Small local suppliers flying blind through 737 Max crisis

EVERETT — More than a year ago, Valence Surface Technologies was poised to accommodate a boost in production of the Boeing 737 Max to as many as 57 airplanes a month.

The company chemically treats and paints metal components for commercial and military aircraft at 11 U.S. locations, including an Everett plant that employs about 100.

Valence was planning to increase output to meet Boeing’s plan to build 737s in Renton at a rate of almost two per day. “We were supposed to be there in 2019,” said Tracy Glende, the company’s CEO.

Now, with production of the troubled jet at a standstill, that capacity might not be needed until 2022, he said.

“We’re still waiting in terms of what we’re going to do,” Glende said.

Snohomish County is home to about 200 aerospace suppliers and the highest concentration of aerospace workers in the state, said Patrick Pierce, CEO of Economic Alliance Snohomish County.

Many thought that the 737 Max, which was involved in two fatal crashes that killed 346 and has been grounded since March, would have been re-certified by now. Through the end of 2019, Boeing continued to produce the plane, though it reduced production from 52 planes a month to 42.

Now it’s zero. Chicago-based Boeing is temporarily suspending production of the troubled airplane until regulators re-certify it.

“We all knew a shutdown was a possibility,” Glende said. “But we were all hoping it wasn’t going to be necessary. I’m not sure you ever prepare for something like this. Fortunately, we do a lot of work on other programs at our 11 locations. If you’re a mom-and-pop supplier, that’s a pretty difficult situation.”

Hundreds of local businesses and shops, particularly smaller companies that furnish Boeing and top suppliers with the nuts and bolts of key components, face an uncertain course.

Tied to the company’s immense global supply chain, Boeing’s woes have become their woes.

“Some of these suppliers are buying materials for airplanes that are to be built two years from now,” said a person familiar with aerospace supply chains, who didn’t want to be quoted by name. “If they were going to 57 planes a month, just imagine how much inventory they had to build up just to be able to support that production. If they’ve got parts that are already finished and getting ready to ship, do they get paid for them? The little guys are the ones that could get hurt.”

Should they stay the course or find other customers? Pass out pink slips or keep workers on the payroll and struggle to stay afloat?

“This isn’t just a local problem — it’s a state, national, global problem. There are thousands of suppliers,” said Jin Prowse, CEO of Prowse Manufacturing Group in Arlington.

The group operates Talon Manufacturing, a specialty machine shop, and Infinity Fabrication, a sheet-metal fabricator. Combined, they employ 28.

Talon makes components for interior 737 cockpit doors and other parts, she said. “The bulk of what we do is for the 737 — some for the 747 and 777X.”

“We’re on a path of growth but that path is very much dependent on the 737 being re-certified,” Prowse said.

Despite the worldwide grounding, which has cost the company billions of dollars, Boeing continued to build the 737 Max, rolling out more than 400 planes in the past 10 months.

The narrow-body, single-aisle workhorse accounts for about 70% of Boeing’s commercial aircraft production and generates significant revenue for outside suppliers.

“When Boeing reduced production from 52 a month to 42 last year, we did feel it somewhat,” Prowse said. “With a complete shutdown we’re in unknown territory.”

“We’re very concerned,” she said. “You can’t make decisions based on the unknown.”

Boeing absorbs the blow

The 737 line in Renton is expected to shut down this week or next once a handful of Maxes, in the final stage of assembly, are completed.

In a memo last week to Renton employees, Boeing said the stoppage would affect about 3,000 workers but that “no layoffs or furloughs are currently planned.”

Instead, Renton employees will be reassigned, in many case to other locations including Everett’s 767 and 777 lines. Others will staff Max airplane storage locations in Moses Lake and Victorville, California. Stored planes need constant upkeep, even though they aren’t flying, and eventually will need to be prepped for delivery.

Smaller firms, on the other hand, might not have the means to keep employees on the job.

Since summer, the jetmaker had said that stopping production of the 737 Max might be in the cards.

“I thought they would have re-certified the plane much earlier. I thought by November, December, fourth quarter, but that hasn’t happened,” said Prowse, the Arlington supplier CEO. “The uncertainty is what’s uncomfortable.”

In Wichita, the uncertainty ended when Spirit AeroSystems, a top Boeing supplier that assembles 737 fuselages, said it would lay off 2,800 employees — 15% of its workforce.

Local sources said they’re hearing that some Puget Sound-area suppliers, too, are about to make cuts — if they haven’t already.

In 1990, Boeing and other manufacturers produced about 80% of a plane’s key components in-house, including such things as wings, the fuselage and tail assemblies. The remainder was outsourced.

By 2012, in-house production had dropped to less than 40% of a plane’s parts, said Kevin Michaels in his 2018 book, “Aerodynamic: Inside the High-Stakes Global Jetliner Ecosystem.”

That made suppliers responsible for producing the bulk of the airframe.

Airplane makers including Boeing and Airbus initiated the change to achieve “better financial returns” and redistribute the financial risk, Michaels said. On the plus side, suppliers had more room to innovate as well as greater design freedom.

