Boeing 787: US's Dreamliner or Nightmare-Liner? Who Will Ultimately Win The Aerospace Race: US, Europe, China, or Russia?

BOEING 787 USS DREAMLINER OR NIGHTMARE-LINER?
Who will Ultimately Win the Aerospace Race: US, Europe, China, or Russia?
Copyright 2013 Exolus. All rights reserved..
Contents
Dreamliner 787 Overly Globalized? Outsourced? Boeings Evolution of Globalization/Outsourcing Aircraft Dreamliner 787: Over-Globalization of Frame Production? Boeings Aggressive Global Sourcing Strategy Illustrative China Case Highly Complex Global Supply Chain Leads to Major Challenges
Airbus Globalization Airbus 350XWB Globalization Strategy Airbus A350XWB - Frame Production Concentrated in Europe Airbus 350XWB: Globalization of Supply Chain China and Russias Unique Models: Glocal-ization Strategies China Market: Foreign Investors: hunger for China Opportunity Road Forward: China Focusing Initially on Single-Aisle & Regional Jets Chinas Glocalization Strategy China / Russia Partnership for Aircraft Development/Production? The Ilyushin Il-96 Considerations for the Future of Aircraft Production Competition in the Global Supply Chain Immense USD100 billion
2 3 4 5 11
17 18 19 22 29 30 41 42 45 46 48 49
1
Dreamliner 787 Overly Globalized? Outsourced?
1. Boeings Evolution of Globalization/Outsourcing Aircraft Production/Development Parts built by the IAM union of Boeing workers
1967 (737 Classic) 2009 (787 Dreamliner)
1969 (747 Series)
Source: A Wing and a Prayer Outsourcing at Boeing, Reuters
1.1 Frame Production: Overly-Globalized? Overextended?

CHINA
COMPANY ENGINEERS
SOUTH KOREA
COMPANY ENGINEERS
JAPAN
COMPANY ENGINEERS
UNITED STATES
COMPANY ENGINEERS
Chengdu Aircraft Industrial Group:

Rudder
Korean Air NA
Wing tips Tail Cone
NA
Kawasaki Heavy Industries:

Midfuselage section
Spirit Aerosystems (Wichita, Tulsa): 670 190

Nose section (Wichita, Kan) Engine pylons (Wichlta)
Shenyang Aircraft Group:

Vertical fin Leading edge
NA
AUSTRALIA
COMPANY ENGINEERS
Fixed trailing edge
Fixed leading edges (Tulsa, Okla.) Movable leading edges (Tulsa)
Boeings Hawker De Haviland unit

Movable trailing edges
Fuji Heavy Industries:
130
80
Center wing box fuselage section
Vought (Charleston): (Dallas):
100 300
Hafei Aviation Industries:

Wing to body Fairing panels
NA
Mitsubishi Heavy Industries:
250
Rear fuselage sections (Chovlestan, S.C)
Goodrich Aerostructures:
Inboard flaps
160 95
Nacelles (Chuta Wista, Caly)
CANADA
COMPANY ENGINEERS Wing to body fairing assembly
ENGLAND
COMPANY ENGINEERS wing box
Boeing:
Vertical fin (Boeing Everett plant):
Boeing Canada (Wing-peg): 60
Messier Dowty
30 Total Engineers: 250
TOTAL ENGINEERS:
Plus 200 support staff (Everett)
4,925
Main landing gear
Aft pylon fairings Nose landing gear Wing to body fairings
FRANCE
COMPANY ENGINEERS COMPANY
ITALY
ENGINEERS
Latecoere
NA
Alenia
770
SWEDEN
COMPANY ENGINEERS
Main landing gear doors (body) Main landing gear doors (wing)
Saab
Aft cargo door Forward cargo door
30
Aft passenger doors Forward passenger doors
Midfuselage sections Horizontal stabilizer
Numbers of engineers are projections for the end of 2005 made by Boeings first -tier partners, and may not include all engineering specialties. Production workers are not included.
Source: Boeing
1.1 Systems Development/Production: Overextended Risk Sharing Partnerships?

Highly Diverse Group of Partners Integrated in 787 Collaborative Development
SYSTEMS
Air Conditioning /Pressurization Autoflight Communications Electrical Power Equipment/Furnishings Fire Protection Flight Controls Fuel Hydraulic Power Ice and Rain Protection Indicating/Recording Systems Landing Gear Lights Navigation Oxygen Pneumatic Vacuum Water/Waste Diagnostic and Maintenance Information Systems Nitrogen Auxiliary Power Cargo and Accessory Compartments
Source: Boeing website
1.1 Global Sourcing: Overextended? Overly-Globalized?

Illustrative Boeing China Sourcing Activity*
Hafei Aircraft Industries 787 upper and lower body panels for wing-to-body fairings, single source; vertical fin parts
Quick Electronics Print hardware, servers in support of Boeing IT hardware Baoji Group Ltd. Titanium ingot, plate & sheet Hong Yuan Aviation Forging & Casting Industry Company 747 titanium forgings since 1984 Xian Aircraft Company 737 Next Generation vertical fin 747 trailing edge ribs, floor beams, detailed parts, and subassemblies 747-8 trailing edge flaps
Harbin Aircraft Industries Shenyang Aircraft Industries

Beijing
Shenyang Aircraft Company 737 aft fuselage subassemblies 787 vertical fin leading edge, single source BHA Aero Composites Company, Ltd. 737 composite panels and parts (flight deck, close out panels, dorsal fin, wing to body fairing, cover panels, wing fixed trailing edge, wing fixed leading edge, tail cone, interior parts, secondary composite structures) 747 miscellaneous composite parts and structures 767 and 777 wing fixed tailing edges and dry bay barriers; empennage panels, interior parts, secondary composite structures 777 flight deck interior panels 787 trailing edge panels for the vertical fin, interior parts, secondary composite structures Shanghai Aviation Industry Company 737 horizontal stabilizers Taikoo Aircraft Engineering Company Ltd. (TAECO) 747 parts, subassemblies 747 boeing converted Freighter modification program * June 2007 Source: Boeing, About us: Boeing in China.
Shenyang
Shaanxi Aircraft Company Xian Aircraft Company

Chengdu
Tianjin
Hanzhong
Chengdu Aircraft Industries 737 forward entry and over-wing exit doors (a subcontract from Vought Aerospace, USA) 747-8 ailerons and spoilers, single source; horizontal stabilizer parts and subassemblies (a subcontract from Vought Aerospace, USA) 787 rudder, single source (sole provider of this assembly) Southwest Aluminum 747 aluminum forgings
Xian
Shanghai Aviation Industry Co.
Shanghai
Chengdu Aircraft Company
Chongqing
Changhe Aircraft Company
Jingdezhen Nanchang Xiamen
Hongdu Aviation Industry
1.1 Dreamliner 787: Overly-Globalized and Overly-Outsourced?

