Monday, February 18, 2013

Too Big to Innovate?

Boeing's problems with the 787 Dreamliner not only have influence on the airlines and Boeing itself. It will also have an impact on hundreds of small companies that may have significant revenue and survival chances resting on Boeing's success with the 787. We obviously think of the assembly and engineering jobs at Boeing. We obviously think of the airlines that have purchase or lease agreements on these planes. We obviously think of the lack of competitiveness of Boeing with Airbus and other striving airframe manufacturers like China Aviation Industry Corporation (AVIC), Sukhoi and Hindustan Aerospace Limited (HAL).

There's been a question about whether the big corporations can innovate. Maybe the question is whether the corporations should innovate.

We don't think about the fallout further down the supply chain. Boeing is the 2000-pound gorilla that influences the strategies of their contractors. Those contractors are the 1000-pound gorilla that exert persuasive influence over the operations of the small- and medium-sized businesses that give them components and services. "In order for you to be a part of this new project on the 787, you will have to provide 'x' amount of free prototypes and services during the qualification phase. Once this happens then you're locked in 'for life'" said with fingers crossed behind the back. For a small- or medium-sized business, the level of investment during the development phase is significant. Also the payback is long-term. (Remember Boeing's announcement on 7-8-07 was supposed to be their first flight originally, but they had already run into problems.) Delays in other areas creates delays in the ROI for these tier 3 suppliers. The 787 was at least 3 years behind schedule.

Because this is such a large project, delays are inevitable. With thousands of components and fit-ups, the risk is enormous that something will go wrong. Even if it's not catastrophic in scale, any problem creates a delay and affects everyone. There was the problem with the how strongly attached the wings were to the fuselage. Now we have a lithium battery problem. Unrelated to the battery, now the landing gear component manufacturers in various states are having their production schedules slowed. This is true for any of the suppliers in many states.

Layoffs will be inevitable. Capital is lost because there's no immediate return. Loans were taken on the press releases of Boeing's 'impending' production schedule.

Perhaps it's time for either big companies to indemnify the smaller guys from the risks, or let innovation happen on a smaller scale until the technology is proven. Then the 1000-pound gorillas can come ask small business to be a part of a certain, ongoing program. Small business shouldn't be asked to 'finance' large scale innovation when they cannot have any influence on the risk that an o-ring manufacturer or ball bearing or battery supplier is going to make a mistake and shut them all down for years.

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