Sometimes the Bear Eats You (Updated)

Naked Capitalism takes note of Boeing’s ill-conceived assay at outsourcing:

…the real problem with outsourcing, if you don’t think it through, is that it can wreck your business and cost you a bundle.

Case in point: Boeing Co. and its 787 Dreamliner.

The next-generation airliner is billions of dollars over budget and about three years late; the first paying passengers won’t be boarding until this fall, if then. Some of the delay stems from the plane’s advances in design, engineering and material, which made it harder to build. A two-month machinists strike in 2008 didn’t help.

But much of the blame belongs to the company’s quantum leap in farming out the design and manufacture of crucial components to suppliers around the nation and in foreign countries such as Italy, Sweden, China, and South Korea. Boeing’s dream was to save money. The reality is that it would have been cheaper to keep a lot of this work in-house.

The 787 has more foreign-made content — 30% — than any other Boeing plane, according to the Society of Professional Engineering Employees in Aerospace, the union representing Boeing engineers. That compares with just over 5% in the company’s workhorse 747 airliner.

Boeing’s goal, it seems, was to convert its storied aircraft factory near Seattle to a mere assembly plant, bolting together modules designed and produced elsewhere as though from kits.

The drawbacks of this approach emerged early. Some of the pieces manufactured by far-flung suppliers didn’t fit together. Some subcontractors couldn’t meet their output quotas, creating huge production logjams when critical parts weren’t available in the necessary sequence.

Rather than follow its old model of providing parts subcontractors with detailed blueprints created at home, Boeing gave suppliers less detailed specifications and required them to create their own blueprints.

Some then farmed out their engineering to their own subcontractors, Mike Bair, the former head of the 787 program, said at a meeting of business leaders in Washington state in 2007. That further reduced Boeing’s ability to supervise design and manufacture. At least one major supplier didn’t even have an engineering department when it won its contract, according to an analysis of the 787 by the European consortium Airbus, Boeing’s top global competitor.

I wonder if there may be more to Boeing’s experiment than just a desire to trim labor costs. Transferring such a large proportion of the design and manufacturing of the plane overseas may have been a marketing strategy as much as for reasons of cost control. We’re not the only country in the world that’s sensitive about imports and local partners make overseas sales easier at the very least. Sometimes they make them possible.

Still, I’ve seen it any number of times. Very few companies, even large companies, are really prepared to manage offshore outsourced manufacturing or operations and lowballing the extraordinary management costs is a commonplace.

Additional thoughts that come to mind are:

• The obvious impossibility of securing against technology transfer.
• I’m becoming increasingly skeptical about how we’re calculating GDP. If you lowball the costs of imported parts (or, worse, characterize them as intra-company transfer), assemble the components here, and slap on a big mark-up, couldn’t that end up overstating GDP pretty substantially? Especially when you multiply it times however many companies are doing that?
• Shouldn’t major defense contractors be treated somewhat differently than a company that manufactures hair extensions? There’s the whole dual-use thing. Presumably, Boeing’s plan is to sell some 787s to our military for one thing or another. I seem to recall that the military has purchased quite a number of C-19s, essentially 747-100s.
• Another things that many companies who start off-shore outsourcing don’t seem to be aware of is that there is no robust system of international civil law. Basically, there are some bilateral agreements. If your overseas contractor screws you over or delivers faulty material, you may have very little recourse.

Update

Felix Salmon comments on this same story:

Outsourcing is a bit like taking collateral from your repo operation and investing it in subprime credit. Most of the time, you make a small amount of money — and then, occasionally and unpredictably, you lose an absolute fortune. Boeing was picking up pennies in front of a steamroller, and ended up getting crushed.

Even more interesting are the comments to his post which repeat the speculation I’ve made above: that at least part of the reason for Boeing’s off-shore outsourcing was marketing gone awry.