Supply Chain Matters once again focuses on commercial aerospace industry supply networks ever-growing and more challenging scale-up needs. Increasing evidence of OEM and major supplier self-induced management strategies that introduce more weighting on short-term financial return needs defeat the ability for the industry’s overall ecosystems to scale to fulfill multiyear order backlogs. The latest example is supplier Arconic.
Our blog readers are well aware of our continuing commentary 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 aircraft. 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 have been 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 difficult because of higher productivity requirements. Added to this are increasing challenges related to Wall Street focused financial engineering.
Metals and forgings supplier Alcoa, the original holder of multi-billion supply agreements with both Airbus and Boeing, announced plans in March 2015 to acquire RTI International Metals, described as one of the world’s largest producers of fabricated titanium products in a stock-for-stock transaction valued at approximately $1.5 billion. In January of 2016, Alcoa announced the split-out of Arconic, destined to be a new value-added aluminum and nonaluminum 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. The spilt also involved the business of exterior aluminum facing in building construction. The spilt was influenced 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.
Arconic’ s products include titanium fasteners that hold the outer metal skin on aircraft, lightweight composite frames, and composite forgings used for newer designed jet-engines.
Ongoing reporting by The Wall Street Journal indicated that the 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. 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. The open question was whether to now split-apart businesses supporting aluminum sheet production for automotive supply networks and metal components and forgings from aerospace supply networks.
In 2018, a consortium of private equity firms that included Eliot made a $10 billion takeover offer for Arconic. That sale of Arconic had been reportedly complicated by turmoil in the credit markets and, specifically, involvement of the company’s exterior-cladding products in the 2017 fire at the Grenfell Tower in London, which killed scores and injured dozens of others.
Since the start of 2019, developments have accelerated. In January, Arconic walked away from the $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.
Last week, in conjunction with reporting quarterly financial results, Arconic indicated plans to now definitively separate into two broad business units, engineered products and forgings and 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.
Again, business media reporting cited an icy response on the part of investors.
The Primary Question- Yet Another Weak Link
The obvious question for commercial aerospace supply networks is whether Arconic becomes a more visible and more prominent weak link for both aircraft and engine supply network scale-up needs over the next few years.
This is a period where far more management attention, productivity focus and added investment is required for the company’s aerospace engineered parts and metals business, which are the company’s most profitable, and likely fastest growing business. Yet, the WSJ reports that any subsequent spin-off can take upwards of a year and add more administrative expense on top of new pressures for $200 billion in cost reductions.
As a result, if Arconic happens to fall farther behind in delivery and quality commitments, yet another weak link has been introduced for this industry’s supply networks.
As an industry supply chain management observer, we continue to find such developments somewhat disappointing.
Supply network scale-up challenges that are driven by product design, operational or quality management shortfalls are understandable and sometimes an expected challenge in commercial aerospace or other engineering-driven industry segments.
Supply network scale-up that is challenged by management or investor induced financial engineering goal setting that appear to build-in obvious conflicting goals that apply higher weight to short-term investor returns against longer-term business growth investment needs remains disappointing.
An industry with an existing customer demand backlog that far outweighs supply network capabilities should be the envy of any management case study for growth industry. Instead, from our lens, a growing emphasis on shorter-term financial engineering might well pre-determine the eventual outcome of whether this industry can indeed succeed.
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