Same as it Ever Was ……… Same as it Ever Was ……… Same as it Ever Was ……… Same as it Ever Was ……… Same as it Ever Was ………

When Boeing rolled out is 777, it decided that the best way to maximize profits was to recruit potential competitors to be risk sharing partners to minimize its upfront costs.

The net result was significant delays and a loss of technical know-how, and now, both Boeing and Airbus are looking to bring these capabilities, because it turns out that they outsourced their profits as well:

The world’s largest plane makers are testing a seemingly simple formula to smooth production, cut costs and fatten profits: Make more of the parts that go into their jets themselves.

In the wake of United Technologies Corp.’s proposed $23 billion deal to buy Rockwell Collins Inc., that push is taking on more urgency. The deal is the latest in a round of consolidation among the world’s biggest suppliers of aviation parts—something Boeing Co. and European rival Airbus SE have eyed warily.

Earlier this week, Boeing said it might cancel some of its parts contracts if the deal undermines competition further in the aerospace supply chain. Airbus had previously expressed its skepticism over it.

Worried about getting squeezed by the consolidation, Boeing and Airbus have moved to protect themselves by building more of their parts in-house. This month, Boeing will start construction of a new production facility in Sheffield, England, that will make some of its own actuation equipment—motors that help move a wing’s flaps. Airbus, meanwhile, is planning to build some of its own nacelles, the metal casings that house a plane’s engines. United Technologies is one of the world’s largest nacelle suppliers.

………


Boeing decided two years ago to make some of its own nacelles after years of buying them. In July, the company also said it is planning to develop and build some aircraft electronics, a market dominated by companies such as Rockwell Collins and Honeywell International Inc.

The wings for a revamped version of Boeing’s new 777 jetliner also will be built at a new plant near Seattle rather bought from a supplier. Boeing bought the wings from a supplier for its last big project, the 787 Dreamliner.


………


Bringing production in-house helps level the playing field.

Those parts makers have also traditionally been able to suck out more profit for their components than plane makers like Boeing and Airbus can extract for selling whole aircraft. Profit margins for plane and engine makers have averaged 9% over the past two years, compared with 14% for so-called “tier one” suppliers such as United Technologies and Rockwell Collins, which make finished parts directly for plane makers. Margins come in at 17% for tier 2 suppliers, which provide smaller components for those parts, according to Boston Consulting Group.

This is not a surprise.

The idea that drove the outsourcing of critical technologies for the 787 was that Boeing could be more profitable and efficient by doing and knowing as little as is possible about the underlying business.

This is classic MBA/High Finance type thinking, and MBA/High Finance type thinking unmoored from the underlying business has ALWAYS been a recipe for dismal failure.

Elon Musk Naked

No, no pictures, I am referring to the fact that the emperor may have no clothes, and Elon Musk, in particular his Tesla Motors project, seems to be increasingly unmoored from reality:

If you’re a hedge fund analyst looking over a public company’s numbers and you see a troubling financial trend making itself evident in the data (like a company burning through cash while booking revenue for a product that is seems perhaps incapable of delivering in the volume promised in the timeframe laid out), you will feel the natural urge to short that company’s stock and wait quietly for the money and praise to roll in.

But we want you to pause for a moment and look at the top of that file. Does it say “Tesla Motors, Inc. (TSLA)”?

It does?

Yeah, you’re going to want to rethink that short, homie, because you have not factored “Blind Elon-ic Faith” into your Alpha.

But you wouldn’t be alone.

Tesla reported yesterday, and from a purely logical perspective it was a mixed bag:

Tesla’s reported a net loss of $336 million, or $2.04 per share, compared to a loss of $293 million, or $2.09 a share, a year ago.

Excluding stock based compensation, Tesla lost $1.33 a share, which was narrower than expected, according to a consensus estimate from Thomson Reuters.

Revenue climbed to $2.79 billion from $1.27 billion in the year-ago period, and outpacing Wall Street’s estimates of $2.51 billion.

