgency about the need for massive change almost from the day he joined Boeing in 1997, after selling defense contractor McDonnell Douglas Corp. to Boeing.
Boeing was a mess, brought on by an overly exuberant effort to thwart Airbus. Boeing's rickety production lines shut down when they could not keep up with the flow of orders.
Stonecipher soon found that the halt in production merely hinted at deeper troubles. The chief flaw: Nobody at Boeing seemed to know what it cost the company to design and build an airplane. It was no wonder Boeing's planes cost so much more than comparable Airbus models.
"We needed to run Boeing like a business rather than just an airplane factory," Stonecipher said. "I used to make the statement, `Nobody here knows what anything costs, and they don't seem to care.'"
Early in his career, Stonecipher had learned to cut costs as head of General Electric Co.'s jet-engine business under legendary GE Chief Executive Jack Welch. At Boeing, he turned to commercial airplane chief Alan Mulally to streamline production. After the Sept. 11 terrorist attacks sent the airline industry into a tailspin, Stonecipher urged Mulally to hunker down and slash 39,000 jobs, permanently cutting Boeing's commercial airplane workforce almost in half.
But Boeing needs more than cost cutting to beat Airbus. Looking across the Atlantic, Stonecipher eyed a competitor built on a model of sharing work, know-how and risk among its European co-owners. Airbus also benefited from government subsidies that Boeing contends have totaled $15 billion over the years.
The unique arrangement has helped Airbus introduce a full line of airplanes, many of them in the last decade. By 2003, after years of winning sales competitions with cutthroat pricing and creative dealmaking, Airbus finally wrested the claim of top aircraftmaker from Boeing.
And Airbus isn't letting up. Last month it rolled out the first A380, a double-decked, superjumbo aimed squarely at Boeing's flagship, the 747. Airbus plans to match Boeing's 787 too. Late last year, Airbus executives, who had publicly scoffed that there was no market for Boeing's plane, reversed field and announced plans to launch a rival in the market for midsize, high-efficiency aircraft.
In contrast to Airbus' permanent industrial alliance, Stonecipher set out to cobble together a flexible consortium with a more bottom-line purpose. The business from Boeing will boost the partners' productivity. This should help them shave costs, pass some savings to Boeing and enable everyone to make money.
Wichita illustrates the point.
"If Wichita belongs to Boeing, what do they build?" Stonecipher asked. "Boeing pieces. But if Wichita belongs to someone else, what can they build? Boeing pieces, Airbus pieces, Lockheed pieces. Everybody's pieces."
With more output spread across the same fixed costs, Onex can afford to lower prices yet still make money. It also plans to invest $1 billion in the operation to boost efficiency and likely will cut labor costs.
"What we want is someone who will give us a guaranteed reduction in unit costs," said Stonecipher. "If we showed you some of these contracts, we have cost reduction that goes down year by year by year."
Learning to let go
One symbol of change at Boeing is the company's new, refreshingly concise way of describing to partners the work that must be done.
In the past, Boeing's work orders ran to thousands of pages and required suppliers to "build to print." In other words, build exactly as specified. No variations, no exceptions.
On the 787, work orders come in dozens of pages. They describe only what the given part or system should do, not how to build it.
The partners each have major sections to construct: The Wichita plant has the nose. A joint venture of Italy's Alenia Aeronautica and Vought Aircraft Industries in Dallas has the tail section. Three Japanese industrial giants--Mitsubishi Heavy Industries, Kawasaki Heavy Industries and Fuji Heavy Industries--will build the wing and center section of the plane. A host of smaller suppliers provides everything from air-conditioning systems to landing gear.
The partners will stuff their sections with electronics, navigation and climate systems, and will add seats and other creature comforts. Many of the parts will come from China, France, Australia, England and other places. The partners will pack their stuffed sections into two modified 747 airplanes and airlift them to Everett, Wash., a Seattle suburb.
In Everett, a skeleton crew of Boeing mechanics will bolt the sections together in three days, lightning speed by aerospace standards. Boeing's fastest final-assembly process, the 737 line, takes 11 days.
For the partners, the new system gives them more power to decide how to do their work. That, in turn, allows them to squeeze profits from the process as they see fit.
"Now you are an actor in the development, not just taking orders," said Alenia's Caiazzo. "If you give an order, it is different than if you find a solution together."
There is a downside for partners to all this sharing: In exchange for the independence, they have to shoulder more risk. But most partners say they prefer the trade-off.
That's the case at Hamilton Sundstrand. Boeing has commissioned the United Technologies Corp. unit to provide the 787 with a power plant that can produce enough electricity to light a small town. It also will devise the plane's cooling and air-compression systems.
Hamilton saw Boeing stagger at the start, seemingly unwilling to relinquish control of key decisions, but likes how the partnership is working now.
