Airbus – the European model
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It takes more than an hour to walk from one end of the Airbus campus in Toulouse to the other. The snow-capped Pyrenees on the horizon are mirrored in the huge assembly-line buildings where the world’s largest commercial aircraft, the A380, is put together. The view is interrupted only by the planes taking off and landing from the nearby airport at Toulouse-Blagnac. Twenty thousand employees work at the campus, which sprawls over 600 hectares, the equivalent of more than 800 football pitches. It feels like a small town.
The size of the aerospace group’s operations in this city in southwest France and the humming activity in its offices, hangars and assembly lines are not only a testament to Airbus’s success but also a symbol of how Europe’s companies can compete in the 21st century.
It is fashionable to write-off the continent’s competitive future. “Europe has no competitive advantage,” says Jim O’Neill, adviser to the World Bank’s International Finance Corporation and former chief economist at Goldman Sachs. He also came up with the acronym Brics to identify a group of emerging markets (Brazil, Russia, India and China) whose economic growth was going to challenge the dominance of western Europe and North America.
According to the popular view, Europe labours under many disadvantages – high costs and regulation, unionised and not very mobile workforces and a sluggish regional economy. The World Economic Forum says the European Union underperforms against other advanced economies in three main areas: innovation, higher education and training systems, and the creation of an efficient labour market. With the continent in apparently permanent decline, the theory goes, its companies will be increasingly overtaken by competitors from more dynamic parts of the world.
But the near-universal gloom obscures what is a more complex and encouraging reality. In many areas of business, Europe is not just competitive but leading the field. Nine of the top 20 countries ranked by the World Economic Forum by competitiveness are in western Europe. And despite the sovereign debt crisis which has rocked the continent, the European Commission calculates that the eurozone has a comparative advantage on the world markets in about two-thirds of manufacturing sectors, concentrated in products with a high degree of sophistication and technical knowledge.
Airbus’s aircraft are one example of the strength of the European model.
The company should not really be successful. It has been repeatedly subjected to political meddling and unable to respond freely to commercial imperatives. The wrangles between its parent companies and the French, German and British governments have often been seen to hamper its development, forcing it to retain operations in parts of Europe which it would not necessarily have chosen had it been able to develop in the manner of a typical private sector company. “If we had started with a blank sheet of paper, this is not how the company would have developed,” acknowledges one company official.
Its genesis, 47 years ago, was more a political decision than a commercial one. In the late 1960s, the US had four-fifths of the world’s commercial aircraft market and, with the launch of the long-planned 747 jumbo jet imminent, looked set to consolidate its supremacy. Europe’s aircraft manufacturing industry, despite triumphs such as the launch of Concorde, the product of French and British collaboration and the world’s first supersonic passenger plane, appeared in terminal decline. Politicians in France, Germany, the UK and the Netherlands decided to act, committing at a meeting in July 1967 “for the purpose of strengthening European co-operation in the field of aviation technology and thereby promoting economic and technological progress in Europe, to take appropriate measures for the joint development and production of an airbus”.
The company began as a consortium of national aerospace manufacturers and at several points in the early years it seemed doomed to failure. It was only in 2001 that the company’s structure was consolidated under the ownership of the Franco-German group EADS and the British aerospace and defence company BAE Systems. The British sold out in 2006 but the governments of France, Germany and Spain, which became a full partner in 1971, continue to own stakes, either directly or indirectly.
Wrangling between the different owners, including over engine choices and manufacturing locations, failed, however, to overshadow the achievements of the Airbus pioneers Roger Béteille and Felix Kracht, who launched its first plane – the twin-engine wide-body A300B – in 1972.
Within 25 years, Airbus controlled 50 per cent of the global commercial aircraft market, and in 2003 it became the world’s largest supplier, measured by plane deliveries, beating arch-rival Boeing for the first time. The company has notched up other global records. It makes the world’s largest passenger aeroplane, the A380; its most advanced military transport plane, the A400M; and its A320 is one of the best-selling jetliner aircraft ranges ever. In 2013, it delivered more than 600 aircraft, received $240bn in orders and has a backlog of 5,000 planes to be delivered.
