For Boeing, competition means alliances

Partnerships help aspiring Asian aerospace firms but may enable company to stay No. 1

EVEN before being expanded to produce the new 777 airplane, the Boeing Company's assembly plant north of Seattle was the world's largest building (in cubic feet). This Everett plant, where many workers ride bicycles to get around, symbolizes the huge investment risks Boeing has taken to become the world's premier commercial jetmaker.

The aerospace business is so capital-intensive that the world market can only support about three companies, analysts say. For now, Boeing holds an undeniable leadership position: 55 percent market share, lowest production costs, and the cash flow to support almost $2 billion in research and development (R&D) annually. Yet aerospace is a strategic business no major industrial nation wants to overlook. That makes aircraft manufacturing a game of politics and economic efficiency. The business is ``plenty competitive,'' and efforts by Japan and China are likely to make it more challenging, says aerospace analyst Wolfgang Demisch of BT Securities in New York.

``As we look to the future,'' Boeing chairman Frank Shrontz said recently, ``it's clear that competition will only increase as more companies and nations seek to expand their aerospace capabilities. Information moves too quickly, and valued technologies are too perishable, for Boeing ... to assume its past is a guarantee of its future.''

Consider what the European consortium Airbus Industrie has done since its 1970 founding with subsidies from Germany, France, and Britain. Airbus has knocked McDonnell Douglas Corporation out of second place and now has about three times McDonnell's market share. (McDonnell holds about 10 percent of the market.) In the first half of this year, Airbus beat Boeing with 76 new orders to Boeing's 53.

DESPITE a 1992 agreement between the United States and Europe that capped the level of subsidies allowed, Airbus can still receive up to one-third of the development cost of new airplanes from European governments.

Now Asia, the world's fastest-growing market for aircraft, wants to get its share of jetliner production. The Russian aircraft industry, which has been hobbled by overall economic breakdown, is a wild card in the region.

With the image of an Asian version of Airbus easy to conjure up, Boeing is forging what some analysts view as preemptive alliances. This month, for example, the company announced a $100 million expansion of its investments in China - for building tail sections of the 737 (Boeing's smallest jetliner), and for spare-parts and training facilities. China, already one of Boeing's biggest customers, is expected to buy $65 billion worth of aircraft over the next two decades, notes Bill Whitlow, an analyst with Pacific Crest Securities in Seattle.

Boeing is also discussing plans with Japanese and Chinese firms for a new 100-seat airplane that would be built in Asia. The company bought fuselage sections from Japanese suppliers in the 1980s. The new 777 adds a carbon-composite tail rudder from Australia and some new components from European sources.

All this outsourcing worries Boeing's work force here in ``jet city.'' Every bit of work contracted out costs jobs. ``Our goal is ... to see that the plane is really made here and not just assembled here,'' says Seattle-based Connie Kelliher, a spokeswoman for the International Association of Machinists.

The union's work force for Boeing in Washington State has fallen from 44,000 in 1989 to 28,000 today. Though the drop is mostly the result of a deep slump in orders by airlines, Ms. Kelliher says outsourcing is also to blame. Mr. Demisch says Boeing's strategy is to help Asian aerospace companies develop and, thus, ``the issue of national airplanes will gradually be superseded.'' McDonnell Douglas, he says, is already building planes in China and is looking for equity partners to launch the MD-12 to compete with Boeing's 747. (A McDonnell effort to team up with Taiwan Aerospace to develop the plane failed, he says.) The number of cooperative efforts among airframe or aircraft-engine firms worldwide rose from 11 in 1969 (almost all located within Europe) to more than 45 by 1992, almost one-half involving at least one non-European company, according to one industry study.

Despite the risk of giving away technology and jobs, the partnership trend is likely to continue out of economic necessity. The industry's biggest development projects are so costly that analysts debate whether a market will even exist for them. One project is a ``superjumbo'' jet that would seat 600 to 800 people. A second is a supersonic plane that would fly three times as fast as today's jets. It is possible that only one global alliance could afford to enter either of these markets.

Still, competition rules the day. For the superjumbo, Boeing is building bridges with the Airbus member companies, doing joint feasibility studies. Meanwhile, Airbus is talking up a big plane that it would build on its own. Lower-budget options that could reach 550-seat capacity include an enlarged version of Boeing's 747, supported by a bigger wing, or stretched versions of McDonnell's proposed MD-12.

For supersonic aircraft, European companies are researching jets that would be more economical than the failed Concorde. And Boeing and McDonnell recently won a large US government contract to develop technology for a high-speed plane.

Paul Nisbet, president of JSA Research in Newport, R.I., says the latter contract is a sign of an unfortunate irony in the Clinton administration's aerospace policy. While pushing for free trade and more cuts in Airbus subsidies, President Clinton has taken a proudly partisan view of the industry. The White House and Sen. Patty Murray (D) of Washington took credit for helping Boeing and McDonnell win a multibillion-dollar order from Saudi Arabia over Airbus earlier this year. Mr. Nisbet notes, however, that the Saudis still have not formally announced their order, perhaps because of the impropriety of US politicians jumping the gun and declaring victory.

This naive grandstanding undercuts Mr. Clinton's efforts to reduce European subsidies and to write such limits into world-trade law, Nisbet says. The Uruguay Round of world-trade negotiations ended without the aerospace provisions the US industry desired. Since its founding, Airbus has received more than $25 billion in subsidies. Analysts say the 1992 US-Europe accord has reduced the level of such aid since the consortium is barred from receiving aid for getting production lines up and running on new planes. Development aid can still be significant.

With Airbus's rival family of aircraft now well-established, Boeing is setting high goals for itself. In the last two years, the company has cut cycle time (the time between order and completion of a jet) from around 18 months to 12 months. The goal now is to bring that down to eight months - or even six for its smaller planes. This would mean lower inventory costs as well as quicker service for customers.

Nisbet says Boeing's momentum in R&D spending positions the company to thrive in this era of expanding aerospace expertise in other nations. But one immediate hurdle is to win orders for the 777, which after a strong launch in 1990 has failed to win new orders this year. Boeing's $4 billion investment in developing the ``triple seven'' could pay off big, but first the plane must win certification for cross-ocean flights. As a twin-engine plane, it would normally have to wait for several years of good overland performance; but Boeing hopes its rigorous flight tests will garner needed approvals by mid-1995, when the first 777s are delivered to customers.