Aerospace Industry Bullish on E-Business
The aerospace industry’s frantic race toward higher productivity and profits has triggered another feverish contest in the world of Internet-based trading exchanges.
The proliferation in recent months of business-to-business (B2B) exchanges for the aerospace industry is symptomatic, on the one hand, of the growing interest in Web-based marketplaces that link buyers and sellers directly, without the traditional middlemen. On the other hand, B2B exchanges increasingly are becoming tools to achieve specific corporate goals—such as increasing sales, improving customer service and cutting back on excess inventory.
Many executives in the industry believe that the aerospace B2B environment is too complex for a one-size-fits-all solution. Some companies, for example, carry enough clout in the industry that they may not feel pressure to join exchanges. Some industrialists simply don’t believe that a corporation’s presence on Web exchanges necessarily translates into higher sales.
Aerospace industry giants, meanwhile, have been rushing to launch independently owned exchanges—which allow them to join forces with their competitors and combine their buying power—without having to merge outright with each other.
There is broad consensus, additionally, that the confidence that aerospace executives are placing on B2B exchanges is tied to the prospects of higher efficiency and lower costs of executing transactions.
"E-commerce eliminates non-value-added activity," said Phil Condit, chairman and chief executive officer of the Boeing Company. Electronic transactions, Condit told reporters, translate into a 25 percent surge in productivity.
Boeing is one of the four founding partners of Exostar, a B2B exchange for the aerospace and defense industries. The other three are Lockheed Martin Corporation, The Raytheon Company and BAE Systems. The chief executives from all four firms briefed reporters at a news conference in Farnborough, England.
Exostar, said Condit, "will provide both external and internal gains in efficiency for both buyers and sellers."
The exchange, whose creation was announced in March, was expected to open for business in late September. Headquartered in the Washington, D.C. area, it is an independent corporation. The four current participants are the industry’s most powerful firms. They collectively have more than 37,000 suppliers and $71 billion in commercial and government sales. The annual sales volume for the entire aerospace and defense industry is about $400 billion. "We have critical mass," said John Weston, CEO of BAE Systems.
Exostar’s interim CEO is Kent Swanson, who is a partner at Andersen Consulting.
"We invite companies of all sizes from around the world to participate," said Vance Coffman, chairman and CEO of Lockheed Martin. "We have 100 people setting up and staffing Exostar in the Washington, D.C. area. ... We are bringing supply-chain management into the digital age and doing so on a global basis."
The supply chain is an industry buzzword that represents the various buyers and sellers involved in the aerospace market. It includes:
During the past several years, B2B Web-based operations have evolved from simple sources of supplier information to online marketplaces, with many buyers and many sellers, all focused on the industry’s offerings. Exchanges, in theory, were designed to match those buyers and sellers more efficiently and to lower their overhead costs via paperless commerce. They also claim to offer small companies opportunities to be on an equal footing with larger ones.
"We are doing this because it will snap the industry into tighter alignment with the e-commerce priorities of our customers," said Coffman. "Exostar’s open supplier network will enhance competition ... will develop opportunities for small businesses," he said.
The exchange, Coffman said, will support the Defense Department’s e-commerce project, called the "integrated digital environment." The defense industry, particularly, wants to facilitate the Pentagon’s effort to "integrate the supply chain," meaning that customers, prime contractors, subcontractors and suppliers would be part of a Web-based exchange.
B2B transactions range from buying and selling products out of electronic catalogs or via electronic auctions, to submission of bids and proposals, and management of joint projects and documents.
Dan Burnham, chairman and CEO of Raytheon, touted Exostar’s "common protocols and expanded horizons" as important benefits that justified Raytheon’s participation.
Raytheon has a separate e-business site called EverythingAircraft.com, which sells general aviation spare parts. It has not been decided yet whether that site will be integrated into Exostar. Boeing set up myboeingfleet.com as a portal for online maintenance, engineering and flight operations data. Boeing’s online site for commercial parts sales rang up more than $400 million last year, Condit said.
Every member of the aerospace and defense industry is trying to decide which exchange to join, Burnham noted. "We want Exostar to be the obvious choice."
The weight behind the four founding companies will be the key selling point in this exchange, said Mark Hoffman, chairman and CEO of Commerce One. The company supplies the hardware and software for Exostar’s e-commerce infrastructure. "This exchange has the span of these big companies. That gives this exchange a lot of power, a lot of buying power, which is very important.
"We are making an open architecture so members can join without extensive investments in internal technology and processes," he said. He also stressed that sensitive information is encrypted, according to industry standards.
Electronic auctions will be one option available to exchange users, Hoffman said. Small businesses, he explained, can register and make their products available to everyone who is connected. "If you want to send ads or information to different companies, you can do that," he said. "You want them to participate as an active community partner."
Hoffman predicted that aerospace industry e-business exchanges eventually will consolidate because there are currently too many.
One of the most viable competitors emerging today is MyAircraft.com, launched by industry powerhouses United Technologies Corp., Honeywell, and i2 Technologies. The BFGoodrich Company recently announced it will became a partner. These firms collectively have about $25 billion in annual revenue.
