January 30, 2013 1:51 pm

Boeing 787 suppliers face revenue doubts

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A burnt auxiliary power unit battery removed from a Japan Airlines Boeing 787 Dreamliner aircraft©Reuters

A burnt auxiliary power unit battery removed from a Japan Airlines Boeing 787 Dreamliner aircraft

The indefinite grounding of the worldwide Boeing 787 fleet has already dealt a heavy blow to GS Yuasa, the Japanese supplier of the lithium-ion batteries that are at the centre of investigations into the Dreamliner’s problems.

No problem has been found in Yuasa’s manufacturing process. However, US and Japanese regulators’ prolonged failure to identify what caused the battery on an All Nippon Airways’ domestic flight on January 16 to become charred could have ramifications throughout Japan’s aerospace industry.

Japanese suppliers to Boeing, from Mitsubishi Heavy Industries, which makes the Dreamliners’ main wings, to Jamco, which provides its lavatories and galleys, face the prospect not only of prolonged uncertainty but, depending on the length and outcome of ongoing investigations, lost revenue on expected orders from Boeing.

So far, Boeing, which has a backlog of 798 Dreamliners that have been ordered, has continued with production of the 787, which was grounded worldwide after a series of problems culminating in the emergency landing of an ANA flight in Takamatsu, western Japan.

Suppliers say they have not been informed of any changes to Boeing’s plans to ramp up production from five planes a month to 10 by the end of the year. Consequently, relations between Boeing and its Japanese suppliers so far show little sign of having become strained.

For one thing, Japanese companies are generally well-placed to weather the latest setback, analysts say.

Toray, for example, which supplies the carbon fibre composite material used in the fuselage to substantially reduce the weight of the 787, generates just 1 per cent or so of its Y1.6tn in sales from the Boeing contract, estimates Atsushi Ikeda, analyst at Citi in Tokyo.

Even in the worst case scenario, if Toray should lose the entire order for carbon fibre composite material from Boeing, in three years’ time, that would be about 15 to 16 per cent of its estimated output of 14,000 tonnes, he says. Much more important for Toray is its textiles business, which generates half its profits, Mr Ikeda says.

Furthermore, with the 787, Boeing and its Japanese suppliers have become even more interdependent than they ever were in their decades-old relationship.

The input from Japanese heavy industry manufacturers in the 787’s airframe structure is 35 per cent, compared with 21 per cent for the 777 and 16 per cent for the 767 before that, Boeing says.

“Japanese manufacturers were essential in enabling Boeing to develop this new aircraft, which really depends on Japanese technology,” says Hajime Tozaki, a professor at Waseda University in Tokyo who specialises in aviation policy.

For the suppliers, a contract to supply Boeing generates revenues over decades, given the long lifespan of planes.

“What Boeing buys out of Japan is massive – actually, a large majority of Japan’s commercial aerospace exports. And much of what it doesn’t buy directly ends up in engines and other systems that are sold for use on Beoing planes by US and international suppliers,” says Lance Gatling, an aerospace consultant in Tokyo.

The 787 “presented a chance for the Japanese suppliers to get into new, cutting edge technology. No one else on the planet is building composite fuselages and wings this size on this scale”, he says.

Mr Tozak adds: “If orders decline, that will be a blow. But they will still benefit from the technology they developed. It won’t be a complete disaster for them.”

However, Boeing’s Japanese suppliers have already had to weather a long delay before the first Dreamliner was finally delivered in 2011, more than three years behind schedule. That has already extended the timeframe for suppliers to recoup their costs.

Moreover, this time, in addition to delays, they could also face cancellations from airlines, which are themselves under pressure to upgrade their fleets amid fierce competition, analysts say.

“Airlines might switch to another plane, if it becomes clear that they won’t be able to take delivery of the 787 as expected or if they become concerned about its safety,” says Mr Tozaki.

It is not entirely clear who would end up shouldering the costs of any delays or cancelled orders, since neither Boeing nor its suppliers disclose details of their contracts. But Mr Tozaki expects Boeing to try to avoid any compensation by allowing suppliers to use their technology to win other businesses instead.

“Loss of orders will be damaging but it won’t be a complete disaster since they will be able to use the technology they developed elsewhere,” he says.

Nevertheless, the timing could not have been worse, as suppliers who provide some of the most important parts of the aircraft, such as the wings, were investing heavily to meet Boeing’s planned doubling of monthly production this year.

“As long as Boeing continues to build, it won’t affect the Japanese suppliers,” says Mr Gatling. “If Boeing stops building 787s because it takes months to resolve the problem, then they’ve got a problem.”

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