* 'Pay to play' on the rise
* Plane makers want 'super suppliers'
* Consolidation expected to gather pace
By Alwyn Scott
PARIS, June 20 It should be a bonanza for
suppliers: $135 billion in new orders booked by Boeing
and Airbus at the Paris Airshow this week.
Yet companies that make everything from overhead bins to
cockpit controls are under mounting pressure to cut prices.
One such company is Renton Coil Spring, which has products
on the biggest world's jetliner, the Airbus A380, on Boeing's
jets and even fighter aircraft including the F16.
Boeing and others are asking it to make production more
efficient and to share the savings in a growing "pay-to-play"
system, said Charles Pepka, CEO of the company based in Renton,
Partnering for Success is what Boeing CEO Jim McNerney calls
it - a way for Boeing to help suppliers to install the same
lean-manufacturing techniques Boeing is using to improve quality
and speed at its own factories.
From Boeing's point of view, this helps suppliers to cut
costs, and Boeing simply wants to share the gains.
But the hit to profit margin leaves suppliers bristling.
"It's like a game of poker," said Pepka. "You have to figure
out if they want 15 percent or will be OK with 0.1 percent."
Aircraft manufacturers say they have no choice. Operating
margins at global commercial and defence plane and finished
equipment makers averaged only 6.4 percent last year, according
to a forthcoming report by Deloitte
In contrast, the profit "upstream" in the supply chain was
12.8 percent - double what the plane makers earned.
The plane makers say they can't raise their prices because
they must wage a brutal sales war to keep winning orders.
Airlines can't pay more for planes because they operate on
very thin profit margins, too, and do not want to raise fares
for fear of choking off demand for travel.
In their drive to reduce costs, aircraft manufacturers have
asked suppliers to become "super suppliers" that can perform
engineering and design work on plane parts, instead of simply
following blueprints drawn up by plane makers, as in the past.
Suppliers are also required to contribute to the capital
cost of new planes and tool up their factories, often before
they are paid.
"You get paid when it flies," said Ingrid Jorg, senior vice
president at Aleris International, a global aluminium supplier
based in Cleveland, Ohio. In December the company opened a $350
million aluminium mill in China, which it hopes will be cleared
to produce its first aerospace material next summer.
Suppliers also are expected to increase the speed of
production to keep pace with the rising demand for jets.
The 500 new jetliners ordered in Paris this week add to a
backlog of more than 9,600 aircraft waiting to be built by
Boeing and Airbus. Suppliers must show they can ensure no
hitches in output as factories speed up fill those orders.
Those demands are driving a parallel trend: consolidation.
As smaller suppliers approach these hurdles, some find they
lack the financial strength and broader engineering ability they
need and are forced to consider selling.
Large suppliers, meanwhile, are looking to buy smaller
operators to gain technology and specialist skills.
Tom Captain, aerospace and defence leader at Deloitte, said
that he spent much of his time at the Paris Airshow working with
suppliers who want to sell their companies.
As for the rest, they just have to "step back and understand
this is a new reality", he said.
At Renton Coil Spring, meanwhile, CEO Pepka sees the trend
clearly, but he is less than enthused by managers who come in
wanting to change how he does things and pay him less.
"You don't want them to run your business," Pepka said.