MyAircraft.com "has the potential to dramatically improve efficiency in a business involving $50 billion in aerospace after-market parts and services annually," said Ari Bousbib, vice president of United Technologies. Like Exostar, MyAircraft.com is an independent company created to provide an electronic exchange for airlines, manufacturers and suppliers. It is expected to begin operations by late 2000 or early 2001, said United Technologies spokesman Peter Dalpe.
The prime motivation for many companies to join an exchange is to improve inventory management, said Dalpe. The aerospace industry has inventories worth about $50 billion, mostly in spare parts. But the annual demand for new spares and repairs amounts to about $30 billion. "This industry presents ripe opportunities for substantial reduction in inventories," said a white paper published by MyAircraft.com.
The site will offer products from parent companies United Technologies and Honeywell. But new capabilities will be added for supply chain management and technical data handling, Dalpe said. The site will earn revenues from transaction fees and technical publication subscription sales.
Neither Exostar nor MyAircraft plans to impose any exclusivity requirements on companies wishing to do business on the site. "It’s best to have as many companies as possible," said Dalpe.
Lockheed Martin spokesman Hugh Burns said that "any legitimate supplier" would be eligible to participate in Exostar, assuming that their products meet government certification requirements imposed by the Federal Aviation Administration and the Defense Department. "This is an opportunity for people to get into the [aerospace] business, but it doesn’t mean any ‘mom and pop’ hardware store can do it."
Exostar’s revenues will come from transaction fees, said Burns.
Customer Web Center
But while Exostar and MyAircraft tout the benefits of multi-company exchanges, one of the industry’s most prominent firms has experienced success with its own e-business site. The GE Aircraft Engines "Customer Web Center," launched in January 2000, is expected to have nearly 300 customers registered by December, said James McNerney, president of GEAE. "E-commerce is a massive productivity play, not just customer play," he told reporters. By early 2001, he said, "$1 billion in orders will be flowing through the site." The company has assigned 300 employees to the Web Center.
According to McNerney, the productivity achieved via e-business will result in a $500 million increase to operating margins during the next three to four years.
There are more than five million pages worth of manuals on the Web today, said John Rosenfeld, global e-commerce leader for GEAE.
To gain access to the Web Center, customers—such as airlines or maintenance shops—must be pre-approved by GEAE. They can buy spare parts, research technical publications and remotely diagnose the condition of specific equipment, which means they can receive information on the status of an engine while the engine is in flight, Rosenfeld said in an interview.
While the Customer Web Center performs the "selling" function, the company has a Supplier Web Center for its 1,200 suppliers. The "buying" side of GE’s Web operation has automated many of the tasks formerly done by humans. About 200 positions in the purchasing department were thus eliminated, said David Overbeeke, general manager of e-business at GEAE.
"Having 1,200 suppliers on our supply chain Web Center allows GE to do forecasting, scheduling, part shipments, drawings, quality control documents," he said in an interview.
"We used to spend a million-and-a-half dollars shipping blueprints to customers. Now, they pull drawings off the web and print them out themselves," said Oberbeeke. "When there is no value added in a task, you can automate that and eliminate people associated with it.
"We have run over 400 electronic auctions this year alone," he said.
The company plans to launch a site for military customers, Rosenfeld said. "It will leverage all of the functionality we built in the commercial site, although we won’t be able to do it all at once because some of it is specific for commercial customers."
Military customers will have access to spare parts, product support and component repair status. The Defense Department’s electronic commerce office, said Rosenfeld, "wants our data so it can take our catalog data and availability information, and data from other vendors, and put it in one big catalog. ... We also provide status of component repair work at our shops."
But he explained that commercial and military customers have their data stored separately and cannot access that data unless they are authorized.
Most of the content material on GEAE’s sites is proprietary or sensitive, "but we don’t have any top-secret information on the Web," said Rosenfeld. But he believes that will change, because "security standards are getting better all the time."
GEAE considered participating in Exostar, said Overbeeke. But he decided against it. "We were in deep discussions and chose to not participate," he said.
"Our volume [for the entire GE company] is as big or bigger than those companies combined. We have no antitrust risk by combining the GE companies. They may have a concentration in aerospace, which may cause them antitrust problems," said Overbeeke.
A more important consideration for GE, however, was the perception that defense-oriented firms operate at a more sluggish pace than commercial firms. "They are much slower than we are. GE is about speed," Overbeeke said. "While they have talked about it for the past six months, trying to get organized, we saved $100 million" through the GE Web Center, he said. "Would you rather have $100 million of bottom-line margin growth, or would you rather have a lot of meetings and talk about it for six months?"
Besides financial matters, there are other reasons why it would not make sense for GE to be part of Exostar, Overbeeke added. "We don’t want to get tied up with four or five companies in a big bureaucratic structure."
Because GE is a $120 billion company, he said, "We have enough leverage, enough focus and expertise to drive the stuff on our own."
GE Aircraft Engines, meanwhile, has begun negotiations with Boeing for participation on the "sell side" of GE’s Web site. "But on the back end, we believe we have a competitive advantage," said Overbeeke.
