In the prehistoric days of avionics manufacturing--say, 10 years ago--suppliers worked under a build-to-print model. Airframe manufacturers such as Boeing, Airbus and Bombardier gave them a system control document that spelled out requirements for functionality in individual systems, and suppliers then built them just as they were told. The boxes then went back to the airframers, who tested and validated the units and integrated them with systems built by myriad other manufacturers.
At the insistence of the airframers, however, the entire second half of that equation--the testing, validating and integrating--has become the responsibility of the first-tier primes like Rockwell Collins, Honeywell, Smiths Aerospace and Thales. And while those primes have in recent years embraced large-scale systems integration and design and engineering, they now expect many of their lower-tier suppliers to step up to the plate with new skills and capabilities.
This change in the interaction between the original equipment manufacturers (OEMs), first-tier primes and everybody beneath them in the food chain is having a profound effect on the way lower-tier avionics manufacturers go about their business. Rarely today do second- and third-tier avionics companies communicate directly with the airframers. So, rather than focusing their sales and marketing efforts on just two or three airplane builders, they must split those resources between a half-dozen or more tier-one avionics primes and hope they hitch their wagon to a prime that wins major contracts. Instead of building discrete, standalone products, they must develop their own systems integration skills and take on greater financial risk. And the lucrative aftermarket business enjoyed by many lower-tier suppliers must, in many cases, be shared with the primes as a condition of their partnership.
The airframers used to procure one function at a time from what they thought was the best supplier for display systems, flight management systems (FMS) and autopilots, Greg Irmen, senior director of Boeing programs for Rockwell Collins tells Avionics Magazine. "Now we're building labs in Cedar Rapids to test, verify and integrate subsystems before we ship them to Seattle."
The trend has come to a head with the development of the 787 Dreamliner, where Boeing deals basically with four avionics companies: Collins, Honeywell, Smiths and Hamilton Sundstrand. The rest of the avionics supplier base now has to ally itself with one or more of those prime vendors and can forget about dealing directly with Boeing.
"There are those who used to work with Boeing and now don't because that work went to tier-one companies--now we're picking them up," says Irmen. "There's not a lot of difference for them; they used to be with Boeing, now they're with us."
The companies seeing the most changes are those at third-tier and lower, who were providing piece parts to second-tier suppliers or even to the avionics prime, says Irmen. "We're passing more work down to them, and we're expecting them to live up to certain business conditions and terms that we, ourselves, have to live up to with Boeing," he says.
Lower-tier companies will now have to support their products for the life of the airplane, Irmen adds. "A lot of electronics suppliers aren't interested in that sort of thing because electronics change every three to four years," he says. "But in exchange they're getting a bigger chunk of business."
Lower-tier suppliers also must take a page from their bigger brethren's business process playbooks by implementing stricter quality control standards. "Not a single failure is acceptable," Irmen says of the products Collins is buying. "They need to be testing as the product is built up at a low level, catching manufacturing errors early on in the process, so they don't manifest themselves as a more costly teardown at a later level. It is part of our terms and conditions."
Packages, Not Products
The fact that airframers no longer seek out the best individual avionics systems, relying instead on first-tier primes to handle the task, means that niche players are quickly losing their niches. It becomes increasingly difficult for smaller avionics manufacturers to thrive when they specialize in only a handful of individual products. Under the old business model, Universal Avionics Systems Corp., for example, would deliver its FMS directly to the OEM, or airframer. It worked closely with Collins, for example, to integrate the system with the largely Collins-supplied cockpit on the Lear 60, but it engineered the FMS for Bombardier.
"Now most OEMs have pushed that engineering task to the integrators, who have the responsibility to complete the total package," says Paul DeHerrera, Universal's vice president of marketing and product support. In many instances, the upshot is that a company like Universal finds itself shut out of programs it once enjoyed. The Lear 60 flight deck, for example, is now wholly a Collins program built around Pro Line 4 and the Collins integrated avionics processing system, which includes, as standard, the FMS formerly provided by Universal. Collins also supplies the Lear 60's dual primary flight displays, multifunction and navigation displays, GPS receiver, automatic flight control system, dual radio tuning units, dual com/nav/surveillance sensors, dual attitude heading reference systems, solid state weather radar system, dual digital air data systems, and the maintenance diagnostics system--leaving little opportunity for other suppliers.
"The bottom line is that [the trend] affects anybody like Universal that doesn't produce an entire package," says DeHerrera. "Markets change, and we understand that. They've got a complete package, and we don't. If we want to compete, we need to put together complete packages, and we're looking at ways to do that."
DeHerrera also makes the point that airlines and business jet operators lose a certain amount of choice under the new relationship between OEMs and their suppliers. "In the past the OEMs would look for the best FMS, the best com radio...all the pieces of the puzzle," he says. "They were driven by the market and what the market perceived were the best products available."
