JUSTIN WASTNAGE / TOULOUSE
The French city of Toulouse has spawned a large aerospace sector, thanks to Airbus. But today those suppliers face new challenges and competition
France's fourth largest city, Toulouse, owes much of its spectacular growth in the last two decades to the aerospace business and the outsourcing policy followed by Airbus. This has brought enormous opportunity, but has also caused social change and a shift in business practices to reflect the era of globalisation.
Half of Airbus's French-sourced work is carried out in Toulouse, amounting to 15% of the European total. Thirty thousand people work in 530 aerospace companies that have sprung up in the past two decades in the city and the surrounding Midi-Pyrénées region and 20,000 more in avionics software, site construction and services.
The Toulouse Chamber of Commerce and Industry (CCIT) says that in 1983 around 14,000 people were employed by Aerospatiale, when just 36 Airbus A300/A310s were produced at its plant at Blagnac airport on the edge of Toulouse. By contrast, Airbus now employs 14,700 at its Toulouse site, which is expected to deliver 200 aircraft this year. "While there have been productivity gains, most of the difference can be accounted for by outsourcing," says CCIT president Claude Terrazzoni.
He traces the development of Toulouse as Europe's centre of aerospace back to UK involvement. Early investment into the Aerospatiale/BAC Concorde project gave the city unrivaled facilities and runways and the entry of Hawker-Siddeley successor British Aerospace into the Airbus consortium as a full partner in 1979 brought with it some "Anglo-Saxon ideas" on subassembly management, he adds.
A320 debate
"There was a big debate around the time of the A320 project as to whether each partner should retain their full competence and thus their independence, or to specialise. The British, who wanted to be 'the wings of Europe', were very forceful in their support for specialisation, with the view that 'money was money'. This became the French view much too late," says Terrazzoni.
This philosophy of specialisation, with Toulouse home to final assembly, was copied by the partners, which increasingly farmed out work to subcontractors, and completed the final assembly of each major section before shipping the section to Toulouse. In the city itself, more and more of the auxiliary functions associated with aircraft manufacture have been outsourced to allow Airbus to concentrate on its core final-assembly competence.
Of the 530 companies in the region associated with aerospace, many started with only a few former Aerospatiale employees. A typical example is Sinters, which maintains Airbus's tooling equipment, and which in 20 years has grown into a company of 160 employees with an annual turnover of €10 million ($11.5 million). "Outsourcing has happened gradually since 1970 and the establishment of the consortium, but the A340 accelerated the process, which has intensified over the past six years. The A380 project has taken the philosophy to the next level," says Michel Carlus, president of Sinters.
When Airbus first discussed the A330/A340 series in the mid-1980s, it realised that a new model of partnership was needed, not only to ease the design phase workload, but also to reduce financial risk. At that stage, Latécoére, France's oldest surviving airframer, pioneered the risk-sharing partner model that has now cascaded down the supplier chain.
Apart from a two-year period of post-war nationalisation, Latécoére has been independent since 1917, and risk-sharing gave the company a chance to be more than just a subcontractor, says François Junca, chairman of Latécoére's supervisory board. The result was that Latécoére was awarded the contract not only to build the upper shell section of the A330/A340 fuselage, but also responsibility for its design and development.
This led to a series of risk-sharing partnerships with Airbus across its aerostructures, onboard cabling and systems engineering activities. Later, Bombardier, Dassault and Embraer followed suit, enabling Latécoére to double its revenues between 1995 and 2000.
Airbus is committed to raising up to 40% of the 550-seat A380's c10.7 billion development costs through top-level partners such as Latécoére. But Junca is keen to underline the risk element in "risk sharing", pointing to the company's c4 million losses in its subcontract with Eurocopter to build aerostructures for the Fairchild Dornier 728 programme.
Another example of a company established in Toulouse to perform a specific function is Aéroconseil, which started as an outsourced design bureau carrying out research into flight physics and flight systems for Airbus. The company was founded by ex-Aerospatiale design engineers and often recruits new staff from Airbus. Aéroconseil chief executive Dominique Berger says such thorough knowledge of the organisation is essential. "We all know why certain parameters are specified in the design sheet checklist, because we wrote the specifications," he says.
Aéroconseil engages with Airbus directly as it works on the design and definition phase of programmes, but most smaller companies have been squeezed out from such direct contact. Jean-Christophe Gauthey, chief executive of Elta, which specialises in emergency locator transmitters and power conversion systems, says the relationship between Airbus and its smaller suppliers has changed in terms of the scope of work. "We used to work very closely with Airbus, but now that there are prime contractors between us, we tend to get much more prescriptive contracts. This is better from our point of view, as the obligations are much clearer," he adds.
Supplier companies
Sales director Daniel Friedmann says that due to the layering of suppliers, Elta's customers are avionics and power systems companies such as Goodrich, Honeywell, Rockwell Collins and Turbomeca. "We work directly with Airbus during the design phase and they recommend us to the primes for subsequent contracts," he says.
This is a recent change, and comes as the latest evolution of the outsourcing philosophy. For example, in 1995 Elta was involved in the design phase of a DC electrical charger unit for what was then the A3XX. Airbus initially gave Elta an "informal agreement" that the design phase participant would end up working on the production model. Before the launch of the programme, the last vestiges of such coy relationships were swept away, however, as part of Airbus's restructuring process. This led to a best-value prime contractor arrangement with component suppliers bidding for parts of the primes' contracts. Some primes, such as Honeywell, have a desire to integrate all the technology in-house, but others such as Goodrich, Messier-Bugatti and Parker Aerospace are following the outsourcing-and-integrator model, "which gives us a chance", says Richard Maurice, sales manager for Elta joint venture Enair'gie.