Problems with 787 Launch
Boeing tried to outsource 90% of frame, but failed to achieve such a high a level of global deployment In retrospect, our 787 game plan may have been overly ambitious, incorporating too many first all at once in the application of new technologies, in revolutionary design-and-build processes, and in increased global sourcing of engineering and manufacturing content Boeing CEO Jim McNerney
Break in Communication Ling between Chicago HQ and Seattle Operations and, Within Operations, Outsourced Jobs Results in Loss of Critical Tribal Knowledge Loss of Tribal Knowledge. Aggressive global outsourcing results in significant reduction of key staff in Final Assembly and enormous loss of Tribal Knowledge. Tribal knowledge is key to producing airplanes. Acquired on job over long time, it is the key ingredient in the development of a new plane. It is the shared method of performing countless daily tasks efficiently and in coordinating with colleagues. In short, it is the grease that cuts frictions through the assembly process. Broken Communication/Management Link Chicago Headquarter and Seattle Operations. Headquarter moved to Chicago after 85 years in Seattle. Labor unions complain the move drove a wedge between executives in Seattle-are rank and file. But the benefit is being in international city, for sales, hiring and so forth.
Source: Reuters
1.2 USD14 billion Launch Costs: Drives Global Subsidies, Global Partnerships
Not Possible for Boeing to Finance alone the USD13.6 bn Project Launch Costs
Given that 2 models are being built, the launch costs are covered by domestic and foreign subsidies, as well as Boeing's risk-sharing partners.
Funding Source Washington State Kansas State States Bidding on FAL State of Washington Japanese Government Amount $3.2 billion $200 million $500 million $16 million Form B&O Tax Reduction Interest Free Bond, 20year Subsidy for retrofitting 747 to carry planes 787 Rail Barge Subsidies and loans to MHI, KHI, Fuji Subsidy to Alenia from Italian Government Risk-sharing contribution Item Final Assembly Nose & Cockpit Production Transport 787 Rail Barge Wing &Fuselage (35% state in frames) Rear Fuselage (13% state in frames) Non-airframe suppliers 787 Launch Funding Aid Type Production Subsidy Interest Free Bond Production Subsidy Production Subsidy
$1.6billion
Production Subsidy
Italian Government International System Suppliers Boeing Contribution
$590 million $3.1 billion $4.2 billion
Production Subsidy Non-Recurring Costs Self-Financed
Total $13.4 billion

Copyright 2013 Exolus. All rights reserved.. Source: Canada-US Trade Center Occasional Paper No. 28 8
1.2 Challenges and Delays: Increase Costs from USD10 bn to USD13.5 bn

Challenges and Delays add an Additional USD4 USD5 billion in Costs

Delay in 2007 shortage of bolts, flight control software.
Delay in 2008 58 day strike

Later major problems with suppliers in South Carolina 2010 - No availability of Rolls-Royce engines October of 2010 another two week delay with horizontal stabilizers from Alenia
November 9, 2010 emergency landing on test flight due to a fire due to foreign debris in electrical cabinets. Electrical systems and power panel are built by Hamilton Sundstrand.
3 Year of Delays Resulted in an Estimated Additional Development Costs of
USD 4 - 5 billion
Copyright 2013 Exolus. All rights reserved.. Source: The Seattle Times 9
1.3 Aggressive Weight Reduction Strategy: Overly Ambitious?
Advanced Composites in Aircraft

55
787
50
A350XWB
Boeing Airbus Other

A400M
45
40
A320 B737
SUCCESSOR
35
30
A380
25
MRJ
20
A321
15
A320-200
10
A310-200 A300 DC10 L1011 MD-80

1975 1980
A340 A330 777
A340-600
737 747
767
A300-600
MD-11 MD-90
ARJ21-700
0 DC9 1965
757 747-400 737-300

1985 1990 1995 2000 2005 2010 2015 2020 2025
1970
Source: Bauhaus Luftfahrt
10
1.3 Aggressive Weight Reduction Strategy: Overly Ambitious?

Benefits: Lighter More Durable Reduced Corrosion/Fatigue & Maintenance
11
1.3 Carbon Composite Weight Reduction: Nice in Theory, Very Difficult in Practice
Carbon Composite Challenges
According to Spirit, composite material lay-down rates are far below projections The initial goal was 100 lbs/hr with a single-head machine
Production started at 8-9 lbs/hour

Efficiency gradually increased to 19 lbs/hour The rate is expected to increase to 30 lbs per hour once a new dual-head machine on order arrives.
The rate of 100 lbs/hour now is a mid-term goal.
Source: Boeing 787 Lessons Learnt, October 2008, Airbus
12
1.4 Hyper-Global Outsourcing /Partnerships: Nice in Theory, Possible in Practice?