Yeah, we said “mixed”:

Heading into the earnings report, analysts expressed concerns about whether Tesla would ramp up production of its Model 3, a more affordable electric car with a base cost of $35,000, quick enough. In the past, Tesla has struggled with production issues.

Musk also said that he hasn’t ruled out dipping a toe back into the debt market.

See, Tesla is currently promising that it can make 1,500 of these things in the entire third quarter of this year, but Elon is also telling anyone who will listen that he will be able to make 10,000 in a week by the end of 2018. That kind of ramp-up has led a lot of people in the asset management game to doubt Tesla’s long-term strength, what with logic dictating that cash will burn at the altar of Elon’s ambition, and that the fire might rage out of control while he’s busy glancing over at his rockets, his Hyperloop tunnels or putting the finishing touches on his dope-ass new solar roof. All those factors are causing David Einhorn and a legion of his fellow traders to go short on TSLA.

Just to remind you, their plant used to be the joint Toyota-GM NUMMI plant, and the most cars that it ever produced under that management was 428,633 units in 2006, or less than 8,500 units a week, and Tesla is saying that it can ramp up from about 120 units a week to 10,000 units a week over the next 18 months.

For his next trick, Elon Musk will appoint a horse to his board of directors.

But the underlying story here is that Tesla releases profoundly mixed numbers, reveals that its production ramp up plans are unrealistic, and they get shorted by speculators.

In response to an awful quarterly report, the stock goes up, and the speculators take it on the chin, because ……… Elon!

This is what happens when you short a cult. At this point, R Kelly has nothing on Elon Musk. And the notion that a short squeeze might put a shudder in Tesla’s rise seems – like all other rational ideas that come in contact with Tesla – to be neutered by whatever Tesla investors think of Tesla.

So, here’s our last word of caution to you hedgie analysts out there crunching numbers on TSLA: You’re wasting your time. Tesla isn’t about facts and figures, it’s about belief in the divinity of Elon f%$#ing Musk. You’ll never understand what is happening because the Kool-Aid is the stock and a lot of people can’t stop drinking it.

(%$# mine)

So, Tesla is facing a unionization effort from employees who say that their manufacturing facility is abusive and dangerous, and the corporate response has been (I am not kidding here) free frozen yogurt at their Freemont, CA plant.

So now Tesla is warning its workforce, one that already has issues with excessive mandatory overtime ans safety issues that they will be facing, "Production Hell".

Honestly, I'm half expecting a strike in the next 18 months:

When Tesla chief executive Elon Musk handed over the first 30 Model 3 sedans to reservation holders last Friday, he warned employees they’ll be in “production hell” for the next several months. It was a curious remark, as Tesla employees have been voicing concerns about workplace injuries since earlier this year. Employees reiterated those points in a letter to Tesla’s board Monday, and demanded answers to questions about pay transparency and safety.

“We’re tired of suffering preventable injury after preventable injury,” said Michael Catura, a production associate at Tesla, in a statement. “It impacts morale, it slows down production and it’s of course traumatizing and financially difficult for the affected person. We want to know what the company’s plan is to address this problem, and to see whether or not any progress is being made.”

The letter, signed by the Tesla Workers’ Organizing Committee, said it believes in Tesla’s mission to build a mass-market, emission-free electric vehicle. But the committee cites a number of ongoing issues, and it requests access to a safety plan and clarity on pay and non-retaliation agreements for employees trying to form a union. Earlier this month, a group of 10 factory employees presented a petition with questions about how workers are paid and how raises are distributed. BuzzFeed reported that about 400 employees had signed the petition.

Out F%$#ing Standing!

I have been out of work for the past few months, and tomorrow I start a new job at Nozilizer, a company that makes No₂ based sterilizers.

As is my wont, I am not going to be blogging about this new job, because this is a way for me to end up on unemployment list.

Even better, it is less than a 10 minute walk from the Lexington Market Metro stop, so I won't be using my car to commute.

