The Supply Chain Matters blog provides added highlights and perspectives toward commercial aerospace supply and demand networks, and the ongoing saga of key supplier Arconic.
Supply Chain Matters readers are well aware of our continuing commentaries focused on commercial aircraft supply networks and their ongoing challenges to scale-up production for meeting growing backlogs of unfilled airline customer orders for new, more technology laden commercial airliners.
Industry dominants Airbus and Boeing continue to manage an unprecedented decade of ramping-up each of their individual global-based supply network ecosystems to make a dent in multi-year order backlogs that now span upwards of ten years.
Depending on aircraft manufacturer model, the weakest links in supply scale-up remain airframe fuselage, certain aircraft interior and aircraft engine suppliers. For an industry that is driven by continual advances in technology, the scale-up problem is especially difficult because of higher component complexity and corresponding needs for higher productivity output requirements.
In February, we updated readers on forging parts supplier Arconic, the original holder of multi-billion supply agreements with both Airbus and Boeing.
In January of 2016, previous parent company Alcoa announced the split-out of Arconic, destined to be a new value-added aluminum and non-aluminum specialty forging manufacturing company. This split new company was formed to take advantage of the growth of supply needs for high-tech alloy fasteners and forged metal parts within the commercial aerospace and automotive industries. This spin-off was influenced primarily by private equity interests.
Since its creation, Arconic has produced what the Wall Street community perceived as disappointing results, given its positioning as one of many strategic suppliers to the commercial aircraft industry that can benefit from multiple-years of unfilled order demand. According to industry reporting, ongoing production problems have constrained profit from the company’s components unit.
Hedge-fund Elliott Management waged a proxy fight in early 2017 to install its own slate of corporate directors. The hedge fund ultimately agreed to drop the proxy fight in exchange for board representation controlling six of 13 seats and the appointment of its hand-picked CEO for Arconic. That board was viewed as split between Elliott supporters in favor of quickly dismantling or selling the company and directors supporting a longer-term approach to improving Arconic’s growth businesses.
In our February update we highlighted a report that Arconic walked away from a $10 billion takeover deal. Arconic’s CEO was subsequently fired by the board after failing to muster approval for the takeover, and the company’s board Chairperson was named chief executive. In conjunction with reporting quarterly financial results, Arconic indicated plans to definitively separate into two broad business units, engineered products and forgings along with global rolled steel, with one destined for yet another split-out. Further announced was a reduction in quarterly dividend, a subsequent $200 million round of new cost cuts and a buyback of $1 billion in company stock. The board’s Chairperson, an automotive industry veteran would serve as chief-executive for a one-year time period, representing the fourth CEO since the spinoff from Alcoa.
Last week, The Wall Street Journal reported that Arconic’s Board, and especially those representing Elliot Management, remains mired in a long-running feud that threatens another disappointment in the company’s strategies.
The WSJ report states the following:
“Board members have questioned each other’s loyalty and claimed that some members care more about their buddies in the aerospace industry than they do about Arconic, according to people familiar with the board’s dynamic. One key disagreement is over the extent of which Arconic should use its leverage as a key supplier, and how much it should demand from customers.”
Other board members and executives accuse Elliot of being conflicted and short-term focused placing longer-term customer relationships at-risk.
According to the report, the feud came to a head last year when the parts supplier was struggling to keep-up with rising OEM jet engine demands for blades, fuselages and fasteners. The supplier faced accusations that it delivered faulty parts and agreed to pay $38 million to settle claims raised in Q2 of last year. Elliot was not in favor of the settlement.
During the latest financial results conference call, the current CEO refused to discuss board turmoil. Instead, he wanted to focus on the future. The WSJ noted in its report that the current CEO stands to gain a $40 million bonus if the company’s shares rise above $30 in two years.
Supply Chain Matters Perspective
We provided this update relative to Arconic because it is symptomatic of what we believe is a growing industry problem, namely a focus on short-term individual financial or shareholder rewards vs. longer-term growth strategy and cumulative revenue goal achievement.
The problem is not limited to the industry supplier base, or to any one particular supplier, but extends among the two dominant OEM’s as well. Boeing may well now be aware of such a conflict with the ongoing global grounding of the 737 MAX.
An industry that has consistently had the luxury of ten-year customer backlogs over the past four years was obviously a prime target for activists and for Wall Street stakeholder interests. An environment where the needs for scale-up to meet existing customer order demands are now clashing with prior product design or manufacturing decisions to cut costs for the benefit of near-term gains may well be coming home to roost.
From our lens, there will may be additional implications in the coming months and years.
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