Poor: Documentation, Oversight, Integration, Supplier Capabilities
Very Poor or Lacking Documentation Production records on deferred work were found to be incomplete or lost in transfer resulting in a loss of configuration control Assembly work was found to be completed incorrectly only after assemblies reached the Final Assembly Lines. Root causes Oversight not adequate for the high level of outsourcing in assembly and integration Qualification of low-wage, trained-on-the-job workers that had no previous aerospace experience Significant amount of change engineering work Inadequate supplier capabilities in design, e.g. Vought had no engineering department when selected Oversight not adequate for the high level of outsourcing in detailed design Weight growth and subsequent weight saving changes Late Definition Boeing admitted responsibility for a shortfall in wiring shipments Late specification indicated by supplier as root cause
Source: Boeing 787 Lessons Learnt, October 2008, Airbus
13
1.5 Hyper-Global Supply Chain: Possible to Manage a Fully Global Supply Chain?
City of origin Major parts traveling to Everett Pieces traveling to be assemblies into larger parts Everet t
FROM ASIA
Vertical fin leading edge and rubber Shipped from China to Frederickson
FROM EUROPE
Horizontal stabilizer flown from Italy to Everett
Wing to body fairing panels shipped from China to Winnipeg
AVIC (Shenyang)
Main landing gear flown from Derby to Everett
Tail cone shipped from South Korea to Everett

SWEDEN CANADA
Wings flown from Japan to Everett

Harbin Shenyang Wing box assembled JAPAN Nagoya Chengdu CHINA
Everett
Vertical fin assembled in Frederickson and trucked to Everett Nacelles sent from Chula Vista* to Everett
Pylon fairing and main landing gear doors moved by rail to Everett
Frederickson
Forward cargo door from Linkping to Wichita

Linkping ENGLAND Gloucester After cargo door from Linkping to Italy
Wing-to-body fairing assembly Winnipeg moved by rail to Charleston
Derby
UNITED STATES Wichita Tulsa Chula Vista Charleston
Wing-tip pieces shipped from South Korea to Japan
Fixed leading edges shipped from Tulsa to Japan
Nose landing gear FRANCE Toulouse from Gloucester to ITALY Wichita Loggia Passenger entry doors Grottaglie shipped from Toulouse to Charleston
FROM THE MIDWEST
FROM THE SOUTHEAST
Nose section assembled in Wichita and flown to Everett Engine pylons moved by rail from Wichita to Everett Fuselage sections flown from Japan to Charleston Movable leading edges moved by rail from Tulsa to Everett
Mid-and rear-fuselage sections assembled in Charleston and flown to Everett

Rear fuselage assembled Mid-fuselage assembled
Fuselage sections from Italy flown to Charleston
FROM AUSTRALIA
AUSTRALIA
Melbourne
Movable trailing edges and inboard flaps from Melbourne shipped to Everett
Source: Boeing
14
1.5 Global Supply Chain: Process Riddled with Challenges and Gross Mistakes
Problems with 787 Launch
Corroborating source believed to be Vought internal (Design News, 1st March 2008) Ship 2 went to Seattle 2 months late from last schedule change
Several 1000 parts short and no insulation, wrong hardware, no system components, full of FOD and unworked discrepancies generated by Vought
Stringer wrinkles and delaminating going undetected by Vought quality No inventory control oversight and accountability Inability to attract competent technicians to the facility Novice student inspectors, no competent management organization in-house Ships 3, 4, 5, and 6 all have more defects than the fatigue model Delivery delayed 5 weeks due to damage sustained in production at Global Aeronautica Incorrectly installed fasteners, non-compliance by temp worker Ad-hoc FAA inspection highlighted FOD issues and workers bringing in their own tools Spirit S41 structure 100% complete Center fuselage systems installation targeted to be 50% complete on delivery Vought aft body section S47/S48 structure 98% complete, systems 87% complete, including THSA as well as potable and waste water tanks
Copyright 2013 Exolus. All rights reserved.. Source: Boeing 787 Lessons Learnt, October 2008, Airbus 15
1.6 Summary of Challenges with Hyper-Globalization of Boeing 787 3 Years of Delays USD4 billion overrun FAA stops flying in Jan 2013 Challenges and problems in the 787 model resulted in 3 years of delays, approximately $4 billion additional costs FAA orders Boeing to stop flying the 787 in January, 2013
4 major strikes in the past 2 decades caused loss of 200 days of production. Machinists in South Carolina, a right-to-work state, voted against IAM representation. FAA had concerns about the heat dissipation through the composite skins. Parts shortages: insufficient supply of frames, clips, brackets, and floor beams. Root causes are:

NDI (non-destructive inspection) / QA not supporting production rate demand. Lack of NDI / QA personnel and equipment at T-2 and T-3 suppliers. Deferral of NDI testing from T-2 and T-3 to Tier-1 partners to expedite pre-assembly
Repeated NDFastener shortages, primarily affecting but not limited to Mitsubishi. Root causes:

Late changes to sleeved fastener design for lightening strike protection Alcoa unable to meet demand in time
To tackle the parts shortages Boeing has now taken a consolidated approach to inventory management across the supply chain.
Rumored that GE GenX and Rolls-Royce Trend 1000 both missed SFC by a 2 4%
I testing at FAL due to all of above

Source: A Wing and a Prayer Outsourcing at Boeing, Reuters 16
Airbus Globalization
17
2.1 Airbus 350XWB Regionally-Focused Globalization Strategy

Cost Reduction + Risk Sharing Partners
Reducing costs by divesting from non-core to future requirements: 1) Those that make lower level composite component, or 2) Employ older metal bending fuselage assembly technologies
The risk-sharing partners expected to absorb $2.5 billion of the A350 development costs Critical aspect for risk-sharing partners to be successful: Ensure they have the financial and technical capabilities, along with the engineering workforce available to design and build composite structures. Conditions for risk-sharing partners are that they need to pay for component development costs, as well as be completive in terms of recurring costs (production) in US$ terms. Looking at 10 potential risk-sharing partners from Europe, Asia, the US and Latin America.
MOUs are already in place for China, South Korea, and Russia.
Source: Strategic Destruction of the North American and European Commercial Aircraft Industry: Implications of the System Integration Business Model by David Pritchard and Alan MacPherson
18
2.2 Airbus A350XWB - Frame Production Largely Concentrated in Europe

