RichardAboulafia.com 

:: September 2016 Letter ::

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Dear Fellow Obscure MiG Design Fans,

The Soviet aerospace industry had one notable quirk: it separated design and manufacturing into separate functions. Aircraft were designed by a bureau (Tupolev, Ilyushin, etc.) and then built by a different manufacturing company. For example, most Sukhoi fighters are designed by Sukhoi, but built by the Komsomolsk-on-Amur Aircraft Production Association. This industry bifurcation continues today, although in 2006 Vladimir Putin created United Aircraft Company, a giant holding company for most design bureaus and production companies (there’s a nifty map at www.uacrussia.ru/en/corporation/company/).

Very few aspects of the USSR economy appeal to anyone today. But Boeing occasionally flirts with this design/manufacturing split. In September, the company revealed its clean-sheet T-X competitor. This trainer was designed with heavy input from Saab; earlier this summer major structures for the plane were photographed flying in from Sweden. Saab stated its first quarter 2016 results were negatively impacted by heavy spending on the T-X design.

I have mixed feelings about this design, but that’s another story. What matters is that if the USAF selects it from the four competitors (the others are Korea Aerospace/Lockheed Martin, Northrop Grumman, and Leonardo/Raytheon) a Western aircraft company would rely heavily on an outside design firm to create a new plane. This almost never happens; the closest historical experience I can recall is McDonnell Douglas’s adaptation of Northrop’s YF-17 to create the F/A-18. Building someone else’s plane under license is one thing; relying on someone else for a completely new design is another.

This is not necessarily a bad thing. In some ways, Boeing’s T-X bid represents a dream team. Saab is arguably the world’s most experienced light combat aircraft designer. Boeing does a fantastic job building civil and military aircraft at reasonable prices. The team reflects the old Joint Strike Fighter competition joke that DoD should choose Lockheed’s design, but have Boeing build it. But Boeing should re-think this as a strategy moving forward, for three reasons:

First, this approach hasn’t served Boeing well in the past. Boeing Commercial tried a variant of this approach on the 787 development program. Notoriously, the company outsourced major design and integration work packages to Tier One aerostructure companies. Some were up to the task; others simply didn’t have the skills and resources. And in many cases separating design from manufacture caused huge problems, with engineers no longer able to directly communicate with production workers in the same location. The term “travelled work” entered the aerospace phrase book as a result.

To Boeing’s credit, design work on the 777X, particularly on the wings and propulsion system, has been moved back in-house. But BDS is well down this path. Boeing’s LRS-B bid was largely designed by Lockheed Martin Skunk Works (that was kind of a dream team too). Did that bifurcated approach contribute to the team’s loss to Northrop Grumman, which stuck with a traditional integrated design/build approach? I don’t know, but the USAF might have remembered the 787 debacle, and concluded that a bifurcated design/build approach added development risk.

Second, it weakens the industrial base argument. One argument made for Boeing to win T-X is that it would keep the company alive as a combat aircraft manufacturer (this same argument was made for Boeing to win LRS-B). But what’s the point of keeping Boeing alive in the military aircraft business if it doesn’t have the capability to design a new military aircraft? It’s not like the company could recruit Saab or someone else to help create a new Sixth Generation air superiority fighter. This approach tells DoD that Boeing will not be doing its part to keep competition alive.

Why did Boeing go down this path? Back in the mid 2000s Boeing was in the thrall of RONA (Return On Net Assets). Quick definition (courtesy of Investopedia): RONA is a measure of financial performance calculated as net income divided by fixed assets and net working capital. You can find a useful article on RONA in Boeing’s in-house magazine from 2005 at www.boeing.com/news/frontiers/archive/2005/march/i_fof1.html.

RONA, in short, is all about leverage. The positive side of RONA is that it measures a company’s ability to create new sources of revenue (particularly products) from a given set of assets. But the flip side of this coin is that it also encourages companies to improve returns by eliminating company assets. Engineers and aircraft design teams, of course, are a company asset. Get rid of them, partner with outside companies to go after the same programs (and the same revenue), and the company instantly improves its RONA.

But this brings me to the third reason to question this design/build bifurcation: it destroys company value. It may be good for RONA, or RoI, or some other financial abstraction, but in the long run this reliance on outside engineers weakens the company. The ability to design and integrate a new system is a core capability for an aerospace company. Divesting this capability and relying on external partners for designs is a way of destroying long-term value. It signals that the company’s future revolves around mere military derivatives of commercial jetliners.

As a thought exercise, consider the aircraft designers with the strongest engineering cultures. There is no way that Lockheed Martin Skunk Works, Northrop Grumman/Scaled Composites, Dassault, or Saab, would ever say, “Here is our new aircraft. We designed it with another company, which did a lot of the heavy CAD/CAM lifting.” This strategy basically tells the world that in terms of capabilities and resources Boeing’s vaunted PhantomWorks just isn’t in the same league as the other companies.

Again, this is not good for Boeing’s long-term worth. BDS needs to follow BCA and bring engineering and design back in-house. As a long-term strategy, it’s the right thing to do.

September Aircraft Binder updates include the Rafale, C-17, Super Puma, AH-1, Avanti, and the Military Transports overview. Please note: we’re a bit late with these due to a new publication system; my apologies for that. And I hope you had a great month.

Yours, ‘Til Boeing St. Louis License Produces Su-30MKIIs,
Richard Aboulafia
 

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