A new way of thinking about the industrial structure of the aircraft industry

The airline industry has been hit hard by COVID-19. However, there is a silver lining as vaccinations are being accelerated around the world.
Domestic flights in the U.S. were among the first to recover, with Delta Air Lines and American Airlines returning to profitability in the April-June period of 2021. Japanese airlines are still in the red, but I believe it is only a matter of time. I think it is quite natural to expect that in a few months, the vaccination rate in Japan will be much higher, and then domestic travel will increase, and even overseas travel will return to the level before COVID-19 pandemic.

On the other hand, the automobile industry, which is one of the mainstays of Japan’s manufacturing industry and has formed a huge market, is facing a major turning point. There are concerns that the market will shrink significantly due to the accelerated shift to electric vehicles. The recent news that more than 2,000 people applied for Honda’s early retirement program seems to be a prelude to this.

Then, the movement to avoid risk by entering the aviation industry suddenly became very hot. Before the new corona, the market had always been on the rise, and about 50 aircraft clusters had been formed nationwide. It is expected that the activity of these aircraft clusters will return to the previous level or higher.

So what is the industrial structure of the aircraft industry? That is what I would like to share with you in this blog.
Figure 1 is a diagram of the industry structure that you often see.

The OEMs are at the top, with Tier 1 below them, and Tier 2 and Tier 3 below them. I believe that this structure is similar not only in the aircraft industry but also in the automobile industry.
Of course, I believe that this diagram correctly represents the industrial structure. However, it is not very useful for those companies who are thinking of entering the aircraft industry.

Therefore, Figure 2 shows the world’s first industrial structure of the aircraft industry, which I can draw only because I have worked for an aircraft manufacturer for 33 years and have searched for parts suppliers all over the world. This diagram was created for the engine manufacturing side.

• Prime engine manufacturers (OEM): GE, RR, P&W, etc.
• Risk and revenue sharing partners (RRSP): IHI, Kawasaki Heavy Industries, Mitsubishi Heavy Industries Aero Engine, MTU (Germany), Snecma (France), etc.
• Parts suppliers: Hanwha (Korea), GKN (Switzerland), AeroEdge (Japan), and other companies that receive direct parts manufacturing orders from OEMs and RRSPs.

Outside of these, there are a number of JIS-Q-9100 (AS-9100) certified manufacturers, and outside of these, there are a number of general parts manufacturers that have not yet entered the aircraft industry but are considering doing so.

The dots represent the companies, and the lines connecting the dots represent the component manufacturing contracts. This diagram is a model diagram, but if I fill in all the lines, it would be difficult to understand, so I have filled in only a few lines and omitted the rest.

In this diagram, what you need to understand is that many parts are manufactured in a network of engine prime manufacturers, risk sharing partners, and component suppliers, and only a few are manufactured outside of this network.In the field of network science, this network is known as the “rich club” phenomenon, where the number of transactions among the companies in the network increases rapidly. There are high barriers to entry in this network.
However, when a company overcomes the entry barrier and obtains a contract from an engine prime manufacturer or risk-sharing partner to manufacture a component, that company becomes visible to other engine prime manufacturers and risk-sharing partners, and has a chance to obtain new contracts when increasing production or developing a new engine. This gives the company a chance to get new contracts when increasing production or developing new engines. And so the number of lines will increase.

Therefore, if you are currently in the ➀ stage, or if you are in the ② stage, I urge you to climb to the ③ stage, join the network, and become visible to engine prime makers and risk-sharing partners around the world.

We already understand that. We already know that, but we are struggling because we don’t know how to get to the top.

Many aircraft clusters are already holding study sessions on how to deal with newcomers, and everyone is learning seriously.

I am thinking about it from the perspective of network science. I will explain how to tackle this in my next blog.