Even as late as the 1990s, many deals between Airbus and its suppliers would be cemented over lunch in one of the prestigious restaurants in Blagnac, or else in the brasserie at the Stade Toulousain rugby club, but this has all changed since the new selection process developed by Airbus procurement team.
In fact, many suppliers feel that the benefits from being situated in Toulouse are not as great as they once were. The CCIT points to advantages such as access to a vast pool of qualified staff, courtesy of the estimated 100,000 students in the city, one quarter of the metropolitan population. Toulouse also plays host to a series of aerospace research institutes including Onéra. However, it was traditionally the networking potential that pushed many companies to locate there.
Key relationships
For some suppliers, relationships are still key. Aéroconseil, for example, has a business unit focusing on customer support for start-up airlines taking secondhand aircraft. "Airbus has 3,000 aircraft flying, with many customers. Any breakdown in the relationship with Airbus Asset Management would have severe consequences, as the banks, lessors and airlines that make up the end customer are almost always referred by Airbus," says Berger.
But Aéroconseil, now also based in Hamburg, says the basis of a happy relationship is competent work, rather than any personal factors. The firm has also diversified into flight-data analysis, pilot consultancy and other areas as the strong Toulouse networks have loosened over the years. Many other suppliers feel the "circle of friends" factor is diminishing too. "The Toulouse relationship network is important for us from a purchasing point of view, but our location is less important than it once was, as it's now all about the quality and cost of your product," says Carlus. "At Aerospatiale, there was a notion that when a company was producing good components, there was no need to change their ways, but that was before the cost-cutting ways of today," he adds.
Lost work
The constant drive by Airbus to reduce prices has seen several Toulouse-based companies losing work to foreign competitors as Airbus widens its supplier network. Latécoére, for example, lost A380 fuselage work to Italy's Alenia Aeronautica, although it won work on the doors. Carlus says: "As new competitors have emerged from high-technology countries such as Ireland and Malaysia, our share of Airbus contracts has dropped from 80% to 60%."
Recently, Airbus's occasionally rocky relationship with its suppliers was revealed when it issued a public warning that it will blacklist any that fail to meet standards. "In many ways the [supply chain] is a cottage industry with a lot of maturing to do...the industry needs to change: we are going to drive change", said Airbus procurement executive vice-president Ray Wilson in late August.
CCIT's Terrazzoni says the global redistribution of work is widespread and the CCIT has funded industry initiatives to help companies manage the transition. To combat the shrinking Toulouse market, the CCIT's efforts - apart from engaging Airbus in a twice-yearly supplier conference - have focused on three areas: diversification, broadening of the customer base and exporting production to lower-cost countries. "Small companies need to find their niche and stick to it," he says. "They are forced to not only master their production techniques, but offer after sales support and anticipate customers' demands," he adds.
Airbus wants to reduce the number of small suppliers it deals with. Elta, for example, was encouraged to join forces with rival TFE Electronics and form Enair'gie to jointly bid for AC/DC power conversion units. "We are a small company, so we must have partnerships all over the world," says Gauthey, adding that the company is also talking to small concerns in Brazil and Canada to work on non-Airbus projects. "We don't want to put all of our eggs into one basket," he adds.
Most suppliers realise the market is becoming less secure and are keen to lessen their dependence on Airbus. Sinters says it aims to reduce the company's Airbus business, currently 33% of the total, to a maximum of 25%. Its first big break was when ATR outsourced its entire test, calibration and maintenance activities, which means it now supports ATR fleets around the world.
Another way suppliers have reacted to the change is to beat Airbus at its own game, chasing other airframers for contracts. Latécoére, for instance, established export sales as a strategic imperative in the late 1980s, with a subcontract to CASA on the (at the time) McDonnell Douglas MD-11. It was, however, following the completion of the A340 programme that the company aggressively pursued work overseas. "Between 1994 and 1998, when there were no big European projects, we chased Bombardier for work on the CRJ700/900 project," says Junca. Latécoére now builds baggage bay doors for the CRJ and has successfully added Embraer 170/190 barrel sections and doors to its portfolio. The company has seen enormous growth and is now targeting the USA, having become part of the Boeing 7E7 Council, comprised of senior executives from each of the 7E7 Airframe Candidate companies, which it expects will lead to a risk-sharing contract (Flight International, 4-10 November).
The other side of the globalisation coin is the establishment of foreign subsidiaries. Latécoére established a joint venture in 1998 with Korean Air's aerospace division to design and manufacture forward upper shells and floor assemblies for the A340-500/600. This has been followed by a cabling facility in Tunisia and the acquisition of Czech manufacturer's Letov's facilities in Prague. For Junca, the reasons for moving production are obvious. In Prague wages are four times lower and even allowing for the €15 million investment in new facilities over the last three years, the cost per unit comes out to about 50% lower.
Technical know-how
However, technical know-how is very advanced in the Czech republic, says Junca, and there is competition for staff where unemployment is only 0.5%, "so we lose a little of the price advantage each year as wages rise" he says. Even in Tunisia, where local salaries are around one-tenth those of France, expatriate salaries, on-site power generation and bureaucracy push total costs to almost half those of Europe.
Junca says: "The reality is that globalisation won't end with aircraft manufacturers only being located in North America and Europe, but elsewhere, as we are beginning to see. This redistribution of work has to happen to allow prices to fall. Our role is to adapt to the needs of our customers and integrate work from overseas and choose a path of technological value adding."
The sum of this activity over the past 20 years has led to Toulouse being the undisputed aerospace centre in Europe, even if the path has not always been smooth. The valuable experiences of outsourcing seen in Toulouse is being held up as an example to the world. The newly established US consulate is sure to be taking notes.
Source: Flight International