CHINA
Rudder Harbin Hafei Airbus Harbin | China
GERMANY
Aft Fuselage Airbus Deutschland Stade | Germany
FRANCE
Fixed Leading Edge Spirit Aerosystems Europe St Nazaire | France
UNITED STATES
Center Fuselage Spirit Aerosystems Kinston | US
Forward Fuselage Premium Aerotech Nordenham | Germany
Nose Section Aerolia Meauite | France
Movable Leading edge GKN Aerospace De Munich | Germany Horizontal Stabilizer Rockwell Collins Cedar Rapids | US Vertical Tailplane Airbus Deutschland Stade | Germany
Pylon Airbus France Toulouse | France Keel Beam Air France Nantes | France
Landing Gear Messier-Dowty Kinston | US
Nacelle Goodrich Chula Vista, US
SPAIN
Horizontal Tail plane Aernnova Getafe | Spain
Wing Box Air France Nantes | France
AUSTRIA
winglets FACC Ried | Austria Rear Fuselage Airbus Spain GetafeSpain
ENGLAND
Fixed Trailing Edge GKN UK Filton | UK
Tailcone Airbus Spain Getafe | Spain
Source: Airbus
19
2.2 Airbus 350XWB: Supply Chain Largely Focused on Europe

Hamburg, Germany Sub assembly line for aft fuselage
2 Wing cover: State Broughton Broughton
Rudder: Harbin St Nazaire Belly fairing: Harbin St Nazaire Wing leading edge: St Nazaire Broughton Wing cover: Getafe Broughton
UK Nordenham
1
Harbin
Winglets/wing spoiler: Ried Broughton
Stade
Forward fuselage Hamburg (equipping in Hamburg)
Gloucester
5
CHINA
Filton
Wing box assembly in Broughton, equipping in Bremen
Bremen
Bremen, Germany Sub assembly line for wing
Vertical Tail plane assembly and equipping
GERMANY MeauiteNose: Meauite

3 Nazaire Inboard & Outboard landing flaps: Munich Broughton
Munich AUSTRIA Ried
Nantes
Doors (MLG/Nose): Corona St Nazaire
St Nazaire, France Sub assembly line for front fuselage and centre fuselage
Center fuselage: Kinston St Nazaire
St Nazaire
Front fuselage assembly and equipping: forward fuselage and nose
FRANCE
After fuselage assembly and equipping: U/L shells and Tailcone
US Cedar Rapids Corona Chula Vista Kinston

Nacelle: Chula Vista Toulouse
Toulouse
Toulouse, France Final assembly line produce Pylon.
SPAIN Getafe Illescas
Tailcone: Getafe Hamburg
Horizontal Stabilizer: Cedar Rapids Getafe
1. 2. 3. 4. 5.
Forward fuselage: Nordenham Hamburg Upper/lower shells: Stade Hamburg Center wing box and keel beam: Nantes St Nazaire Fixed trailing edge: Filton Broughton Landing gear: Gloucester Filton
Source: Airbus
20
2.2 Systems Development/Production: US/European Risk Sharing Partnerships

Airbus Key Systems Suppliers
SYSTEMS
Source: Airbus
21
2.2 Global Sourcing: Globalized, but Less than Boeing

Airbus Strategic Sourcing in China*
Hong Yuan Aviation Forging & Casting Titanium forging parts Xian Aircraft Industry Company Access doors for wide-bodied aircraft Wing fixed trailing edges Medium air ducts
Harbin Aircraft Industries
Harbin Shenyang
Hafei Aviation Industry Co., Ltd. HTP leading edge ribs and torsion box
Shenyang Aircraft Industries Shaanxi Aircraft Company

Hanzhong
Chengdu Aircraft Company
Xian Aircraft Company

Chengdu
Shenyang Aircraft Company Produces and assembles emergency exit doors Manufactures: -Fixed leading wing edges and ribs -A320 cargo doors -Skin plates
Xian
Shanghai Aviation Industry Co.
Shanghai
Changhe Aircraft Company
Guizhou Nanchang
Chengdu Aircraft Industrial Company A320 rear passenger doors
Hongdu Aviation Industry
Guizhou Aviation Industrial Group Maintenance jigs and tools
* July 2007 Source: Airbus S.A.S., Airbus in China; Airbus S.A.S., Airbus in China: Milestones
22
2.2 Yet A Great Leap Forward: Airbus Moves Final Assembly of A320s to China
Migration of Assembly Functions to China
Company: Airbus Total Investment:
USD1.2 - 1.5 billion
Labor Force
1,000 employees
Functions:
Final Assembly for A320
Investment Site and Joint Venture Partners:
Tianjin. Three-party joint venture with Tianjin Free Trade Zone and Aviation Industry Corporation of China (AVIC).
Operational Commencement
September 2008
2010 Production Output/Sales
37 A320 planes for eight Chinese airlines 2011 Assembly (Planned)
36 A320 planes
Source: All Publically Available Information; Tianjin Economic Development Area (TEDA), Company Website 23
2.3 Aggressive Weight Reduction Strategy: Equal to Boeing - Overly Ambitious?

100% 90% 80% 70% 60% 50% 53 40% 30% 20% 10% 0% A300 Aluminium
3 13 5 4
3 12 5 7
2 9
6 15
2 7
6 18
4 3 5 5
8 6 14
22
75
73
68
67
61
19
A310-100 Composites
A320-200 Titanium
A340 Steel GLARE
A380
A350 XWB
Miscellaneous
Source: Airbus: Metal Materials in Airbus A380 24
2.3 Aggressive Weight Reduction Strategy: Airbus Composite Evolution

Within primary structures
Composites Introduction
A350 XWB + Outer Wing, Fuselage

A380 + Rear Fuselage, Center Wing Box, Wing Ribs A340-600 + Rear Pressure Bulkhead, Keel Beam
A330/340 + HTP as Fuel Tank
A320 +HTP, Flaps, Ailerons, Spoilers

A310-300 Fin, Rudder, Elevator
1980
1990
2000
2010
Source: Airbus: Composite in Airbus: A Long Story of Innovations and Experiences 25
2.3 Aggressive Weight Reduction Strategy: A350 XWB Structures
Source: Airbus: Composite in Airbus: A Long Story of Innovations and Experiences
26
2.4 Regional Supply Chain: Outsourced and Integrated Logistics Model

