BRENDAN SOBIE / TOKYO
To support Boeing's ambitious development schedule, Japanese manufacturers have had to begin preparing for the 7E7 without a contract
Japan's five largest aerospace companies have begun preparations to build 35% of the Boeing 7E7 and are banking on their hefty investments in the new project to bring a steady stream of revenues over the next two decades.
The 7E7 represents Japan's largest commercial aircraft project and provides a significant advancement of its manufacturing capabilities. For Boeing, outsourcing to Japan components as large as the wing makes financial and strategic sense given its historic domination of the Japanese market and the government support that will result from Tokyo granting the 7E7 "national project" status.
The non-profit-making Japan Aircraft Development Corporation (JADC) is overseeing Japanese participation in the 7E7 on behalf of five companies: Fuji Heavy Industries, Kawasaki Heavy Industries, Mitsubishi Heavy Industries, Nippi and ShinMaywa Industries. Boeing and JADC are now negotiating a master programme contract to cover the Japanese role in developing and producing the new aircraft.
"The master programme contract has not concluded. Of course, the joint work has started," says JADC senior managing director Toshinori Nishi.
JADC sent its first team of 7E7 engineers to Seattle in mid-2003, several months before Boeing publicly disclosed the selection of Japanese companies to build 35% of the 7E7 airframe.
Mitsubishi has been chosen to supply the wing box; Kawasaki will provide the forward fuselage section, the main landing gear wheel well and wing fixed trailing- edge; while Fuji will supply the centre wing box. ShinMaywa and Nippi are guaranteed to be second-tier suppliers under the other three companies, but they are still discussing with JADC and Boeing which components they will supply.
Information exchange
JADC was formed by Japanese Aircraft Industries (JAI) in 1973 ahead of its participation in the 767 programme. JAI's five member companies secured a 15% workshare of the 767 and for the first time qualified for national project status. In 1991, JADC was again selected by JAI to oversee participation in the 777, which also qualified for national project status after a 21% workshare was guaranteed.
Boeing has since repeatedly turned to its Japanese partners to support new commercial aircraft projects. JADC negotiated deals with Boeing to participate in the 747X and Sonic Cruiser before these programmes were scrapped due to insufficient customer interest. Almost as soon as Boeing began studying the 7E7, JAI companies proposed participation schemes. Discussions began in early 2003, with JAI seeking a workshare of at least 30%. Boeing vice-president of business development and global strategy Wade Cornelius says an initial memorandum of understanding was signed last spring, laying out a general framework and allowing proprietary information to be exchanged.
After the companies tentatively secured a 35% chunk of the 7E7 airframe, Japan's ministry of economy, trade and industry (METI) was successfully persuaded to support their request for national project status. The cabinet later agreed with METI's determination and the Japanese parliament will decide how much to loan JADC by the end of March. The first wave of funds should be available after the new fiscal year begins on 1 April.
For the 777, a government investment bank loaned JADC ¥60 billion ($570 million), enough to cover 60% of its development costs. This time JADC is asking for a 70% cover and a loan scheme similar to that used for the 777.
"We expect more than 60%, for example 70%, because the 7E7's risk and volume will be a lot larger than 777," says Nishi.
The Japanese share of development costs, reportedly ¥240 billion, will be negotiated as part of the master contract.
"That's a big secret," says the general manager of Mitsubishi's civil aircraft and aeroengine department, Masakuza Niwa. "Of course we're discussing subsidies with the government, but the subsidy scheme is not yet fixed."
Nishi says the final contract will probably not be wrapped up until after the Japanese parliament approves the subsidy scheme next month, but a partial agreement could be signed before parliamentary approval. Cornelius says "a general agreement on terms and conditions" should be in place by the end of March and Boeing aims to sign the final contract in the second quarter, possibly in early April.
Boeing and JADC are confident contract negotiations will be successful and believe it is a matter of when rather than if.
"Of course JADC will conclude a master executive contract with Boeing for the 7E7," says Nishi. "We expect that conversation will be finished early. But we can't say how much in concrete time that will take."
To support Boeing's ambitious development schedule, including a 2007 first flight and 2008 entry into service, Japanese manufacturers have had to begin preparing for the 7E7 without a contract. For example, the companies need to break ground this year on new manufacturing facilities.
