Online Extra: Boeing's Global Strategy Takes Off

The aerospace titan is taking a measured approach to outsourcing, with help from local teams

Boeing's outsourcing strategy isn't as simple as locating a call center in Bangalore. It's far more complicated -- and controversial. After all, political drama is never far from the scene when big airplanes are involved.

True, the aerospace giant does turn to Russian aircraft engineers and Indian software geeks because of their high technical skills and cheap wages. At the same time, Boeing seeks foreign suppliers with the best aerospace technologies and manufacturing skills regardless of the cost. What's more, Boeing often is required to swap manufacturing work in countries such as China and India in exchange for aircraft sales -- a term known as an offset agreement.

It doesn't hurt that a Chinese worker can bend metal for a 737 tail section at a fraction of the cost it would take a U.S. worker. But that's not the primary reason Boeing (BA ) outsources to China: It's to gain access to the fastest and biggest airplane market in the world, and that often means putting some manufacturing work in the country.

"We look all around the world for the best technology, the best intellectual capability, and for the best manufacturing capability in a serious effort to improve our competitiveness," says Jim Morris, Boeing's vice-president for engineering & manufacturing and the architect of the company's outsourcing strategy. "We keep the best partners in terms of quality, cost, and capability."


  Today, like other tech companies, Boeing is pursuing design and engineering talent across the globe. In designing its new carbon-fiber-based 787 Dreamliner, Boeing is outsourcing a much higher percentage of the engineering and design work to outside contractors than it has on previous airplane programs.

"One of the things we have found [is that] it's best to have the people building the parts designing the parts," says Michael Bair, Boeing's vice-president in charge of the 787 program. "It's arrogant for us to sit here in Seattle and guess how to optimize someone's factory in Japan." That raises concerns inside Boeing. "It's difficult for us to justify bending sheet metal, but doing the higher-level assemblies is something we have talent in. There has been a lot of fear expressed about outsourcing our competency, but our view is that we're strengthening our competency. It's a model we're building on."

For the first time, with the 787, Boeing is outsourcing more than 70% of the airframe and is giving all aircraft suppliers the responsibility for doing the detail engineering designs. The Japanese and Italians are designing and building the composite fuselage sections and the wings. The Russians are contributing key engineering talent -- particularly in the area of designing titanium aircraft parts.


  Boeing needed to cut costs to be able to compete with the more efficient Airbus, but Boeing also needed top engineering talent from around the world to help it pull off what will be the design and production of the first plastic commercial jetliner. "We just had to make sure that we absolutely found the most capable and the best of what we needed," Bair says. "We couldn't limit it to Boeing, Washington state, or the U.S."

The other significant change: Boeing is focusing its intellectual talent on what its engineers do best. Boeing engineers still create the conceptual design and requirements for new aircraft, as well as develop the system architecture. What's more, they're responsible for integrating the systems with the fuselage and engines. Boeing engineers also will continue to oversee all testing and the certifying of the airplane. "With the 787, it's a much more collaborative effort" than before, Morris says. "We worked on the top-level designs together. Then the suppliers go off and come up with the detail design of parts."

The 787 outsourcing strategy certainly didn't sit well with the unions or Boeing employees. After all, following September 11, 2001, Boeing laid off 38,000 people over a four-year span. The Society of Professional Engineering Employees in Aerospace, or SPEEA, lost more than 5,000 union members even as Boeing was hiring more than 1,000 Russian aerospace engineers for its Moscow Design Center.


  But union leaders and employees now see that Boeing's outsourcing is more than about cutting jobs. "In the beginning, we were concerned because we were all losing our jobs, but in an environment of stable employment the urgency dissipates," says Charles Bofferding, SPEEA's executive director representing more than 18,000 Boeing engineers and technical workers. "But it's still an important issue. What's at play is the long-term tech expertise of our company and our professions."

Bofferding credits Boeing for engaging SPEEA employees in discussions over outsourcing. Conversations about creating a permanently stable engineering workforce are also encouraging, he says. So far, part of Boeing's strategy is to maintain stable employment, or modest job growth, in the current upturn and to rely on suppliers or Russian engineers to fill the demand for the expanding workload.

But the real test will come in the next downturn. "When a downturn comes, will Boeing be just as committed to keeping the work force stable as they are showing in the upturn?" Bofferding wonders. "I'm somewhat encouraged by what [Boeing is] doing. They seem to have a plan that sounds good on paper, but like all good designs, the real question is, can you build it?"


  Boeing's Morris says the company is committed to a stable workforce. He believes the red-hot success of the Dreamliner -- 235 firm orders so far -- goes a long way to validating the new outsourcing strategy. Without the ability to reduce the plane's overall development costs and be able to sell at prices comparable to older jetliners, Morris says success would be far less assured.

"What we've been trying to achieve is a way to improve our competitiveness and grow our business," Morris says. "Our strategy is to focus on large-scale integration and use the best the world can offer. It's been a hard journey, but if you look at the successes over this last year, it's beginning to pay off."

Holmes is a reporter in BusinessWeek's Seattle bureau

By Stanley Holmes


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