Time for a hearty "Boo Yah!"

After 30 Years and Billions of Dollars the Missile Defense Contractors Still Cannot Solder a Wire Correctly

Notwithstanding the myriad tough technical problems that are involved, one would think that the Missile Defense Agency would at least be able to make the manufacturers make the interceptors to spec:

Two serious technical flaws have been identified in the ground-launched anti-missile interceptors that the United States would rely on to defend against a nuclear attack by North Korea.

Pentagon officials were informed of the problems as recently as last summer but decided to postpone corrective action. They told federal auditors that acting immediately to fix the defects would interfere with the production of new interceptors and slow a planned expansion of the nation's homeland missile defense system, according to a new report by the Government Accountability Office.

As a result, all 33 interceptors now deployed at Vandenberg Air Force Base in Santa Barbara County and Ft. Greely, Alaska, have one of the defects. Ten of those interceptors — plus eight being prepared for delivery this year — have both.

Summing up the effect on missile-defense readiness, the GAO report said that "the fielded interceptors are susceptible to experiencing … failure modes," resulting in "an interceptor fleet that may not work as intended."

………

One of the newly disclosed shortcomings centers on wiring harnesses embedded within the kill vehicles' dense labyrinth of electronics.

A supplier used an unsuitable soldering material to assemble harnesses in at least 10 interceptors deployed in 2009 and 2010 and still part of the fleet.

The same material was used in the eight interceptors that will be placed in silos this year, according to GAO analyst Cristina Chaplain, lead author of the report.

The soldering material is vulnerable to corrosion in the interceptors' underground silos, some of which have had damp conditions and mold. Corrosion "could have far-reaching effects" because the "defective wiring harnesses" supply power and data to the kill vehicle's on-board guidance system, said the GAO report, which is dated May 6.

………

Chaplain told The Times that based on her staff's discussions with the Missile Defense Agency, officials there have "no timeline" for repairing the wiring harnesses.

The agency encountered a similar problem with wiring harnesses years earlier, and the supplier was instructed not to use the deficient soldering material. But "the corrective actions were not passed along to other suppliers," according to the GAO report.

L. David Montague, co-chairman of a National Academy of Sciences panel that reviewed operations of the Missile Defense Agency, said officials should promptly set a schedule for fixing the harnesses.

"The older they are with that kind of a flawed soldering, the more likely they are to fail," Montague, a former president of missile systems for Lockheed Corp., said in an interview.

The second newly disclosed defect involves a component called a divert thruster, a small motor intended to help maneuver the kill vehicles in flight. Each kill vehicle has four of them.

The GAO report refers to "performance issues" with the thrusters. It offers few details, and GAO auditors declined to elaborate, citing a fear of revealing classified information. They did say that the problem is different from an earlier concern that the thruster's heavy vibrations could throw off the kill vehicle's guidance system.

The report and interviews with defense specialists make clear that problems with the divert thruster have bedeviled the interceptor fleet for years. To address deficiencies in the original version, Pentagon contractors created a redesigned "alternate divert thruster."

The government planned to install the new version in many of the currently deployed interceptors over the next few years and to retrofit newly manufactured interceptors, according to the GAO report and interviews with its authors.

That plan was scrapped after the alternate thruster, in November 2013, failed a crucial ground test to determine whether it could withstand the stresses of flight, the report said. To stay on track for expanding the fleet, senior Pentagon officials decided to keep building interceptors with the original, deficient thruster.

What sort of moron structures a multi-billion dollar multi-year defense system in such a way that there is absolutely no quality control?

To accelerate deployment, then-Defense Secretary Donald H. Rumsfeld exempted the missile agency from the Pentagon's standard procurement rules and testing standards.

(emphasis mine)

OK, that kind of moron.

Why the hell is the MDA still operating this way? 

Rumsfeld has been "spending more time with his family" for about 9 years, so one would think that the pentagon would be able to correct at least one of his f%$#-ups in the interim.