That competitive advantage would be sacrificed, he explained, if GE shared its purchasing power with other companies. The upshot would be that they all would be charged the same prices by vendors. "We would all be sourcing the same stuff, getting the same price, yet we have to compete in the marketplace. To me, that doesn’t drive the right value proposition."
The Exostar exchange, meanwhile, "is the right thing for Boeing and the other companies to do, because they need cost control. We have our own cost control."
The "real issue that we have to figure out" in the aviation and aerospace industries is "the interface between product manufacturers and the airlines themselves," said Overbeeke, so that the customers get more benefits and gain productivity. "That is the real challenge and the real question," he said.
The development of standards throughout the B2B exchange universe will be a top priority for the industry because "every company is affected by what other exchanges are doing," said Shirley Goodman, from the Association of Enterprise Integration, in Arlington, Va. The organization has hosted industry forums to address these issues, she said.
"You have all kinds of other exchanges out there being developed but they are all tackling it from different perspectives," said Overbeeke. "Our view right now is to stay GE-branded, give our customers state-of-the-art functionality and be fast to market, building de facto standards.
GE’s status as one of the world’s three major engine manufacturers means that, no matter what exchanges are out there, GE will be a player, said Rosenfeld. "Exchanges are becoming intermediaries, so they can’t survive without us, but we’ve been around a long time without them," he said. "So we are in no rush to go and let one of these folks take over our relationship with our customers. We won’t allow that to happen."
GEAE’s top competitor, Pratt & Whitney, is affiliated with MyAircraft.com. Pratt & Whitney is owned by United Technologies. The third major engine maker, Rolls-Royce, announced it is launching an e-business portal called "aeromanager," which will provide "tailor-made fleet management solutions to the aviation industry," said a company statement. The portal is a joint venture with San Diego-based Science Applications International Corporation.
It is unlikely that all the exchanges currently in business will survive in the long term, Overbeeke said. One of those exchanges, AviationX, appears already to have folded. Phone calls to AviationX offices in Arlington, Va., were not returned.
MyAircraft’s Dalpe believes that there is room in the industry for more than one exchange, but that there will be dropouts as time goes on.
Another exchange that was scheduled to begin operations in the summer of 2000 is Aerospan.com, an e-business site for the aviation transportation industry. The company predicted it would help boost airline profitability by 26 percent.
"There is going to be a rationalization of all this effort," said Overbeeke.
Both Exostar and MyAircraft have been actively promoting their "openness" to other companies’ participation, seeking to avoid being perceived as exclusive clubs. But industry observers believe that anti-trust issues inevitably will arise if companies find that access to certain exchanges is restricted.
Jill Posnick, spokeswoman for Andersen Consulting, said Exostar officials have been aggressive in securing legal advice to preempt antitrust concerns. Andersen Consulting is a partner in Exostar.
The corporate owners of MyAircraft do not plan to become a "buyers club" and make purchases jointly, said Dalpe. "United Technologies will not be doing bulk buying with Honeywell," he said, because that was not the original intent for setting up the site. The emphasis for MyAircraft, he said, is inventory management and automating the supplier-buyer transactions.
There still remain a few non-converts in the e-business frenzy.
Francois Roudier, director of communications at Messier-Dowty, a French supplier of civilian and military aerospace products, said there is much more to achieving growth in the industry than having a "wonderful Web site."
Messier-Dowty, which is owned by the SNECMA Group, has a Web exchange for selling parts and a larger site for electronic business transactions. "But we are doing quite well, even without the Web site," said Roudier in an interview. He is not convinced that a Web exchange can help increase sales, but he endorses the Internet as a valuable customer-service tool.
"For us, as a global company, e-mail has been a revolution, especially when dealing with customers who don’t know English very well and prefer to write things out," he said. "I am not convinced that launching a big web site increases business. I believe in human face-to-face contact. That is the only way to keep yourself in the business. If you don’t meet your customers in person, you’ll be out of the market soon. E-business is just a tool."
Large exchanges such as Exostar, said Roudier, should benefit small parts manufacturers "who don’t have a lot of visibility, who make unique, specialized items."
The belief that "buyers and sellers need help finding each other" is feeding the optimism of dotcom executives, said Barry Wightman, spokesman for TradeAir.com, based in Minnetonka, Minn.
Exchanges allow companies to set market prices more quickly, he said in an interview. TradeAir currently is a commercial aviation site, but is "moving into the defense market," he said. "There are many buyers in the defense community that have the same problems as the commercial customers."
Wightman does not see Exostar or MyAircraft as direct competitors, because TradeAir specializes in the surplus market for spare parts, which accounts for about $10 billion to $11 billion a year in sales. "We are not trying to be all things to all people."
Used surplus parts are sold by airlines, manufacturers, overhaul shops and brokers. Like other exchanges, said Wightman, "we don’t require exclusive relationships with companies. They usually don’t work."
The successful exchanges, said MyAircraft’s Dalpe, will be the ones that implement the "supply chain management software" in ways that will make participating companies more efficient.