Tim Morris, the president of Hamilton's Rockford-based aerospace power-systems division, recalled how Boeing engineers at the first meeting unilaterally changed a design, just as they had in the old days. Hamilton engineers balked at the needless expense of Boeing's solution. Recriminations flew. The meeting collapsed and it took several days to get things back on track.
Today, the relationship runs more smoothly, said Bob Guirl, who is in charge of Hamilton's 787 work. Boeing has given all its major partners a vote on matters that affect them. Engineers from Japan, Italy and elsewhere are stationed in Seattle and participate in top-level decision-making. Others routinely hook up via teleconference from around the world. A robust, computerized design system enables engineers around the globe to meet and propose changes on the spot.
"In my Dad's time, you'd all be standing around the same drafting table," Guirl said. "Now, there's one drawing, a single model, but it is being made by a group of companies around the world."
The deeper relationship pays off. As the supplier of both the air-conditioning and refrigeration systems on the 787, Hamilton figured out trade-offs between them that cut the size of each by nearly 20 percent. That means less weight, fewer parts and lower costs. In the electrical system, Hamilton substituted a smaller, solid-state circuit-breaker box for a bulky mechanical one. That will free up space under the passenger deck, creating room for revenue-producing cargo.
The changes, which benefit Hamilton and Boeing, would not have happened if Hamilton merely were building "to print," as in the old days.
"They have to agree to give some of it up," said Guirl. "And they have to be comfortable with that."
For Vought Aircraft Industries in Dallas, being a risk-sharing partner carries its own set of burdens. Vought formed a joint venture with Alenia to build the plane's aft section and both will have to pony up hundreds of millions of dollars for the tools needed to build their sections. And since the use of carbon-fiber composite in the 787 is so novel, the original plan called for the partners to pay to invent the tooling.
Early in the process "we started running the numbers, and it was a really bad business deal," said Vern Broomall, chief technology officer at Vought. The hurdle was so high, Vought assumed that Boeing would have to dial back on the composites and other complex aspects of the plane's design.
But after Boeing eventually agreed to share the cost of devising a radically new set of manufacturing technologies, the math made more sense.
"We found it a very difficult case to make, because it had never been done before," said Tom Risley, Vought's chief executive. "But we've gotten to an acceptable answer. I have seen a real change in the way Boeing is working with suppliers."
A culture clash
Boeing's biggest challenge has been working across cultural barriers. This came to light last summer when Boeing flew a team of design engineers to Nagoya, Japan, to focus on a seemingly mundane task: working together to eliminate parts from inside the 787's wing. The idea was to mix groups of wing specialists from Seattle and Japan, so they could come up with a solution neither would develop on its own.
But as a moderator tried to jump-start creativity, he struggled against the tide. Engineers from Boeing sat on one side of the U-shaped table. Japanese engineers sat on the other. The space between them looked as forbidding as an empty dance floor.
Ideas bubbled from the Americans. Middle-aged men in polo shirts, they scribbled thoughts on Post-It notes, then bustled to press them onto the front wall. The notions sprouted like leaves on a canary-hued tree.
The Japanese barely spoke. A pair of jumpsuit-clad Mitsubishi engineers sat with eyes closed, either concentrating deeply or sleeping lightly.
The more the Americans prattled on, the less the Japanese had to say. If this was brainstorming, the Japanese didn't get it.
"This is new culture for us," said Masnori Yamaguchi, a Mitsubishi engineer, wrestling a bit with his second language. "At this time, I'm always shocking. It's very culture shock."
Boeing's Mark Jenks, a former space-station designer in charge of developing the 787's wing, explained that the American style is to dive into problems and attack them almost helter-skelter. That creates wasted effort, but it also leads to innovative solutions.
The Japanese, on the other hand, are more deliberate. They prefer to plan carefully and create a targeted series of tests to arrive at a high-quality solution.
A blended approach may work best. For instance, Boeing quickly designed a slick architecture for the 787's wing box, while the Japanese developed a way to minimize defects. Working together, Jenks said, "leads to both innovative solutions and ones that are practical in a manufacturing environment."
With its overseas partners, Boeing also is counting on a far more measurable payoff: government support for the partners' work.
The Japanese companies, which are building an unprecedented 35 percent of the 787's airframe, are expected to receive up to $1.6 billion in Japanese government financial support. Investing in foreign countries also helps sales efforts there. It's no surprise that Japan has ordered 80 787s. Indeed, Boeing's robust use of Japanese suppliers over the decades has made the country basically off limits to Airbus.
While the partnerships generally are working well, Boeing has not reached a final contract with all the partners. Instead, it is working under less-binding memoranda of understanding.
What degree of risk
Pricing and risk-sharing have been the main sticking points. The Japanese partners threatened to walk out last spring unless they received a 25 percent boost in payments from Boeing--and did get an increase, though not in that range.
Later in the year, the talks focused on a potentially more serious issue, the amount of risk that each partner must bear as the program proceeds.