What has emerged is a complex, tiered global supply system that shares boom times and busts but has the potential to fray if too many links are stressed.

‘We’re trying to get clarity’

Top-tier suppliers rely on a finely tuned network of other suppliers who must meet “just-in-time” component deliveries.

The bigger “tier 1” companies communicate directly with the planemaker and are in charge of designing and manufacturing an airplane’s main systems, such as the engine, landing gear, fuel system or cabin components.

They typically outsource parts and subassemblies to tier 2 firms, which might rely on tier 3 machine shops, for example, or tier 4 companies for raw or near-raw material.

When Boeing announced the 737 shutdown, small companies farther down the food chain were left in the dark.

Several local companies said last week they’ve contacted bigger suppliers to find out what Boeing is planning.

Boeing spokesman Paul Bergman said the company has told 737 suppliers to suspend parts shipments for one month starting in mid-January.

“This is intended to provide guidance for suppliers as they manage their own production. In addition, we provided 737 suppliers with potential production scenarios for their input,” Bergman said in an email to The Daily Herald.

“The scenarios show some possible supplier delivery rate options that are under consideration, and are not specific commitments. The input we receive from suppliers will help inform our planning going forward, and does not represent a commitment for when production will restart, or how quickly the program will increase the production rate. Nor do the scenarios speculate on return to service or return to delivery.

“These scenarios will be used to pulse the supply chain’s reaction to potential options that might ultimately differ from 737 airplane build. We realize this poses challenges for some suppliers and we appreciate their partnership and support during this time. We are working with them to manage risk, address hardships, and ensure their ability to support seamless production resumption.

”This action to the supply chain in no way supersedes the temporary 737 production suspension. We continue to focus on safety and quality as we assess our 737 production needs, and are working with suppliers to ensure production system stability. Our objective is unchanged: a healthy and stable 737 production system,” Bergman wrote.

Those scenarios are raising alarms.

“The most concerning thing is the production rate schedules that go out to 2022,” said Glende, the Valence CEO. “We’ve seen various versions. Some of them have Boeing maybe producing 30 a month.”

“We’re trying to get clarity from Boeing, but they can’t determine a rate schedule until re-certification occurs. At the moment we’re just working off a best-guess scenario,” he said.

“We’re going to have to re-adjust our capacity, and part of that could include people,” Glende said.

Vulnerable supply chain

An intertwined network of suppliers potentially puts everyone at risk.

“We don’t have any direct 737 Max work,” said Allen Gipson, vice president of operations at Jamco America. Jamco produces furnishings, galleys and other interior features for airplane cabins at an Everett location.

But a lengthy shutdown could negatively impact “our suppliers — second- and third-tier companies,” Gipson said. “If they’re having problems or go out of business, it could have an impact on us.”

“Without knowing when the FAA will re-certify the Max, Boeing can’t truly gauge when production will resume,” reported Leeham News and Analysis, a Bainbridge Island consulting firm.

Once 737 production resumes in Renton, it’s not clear what the rate will be.

“Just because they’ve been producing at 42 a month doesn’t mean they’re going to go back up to that level — at least not immediately,” said Glende, the CEO of Valence. “You’ve got 400 aircraft sitting on the ground that haven’t been delivered and another 300-plus that have been delivered to the airlines and have to go back into service.”

Some 6,000 or so work at local aerospace firms besides Boeing — painting, finishing or assembling seats, tray tables, cockpit doors and other airplane parts, according to Snohomish County estimates.

New Tech Industries in Mukilteo makes tools and parts used in the Boeing assembly process, “like specialty wrenches and drill jigs,” said Carmen Evans, who co-owns the company with her sister and mother.

“We make specific tools used to make the plane,” Evans said.

“We’re a small, family-owned business with 37 people. Some of our employees have worked here for 25 years,” she said. “Any shutdown or slowdown affects us.”

Bucher Aerospace’s Everett facility employs about 55. Its products include entertainment systems, seats, tray tables and business- and first-class items, said CEO Francisco Aguilera.

“We are in a fortunate situation in that we have a diverse portfolio of airplanes we serve,” Aguilera said. “The 737 is not too severe of a problem for us. Nevertheless, no one wants to see Boeing struggling like this. We all care about this.”

Aerospace companies that serve the general aviation community are also in a bind, concerned that their projects are being sidelined by federal regulators focused on the Max.

“The Federal Aviation Administration is going to want to personally test each and every plane … to go through that many airplanes, that’s huge,” said the owner of an Arlington general aviation firm who asked not to be identified.

“They’re focused on the 737 and can’t get to us. We’ve got projects awaiting FAA approval that are stalled.” The projects require FAA certification.

Prowse, CEO of Talon Manufacturing, is proceeding carefully. “We’ve been much more cautious with financials,” she said. There’s nothing she can do about the uncertainty. “It’s making everyone uncomfortable.”

But Prowse is trying to be optimistic.

“We’re moving ahead and taking this time to refresh the machines, get our house in order,” Prowse said.

Janice Podsada; jpodsada@heraldnet.com; 425-339-3097. Twitter: JanicePods.