Airbus’s success lies in its political roots. While the original partners in the company recognised that the only way to compete was to consolidate national industries on a regional European basis, consolidation required negotiation and political finesse. Most sensitive was the decision where to site the different manufacturing operations. The easiest way to defuse tensions was to build different bits of the first plane, the A300B, in the different partner countries. The French made the cockpit, the control systems and the lower-centre section of the fuselage; the UK made the wings, and the Germans made the rest of the fuselage and a part of the centre section. The Dutch made the moving parts of the wing, the flaps and the spoilers, while the Spanish made the horizontal tailplane.
Another reason for this dispersed supply chain was to minimise arguments about the cherry on the cake of the whole process – who would put the plane together on the final assembly line. This was established in Toulouse but the decision was made to do as much of the work as possible in each separate manufacturing location, minimising the time at the end of the process, which ended up representing only one-40th of the total hours spent building the A300B.
“We got to develop deep expertise in each location,” says Tom Williams, who has been in the aerospace industry for more than 40 years, and is now in charge of programmes at Airbus. “That vision, that competitive advantage is now extremely difficult to replicate.”
The impact of that expertise can be felt on the ground. Like the original Airbus plane, each bit of the A400M military transport plane, which is put together in Seville, comes from a different part of Europe: the wings from the UK, the fuselage from Turkey and Germany, the nose and cockpit from France, and the engine from a consortium of European manufacturers that includes Rolls-Royce. Each component is transported in one of Airbus’s five specially built cargo planes, which have the biggest holds of any aeroplane in the world. One squats outside the main hangar in Seville, its protuberant front fuselage – which give the plane its nickname, the Beluga – flush to the doors of the final assembly line.
The A380’s journey for final assembly is even more like some modern-day pilgrimage. The wings, fuselage sections and tailplane are shipped from manufacturing sites in France, Germany, Spain and Britain, some parts in Belugas, others on special ferries, then by boat, barge and road in a convoy of six articulated lorries in the middle of the night to Toulouse.
The dispersed supply chain is fixed in stone – it would be a practical impossibility to switch the company’s mammoth operations in Bremen or Hamburg to somewhere possibly cheaper or more efficient. But Airbus believes that spreading out the process has enabled each site to develop a level of specialisation which has led to innovations and lowered the costs of its planes: laser beam welding for civil aircraft, for example, which reduces weight and corrosion, or the computerised flight attendant system developed in Germany and first installed in planes in 2005. The spread-out nature of its manufacturing operations also means Airbus has developed innovative means of collaborating on projects remotely. The engineers in Seville hold discussions with their colleagues in Hamburg over a 3D digital mock-up of the A400M which shows every bolt in the plane.
And that discussion is in English. Béteille, the French engineer who pioneered Airbus’s first plane, insisted that the company’s working language had to be English; every work station in the Seville final assembly line is labelled in English, and every senior manager is required to speak it.
Despite such achievements, the Airbus story is far from an entirely rosy one. It may be a company with a stock market capitalisation of €38bn but it made its first operating profit only in 1990. And although analysts forecast an operating profit of just under €4bn in 2014, its profit margin is only a relatively measly 6 per cent.
Analysts at UBS estimate that the A380 programme will lose $1bn this year, while the A400M suffered years of delay and cost overruns in development and is struggling to find export orders.
Airbus’s ownership ructions also continue. In 2012, it attempted a second marriage with its former British partner, BAE Systems. But the deal was scuppered by Angela Merkel, who apparently believed that it would shift too much power away from Germany. Although the final outcome – a dramatic reduction of indirect state ownership in Airbus – should reduce political meddling in the company in the future, it was a huge setback. Airbus has since restructured and abandoned its target of reaching a 50/50 split between commercial and military sales by 2020.
Underpinning this challenge is the constant drumbeat of rows with Boeing in the US, its main rival. Boeing has continually protested over “launch aid” and other forms of government support to Airbus, while Airbus has argued that Boeing receives illegal subsidies through military and research contracts and tax breaks.
But Boeing is not the only competitive threat. The most buoyant demand for aeroplanes in the future will be from emerging markets. To compete, Airbus has opened facilities overseas in Indonesia, Tianjin, China and, last year, in Mobile, Alabama. As one Airbus official puts it, the assembly line design was “copied and pasted to Tianjin and Mobile”.
