In 2012, The Economist described the dawn of the Third Industrial Revolution, an era that would feature the digitization of manufacturing and the use of new, stronger and more innovative composite materials. And indeed, that trend continues at a rapid pace. Competing in this new era requires manufacturers to invest in new technologies that can provide both product as well as process innovation. General Electric, through its GE Reports series, recently highlighted its billion dollar bet on ceramic super material as a basis of product innovation.
Ceramics has been utilized for many years for certain power and electrical based applications mostly used in kitchen appliances. A visionary GE engineer however, believed that ceramics, which can withstand higher heat than even the most advanced alloys, could be the perfect material for jet engines and other machines that burn fuel and must handle enormous temperatures. Nearly 30 years later, along with nearly $1billion in research investment, components made from ceramic matrix composites (CMC’s) are being incorporated in the next generation of aircraft engines such as CFM International’s LEAP model that will power the upcoming Airbus A320 neo (new engine option) aircraft. The concept of a new and highly more fuel efficient upgrade of the A320, with a shorter new product development time, was prompted by these newer innovations in aircraft engine technologies.
According to the GE report, unlike other alloys, CMC components weigh one-third the weight of metal and do not need to be air-cooled. A GE Research leader indicates: “CMC’s allow for revolutionary change in jet engine design.” This was a tremendous bet on innovation. Now, aerospace, military and industrial customers may soon experience aircraft, helicopters and industrial turbines made from more CMC material based components providing lighter weight higher performance and operational savings.
However, not all suppliers have the deep pockets of global-based manufacturer such as GE. Suppliers that currently exist in commercial aerospace supply chains experience constant cost-control pressures from respective aerospace producers seeking to improve product margins or overcome prior expensive aircraft program delays. Even now, as both Airbus and Boeing are planning for significant production volume ramp-up, there still remains the perspective of who pays for innovation, and who reaps the overall benefit.
So what is the key difference for GE and its joint partners, Italian based Turbocoating, France based Snecma. That difference is that airlines negotiate and contract for aircraft engines directly with engine manufacturers. These manufacturers can translate investments in innovation to bottom line financial outcomes. CFM International has thus far booked orders for 9550 LEAP engines valued at $134 billion at list prices. The margins achieved from this amount of orders are under the direct control of the aircraft engine manufacturers themselves, a benefit that the majority of other aerospace suppliers do not have.
From our lens, the takeaway is twofold. Manufacturers ultimately own the responsibility for overall product design innovation. It is not a task delegated to key suppliers without joint compensation. Several years ago, the industry embarked on a strategy of de-centralized innovation and cost-sharing, one that required key component suppliers to innovate in product and process dimensions but not necessarily harvest the benefits from longer-term production volumes. Principle aircraft manufacturers are investing heavily in final assembly process and test automation, yet seek to offset program costs within other areas of the supply chain.
Much continues to be written on the lessons learned by that strategy, particularly those related to design and cost implications. Now, as the industry faces its toughest test in terms of supply chain ramp-up, suppliers seek due compensation for their innovation efforts. Suppliers must also answer to investors who have a shorter-term horizon.
The Third Industrial Revolution will continue to lead to breakthroughs in many dimensions, and to a new breed of more agile, market responsive manufacturers. The notions of who owns and who is rewarded for innovation will be front and center in this race to the top and will lead to a return to vertical integration supply based strategies.
The manufacturing leaders of tomorrow will be those that master the risk and reward dimensions of product and process innovation.