H/T the hairiest Saroff, aka Bear who Swims.
    o o
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      oo oo


There May Still Be Some Utility Left in the Mk. 1 Human

Toyota has discovered that robots cannot do it all, and that they need highly experienced experts to maximize the productivity at their plants:

Inside Toyota Motor Corp.’s oldest plant, there’s a corner where humans have taken over from robots in thwacking glowing lumps of metal into crankshafts. This is Mitsuru Kawai’s vision of the future.

“We need to become more solid and get back to basics, to sharpen our manual skills and further develop them,” said Kawai, a half century-long company veteran tapped by President Akio Toyoda to promote craftsmanship at Toyota’s plants. “When I was a novice, experienced masters used to be called gods, and they could make anything.”

These gods, or “kami-sama” in Japanese, are making a comeback at Toyota, the company that long set the pace for manufacturing prowess in the auto industry and beyond. Toyota’s next step forward is counterintuitive in an age of automation: Humans are taking the place of machines in plants across the nation so workers can develop new skills and figure out ways to improve production lines and the car-building process.

“Toyota views their people who work in a plant like this as craftsmen who need to continue to refine their art and skill level,” said Jeff Liker, who has written eight books on Toyota and visited Kawai last year. “In almost every company you would visit, the workers’ jobs are to feed parts into a machine and call somebody for help when it breaks down.”

The return of the kami-sama is emblematic of how Toyoda, 57, is remaking the company founded by his grandfather as the chief executive officer has pledged to tilt priorities back toward quality and efficiency from a growth mentality. He’s reining in expansion at the world’s-largest automaker with a three-year freeze on new car plants.

………

“What Akio Toyoda feared the company lost when it was growing so fast was the time to struggle and learn,” said Liker, who met with Toyoda in November. “He felt Toyota got big-company disease and was too busy getting product out.”

………

Learning how to make car parts from scratch gives younger workers insights they otherwise wouldn’t get from picking parts from bins and conveyor belts, or pressing buttons on machines. At about 100 manual-intensive workspaces introduced over the last three years across Toyota’s factories in Japan, these lessons can then be applied to reprogram machines to cut down on waste and improve processes, Kawai said.

In an area Kawai directly supervises at the forging division of Toyota’s Honsha plant, workers twist, turn and hammer metal into crankshafts instead of using the typically automated process. Experiences there have led to innovations in reducing levels of scrap and shortening the production line 96 percent from its length three years ago.

Toyota has eliminated about 10 percent of material-related waste from building crankshafts at Honsha. Kawai said the aim is to apply those savings to the next-generation Prius hybrid.

The work extends beyond crankshafts. Kawai credits manual labor for helping workers at Honsha improve production of axle beams and cut the costs of making chassis parts.

Though Kawai doesn’t envision the day his employer will rid itself of robots — 760 of them take part in 96 percent of the production process at its Motomachi plant in Japan — he has introduced multiple lines dedicated to manual labor in each of Toyota’s factories in its home country, he said.

“We cannot simply depend on the machines that only repeat the same task over and over again,” Kawai said. “To be the master of the machine, you have to have the knowledge and the skills to teach the machine.”

True dat.

Guys on the shop floor are an invaluable source of knowledge and wisdom.

Bummer of a Birthmark, Boeing

A Boeing 787 caught fire at Heathrow, though there are no indications that batteries are involved:

Investigators classified the fire that broke out on a Boeing 787 Dreamliner parked at London's Heathrow airport as a "serious incident" but have found no evidence it was caused by the plane's batteries, Britain's Air Accidents Investigation Branch (AAIB) said on Saturday.

The question of whether the fire was connected to the batteries is crucial because the entire global fleet of Dreamliners, Boeing's groundbreaking new flagship jet, was grounded for three months this year due to battery-related problems.

The AAIB designation fell just short of a full-blown "accident" on the scale it uses to describe investigations. The agency's preliminary probe is expected to take several days, opening up Boeing to more questions about its top-selling plane.