The reasons behind moving production out of Europe, though, are not what might be expected. They were made not because it is cheaper or easier but because of the difficulties of breaking into certain markets and the lure of government support. Production of the C295 military aircraft was moved to Indonesia because its government provided financial and regulatory incentives to foreign aircraft manufacturers to shift its domestic industry up the value chain. In China, it would also have been difficult to increase sales without a joint venture.
The long-term threat is that those countries will develop competitive aircraft manufacturing industries of their own. China, Russia, India and Brazil all have aspirations to become global players.
Similarly, Airbus’s decision to open a facility in the US last year was to help it compete for government and commercial contracts. In 2008, for example, the federal government’s decision to acquire its military tanker plane, the MRTT, was overturned on political grounds. “When we can offer American Airlines an American-built plane, it will make a difference,” says Williams wryly.
But the company’s decision to stay predominantly European is not just political or the result of its history. It is also because by doing so it can benefit from one of the region’s main competitive advantages in the 21st century: its ability to innovate, particularly in technology. “Innovation is not sudden,” says Jesús Portillo, who manages the A400M programme in Seville.
The lessons Airbus’s success holds for Europe and its businesses are as complex as the company’s political roots. Quite how to apply them is just as unclear. The most obvious is for Europe’s leaders to select another industry in which to build a global presence and nurture it as they did Airbus. But the aerospace company was born in the heady days of euro-optimism and the likelihood of a similar project today seems low. “Another path for Europe to consider would be to pick a couple of other sectors where it could pose a global competitive challenge,” says O’Neill. “But this doesn’t sit with the philosophy of the UK and Germany.” Overcoming national resistance might prove worthwhile.
Colm Reilly of PA Consulting has conducted in-depth research on companies’ global competitiveness. “The smartest countries are tailoring the levers,” he says. “Countries with a clear industrial strategy … target particular foreign direct investors, they develop trade prowess in certain sectors. They go to five multinational companies and ask, ‘How do I get you to invest here in the next five years?’”
Reilly believes one strategy is to focus on filling gaps in current capability – as Indonesia and China have done in attracting Airbus to invest. He argues that there is a need for a pan-European strategy to focus on developing sectors where Europe already has an advantage, such as pharmaceuticals, cybersecurity or life sciences.
Peteris Zilgalvis, visiting EU fellow at St Antony’s College, Oxford, agrees that there are areas where Europe can replicate past successes. “We had Concorde, we had high-speed trains, the start of the internet… but they are all now some way back,” he says. “But the big jumps are going to be made in areas where so far there has been little innovation up until now, such as healthcare, education and the public sector.” He also emphasises the positive role the state can play and says that Europe has an advantage here over the US. “We can support an essential sector by saying we do and will need finance, for example, and we will invest in it. But [Europe] needs to be more active in leading on research, in providing government support on finding markets.”
If governments had not argued to keep manufacturing capacity in their individual countries, not only would Airbus have turned out to be less competitive but the skills that go with such capability would have been lost.
The European Roundtable of Industrialists, an influential lobby organisation which groups together chief executives and chairmen of the continent’s 50 top companies, believes that as the world’s biggest market, Europe is most likely to succeed if it operates as a region. “Europe’s industrial renaissance must remain the priority,” says chairman Leif Johansson, who also chairs AstraZeneca. “This can best be achieved if the EU renews its political determination to complete the single market.”
“We need to have more of a single market, more of an integrated market,” agrees Nani Beccalli-Falco, head of GE Europe, the US conglomerate which employs 90,000 people in Europe. “Europe has to become more united rather than less united.”
Airbus is certainly one example of a company that is only competitive because it was a pan-European endeavour. If the individual countries had pursued purely national objectives, their domestic industries would have succumbed to global rivals.
“Airbus is one of very few examples of successful European state planning,” admits O’Neill. “If Europe operated as one single entity, you can explore the economies of scale of a single entity.”
The challenges of replicating Airbus in another industry are great: getting the choice of industry right, whether Europe has the skills and technology needed, who would lead the project, whether the region or its companies can pull in one direction. But the same challenges existed nearly 50 years ago when Airbus was born.
“If there could be one lesson… to be learnt from the Airbus Industrie experience,” says Jean Pierson, Airbus’s chief executive from 1985 to 1998, “it would be that co-operation is the key to prosperity and that there simply is room no more for narrow nationalistic endeavours.”
Sarah Gordon is the FT’s Europe business editor
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