Airbus Outsourced Integrated Logistics
KUEHNE+NAGEL
Transformation Plan during implementation (i.e Toulouse)
September 2008
BLAGNAC JLL ST ELOI SEOR TIT CLEMENT ADER L. BREGUET ATHOS HARDWARD & FASTENERS 7P2 BOOKING EUROCENTRE
September 2008
BLAGNAC JLL ST ELOI SEOR TIT CLEMENT ADER L. BREGUET ATHOS HARDWARD & FASTENERS 7P2 BOOKING EUROCENTRE
Take over of over 360 employees (providers & AIRBUS) in one year with 4 different collectives agreement and 5 different HR policies Smooth transition with 0 day of work stoppage
Source: Kuehne+Nagel AIRBUS Case Study, Paris 2010
27
2.4 Regional Supply Chain: Outsourced and Integrated Logistics Model

Airbus Flight Hour Services & Total Support Package
Maintenance & Engineering domains

Airframe maintenance Engineering Component repair Component spare parts and logistics Engine maintenance
FHS TSP: Line & light maintenance Fleet engineering IT and engineering services Airbus FHS full component
FHS Component: FHS Airbus vendor: Component stock, pool access, logistics And repair for Airbus LRUs only Component stock, Pool access, logistics and Repair for all components Including Airbus LRUS
In-House
Airlines outsourcing policy
Outsourced
Source: Airbus: Airbus Material, Logistics and Suppliers,, MOR Conference in Dallas, 2009
28
China and Russias Unique Models: Glocal-ization Strategies
29
3.1 China Market: Foreign Investors Hunger for the China Market
230% Increase in Aircraft Needed in China by 2028
New Deliveries 2028 Existing Fleet 2010
12,000
Existing Fleet and New Deliveries (2010 - 2028)
10,000
5,000
Aircraft (units)
8,000
6,000
4,000
6,567
3,165 1,150
1,383
826
2,000
1,100
702
1,050
423
1,000
447
600
387
550
507
500
544
480
479
0
US China UK
Germany
India
Russia
Ireland
Australia
Japan
Brazil
Source: Airfleets, COMAC, Boeing, EIU 30
3.1 Driven by: Growth Spike in Chinas Travel Volume

China Worlds 3rd Highest Traffic Volume by 2020 Foreign Inbound & Chinese Outbound Travel Volume
250 225 200 Outbound, Chinese Inbound, Foreign 237
USD millions
175 150 125 100 75 50
167 million Traveler Increase
CAGR 11.8%
51 21
69
25
0
13
Source: China National Tourism Association (CTNA); World Tourism Organization (UNWTO) 31
3.2 China: also hungers for Opportunity, However

China Fleet 99% Foreign Airplanes China Civil Aircraft Fleet (2010)
China Aircraft Fleet

Boeing Airbus 736 500 133
China Domestic Planes 1%
Other Foreign Aircraft, 10%
Other
Domestic
Total Aircraft
14
1,383
Airbus 36%
Boeing 53%
Source: All Publically Available Information , Company Website 32
3.3 Therefore: China developing own Suite of Domestic Aircraft

2010
Stage 1 Regional Jet (2010): ARJ21

Aircraft Type: 70 to 90 Seat Twin Turbo-Fan Development: CIVIC drawing on foreign suppliers for nearly all research and development, production for sub-systems, local partner providing facility, sub-contracting Schedule: First Flight - November 2008 and in-service 2010/11
2015
Stage 1 Regional Jet (2010): MA 700

Aircraft Type: 60- 70 seats Development: Xian Aircraft Corporation Schedule: Launch 2009 and in-service 2015
2013
Stage 2 Single Aisle (2013): C-series

Aircraft Type110/130 , Single-aisle - Twin-Turbofan Development: : Fuselage Build by AVICs, Shenyang Aircraft Industries Group , Bombardier Schedule: First Flight in 2011 and In- Service in 2013
2016
Stage 2 Single Aisle (2016): C919

Aircraft Type: Single-Aisle Narrow Body (156 Seat, 168 Seat and 180 Seat) Development: COMAC and joint ventures with foreign suppliers to jointly research and develop the platform systems Schedule: First Flight in 2014 and In- Service in 2016
20XX
Stage 2 Single Aisle (201X): CS2010

Aircraft Type: 150-200 Seat- Single-aisle - Twin Turbofan Development: Guangdong Prosperous Airline Schedule: First Flight in 20xx and In- Service in 20xx
Source: Chinese Aerospace Market Research 33
3.4 Road Forward: China Focusing Initially on Single-Aisle & Regional Jets
Chinas 3,165 New Aircraft = 12% of Future Global Demand Future Global Aircraft Deliveries (2009 2028)
China % of Future Aircraft Demand (2009 2028) Global Demand China Portion 26,500 3,165
Twin-Aisle , 6,250
China = 12% of Global Demand
Large Aircraft, 1,729
26,500 New Aircraft by 2028

Single-Aisle , 16,977
Regional Jet, 1,500
Source: Airbus, Airbus Global Market Forecast, von Tronchin, March 2010, other Public Sources
34
3.5 Chinas Glocalization Strategy: Frame Production / Assembly in China
China Aircraft: C919

AVIC: Harbin Aerostructure: Wing/body fairing AVIC: Shenyang Aerostructure: AFT fuselage Engine nacelles Tail fin Harbin AVIC: Shanghai Aerostructure; Sub-assembly line final assembly line
Shenyang
AVIC: Xian Aerostructure: Wing box Aileron Trailing edge flap Leading edge slat Center fuselage AVIC: Nanchang Shanghai
Xian Chengdu Nanchang
Aerostructure: Trailing edge flap Leading edge slat
AVIC: Hongdu AVIC: Chengdu Aerostructure: Nose Hongdu Aerostructure: Forward fuselage
Source: COMAC
35
3. 5 Chinas Glocalization Strategy: Foreign Joint Ventures Set Up in China

