Large companies today are increasingly moving to become more vertically integrated. The name of the game is an old one: profit margin. Bloomberg reports that The Boeing Company is setting up its own avionics unit called Boeing Avionics. The move is a reversal of a strategy to shed its electronics division 14 years ago when the Dreamliner was launched. The objective, back then, was to shed cost, when the internal electronics division was competing with outside suppliers to bring down cost. What ended up happening was that once Boeing dissolved its internal supply of avionics, outside suppliers cost slowly inched up. From 2012 to 2016, one of Boeing’s avionics suppliers, Rockwell Collins, averaged 22% in operating profit before taxes in its Commercial Systems segment (note). In contrast, Boeing’s entire commercial airplanes segment averaged 9% in operating profit before taxes for the same period. The number in 2016, however, was down to 4.81%. Additionally, commercial avionics systems are not just one-time transactions. Revenue from these systems continues for years after the initial sale in the forms of systems maintenance and updates. Wouldn’t it be nice to capture some of that, when you’ve had the capabilities all along?

Moreover, quality control and supplier reliability became an issue. When much of a company’s manufacturing of a product, like the Dreamliner, relies on its vast global supplier network, it can put the product delivery schedule at the mercy of suppliers. The Dreamliner is more than three years behind schedule. Overheated batteries grounded the fleet worldwide in 2013.

Vertical integration in avionics is a brilliant move for The Boeing Company. It is about control – the control of quality, design, security, and delivery of critical and, perhaps more importantly, profitable components of a key product.

Boeing’s stock price is at its historical high, and it deserves to be there.

Note: This segment provides aviation electronics systems, products, and services to air transport, business, and regional aircraft manufacturers and airlines.
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