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Will New Entrants Upset the Aerospace Apple Cart?

Competitive dynamics favor the supply chain more than the assemblers.

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After a period of gradual consolidation, followed by  Boeing's (BA) acquisition of McDonnell Douglas in 1997, two main assemblers, Boeing and Airbus, have dominated commercial aviation. While a duopoly might seem to indicate a strong buyer power over suppliers, assemblers have a symbiotic relationship with their supply chain, leading to competitive advantages for both suppliers and assemblers. Further, with new manufacturers from China and Russia looking to challenge the duopoly, assemblers appear to have a fight on their hands.

Aircraft manufacturers choose the parts of the value chain they would like to own, outsourcing the rest. This classic "make or buy" decision is a result of what the firm considers its core competency and the financial benefits associated with either decision. Staying vertically integrated has its benefits. By controlling the entire supply chain, firms minimize project delays and can respond quickly to production challenges. However, vertical integration is capital-intensive and entails large fixed costs. Moreover, when the product needs to be technologically advanced, no firm has the wherewithal to handle the entire risk itself. Prudence suggests outsourcing risk to supply chain partners.

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Anil Daka does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.