"Spirit AeroSystems is going full circle, from part of Boeing to independent supplier and back to part of Boeing. It is the perfect example of a realization dawning on corporate America: Outsourcing isn't all it was once cracked up to be.
On Monday, Boeing said it would buy the Wichita-based aircraft-fuselage maker in an all-stock deal valuing it at $37.25 per share, a 13% premium over Friday's closing price. It seems like a good deal for Spirit's investors, who have suffered a 53% negative total return since the end of 2019 -- worse than Boeing's negative 42%.
The pandemic hit to jet production was particularly devastating for Spirit, which accumulated $2.6 billion in losses between 2020 and 2023. This year, analysts expect net income to come in at minus $681 million. Its quality-control lapses -- including goofy ones such as badly drilled holes -- have in turn been a headache for Boeing, which is under severe pressure from lawmakers and customers following the blowout of a 737 MAX-9 door plug in January.
The deal's logic of vertical reintegration makes sense in light of recent history, with air-travel safety likely benefiting from centralized supervision and a simpler workflow between plants. Yet it is also an indictment of what executives in most industries have been doing for almost three decades.
When Boeing sold its Wichita and Tulsa operations to Canadian private-equity firm Onex in 2005, creating Spirit, aviation was still recovering from the 9/11 terrorist attacks. The IT revolution, together with the rise of consultants and business schools, had made outsourcing fashionable. Before the late 1980s it was unusual. Then, in 1989, Eastman Kodak pointed the way by tasking IBM with managing its data center. In 1996, General Electric showed how offshoring support jobs to low-wage countries such as India could help cut costs. Supply chains spread across the world: The share of imported value in U.S. manufacturing exports rose to a peak of 20% in the late 2000s, from 13% in the mid-1990s.
Renegotiating labor agreements was one rationale for an independent Spirit, and it broadly succeeded. The other was to gain economies of scale by selling to more manufacturers, which never worked as well.
At the core of the outsourcing trend, however, was the idea that an "asset-light" firm focused on intellectual property and its "core" expertise would be better run.
With this mindset, jettisoning aerostructures operations seemed like a no-brainer. It is a capital-intensive, competitive business that faces a lot of production pressure from final assembly -- not unlike the jet-engine business but with narrower gross profit margins. Over the years, many of Spirit's peers have either closed down or been taken over. In 2018, Britain's GKN was bought by Melrose Industries.
It wasn't just aerostructures: In the 2000s, Boeing outsourced more than 70% of the 787 Dreamliner program. But the problems with becoming an assembler of planes, as opposed to a true manufacturer, gradually became apparent. The company lost control of supply, resulting in years of delays and cost overruns.
Airbus followed Boeing's lead, including with the 2009 carve-out of its two aerostructures subsidiaries, Premium Aerotec and Stelia Aerospace. It was perhaps lucky to find no good buyers. Now, Airbus also sees aerostructures as essential again.
Aerospace isn't the only industry to revive vertical integration. Intel is beefing up chip manufacturing in the U.S., General Motors is building battery plants and Sweden's IKEA is acquiring containerships.
One general flaw of the asset-light model is that, over time, firms can lose their innovative edge because a lot of "learning by doing" happens when production processes interact. Another is that low-margin bits of the supply chain get worn down to just a few sources. These may not have the financial muscle to make big investments in times of turmoil, or they may be geopolitically sensitive. Such risks were underscored by post-Covid shortages, particularly in the largely "fabless" U.S. microchip industry, which has outsourced chip making to foundries in East Asia in a way that echoes what happened to aerostructures.
Spirit's round trip back to Boeing was borne of desperation, yet it captures the zeitgeist." [1]
1. Boeing Calls Time on the Great American Outsourcing. Sindreu, Jon. Wall Street Journal, Eastern edition; New York, N.Y. 03 July 2024: B.12.
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