Chairman and CEO
The Boeing Company
"Forging Strategic Alliances: Rethinking the Model"
The Australian Information Technology (IT)
Strategic Alliances Summit
August 23, 2000
Thank you, Professor Donaldson. It's a delight to join you in Sydney as you count down to the Olympics. I'm here in Boeing's Board Room in Seattle, and the sun will soon set behind our mountains, the Olympics. So while we are far apart in person, we are connected electronically and by a word that conjures up great images of our two cities.
Today I want to talk a little about the global trading exchange we are creating in the aerospace and defense industry. First, let me paint a picture of our industry so you can get a real sense of the sheer scale and scope of our exchange effort. We are an industry that makes a remarkable number of highly technical, sophisticated products...from military jet fighters to commercial jetliners to launch vehicles and satellites. We have customers and suppliers in 220 countries, and have annual revenues estimated in excess of $400 billion (U.S.) We are about...270,000 general aviation aircraft; 85,000 military aircraft; 37,000 suppliers; 13,000 commercial jetliners; 5,000 space launches; and 2,500 satellites. Our products take huge amounts of data to design, build, and support. So we have big databases, lots of computing power, lots of purchase orders, and lots of transactions. Our aerospace industry is far-reaching, complex, and fragmented because of size and scope of work.
So imagine doing business in an industry where your products have millions of parts; where your suppliers use different procurement systems and operate worldwide; where your company, as ours does, has about 12 million procurement transactions annually. You would come to the same conclusion that many of us did: There is enormous opportunity to improve productivity.
E-commerce offers us that opportunity, and our neutral Internet trading exchange is one way to do that. Last March, Boeing, BAE Systems, Lockheed Martin, and Raytheon joined forces to create an open, neutral digital marketplace that serves and benefits all buyers and sellers to improve the way we do business.
The companies involved in the launch do business in both aerospace and defense, represent a broad spectrum of products and services, and have a history of success with web-based systems. Many of us adopted electronic commerce early on, and most of us aggressively embrace it today because of the nature of our highly technical work. At Boeing, for example, we launched our e-commerce site - the PART Page - four years ago to sell aircraft parts to commercial airlines. It has been very successful. Last year that business produced more than $400 million (U.S.) in annual revenues. It will migrate to the exchange.
In forming our exchange, we wanted partners who could create a balance between commercial and defense and buy- and sell-side functionality, and who would ensure broad participation across multiple segments and reflect the global nature of our industry. Our four founding industry partners do that. Together they buy more than $70 billion (U.S.) annually, which guarantees critical mass and a global presence.
Our partners also have an equal initial ownership stake, with equity incentives based on the amount of procurement and sales that run through the exchange. We have reserved additional equity stakes for other strategic partners, but it is not necessary to own an equity stake to participate in the exchange. Early on, we determined that owning a smaller but equal equity piece of an industry exchange is far more valuable than owning 100 percent of a Boeing-only exchange. The exchange is owned and operated as Exostar, a separate company with an independent board of directors. Exostar begins operation soon, and you can learn more about it on the Web at exostar.com
What is fundamentally unique about the alliance is that the founding aerospace and defense companies, while active competitors, have also been partners and suppliers to each other. I believe this history of cooperation has created an environment conducive to the formation of a trading alliance. And so, from the start, we brought together our competitors and partners.
What advantages do we expect from this new global trading exchange?
First advantage: It will offer value for buyers and sellers by simplifying transactions for participants.
Because the Web-based exchange will serve the entire aerospace industry, we all have the opportunity to create and capture value. We expect to significantly reduce interaction costs by using one e-commerce portal to obtain and provide production and non-production materials, parts, technical documents, etc. It will offer a complete set of services, from request for proposal to procurement to delivery.
Second advantage: It will increase productivity by reducing transaction costs.
Why should a company participate in a global trading exchange rather than just setting up its own Web site and selling directly to customers? In simple terms, it provides one way to complete purchase orders, purchase revisions, and payments.
E-commerce today gives us the golden chance to adapt, and adapt fast. In fact, recently the U.S. Labor Department reported a 5.3 percent increase in productivity. Some economists cited computers and the Internet for the increase, which was the largest annual jump since the third quarter of 1983, when we were coming out of a recession.
The exchange also will help improve productivity by making "paperless" procurement possible...from invoices to shipping documents to billing and payment. This will save non-value-added transaction costs and eliminate investments in redundant systems. Suppliers will be able to serve customers better because they will have improved visibility of inventory requirements, and the exchange will enable "frictionless" commerce within the industry's supply chain.
Third advantage: It will standardize the procurement process.
An open computing architecture and standards-based integration capabilities will make the exchange simple and easy to use. This allows participants to join quickly, to leverage common ways to do business, and to connect with a global e-marketplace of suppliers and customers in a secure environment.
The exchange will use a common software language to standardize transactions and improve the process. In addition, the exchange can improve the buying of indirect goods. As much as 45 percent of indirect corporate spending is rogue buying; that is, buying without following corporate purchase contracts. An automated, standardized approval process will slow rogue buying and cut transaction costs even more.
Major subcontractors and subassemblers are not the only ones to benefit. Small-assembly suppliers, component and commodity suppliers will have easier access globally. The only thing the small supplier will need to interact with Exostar will be a browser.
Auctions and easy access will move inventories quicker. This is expected to result in operating cost and working capital savings of one percent to two percent of current inventory valuations. In the future, the exchange will provide connections to other electronic marketplaces. So participants will also have one-stop buying opportunities.
Now let me wrap this up.
Darwin once said, "It is not the strongest of the species that survives, nor the most intelligent; it is the one that is most adaptable to change." Our alliance is just that. By adapting, we are tapping advances in e-commerce and computing technology to benefit both buyers and sellers in the aerospace and defense industry. By adapting, we are improving a complex, fragmented procurement process that is both cumbersome and costly. By adapting, we are simplifying tasks, increasing productivity, and standardizing an "old economy" procurement process. And that is why we have joined together to make this happen.