Boeing on outsourcing: We`ll go it alone - Curt Lewis

Boeing Moves Into Jet Controls, Setting Up Supplier Showdown

• New unit would potentially compete with Rockwell, Honeywell
• CEO says greater 'vertical capability' will enhance offerings

 Boeing Co. is creating a new unit that develops avionics for its commercial and military aircraft, a move that potentially pits the planemaker against suppliers such as Rockwell Collins Inc. and Honeywell International Inc.

Rockwell Collins posted the biggest decline in almost six years on the news that its second-largest customer is planning a rival product lineup. Boeing Avionics will focus on navigation, flight controls, information systems and other technology with a goal of bringing goods to market next decade, the Chicago-based company told employees Monday.

The move is part of a strategic shift as Boeing tries to reap cash across the life span of a jetliner, even if it risks straining supplier ties. The manufacturer is bringing more work in-house as it studies whether to make or buy thousands of aircraft components. Boeing Global Services, a new division founded July 1, is expanding into higher-margin maintenance and spare-parts sales -- a traditional source of profit for its subcontractors.

"Our new avionics organization continues our strategy to build targeted vertical capability so that we can further drive cost down and value up for our customers, in all phases of a product's life cycle," Boeing Chief Executive Officer Dennis Muilenburg said in the internal announcement Monday. The new business unit will grow to a workforce of about 600 by 2019 from the current 120.

Rockwell Collins fell 6.3 percent to $106.53 at the close in New York, the most since August 2011. The Cedar Rapids, Iowa-based supplier of cabin equipment and avionics said it did "not anticipate any impact to our business in the foreseeable future" from Boeing's strategy.

'Collaborative Relationship'

"We continue to enjoy a strong, collaborative relationship with Boeing on its current programs, and remain committed to working together to deliver innovation, quality and value to meet its customers' needs," Rockwell Collins said in a statement.

Boeing advanced less than 1 percent to $242.46. Honeywell, another producer of avionics, fell 0.5 percent to $136.12. Honeywell didn't respond to a request for comment.

"Is Boeing pushing too hard? Our current answer is 'no' but this is something to watch in the months and years ahead," Seth Seifman, an analyst at JPMorgan Chase & Co., said in a report Monday before Boeing's announcement. "The company is seeking more of the value available in the aerospace industry, in part through the aftermarket, and this has the potential to disrupt supplier business models."

The new Boeing unit is led by Allan Brown, a 30-year veteran who most recently headed the company's missile-defense national team. He reports to Greg Hyslop, the chief technology officer and senior vice president for engineering test and technology.

Dreamliner Delays

Boeing has shifted away from the reliance on outsourcing that dominated its strategy for more than a decade after a 1997 merger with McDonnell Douglas Corp. Focused at the time on return on net assets, Boeing shed its previous internal avionics group and a major manufacturing hub in Wichita, Kansas.

The strategy culminated in the global supplier network that designed and built much of the 787 Dreamliner, struggling to meet Boeing's standards and deadlines. After the carbon-composite plane fell more than three years behind schedule, the world's largest planemaker shifted course this decade to handle more factory work itself.

Read more: Boeing's cash gush wins over 'late to the party' stock pickers

The company spent more than $1 billion on a new center to build composite wings for its 777X, while ramping up work on propulsion engineering, actuators and other components once handled by suppliers.

Boeing currently produces some avionics equipment, including vehicle-management systems, secure computing systems and signal intelligence for its commercial and government divisions, according to the announcement.