Transpacific Triangle : California Firms Profit as Japan’s Aerospace Plans Run Into Turbulence
When a consortium of Japanese manufacturers won a coveted contract to build 20% of the new Boeing 777, Michael Stow was among the many critics. He feared the Seattle aerospace giant had signed away his future to a new generation of foreign competitors.
Four years later, Stow’s Orange County firm, Arden Engineering Inc., has landed a contract to produce those very aluminum fuselage pieces that the Japanese lobbied so hard to get.
His employer? Kawasaki Heavy Industries, one of three big Japanese companies participating in Boeing’s next-generation airplane project. Kawasaki’s partners, Mitsubishi Heavy Industries and Fuji Heavy Industries, are also scouring California and other parts of the United States for suppliers.
Arden Engineering’s unlikely position in this economic menage a trois --a U.S. subcontractor to a Japanese partner to a U.S. manufacturer--could presage an important stake in Asia’s burgeoning aerospace industry for Arden and other U.S. firms, notably those in California, which have survived the nation’s brutal aerospace decline.
And to the extent U.S. subcontractors can capture high-value pieces of such Japanese projects, it suggests trouble for Japan’s ambitious plans to build its own aerospace industry.
While Japan’s leaders have shown no signs of relinquishing their postwar dream of joining an elite group of aerospace giants, they find themselves undermined by a faceless villain as unpredictable as foreign competitors or national governments.
The strength of the yen has simply made it too expensive for Japanese firms to produce certain aerospace components in Japan, particularly those that are labor-intensive and low-volume.
Under the 777 contract won by the the Japanese in 1991--to a chorus of criticism from U.S. labor groups and others--they are obligated to provide major sections of the wide-body airplane, including the fuselage panels, cargo doors, wing center section and passenger doors. But their costs have skyrocketed because they are paid in weak dollars and must cover most of their operating expenses with yen.
Earlier this year, the dollar plummeted to about 60% of what it was worth at the time the Boeing contract was signed. Even with the dollar’s recent gain, it still buys 28% fewer yen than it did in 1991.
And Japan is not alone. Germany’s powerful Daimler-Benz conglomerate, the parent company of Daimler-Benz Aerospace, blamed the strength of the German mark for losses that amounted to $1.1 billion in the first six months of this year, nearly all of it at its aerospace subsidiary Dasa. The unit has said it may cut 15,000 jobs and is shifting more work to lower-cost producers overseas.
In August, Dasa invited a large group of U.S. aerospace suppliers to Germany to bid on contracts to produce structural components for five models of Airbus and Fokker airplanes being manufactured by the company.
Brian Fairhurst, director of marketing for Nashville-based Textron Aerostructures, already a supplier for Airbus Industries, the European consortium whose members include Dasa, said it was highly unusual for an airframe manufacturer to switch suppliers in the middle of a production line.
“It’s significant that Dasa is taking the exchange situation so seriously that they’re willing to [change] the current production,” he said.
It is the Japanese move offshore that has drawn the greatest attention in U.S. aerospace circles, however, because it strikes a blow to Japan’s international image and appears to undermine its lengthy, and expensive, struggle to build a domestic aerospace industry.
“Frankly, I was surprised that the Japanese were willing to outsource some of their 777 work in the United States, given the strategic importance of those contracts to those companies,” said one U.S. supplier, who asked not to be named.
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But the pressures are fierce. The strong yen is also hurting Japan in other aerospace co-production programs, such as the FSX next-generation fighter plane. Under the 1987 contract between Mitsubishi Heavy Industries and Lockheed Corp., the Japanese agreed to give 40% of the production work to U.S. companies in exchange for the technology to build the FSX. To maintain that ratio at the present exchange rate, the Japanese are being forced to farm out much more work to U.S. firms than originally expected. An FSX fighter prototype made its first flight this month.
This yen shock comes as Japanese aircraft manufacturers, not unlike their U.S. counterparts, are reeling from cutbacks in domestic military contracts that have historically supported more than 70% of the nation’s modest aircraft production. And the recession in Japan has made it tough for the government to boost subsidies to manufacturers to fill the gap.
So they’re looking for ways to quietly send work to lower-cost producers in China and Southeast Asia and, increasingly, back to the United States.
It’s a surprising turnabout for U.S. companies that have watched their business evaporate as defense contracts were cut back, and the likes of Boeing Co. came under increasing pressure to give manufacturing work to customers in Europe and Asia in exchange for airplane contracts.
For the first time, beleaguered U.S. aerospace subcontractors are beginning to view these foreign companies as potential customers rather than competitors. Southern California is particularly well-positioned to take advantage of this shift because of its proximity to Asia and its wide range of suppliers. Even with the downsizing of recent years, an estimated 400 to 500 aerospace subcontractors still make their home here.
The Boeing 777, the focus of this unusual transpacific manufacturing triangle, was launched this year as the first airplane designed entirely on computers. The twin-engine, wide-body aircraft is far cheaper to operate than the 747 but nearly as big. Boeing has taken orders for nearly 200 and has delivered eight so far.
Arden Engineering, of Orange, and Hydro-Mill Co., based in Chatsworth, were originally hired by Kawasaki in 1992 to produce a small batch of 777 components. Then, earlier this year, they each signed five-year contracts for a significantly larger section of the fuselage.
These components are produced in Southern California, shipped to Japan by boat or plane for initial assembly and on to a Boeing plant in Everett, Wash., for final assembly. The firms, which are competitors, are now bidding on additional 777 work from Kawasaki.
“This is definitely our future business,” said Julius Kocian, director of contracts at Hydro-Mill Co. “We’re real excited about it.”