C919 Largely Based on Joint Sino-Foreign Research & Development Suppliers for Chinas C919
Liebherr Parker Rockwell Collins CFM International Eaton Corporation Hamilton Sundstrand Eaton Corporation Kidde Aerospace Liebherr Honeywell Parker Aerospace Rockwell Collins Eaton Corporation Albany Engineered Composite
Oxygen Equipment Flight Deck Panel Assemblies Interior Components Engines Lighting Equipment Electric Power System Primary Flight Control Fire Protection AMS, Landing Gear Auxiliary Power Unit Door System Fuel, Hydraulic, Flight Controls Avionics Flight Deck Control Suite Engine Interface Control System
C919
Source: Airframers, January 2011; Various Public Sources 36
3.5 Chinas Glocalization Strategy: Frame Production / Assembly in China
China Aircraft: ARJ21
AVIC: Shenyang
Rudder Vertical leading edge Rear fuselage Tail cone pylon
AVIC: Shanghai Shenyang Sub-assembly line final assembly line Vertical stabilizer Horizontal leading edge
AVIC: Xian Forward fuselage Center fuselage Aft fuselage Wings Nacelles
Xian Chengdu
Shanghai
AVIC: Chengdu Nose
Source: COMAC
37
3.5 Chinas Glocalization Strategy: Focus on Technology Transfer to China

2010: ARJ21 Largely Based on Foreign Research & Development
Suppliers for Chinas ARJ21
BE Aerospace Eaton Aerospace Oxygen Equipment Flight Deck Panel Assemblies
Fisher Advanced Composites Interior Components General Electric Goodrich Hella Aerospace Hamilton Sundstrand Honeywell Kidde Aerospace Liebherr MPC Products Corporation Parker Aerospace Rockwell Collins
ROSEMOUNT AEROSPACE
Engines Lighting Equipment Electric Power System Primary Flight Control Fire Protection AMS, Landing Gear Auxiliary Power Unit Door System Fuel, Hydraulic, Flight Controls Avionics Wiper System, Windshield Heater System Flight Deck Control Suite Windshields and Window Openers Engine Interface Control System Crew Seats
ARJ21
Rosemount Aerospace Sagem Saint Gobain Vibro-Meter Zodiac-Air Cruisers
Source: Baidu Encyclopedia, Various Public Sources 38
3.6 Foreign Systems Vendors: Driving Development Aerospace Industry in China

Investment Footprint largely aligned with China Aviation Structure/Clusters
ERJ145 Assembly EC175 design & production

Harbin
A350 composite parts
Turbine NGVs, turbine rings, compressor seals

Beijing Shenyang
Heat shields A320 Final Assembly Line

Tianjin XiAn Nanjing Chengdu Shanghai Suzhou
COMAC C919 Production
Landing gear & engine nacelle components
Composites manufacturing Design & Production of ECS
Precision sheet metal
Autoclaved composite parts

Xiamen
Engine parts
Landing gear components Sensors, valves, nozzles

Copyright 2013 Exolus. All rights reserved.. Source: AeroStrategy, 2010 39
3.6 Foreign Aircraft OEMs: Driving Development Aerospace Industry in China

Wide Variance in Strategies employed by Major Aerospace OEMs Aerospace OEMs Functional Deployments in China
Embraer
Training Engineering Manufacturing / Assembly Sourcing Service Sales
Diamond
O O O O O O
O O O O O O O O O O O
O O
Source: Company Information pages, EIU
40
3.7 Paving the Road for the Future: Chinas Twin-Aisle and Jumbo Jets
Develop Homegrown China Aircraft > Compete with Boeing, Airbus, Embraer
Chinas Future Aircraft (2020 2030)
2010
Stage 1 Regional Jet (2010): ARJ21

Aircraft Type: 70 to 90 Seat Twin Turbo-Fan Development: CIVIC drawing on foreign suppliers for nearly all research and development, production for sub-systems, local partner providing facility, sub-contracting Schedule: First Flight - November 2008 and in-service 2010/11
2016
Stage 2 Single Aisle (2016): C919

Aircraft Type: Single-Aisle Narrow Body (156 Seat, 168 Seat and 180 Seat) Development: COMAC and joint ventures with foreign suppliers to jointly research and develop the platform systems Schedule: First Flight in 2014 and In- Service in 2016
2020?
Stage 3 Twin-Aisle (2020 2025)?: C919 Extensions?
?
2020?
Aircraft Type: Extensions of C919, possible Twin-Aisle version Development: : COMAC and joint ventures with foreign suppliers to jointly research and develop the platform systems In- Service: 2020 - 2025
Stage 4 Jumbo Jets (2020 2025)?: ?
Aircraft Type: Jumbo Jet Development: COMAC and joint ventures with local domestic suppliers to jointly research and develop the platform systems In- Service: 2020 2030
Source: Chinese Aerospace Market Research 41
3.8 Chinas Unique Path in Building its Glocalized Aerospace Sector

China Strategy Cost Competitive FAA/JAA Compliant A/C
Airframe Production in China: Technology Acquisition through Offsets and Acquisitions (FACC) Chinas labor costs are at least 4 times lower than those that prevail in Europe and North America important in light of the labor-intensive nature of certain aspects of the airframe production process Western components are readily available to install on Chinese airframes engines, avionics, hydraulics, fly-by-wire systems. Result is that Chinese aircraft that are endowed with proven Western and/or Russian systems, cheap Chinese airframes, and performance characteristics that match US FAA and EU JAA technical and safety standards. China starting production effort with state-of-the-art machine tools and fixtures, new materials handling processes, Western design software, and advanced engineering procedures. As such, they will technologically leapfrog the west. Chinese government has the investment capital and political determination required for massive and sustained industry support. China will be able to pump-prime its domestic aerospace industry by mandating the purchasing behavior of Chinese airlines. This is non-tariff trade barrier of immense significance at the global level.
Source: The emergence of a new international competitor in the commercial aircraft sector: The China syndrome by Alan MacPherson
42
4.1 Russias Glocal Strategy:
Local Frame Production/Assembly in Russia SSJ100

Center fuselage Centre wing fuselage
Aircraft parts made of composite materials
Nose section Forward Fuselage Aft Fuselage Empennages: vertical and horizontal tail surfaces
About 40% of SSJ 100 are manufactured in NAPO.

Komsomolskon-Amur (KnAAPO) VoronezhVASO
Novosibirsk (NAPO)
Source: Komsomolsk-on-Amur Aircraft Production Association
43
4.2 Russia Glocal Strategy: International Partnerships with System Suppliers

SSJ100 Key Systems Suppliers
SYSTEMS
Source: Komsomolsk-on-Amur Aircraft Production Association 44
China / Russia Partnership for Aircraft Development/Production?
45
5. Russia and China: Joint-Venture for new Long-Range Aircraft?