"I think [the trend] is also frustrating for the customer," he adds. "We talk to a lot of customers that would like a choice,...and unfortunately don't get one in the packages offered by OEMs."
The trend also has changed the aftermarket business model. "In many of our markets we had rights to the aftermarket because we held the rights to parts sold directly to the OEM," says Laura Dion, vice president of global sales for Ametek Aerospace & Defense. "Now that model has changed. We've given up the rights in some cases, and in other cases a first-tier company is our distribution channel for the aftermarket. As a result, we're not enjoying selling directly to the end user."
The trend "is being driven more by Boeing and not necessarily by Honeywell or `tier ones' like Parker," she adds. "Boeing is expecting large investments from the tier-ones and because of it, the tier-ones believe everything should go through them."
Dion says that Ametek could, at one time, keep its cost structure low because it controlled the distribution of its aftermarket parts. As that is no longer the case, "we'll have to look at our distribution methods. It changes how we bid business."
Lower-level suppliers also must court more prime contractors in bidding for new business. "We sold a large amount of products to Boeing," says Dion. "[But] on the 787, we don't provide anything directly to Boeing. We must talk to several integrators to sell a device.
"It multiplies our sales effort and engineering effort because [each prime] has a different spin on their offerings. For us it simply means more customers to pursue. You must court all the potential winners."
Ametek has responded by sharpening its global sales force. Rather than having sales people representing different divisions it may, in some instances, have just one person calling on Honeywell, Collins or Parker, ready to sell a range of products.
On the engineering side, lower-tier suppliers must drive toward a more collaborative approach with customers. "That means companies must show a willingness to commit engineering resources well before the work is done," says Dion.
Second- and third-tier companies must simultaneously adopt lower pricing structures to meet cost targets mandated from above. "We tend to go out a lot more than we used to [for manufacturing]," says Robert Majure, director, marketing and product management, platform electronics, for Honeywell Aerospace. "Lower cost is the dominant issue...and we go to where they produce in huge volumes to obtain economies of scale."
One such supplier is IBM, which produces boards for Honeywell. "It gives us a cost-effective way to access their technology without having to develop our own," says Majure.
In other industries, IBM serves as an OEM and first-tier integrator, but it falls squarely in the second- and third-tier category in aerospace. And that is apparently how they want it. "You will not see IBM out there trying to develop cockpits," Majure says.
Likewise, Collins looks for the best-in-class suppliers from the lower tiers. "We used to do all the display control panels ourselves--the light plates, the buttons, the electronics," explains Irmen. "Now we've pushed that down to the suppliers, who ship it to us complete. The electronics aren't that complex and they can do it cheaper."
The same goes for satcom antennas. Collins used to purchase the antenna system and low noise amplifier from different vendors and then integrate the pieces. Now satcom system providers must do the integration themselves if they expect to sell to Collins.
Integration for All
Ametek has established what it calls a "value-added operation" for subsystem integration at its Rotron division in El Cajon, Calif. There the company combines its air movers from Rotron with heat exchangers from Hughes-Treitler, another division, to develop more complex engine oil cooler subsystems.
"Our strategic plan has us partnering with tier-ones, particularly in areas where they don't plan on expanding and where we can help through internal development or acquisition strategies that complement our partner and not threaten our partner," says Dion.
Acquisition, either adding new companies or becoming part of a larger company, certainly will be at the top of the list for second- and third-tier companies expecting to survive under the new regime. Data communications device company, Pentar Systems, took the second path. It was bought in mid-2004 by the Chelton Group, itself an amalgam of approximately 45 companies. Chelton is part of the larger UK-based Cobham plc.
"We are definitely seeing more systems integration work," says Bob Rodgers, founder of Pentar and now president of NAT (Northern Airborne Technology) Seattle Inc. "Even though the Chelton Group is a large-scale integrator, they're looking for us to be a one-stop shop, so we're becoming an integrator of sorts, ourselves.
"It increases the total dollar value of your offering if you're successful at it. But it would have been a bad thing [for Pentar] before we were acquired by Chelton because we had only one piece of the puzzle."
Innovative Solutions & Support (IS&S) has thrived in recent months by transitioning from manufacturing individual units to integrating systems. "What we see is the first tier looking to move down essentially more responsibility to us," IS&S chairman and chief executive officer, Geoffrey Hedrick, tells Avionics Magazine. In October, for example, IS&S joined with cargo airline ABX Air to upgrade and retrofit Boeing 767 cockpits with its flat panel display systems for both primary flight control and navigation. The retrofit has received FAA technical standard order (TSO) approval and supplemental type certificate (STC) approval.
It consists of a pilot and copilot suite of high-resolution, multicolor, flat panel liquid crystal displays. Acquiring internal test, validation and integration skills helped IS&S develop the retrofit and pursue a market for what it says are 1,700 B757 and B767 aircraft.