The manufacturers say they are taking into account supply-chain logistics in their review of potential building sites. Assembly will probably take place near the port of Nagoya, Japan's traditional aerospace centre, so the components can be shipped by boat to the new Central Japan International Airport, set to open next year on landfill outside Nagoya. Boeing will then transport the parts, including the Mitsubishi wing, from central Japan via a modified Boeing 747 freighter.
New facilities
Mitsubishi is looking at building a new production facility at either its Tobishima or Oye plant. Kawasaki is considering constructing a new building dedicated to 7E7 assemblies at its Nagoya complex, which already houses two buildings, one for the 767 and one for the 777. There is plenty of space in Nagoya for expansion, whereas its larger complex at Gifu is restricted.
"Boeing is making the effort to put the aircraft in the market in 2008," says Kawasaki marketing and sales manager Joyce Ootake. "Therefore, preparation to start production will begin in the middle of 2004 and fabrication will start in the middle of 2005."
Cornelius says 7E7 components for the first aircraft will have to be produced in 2006. But the Japanese manufacturers will have to be ready to start fabrication in 2005 to produce test parts and samples ahead of initial production.
Fuji, Kawasaki and Mitsubishi have also loaned engineers to JADC to support development efforts in Seattle and are working with Boeing on a conceptual design study. Just under 100 Japanese engineers have already been appointed to Seattle and this workforce will rise to over 300 as development progresses.
The companies have also begun internal studies to support development of their specific parts. For example, Mitsubishi began studying in October how to fabricate a composite wing.
"This is the first time anywhere in the world that such a large wing will be built with composite materials," says Niwa, adding that there are many new processes Mitsubishi will have to prove to secure type certificate approvals.
Composite wing
The study will be completed by the end of March and will be followed by a testing and pre-production phase that should give Mitsubishi confidence in its new wing-building capabilities.
Mitsubishi already builds wings for smaller aircraft, including the Bombardier Global Express, but the 7E7 wing is roughly three times larger.
"Yes, it will be a remarkable size," Cornelius says. "But it is based on existing technology and processes Boeing has with the 777 vertical tail fin." He adds that Boeing's experience with composites, combined with Mitsubishi's experience with composite wings on its F-2 fighter, is sufficient to overcome any challenges. "We're looking for them to supply an integrated wing similar to the Global Express they supply Bombardier. Given their ability and our confidence in them, we think they will be capable of handling this responsibility," he says.
Boeing's selection of Mitsubishi for the wing is historic for both companies because Boeing has never outsourced a wing and Mitsubishi has never supplied such a large part.
"This project is unique and very meaningful to us," says Niwa.
Mitsubishi supplies fuselage floor panels for the 767 and 777, but believes its expansion into wings will pay dividends and may result in additional contracts for this critical part.
"We tried to change focus from fuselage to wing with the Bombardier programme," he says. "We want to provide integrated products."
As a result, Mitsubishi stands to gain the lion's share of the workshare increase of more than 50% for Japanese companies in the 7E7, compared with the 777.
Fuji already produces the centre wing box for the 777 and for the 7E7 will only add responsibility for integrating the wheel well. Fuji declined to be interviewed.
For Kawasaki, the 7E7 mainly represents an extension of its current fuselage expertise. The company already supplies the forward fuselage panel for the 767 and 777 and will produce this part for the 7E7.
Kawasaki also builds the middle fuselage panel for the 777, but for the 7E7 this section is being sourced to a team led by the USA's Vought Aircraft Industries and Italy's Alenia Aeronautica.
Ootake says the addition of the main landing-gear wheel well and wing fixed trailing-edge offsets the middle fuselage. Overall, he says, the company's share in the 7E7 will be the same or bigger than its share of the 777. This will also be Kawasaki's first experience with the landing gear wheel well, which requires many complicated components such as the pressure bulkhead. "In appearance, it doesn't look bigger, but the work required isn't so small," says Ootake.
Cornelius adds that although the Mitsubishi wing is "the significant area of increase" for JAI companies compared with the 777, the switch to composite components will also help Fuji and Kawasaki advance their capabilities.
"Because it's composite material, it will be a real step-up in sophistication. It will be a substantial advancement of technology," he says.