Beijing is putting the money upfront, while Russia is supplying the know-how Cost Competitive FAA/JAA Compliant A/C
Beijing, China - (WAPA) - "Vedomosti" published today some declarations by Russia's United Aviation Corp and China's Commerical Aircraft Corp about a joint-venture which aims to develop and produce a new long-haul aircraft based on the airframe of the Ilyushin Il-96 aircraft. The agreement is going to be sealed during Vladimir Putin's visit to China next month. The joint-venture headquarters will be in China, that will fund the programme. Russia is expected to provide technology. "Vedomosti" also reported that separately, Russia's Rosoboronexport agreed with China to supply aircraft engines in a contract valued more than 700 million dollars. No more details are available since the agency quoted a person it did not identify. The Ilyushin Il-96 is a modern long-range civil aircraft and the first Russian-made widebody. It is equipped with fly-by-wire controls and modern technologies. Only 29 exemplars were built, most of them purchased by Aeroflot. The airplane boosts the title of one of the most secure aircraft worldwide, as since its first deployment during the 1990s, it has never suffered any kind of accident.
Copyright 2013 Exolus. All rights reserved.. Source: (Avionews 2013) 46
5. Russia and China: Joint-Venture for new Long-Range Aircraft?

Beijing is putting the money upfront, while Russia is supplying the know-how Cost Competitive FAA/JAA Compliant A/C
Source: (Avionews 2013)
47
Considerations for the Future of Aircraft Production
48
6.1 Competition in the Global Supply Chain Immense USD100 billion

Up-Front Investments Required for New Projects Globally: $100 billion
Heavy Competition in Global Supply Chain for Resources and Financing

Company Bombardier New or Proposed Programs C Series Single Aisle Country / Region Canada
COMAC
UAC Embraer Boeing Boeing Airbus Airbus Mitsubishi Kawasaki
C919 Single Aisle

MS21 Single Aisle KC 390 Cargo Aircraft 737 Replacement Single Aisle Next Gen Tanker A320 Replacement Single Aisle NSR MRJ YPX
China
Russia Brazil US US Europe Europe Japan Japan
Source: Exolus
49
6.2 Considerations for Future of Aircraft Production

New Airplane Considerations to be Competitive
Financing and technology. Next generation of LCAs will rely heavily on composite materials, advanced avionics, radically improved engines, and new airframe designs.
New entrants face established, fiscally strong brands with global support infrastructure in place. The provision of Boeing and Airbus of training, spare parts and managerial support to airlines and to other aircraft manufacturers contributes to their strong market reputation. New entrants must consider providing these functions in addition to building and supporting a competitive product.
It is unclear to what extent, the private sector will control aircraft design and production in China and Russia. Both governments have allocated funds for the creation of integrated aircraft manufacturing centers; China allocated nearly $3 billion for its program, while it is our preliminary understanding that Russia has spent $1 billion to create a design and manufacturing center near Moscow. Their LCA plans likely will provide an opportunity to consolidate fragmented manufacturing capabilities and develop R&D and sales and support capabilities.
In China, the FAA has opened a new office to support the FAA certification of the ARJ21, even though no US airline has purchased the aircraft.
Source: New entrants face established, fiscally strong brands with global support infrastructure in place by Peder Andersen, April 2009
50

Offset Agreements and Risk-Sharing Agreements
Industrial offset agreements are typically designed to provide importers with a negotiated production share for the final product, usually in return for guaranteed sales. For example, most of the Boeing 747s operated by Chinas state-owned airlines fly with wing leading edges and various other sub-assemblies that were manufactured in China. Major industrial offsets are possible only under regulatory conditions where the importing nation has public control over the end customer (e.g, and airline or other state-owned industry). If Airbus negotiated offset agreements with Chinese manufacturers, then the Chinese government ensures that domestic airlines will buy Airbus products. This type of arrangement becomes more complex when the end-user is not closely regulated or controlled by the state. A further factor that complicates matters is that industrial offsets involving technology transfer are usually regulated by the government of the exporting nation to ensure that sensitive or critical expertise is not internationally diffused. For systems integrators such as Boeing and Airbus, major industrial offsets at the international level have increasingly been accompanied by risk-sharing agreements. China has yet to become a significant risksharing partner in any of the aircraft programs of these two companies, but things may soon change in this regard. Systems integration is a cost-driven strategy that involves extensive subcontracting for parts production. The SI has minimal involved in manufacturing, but instead acts as a kit builder (e.g, final assembly). Under risk sharing in the commercial aircraft sector, the systems integrator no longer subcontracts on a build-to-print arrangement. Rather, the risk-sharing partner is expected to design, develop and manufacture the sub-assembly in question using its own funds. This is clear strategy because it dramatically reduces launch cost for the new aircraft programs among system integrators. The downside is that risk-sharing partners must receive infusions of tacit knowledge form the prime contractors, expertise often referred to as tribal knowledge.
Source: New entrants face established, fiscally strong brands with global support infrastructure in place by Peder Andersen, April 2009 51

Offset Agreements and Risk-Sharing Agreements
Airbus is copying many of Boeings tactics to secure international sales. IN last 6 years, Airbus has shifted its compensatory state emphasis from an indirect offset mode to a direct offset position, and is now employing a business development model that closely mirrors the approach initially pioneered by Embraer (but recently perfected by Boeing). Under the indirect offset mode, Airbus secured foreign sales by granting market concessions such as landing rights to busy EU airports. These types of concessions are still part of the Airbus marketing package, but direct offset are becoming important too.
Source: New entrants face established, fiscally strong brands with global support infrastructure in place by Peder Andersen, April 2009
52
For a Comparative Perspective with the other BRIC Countries Please Refer to the Following Research Reports
China 2020
India 2020
Brazil 2020
Russia 2020
Found on Slideshare @
http://www.slideshare.net/Exolus/china-2010-2020-v58slideshare http://www.slideshare.net/Exolus/india-2020-what-india-will-look-like-in-the-future http://www.slideshare.net/Exolus/brazil-2020-what-will-brazil-look-like-in-the-future http://www.slideshare.net/Exolus/russia-2020-what-will-russia-look-like-in-the-future
Download Reports @
www.exolus.com/en/knowledge/research.html
Copyright 2013 Exolus. All rights reserved.. 53
Global Expansion Strategy & Cross-Border Investment Execution

