A Boeing Of Asia?

The prototype of the new Boeing 787 Dreamliner is being built in a virtual factory so big, it effectively spans continents. Engineers in Japan build the wings, Koreans add the raked wingtips, Brits refine the Rolls-Royce engines, while Italians and Texans fit the horizontal stabilizer and center fuselage. Project managers in Everett, Washington, watch it all take shape with 3-D glasses that allow them to walk around the digital prototype and monitor every change made by their 6,000 workers worldwide, just as if the model were being assembled in a real factory.

The ultimate manufacturing race--Boeing versus Airbus--is evolving from a battle pitting America against Europe to a competition between two global companies. The national identity of their planes is disappearing, even as the transatlantic trade battle continues to boil over which side supports its aerospace industry more unfairly. Consider: 70 percent of the Dreamliner, which is due to take to the skies in 2008, is being built outside the United States. And up to 60 percent of the production work on Airbus's answer to the 787--the A350, due to launch in 2010--will be done outside Continental Europe.

Even more interestingly, the two companies' rival networks of exclusive subcontractors are evolving into one network, with many factories that serve both giants. The biggest beneficiaries will be contractors in Asia, particularly Japan and China, fueling a new trade worry that could unite Europe and America at a time of sharply rising concerns about globalization. "We're transferring lessons learned and new technology being honed to Asian [companies]," says David Pritchard, an aerospace expert at the State University of New York at Buffalo. "When the next-generation airplane comes along, we will have no base knowledge of how to produce it ourselves."

The shift east has been quiet, but dramatic. More than 35 percent of Boeing's 787, including the wings (which up until now Boeing has refused to outsource because their construction requires the most expertise), is being made in Japan. That's up from 15 percent of the 767 in 1982 and 20 percent of the 777 in 1995. In March, Airbus announced a final A320 production line in China, the company's first ever outside Europe. Already, nearly half of the component parts for Airbus's highly anticipated A380 superjumbo, which will be the largest-ever commercial airplane when it lands with buyers later this year, is being built by non-Europeans.

Aerospace outsourcing to China follows a familiar pattern: chasing low labor and production costs. But the majority of foreign imports for both Boeing and Airbus are coming from countries like Japan and Canada, where costs are just as high as or higher than at home. The key to collaborating globally comes down to expertise, says David McKenna, an executive in Boeing's airplane-production global-strategy unit in Seattle. "We want to have the best partners in the world in our new program ... whether they're from Italy, Sweden, France, Korea, Japan, China [or] the United States," he says. China, for instance, can handle assembling metal aircraft like Airbus's A320 or building wingboxes, but doesn't yet have the skills to craft the newest composite wings, which the 787 will debut commercially. For those, Airbus will rely on British Aerospace, which is an independent contractor now that it's sold its 20 percent stake in Airbus back to the Franco-German majority owners, EADS.

There are, however, other reasons, including politics. America's close relationship with Japan has given Boeing a 96 percent share of the market there. Boeing also benefits indirectly from Japanese government subsidies, including an estimated $1.6 billion to Mitsubishi, Kawasaki and Fuji to fund work on the 787. This is a major European talking point in the trade dispute over aircraft subsidies. Indeed, many analysts see the Airbus foray into China as a so-far successful attempt to prevent Boeing from taking control there, too. In the past six months, China has placed $9 billion in orders for Boeing 737s and $10 billion in orders for Airbus A320s, often in deals sealed during high-profile official visits (including Chinese President Hu Jintao's recent tour of Boeing operations in Everett, Washington). Says Ben Fidler, an aerospace analyst at Deutsche Bank, "At the end of the day, airline purchasing decisions are as much based on politics as they are on the quality of the product."