The financial troubles in southern Europe are spreading and impacting the supply chains of Airbus and Boeing (and Embraer). Daniel Michaels and Darcy Crowe report in The Wall Street Journal that Spanish supplier Alestis was placed under court administration (the Spanish equivalent of US bankruptcy protection) earlier this month.
The interesting part is that Alestis is in the attractive business of new advanced composite materials (carbon fiber parts—as a cyclist, I love this stuff and have written about this great material before on this blog) manufacturing: it supplies
“major parts of jetliners including composite ribs, panels and skins for the hot-selling Airbus A320 and the A380 superjumbo, the world’s largest passenger jet. Its long-term contracts bring steady payments from established companies. But Spanish banks have slashed lending, so Alestis, like many skilled companies, is operating from one bill to the next.”
So why is this affecting Alestis?
“Alestis was established in 2009 from the merger of several small aeronautic companies around Spain with support from the regional government of Andalusia. It was just coming together when Spain’s real-estate industry went bust. Banks were left with piles of bad loans that have drawn scrutiny from authorities and financial markets. Last week, the government ordered all banks in Spain to raise their provisions against potential losses tied to real estate, which will reduce their capital for lending to companies like Alestis.”
Given that Alestis doesn’t disclose financial results, I don’t know exactly what’s going on but it is quite likely that they need some help in working capital and supplier relationship management. Carbon fiber and finance must go hand-in-hand. With strong long-term contracts from premier customers, Alestis should be able to manage its cash, inventory, and suppliers better.
Airbus and Boeing have learned their lessons when they burned themselves by transitioning to a system integrator business model. (Quick review from our Kellogg Operations Strategy course: They outsourced major parts manufacturing without a parallel sufficient investment in supplier relationship management. To minimize their financial risk, they were going to pay suppliers only when aircraft were finished. Suppliers invested early but didn’t get paid with the delays in the A380 and the 787. Subsequent supplier defaults forced A& B to buy up some key suppliers: A bought PFW Aerospace and B bought Vought Aircraft.)
The story with Alestis is different and A & B are keeping a close eye on this and are lending to Alestis. Interestingly, Airbus must walk a fine tight rope: keep Alestis afloat yet not lend too much because that may make it liable to all of Alestis’ debt. Or will they buy Alestis?
Supplier management must combine strategic contracting and relationship management that drives continuous improvement. It is key to operations strategy and any outsourcing models.