(Greenfield, M&A, Joint Ventures, Outsourcing)
About Exolus: Exolus is a hybrid management consulting and transaction advisory firm. We work with management teams in the development of their global expansion strategies, across the range of investment formats: Greenfield, M&A, Joint Ventures and Outsourcing. As well, we deploy against global strategies by providing program management across all phases of cross-border investment projects, from candidate searches and evaluation, through investment structuring and negotiations.
The founders of Exolus have spent the past two decades in the global service space and have direct experience operating in nearly all of the major investment destinations in the world (40+ countries). The team has served clients of all sizes, both public and private, on projects that ranged in investment size from USD10 million to greater than USD1 billion. We have served clients across all of the following industry segments: Life Sciences, Manufacturing, Automotive, Technology, Retail, Consumer Business, Real Estate, Public Sector.
Follow Exolus at: www.exolus.com Need Further Information: info@exolus.com
Want Copies of our Reports: www.exolus.com/en/knowledge/research.html
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Disclaimer
In writing we benefit from standing on the shoulders of others and, in the process, we strive to make our own contributions to the market of ideas. As well, we are always tremendously grateful for the many, often selfless, contributions that are availed in the process. The opinions represented herein were prepared for information purposes only, at the time of publication. The information represented herein is believed to be reliable, at the time of publication, and was obtained by various public sources also believed to be reliable. The opinions were considered to be accurate at the point of creation, and further, any views, forecasts, or estimates contained herein may be subject to change at anytime without notice. The opinions expressed or implied herein may not be the opinions of the author, also Exolus, or any associated affiliates. This report and the information contained herein collectively, is not offered as, and should not be regarded as, used or relied upon as advice on any matter. It shall not constitute or be construed as a recommendation or solicitation on behalf of the author, and no legal commitment or obligation shall arise by reason of this document. Thus, the reader shall make an independent assessment of opinions stated herein that shall not be considered a substitute for obtaining advise from the readers advisors. The author shall not accept responsibility, express or implied, with regards to the accuracy and completeness of the information herein, and the author shall not be liable whatsoever and howsoever arising in connection to this publication. The author shall not accept, and hereby disclaim, all responsibility and liability to all persons, entities, or organizations for all consequences arising out of any use or reliance on the whole or any part of this publication. This publication should not be reproduced or distributed without the authors consent and is not intended for distribution in any jurisdiction in which this would be prohibited.
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France Houdard Managing Director

france.houdard@exolus.com January 2013
Copyright 2013 Exolus. All rights reserved.. 56

Boeing 787: US's Dreamliner or Nightmare-Liner? Who Will Ultimately Win The Aerospace Race: US, Europe, China, or Russia?

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Boeing 787: US's Dreamliner or Nightmare-Liner? Who Will Ultimately Win The Aerospace Race: US, Europe, China, or Russia?

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BOEING 787 USS DREAMLINER OR NIGHTMARE-LINER?

Dreamliner 787 Overly Globalized? Outsourced?

Copyright 2013 Exolus. All rights reserved..

1967 (737 Classic) 2009 (787 Dreamliner)

1969 (747 Series)

Copyright 2013 Exolus. All rights reserved..

Source: A Wing and a Prayer Outsourcing at Boeing, Reuters

1.1 Frame Production: Overly-Globalized? Overextended?

Chengdu Aircraft Industrial Group:

Kawasaki Heavy Industries:

Spirit Aerosystems (Wichita, Tulsa): 670 190

Shenyang Aircraft Group:

Fixed trailing edge

Fixed leading edges (Tulsa, Okla.) Movable leading edges (Tulsa)

Boeings Hawker De Haviland unit

Fuji Heavy Industries:

Vought (Charleston): (Dallas):

Hafei Aviation Industries:

Mitsubishi Heavy Industries:

Rear fuselage sections (Chovlestan, S.C)

Nacelles (Chuta Wista, Caly)

Boeing Canada (Wing-peg): 60

30 Total Engineers: 250

Main landing gear

Aft pylon fairings Nose landing gear Wing to body fairings

Aft passenger doors Forward passenger doors

Midfuselage sections Horizontal stabilizer

Copyright 2013 Exolus. All rights reserved..

1.1 Systems Development/Production: Overextended Risk Sharing Partnerships?

Copyright 2013 Exolus. All rights reserved..

Source: Boeing website

1.1 Global Sourcing: Overextended? Overly-Globalized?

Harbin Aircraft Industries Shenyang Aircraft Industries

Shaanxi Aircraft Company Xian Aircraft Company

Shanghai Aviation Industry Co.

Chengdu Aircraft Company

Changhe Aircraft Company

Jingdezhen Nanchang Xiamen

Hongdu Aviation Industry

Copyright 2013 Exolus. All rights reserved..

1.1 Dreamliner 787: Overly-Globalized and Overly-Outsourced?

Copyright 2013 Exolus. All rights reserved..

Italian Government International System Suppliers Boeing Contribution

$590 million $3.1 billion $4.2 billion

Production Subsidy Non-Recurring Costs Self-Financed

Total $13.4 billion

1.2 Challenges and Delays: Increase Costs from USD10 bn to USD13.5 bn

Delay in 2007 shortage of bolts, flight control software.

Delay in 2008 58 day strike

3 Year of Delays Resulted in an Estimated Additional Development Costs of

1.3 Aggressive Weight Reduction Strategy: Overly Ambitious?

Advanced Composites in Aircraft

Boeing Airbus Other

A310-200 A300 DC10 L1011 MD-80

A340 A330 777

757 747-400 737-300

Copyright 2013 Exolus. All rights reserved..

Source: Bauhaus Luftfahrt

1.3 Aggressive Weight Reduction Strategy: Overly Ambitious?

Copyright 2011 Exolus. All rights reserved..

Production started at 8-9 lbs/hour

The rate of 100 lbs/hour now is a mid-term goal.

Copyright 2013 Exolus. All rights reserved..