One example: Boeing for the first time is asking partners to bear the cost of meeting Federal Aviation Administration safety certification on the parts of the airplane they build. Failure to win quick FAA approval could lead to costly redesign and manufacturing changes for a partner.
The Japanese also need to buy the major equipment to build the airplane--machinery that rolls out ribbons of uncured composite fabric, the forms that give the fabric shape, and the huge ovens called autoclaves that cook and harden it.
Takashi Fujimoto, head of airplane engineering for Mitsubishi Heavy Industries, is pushing to do testing early, to minimize costs and keep on schedule.
"If we find the problem early, we can have many countermeasures," Fujimoto said. "If some problem happens late, we cannot buy the time." Costs rise, too, he added.
With contract talks dragging past their initial deadline last year, other elements of Boeing's plan have been put in limbo. In Japan, the government-backed International Aircraft Development Fund will not move ahead with loans until the contract is complete.
"The cash flow is very severe without government support," said Norisha Matsuo, president of Fuji's aerospace company. If it doesn't come through, Fuji likely would renegotiate its deal with Boeing, he said.
At one point last summer, Fuji balked at buying the capital equipment needed to test the parts it is building for the 787's wing section. It shipped the work back to Seattle.
Problems deepened from there. Fuji engineers from Japan who needed to come to Seattle to do the testing work could not obtain visas, due to restrictive new U.S. immigration policies.
Mike Bair, the wiry and intense engineer who heads up the 787 program, has worked hard to keep the engineering teams overseas and in the U.S. working together, even without a contract. They have moved forward, keeping tabs on their costs, investments and contributions as work shifted among them, planning to tally it all up later on.
Bair said the ongoing talks are not affecting the partners' work: "The practical impact is essentially none."
But outsiders say Boeing must meet its new March 31 deadline or risk seeing the program lose momentum.
"The first quarter of 2005 is key," said Richard Aboulafia, analyst at the Teal Group, an aerospace consultancy.
Inside the partnership, the focus is on another impending deadline: The date in May by which Boeing is set to finish principal design of the airplane. That will mark the point when Boeing lets the partners take over detailed design of the parts and systems that they will build.
This will be the ultimate test of Boeing's drive to become a systems integrator, not a plane builder. And it makes Bair a bit nervous.
"There's a real danger that we're going to micromanage it," Bair said. "Once we get them to the point that we do have a plan that will work, then the real challenge here is backing off, letting everybody do their jobs without us doing it for them."
No turning back
Inside and outside Boeing, concern is rising that the company could lose its capacity to build an airplane. It might also create a new competitor that one day could take away its market share, as Airbus did. Boeing executives dismiss this notion, saying industry economics argue against it.
"It requires the wealth of nations anymore, over several decades, to establish yourself to the point where you can be competitive. Besides, the world only needs two providers," said Walt Gillette, the chief engineer on the 787 program.
Most economists accept the economic argument. But that hardly means Boeing's position is secure. The Japanese might try to oust Boeing to become one of those two players. And China, which is building the rudder for the 787 in the western industrial city of Chengdu, has launched a long-term program to develop a civil aerospace industry, for a mix of business and nationalistic reasons.
Previous contracts from Boeing and other plane builders have given the Japanese aerospace industry the know-how to build other parts of a commercial jet. Until now, the key missing piece was the wings themselves. With their 787 partnership, the Japanese are learning how to do that too.
"Our company objective, not near term, but long term, is to develop a commercial airplane accepted in the market," said Shoji Aoki, vice president of marketing at Kawasaki's aerospace unit. "But not alone. With partners."
Boeing has a manual that describes how to invent new airplanes. The manual, which runs thousands of pages, is locked away at the commercial airplane business' headquarters outside Seattle.
In the past, Boeing had plenty of engineers who knew how to design airplanes without reading the manual. But with Boeing ceding so much know-how to partners and laying off so many of its own engineers, that won't always be the case.
The rash of job cuts has boosted the average age of a Boeing engineer to 47 years old, up 9 percent in three years. And Boeing could find it difficult to restock with new talent quickly should it have a need.
"You can't just bring in a kid, because there is so much of this work I would refer to as tribal knowledge," said avionics engineer Dave Patzwald, a 31-year Boeing veteran who recently became secretary of the engineers union.
Even engineers who have jobs in the 787 program say Boeing's partnering strategy is testing their nerves.
"We're betting the commercial airplane company that this will be a success," Patzwald said. "If it's not, that will be the end of the commercial airplane group."
Boeing believes it is creating a new capability that's as valuable as the capacity to design a wing flap or strut--that of maestro of design and construction. There's no going back, and no desire to do so.
Such capabilities, Bair said, are as valuable today as drafting tables, parts shops and fabrication plants were in years past.
"We are generating the unique capability to manage this extended partner base," Bair said. "All this angst we're going through with our partners? When we're done, we will end up with the capability unique to our company, one that we would not have had."
And one that creates enough value, Boeing hopes, to keep it in the battle with Airbus for years to come.Copyright © 2015, CT Now