Bloomberg News

Boeing Japan Suppliers at Risk as 787 Doubles Parts Share

January 30, 2013

Boeing Probe Seeks More Failures With Battery Under Microscope

A Boeing Co. 787 Dreamliner aircraft operated by All Nippon Airways Co. that made an emergency landing stands on the tarmac at Takamatsu airport in Takamatsu, Kagawa Prefecture, Japan. Photographer: Yuzuru Yoshikawa/Bloomberg

Boeing Co. (BA:US)’s suppliers in Japan that doubled their share of parts going into the 787 Dreamliner over previous models now find themselves at greater risk with no end in sight to the jet’s grounding.

Mitsubishi Heavy Industries Ltd. (7011), Kawasaki Heavy Industries Ltd. (7012) and Fuji Heavy Industries Ltd. (7270) are among companies awaiting a payoff from their investments on the plants and people it takes to make parts for the 787, which is assembled in the U.S. Boeing says the number of Japanese working on its programs soared by two-thirds to 22,000 from 2004 to 2010, the years when development of the 787 accelerated.

“This is a potential crisis point, not just for Boeing but for Japan’s aerospace programs,” said Richard Aboulafia, a vice president of Teal Group, a Fairfax, Virginia-based consultant. “Japan is the biggest aircraft structure exporter in the world.”

With the Dreamliners still grounded after two weeks and investigations giving no hint as to when the planes can fly again, Mitsubishi risks having to wait longer to see a return. Japan’s biggest aerospace company needs about 10 years to recoup the investments it made for the 787, Yoichi Kujirai, an executive vice president of Mitsubishi Heavy’s aerospace division, said in an interview in Tokyo.

Mitsubishi’s 40-meter (131 foot) long ovens in Nagoya crank out seven pairs of wings every month for the 787. The company added a second autoclave oven in 2011 and aims to build 10 composite-material wing boxes a month for Boeing.

Mitsubishi shipped a wing for the 100th 787 last month. The company, which also makes construction equipment and climate- control products, received about 9.4 percent of its 2.82 trillion yen ($31 billion) in fiscal 2012 revenue from the U.S., according to data compiled by Bloomberg.

Return to Service

Aviation regulators in the U.S., Japan and other nations ordered airlines to park their 787s on Jan. 16 after a battery fire on one jet and an emergency landing by another. Airlines so far have received 50 of the aircraft, which entered service 16 months ago and start at a list price of about $207 million.

“We’re all concerned,” Chief Executive Officer Jim McNerney said of Boeing and its suppliers on a Jan. 30 conference call after the Chicago-based company posted a 30 percent decline in fourth-quarter net income. “We want to get to the bottom of this quickly. But I would characterize it more as pulling together to solve the problem.”

Boeing projected 2013 earnings that met analysts’ estimates, assuming that the Dreamliner’s issues get resolved.

Production Plan

The planemaker is maintaining production while U.S. and Japanese authorities investigate the cause of a battery fire on a Japan Airlines Co. 787 in Boston on Jan. 7 and smoke from a lithium-ion battery that led to the emergency landing of an All Nippon Airways Co. flight on Jan. 16.

The probe hasn’t yet found out whether those were causes or the result of a fire.

“Boeing hasn’t changed its plan for our increase in production,” Tokyo-based Mitsubishi Heavy’s Kujirai said. “We are a supplier of Boeing and are following their instructions to the letter.”

The Dreamliner’s problems may run so deep that it has to write off about $5 billion in anticipated revenue, said Howard Rubel, a Jefferies & Co. analyst who puts the odds of that at about 4 percent.

The costs are likely to be much less, in the hundreds of millions of dollars, said New York-based Rubel. That would let Boeing make a profit from what he estimates was a $25 billion investment in the plane.

Increased Production

Japanese suppliers’ share of the production of Boeing airplanes has increased from 16 percent for the 767, to 21 percent of the 777, and 35 percent for the 787, according to figures from Boeing.

“Their track records speak volumes about them,” said Rob Henderson, a spokesman in Tokyo for Boeing. “It’s about their technological ability, we wouldn’t continue working with them if they weren’t good.”

Mitsubishi Heavy makes the wings for the 787, Kawasaki makes the forward fuselage and Fuji Heavy builds the center wing box. Toray Inc. makes carbon fiber for the plane’s body and GS Yuasa Corp. (6674) supplies lithium-ion batteries.

“If it’s found that there’s a problem with a part then there may be a loss of confidence in that manufacturer,” said Ushio Chujo, a professor at Keio university and an aviation adviser. “I don’t think it’s going to affect confidence in Japan’s manufacturing though.”

GS Yuasa

GS Yuasa and the batteries it supplied are at the center of the investigation by U.S. and Japanese authorities. U.S. investigators are asking for data on the performance of the devices as All Nippon Airways said it had replaced 10 of the battery and charger systems on its planes.

The U.S. National Transportation Safety Board is working with Boeing to study the batteries’ history since the 787 entered service late in 2011, according to an e-mailed release by the investigative agency.

Earlier this week, Japan’s government said it’s ending on- site inspections of Kyoto, Japan-based GS Yuasa’s headquarters, as no reports of problems with quality control that could affect the battery were made so far, said Shigeru Takano, a director for air transportation at the ministry’s Civil Aviation Bureau.

Tokyo-based ANA was the first customer for the 787, which uses new technology such as carbon-fiber materials to save weight and improve efficiency. ANA and JAL together have signed up for 111 of the Dreamliners, about 13 percent of the 848 orders for the plane, according to Boeing’s website.

Lithium-Ion Batteries

The plane was the first to use large lithium-ion batteries for backup power and to start the plane’s auxiliary power unit, a turbine engine that drives a generator mainly for power on the ground.

U.S. investigators are putting evidence under microscopes as they also look globally for patterns of flaws with the plane’s lithium batteries, the agency said in a Jan. 29 update.

The broadening NTSB probe shows the board’s “methodical” work, as Chairman Deborah Hersman has termed it, won’t lead to an end to the 787’s grounding any time soon. Flights on Boeing’s most advanced jet were stopped by the Federal Aviation Administration and other aviation authorities Jan. 16, in the first such U.S. action involving an entire aircraft type since 1979, after a battery smoldered and emitted fumes on an ANA domestic flight in Japan.

The grounding of the 787s is unlikely to extend beyond this year, said Teal Group’s Aboulafia.

“Right now the worst case scenario is another nine-month delay,” he said. “We’re not looking at a fundamental design flaw, we’re looking at teething problems.”

To contact the reporters on this story: Chris Cooper in Tokyo at ccooper1@bloomberg.net; Kiyotaka Matsuda in Tokyo at kmatsuda@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

A Boeing Co. 787 Dreamliner aircraft operated by All Nippon Airways Co. that made an emergency landing stands on the tarmac at Takamatsu airport in Takamatsu, Kagawa Prefecture, Japan. Photographer: Yuzuru Yoshikawa/Bloomberg Jan. 30 (Bloomberg) -- Sash Tusa, an analyst at Echelon Research Advisory LLP, talks about Boeing Co.'s 787 Dreamliner and the impact of its grounding on suppliers. Tusa speaks with Francine Lacqua and Guy Johnson on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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