Sub-suppliers evaluated
The three companies have also begun evaluating potential sub-suppliers, including for some machined parts. JADC says a majority of this work will be handed to other Japanese companies with a small portion potentially being outsourced outside Japan.
JAI members ShinMaywa and Nippi, which is an independently operated subsidiary of Kawasaki, will be given the largest subcontractor roles.
"ShinMaywa and Nippi will get a special position because the two companies are very big compared to the usual subcontractors," Nishi says.
For raw materials, Boeing will select the suppliers directly. But the Japanese manufacturers believe the composites will be sourced in Japan, with Toray Industries the leading candidate. "We've been in extensive discussions with a number of companies, including Toray," says Cornelius.
Japanese companies are banking that revenues from the 7E7 will more than offset a reduction in sales of other Boeing aircraft and help fuel an effort to increase their civilian business.
Japanese aerospace companies have historically been heavily dependent on Boeing's sales record. The introduction of the 767 and 777 resulted in a revenue spike that JAI hopes will be duplicated with the 7E7, but revenues have also fallen in recent years as production of the 767 and 777 slowed.
Loyalty to Boeing
"If Boeing catches a cold, then we catch pneumonia," says Society of Japanese Aerospace Companies (SJAC) vice-president of international affairs division Shuichi Miwa.
The fall of the US dollar in recent months has further dented the financials of Japanese aerospace companies. Airbus's market-share gains at the expense of Boeing have also hurt Japanese companies. JAI companies are only minor suppliers to Airbus and have stayed loyal to Boeing, declining offers to be risk-sharing partners in projects such as the A380. Japan also has relatively small shares in Boeing narrowbody programmes.
SJAC is aiming for 25% of member company revenues to be generated from commercial aircraft exports, compared to the current 19%. Defence now accounts for 46% of revenues, but this sector is expected to be, at best, stagnant over the next several years because of budget cuts. Domestic civilian sales account for 10% of revenues and space 25%.
Defence exports are prohibited under Japanese law and the domestic civilian market is limited, forcing aircraft manufacturers to rely on civilian exports to expand their business. As a result, Japan's aerospace companies need a successful 7E7 sales run if they are to expand and slow sales could result in industry contraction. "This is a very big chance for us," says Niwa.
JADC estimates a market for 2,500-3,000 7E7-size aircraft over 20 years, with "many, many" in Japan. All the manufacturers conducted market studies last year before signing on as risk-sharing partners.
"We think the 7E7 is the latest technology and it will be the standard for the next-generation airliner," says Ootake, adding that the capabilities gained as a 7E7 supplier could lead to other commercial aircraft component contracts.
The 7E7 is considered the leading candidate to replace the more than 100 767s and Airbus A300s in service at Japan Airlines (JAL) and All Nippon Airways (ANA). JAL and ANA placed simultaneous orders for 777s in 1991 and will probably place launch orders for the 7E7 later this year. Boeing has historically dominated the Japanese airline market while Airbus has failed in attempts to gain market share and sign up risk-sharing manufacturing partners in Japan.
Funding inquiry
Boeing's ability to win Japanese national funding for the 767, 777 and now the 7E7 has further cemented its domination of the market. Airbus late last year asked the European Union to launch an investigation into the Boeing-JADC 7E7 partnership arrangement to determine if there is a breach of World Trade Organisation subsidy rules. JADC's Nishi rejects such claims, saying: "They don't know the details of the scheme."
For the 767, METI directly provided funds to JADC that have since been returned. For the 777, a political investment bank was instead used as the loan vehicle. Most of this loan, distributed through JADC to each JAI company, based on workshare allotment, has been paid back. The government initially covered some of the interest payments on the loan but these too are being repaid.
"We do not call it a subsidy. It is a loan," Nishi says. The loan vehicle for the 7E7 has "not been decided, but maybe will be a similar scheme".
JADC expects some of the interest on the 7E7 loans will initially be covered by the government but ultimately repaid.
For the 767 and 777, JADC negotiated a joint development and production contract with Boeing. JADC later transferred the production portion of these contracts and the government loans to the Commercial Airplane Company (CAC).
CAC later asked for additional government support to help cover development of the 777-300ER and 777-200LR, but METI rejected the request because the projects were not big enough to merit national subsidies.
Source: Flight International
