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.

4 comments… add one
  • I wonder how it is possible to ensure safety under such conditions? If Boeing doesn’t get it’s shit together, the real cost will be in lives and lawsuit-related losses.

  • I have some thoughts on your additional thoughts:

    -First, well, details of the technology will always leak, but the technology for airplanes and most other things have gotten so complex that linking things together is so difficult it takes almost as big an effort as developing the entire technology in the first place. I write this as a former R&D person for a formerly major semiconductor firm.

    -Second, I unfortunately cannot remember where I read it, but recently there was an assertion we are supposedly underestimating GDP because companies like Apple are based in the US and despite the fact they manufacture their products overseas they derive the benefit of the sales, and being US companies, they contribute to the the US GDP. I’m not sure that argument is valid, so I leave it to those more knowledgeable to fight it out.

    -A thought not necessarily based upon your final thoughts: in the end, if more and more is outsourced from the US, who within the US will be able to afford to buy the products and services that US companies provide? No jobs mean no income means no air travel means fewer US airlines buying fewer Boeing planes in this particular case, but in other cases as well. Fewer people making semiconductor chips means fewer people with income to buy the cell phones and computers and TVs and other products that use the chips.

    It is likely not what was really said, but purportedly Henry Ford (the first) said he raised the salary of his employees so that there would be people who could afford the cars he was making.

    There are often times when I feel that all the outsourcing by US companies will be viewed in the future as cutting off their noses to spite their faces. They get rid of “high expense” employees without a thought to who can afford to buy what they make, and in the end, suffer for it because they were not insightful enough to make the connection.

  • Drew Link

    I only have time for a quick hit, as my day started at 3:45 AM for a 6AM flight to Charlotte and I’m tired.

    Naked Cap, and Dave have hit the nail on the head. I know people are probably tired of hearing “we have a company”………but we do, who supplies the Dreamliner. Local content vs Dreamliner marketing was/is an issue. And control of this far flung supplier arrangement is just holy hell.

    Our company stands to increasee EBITDA by 25% if the damned thing could ever get going in earnist………………….but we aren’t counting our money.

  • Roy Lofquist Link

    The A380 mashup, where the wiring was too short, was caused by two different CAD systems in Germany and France.

    My son is the manager of a software company that farmed the programming out to India. I sent him a photo of the electrical wiring of a city in India – looks like Shanghai. His reply? “Their code looks just like that”.

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