While these contracts from Japan represent a fraction of the total aerospace business in the United States, they provide an entry point for U.S. firms hoping to leverage their technology, flexible work forces and relatively low wage rates into a bigger role in Asia, a region filled with Boeing wanna-bes.
Throughout Asia, governments have targeted aerospace manufacturing as a vehicle for propelling themselves up the industrial ladder. Japan’s aerospace companies are discussing link-ups with governments in Korea, Taiwan, China and Russia to develop home-grown aerospace programs. The Indonesian government, which already produces a 60-seat airplane, is talking to Malaysia and Singapore about creating an aerospace consortium.
Based on the present exchange rates, the wages for U.S. aerospace workers are at least 10% less than their Japanese and German counterparts, according to the Washington, D.C.-based Aerospace Industries Assn. of America, an industry trade group.
Joel Johnson, vice president of international affairs for the association, said U.S. companies also have the advantage of greater flexibility in their work force. Japanese and German companies have tougher labor laws, which make it more difficult for companies to lay off workers if the demand for airplanes drops and orders fall off.
“Relative to the Japanese and Europeans, we have become cheaper,” Johnson said.
How much the currency crunch will hurt Japan’s efforts to build itself into a global aerospace competitor depends on the amount of work and technology being shipped offshore, according to industry experts. To date, the contracts coming back to the United States are primarily in precision machining and highly specialized processes such as heat treatment.
John Harbison, chief aerospace analyst for the consulting firm Booz Allen & Hamilton Inc., is confident the Japanese government remains committed to building a domestic aerospace industry even at today’s higher price tag. He said Japanese manufacturers may shift more manufacturing overseas to beat the currency costs, but only in areas that aren’t critical to improving their learning curve.
“I think they will continue to expand their value-added content,” he said. “Whether or not they are manufacturing everything in Japan for cost issues is another question.”
But Johnson argues the currency pressures have made it much tougher for the Japanese to drum up the political and financial capital they need to make their nation a major player in global aerospace.
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Instead, he believes they will funnel their funds into areas where they have a technological advantage, such as flat glass display, composite materials or airplane entertainment systems.
“In a sense, this dollar-yen situation may accelerate a direction they probably had to take anyway,” he said. “This would be a very difficult arena for them to break into as a prime,” referring to the status of a prime contractor such as Boeing.
It remains unclear how much work the Japanese aerospace companies are willing to give away, particularly in light of the gloomy job picture back home.
Japanese executives are breathing a bit easier now, since a concerted effort by the U.S., Japanese and European governments has driven the yen down to the 100-level in recent weeks. But they say the yen remains too strong and unpredictable, forcing them to continue shifting the higher-cost production overseas.
“One hundred yen is not enough to bring us a profit,” said Yasuro Watanabe, a Fuji Heavy Industries representative based in Seattle. “We must make more cost reductions.”
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Japanese officials concede that while the creation of a strong domestic aerospace industry remains a top priority, their first obligation is to the company’s bottom line. Takeshi Suzaki, vice president of Kawasaki Heavy Industries U.S.A. Inc. in New York, said his company is seeking out ways to shift still more production to America, from airplane parts to motorcycles.
“The current situation indicates that we have to think about cost first,” he said.
Grabbing a piece of this Japanese and German business won’t be easy for U.S. aerospace subcontractors, many of which have never done business outside the United States. Johnson said many have historically depended on Boeing or McDonnell Douglas Corp. for the bulk of their work and will have to develop new skills to navigate in these increasingly competitive markets.
“A lot of companies really haven’t done much about supplying other companies in the U.S., let alone the foreign market,” he said.
Arden’s Stow, who made his first trip to Japan earlier this year, had a lot of trepidation about jumping into the global marketplace. As an executive of a small operation, he felt he had his hands full keeping track of the status of the U.S. prime manufacturers, raw material prices and work force availability.
“We’re such a small company and we’re used to doing business in our back yard,” said Stow, who is in charge of contracts. “We’re kind of fearful of doing business abroad.”
But Stow said his sales staff, which works closely with Boeing, recognized the potential markets overseas and spent months trying to put Arden Engineering on the Japanese radar screen. The 40-person machine shop hosted several groups of Japanese for site visits and quality checks before landing the Kawasaki contract.
“We’re very customer-oriented,” Stow said, “and we’re willing to do what it takes to work with the Japanese or anyone else.”
Transpacific Triangle
The strong yen has sent Japanese aerospace firms scrambling to Southern California, where they are signing up subcontractors for work on the new Boeing 777. The zigzagging supply lines are providing a good workout for transpacific freighters.
1. SEATTLE
Boeing Co. and three Japanese aerospace manufacturers sign a 1991 agreement to co-produce the 777 twin-engine jet. Japan agrees to make about 20% of the airframe, including most of the fuselage panels and doors.
2. TOKYO
The strong yen makes it too costly to produce these 777 parts in Japan. The Japanese hire California-based Arden Engineering Inc. and Hydro-Mill Co. to produce some of the fuselage components.
3. SOUTHERN CALIFORNIA
Arden and Hydro-Mill begin producing the 777 components at their plants in California and ship them to Nagoya, Japan.
4. NAGOYA, JAPAN
Employees at Kawasaki’s Gifu plant fit the components into a larger fuselage section, which is put on a ship and sent to the Seattle area.
5. EVERETT, WASH.
The Kawasaki fuselage section is transported from the port to the Boeing 777 plant for final assembly.
Sources: Boeing Co., Arden Engineering Inc., Hydro-Mill Co.
