As a supplier of capital goods to each segment and tier of the global gas turbine industry, we have a distinctive perspective on who does the best job of investing for competitive advantage. The buying practices among the OEM’s, Tier 1, Tier 2, and aftermarket imitators manifest remarkably contrasting economic results. There is a confluence of technology and business practices that substantially are altering the competitive advantage among gas turbine manufacturers. The OEM’s and some Tier 1 suppliers seem highly vulnerable to attack from vendors and imitators both better at adopting new technology and using more effective investment practices to achieve new extremes of competitive advantage.

Our market niche is gas turbine gas path part manufacture and repair processes replacing traditional machining. On average, these parts make up about 30% of the OEM and typically up to 75% of the gas turbine OEM’s profit stream comes from the overhaul, repairs, and spares aftermarket. That makes the OEM’s profit structure quite vulnerable to changes in traditional barriers to entry for parts manufacturers. Rapidly improving technology and better investment practices are accelerating cost and investment advantages to unprecedented levels.


Time is money
A Tier 2 supplier invested in new technology capital equipment to grind vanes (nozzles) using effective investment procedures to achieve an 80% throughput time reduction using one-third the capital compared to their Tier 1 customer, also a customer of ours. Instead of 100 minutes per part, they spend 20 minutes per part. Instead of six setups and three machines, they do all in one set up and on one machine. They use one-fifth the labor and no longer require a skilled operator but can use available labor. Their customer, a Tier 1 supplier, uses the same basic equipment but with ten year old process technology, never having upgraded to current technology. The OEM is using 30 year old technology, and has the highest cost of all. From our perspective, this extreme of an investment and productivity disparity seems amazing within the same supply chain, and among competitors. It gets worse.

There is a segment of this market for flight gas turbines that is rapidly growing called the PMA market. Parts Manufacturing Authority (PMA) stands for an FAA approval process for a reverse engineering company to make an equal to product as the OEM and then sell it to the enduser in competition with the OEM in the aftermarket. While there are a few OEMs reverse engineering competitor’s parts, remarkably there are many smaller companies and start-ups investing in new manufacturing technology to enter the spares market quite successfully and swiftly. So instead of the OEM just outsourcing the cost reductions, they are also seeing new entrants using the same investment cost advantages and improved ROA’s to compete directly with themselves. How can a $4M start-up take on a $40B OEM and soundly beat them at their own game? The answer to that question is what the rest of this article is about.

While better technology is a huge component of competitive advantage, really the investment process used by the Tier 2 companies or the PMA new entrants is what earns them the enormous competitive advantage. Smaller companies are more effective investors than larger global corporations, but not always. Sometimes there are islands of wise investors in big companies too.

Here is a list of characteristics of the companies that hit the ball out of the park for cost reduction and ROA on capital equipment.

Detailed Look

1. They shop or do not shop. The successful are always looking for something that can help them make better products, faster, cheaper, and safer using less assets. In good times or bad, they have a travel expense budget to stay abreast of the latest technology. They travel to competitive suppliers. The unsuccessful shop by written proxy, and perennially have no expense budget to travel to suppliers to stay contemporary. They typically make drive-by shooting style investments during market highs.
2. The successful invest rather than just purchase. The successful are intensely aware of desired outcomes to create competitive advantage and make a high return on the investment that are in fact their primary goals, not just how much they pay. The successful seek and will pay for value and move quickly when high value is proven. The unsuccessful mistakenly believe they are “buying” capital equipment, and so mistakenly concentrate on reducing price often to the exclusion of and detriment to increasing value or timely return on investment.
3. The responsible executive is involved in the investment or not involved. In the highly successful investment, the P&L, ROA, and cash flow responsible executive is actively involved in driving the transaction team. In the unsuccessful companies, the key executive hands-off and delegates the decision to the non-traveling purchasing department and is usually measured on cost savings, rather than timely ROA.
4. The successful try before they buy; the unsuccessful try after they buy. The successful companies insist on funded demonstrations of the process capability before purchase, at their own expense. They fund 5% to 10% expense of the end capital purchase in order to prove the investment before committing. They want to know in advance that the investment will succeed, or they do not invest. They avoid failures. In confidence, they share their performance goals with prospective suppliers and collaborate on lessons learned for achievement. The unsuccessful do not pay for up front proof, may seek free demos, and intentionally stay distant from collaboration with suppliers on their intended outcomes. They discount and ignore the supplier’s full industry wide experience, and instead are more do it yourselfers.
5. The successful check credentials and references. It amazes us how thoroughly and unabashed the successful investors are in getting broad unfiltered market feedback on potential suppliers. How did the potential supplier work through problems with existing customers during and after the sale? Broad reputation counts. Is the supplier ISO-9000 certified, and have we audited their system? The unsuccessful assume any vendor listed as a potential supplier is competent, in lieu of reputation or systems checks. Again, the unsuccessful believe verbal and written anecdotal responses from sales literature and personnel without direct experience or third party factual verification.
6. The successful are balanced contrarian investors, continuously investing when the opportunity presents itself, often when markets are at low ebb instead of high. The unsuccessful just buy at peak economic times or for new programs, and/or outsource for lower labor cost, or move old technology to low labor but distant suppliers, ignoring actual cost, quality and market responsiveness requirements.
7. Lastly, The successful deal with suppliers on a succeed-succeed basis seeking a long term relationship after purchase. When the high returns on investment (ROC ROI, or ROE) are proven in advance of the investment, the successful company permits the vendor a fair price and terms. This encourages good service after taking ownership. The unsuccessful investor plays by win-lose transactional rules and regardless of value received dictates onerous terms, often provoking a co-dependant post investment service relationship, which instigates burdensome ongoing maintenance and service expense at the cost of productivity and real ROA.

These are the principal investment practices we see generating industry altering economic advantages for some capital goods investors. While there is the occasional island of successful investment by large OEMs or even first tier suppliers, the tide is definitely in the favor of the usually smaller and wiser 2nd tier supplier or PMA investors. We see a competitively altering tsunami headed toward the gas turbine industry that spells a major shifting of competitive power based on the OEMs inability to efficiently keep pace with extremes of higher competitive advantage offered by new technology and better investing practices.
 

Huffman Corp.
Clover, SC
huffmancorp.com