When Boeing decided that it would be a good idea to outsource most of its expertise to "risk sharing partners", it was pretty much inevitable.

As I noted 2 years ago in the case of Dell Computer, this is penny wise and pound foolish:

So the decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.

Boeing's problems are further complicated by the fact that its partners did not have the time to develop the expertise to do the job right, so now we have a troubled airliner where the sum of the parts is less than the whole.

Just Read This

It's an article, from Forbes of all places, which explains how our zeal to become a "knowledge economy" is razing our economy to the ground.

They use Dell Computer as an example:

ASUSTeK started out making the simple circuit boards within a Dell computer. Then ASUSTeK came to Dell with an interesting value proposition: “We’ve been doing a good job making these little boards. Why don’t you let us make the motherboard for you? Circuit manufacturing isn’t your core competence anyway and we could do it for 20% less.”

Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. On successive occasions, ASUSTeK came back and took over the motherboard, the assembly of the computer, the management of the supply chain and the design of the computer. In each case Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. However, the next time ASUSTeK came back, it wasn’t to talk to Dell. It was to talk to Best Buy and other retailers to tell them that they could offer them their own brand or any brand PC for 20% lower cost.

It's an evocative example, and one which is easily understand, but the problem is that it invites the criticism that it's just another mindless "Yellow Peril" argument.

The meat of the argument, at least to me as an engineer, is further down:

So the decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.

One of the arguments made by what used to be called "Atari Democrats" in the 1980s was that we could dump all the manufacturing, and then we could all sit behind desks and create the ideas for the lesser (i.e. non-white) people to manufacture.

It's simply wrong.  When you no longer make stuff, you no longer know how to make stuff, and when you no longer know how to make stuff, you can no longer come up with viable ideas.

The question is whether we want to have the German economy, or the Mexican one, and increasingly, it appears that we are trying to achieve the latter, since by making everyone else poorer, it makes the people at the top of the pyramid comparatively richer, and they are the ones who make the big campaign donations.

Read all 4 parts.

H/t DC on Stellar Parthenon BBS.

Year End Auto Wrap Up

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Numbers are year over year h/t CNN

The surprising news is that in 2009, more old cars were scrapped than new cars were bought, meaning that the US auto fleet fell to 246 million from 250 million.

Note that "cash for clunkers" accounted for only about 700,000 vehicles, so the auto fleet would have contracted without the program.

This is the first time that the US fleet has shrunk since probably the end of WWII.

So the year sucked in terms of sales, though December was good for Ford and Toyota, but bad for GM and Chrysler.

Sales had to go up, as at their nadir, sales would have resulted in a fleet age of almost 30 years.

How to build the F-35 center fuselage - The DEW Line

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Blah, blah, blah!

Stephen Trimble has come across a very nice illustration the process of assembling the center fuselage of the F-35 JSF.

What is interesting here is the size of the final assemblies that are mated. It implies a pretty tight control of manufacturing tolerances.

Economics Update

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Commercial Real Estate Delinquencies
$ billion


Percentage
CRE Data H/t Realpoint (PDF) and FT Alphaville


ISM Employment Index v BLS Manufacturing Employment H/t Calculated Risk


Construction Spending

Yeah, we are in some sort of recovery, though I still think that the underlying problems, particularly as pertain to finance and real estate, have not been addressed.

The Institute for Supply Management's Manufacturing index rose to 55.7 in October, up from September's 52.6 and its Manufacturing Employment index rose to 53.1, the first time that this index has broken 50, showing expansion, since April 2006.

On the other side of the Pacific, we have Chinese manufacturing growing for the 8^th straight month.

Real estate news appears to be improving too, with construction spending rising in September, and the NAR's Pending Home Sales Index rising for the 8^th month in a row.

This news has had the anticipated effects in currency and energy, with the dollar falling on an increased risk appetite, and oil rising in expectation of increased demand.