The Myth of Verticalization
It's time to take a closer look at the verticalization narrative in aerospace.
The Myth of Verticalization
Verticalization has been hailed as a panacea for aerospace startups, promising cost savings, increased efficiency, and better quality control. However, this belief is misguided.
The past two decades have seen many aerospace companies emerge, propped up almost entirely by venture capital. Under the belief that they were learning from their predecessors, the Primes, they’ve boasted attitudes of “we’ll fully verticalize and do it all ourselves.”
This Need to Verticalize has become a cultural phenomenon in aerospace. Indeed, it has become a point of pride and marketing copy for everyone joining or discussing these new aerospace companies.
In the interest of research and development of new systems, this attitude may have been ideal. However, with reliance on venture capital and a need for faster returns, a push to prematurely scale manufacturing internally has led many companies to immense financial pains.
Verticalization is a policy that works well under two conditions: low interest rates and venture capital kingmaking. Only the capitalized survive. As both conditions evaporate this decade, we will see that the economics of verticalized aerospace companies are fatally flawed.
Verticalization is a risky, capital-intensive bet that kills many young startups. It is a band-aid on the real problem in aerospace:
Contract manufacturers have become entirely unreliable partners in the aerospace manufacturing ecosystem since the end of the Cold War.
Aerospace companies are fundamentally engineering companies, but they have been forced to become manufacturing companies out of necessity.
Operating a massive, fully-verticalized manufacturing facility has become a distraction and burden for companies whose main objective is to develop innovative technology, not run a production line.
While counterproductive for engineering companies, verticalization makes quite a bit of sense for many manufacturing companies. Capital equipment utilization is a main driver of cost within manufacturing facilities; in many verticalized aerospace facilities, several million dollar machines are often vastly underutilized. Likewise, aggregating more varied resources to better serve customers can dramatically expand the utility of a manufacturing company to its partners. If you imagine engineering and manufacturing as orthogonal, this actually looks like horizontalizing to an aerospace company.
The natural state of aerospace is a network of agile, specialized, decentralized manufacturing facilities. The Primes mastered this network, but the nodes within it have rusted and become sclerotic with age. New aerospace companies balk at their rigidity, but we often forget that they once armed the Arsenal of Democracy.
See: Freedom’s Forge — https://www.amazon.com/Freedoms-Forge-American-Business-Produced/dp/0812982045
To prepare for the demand and productization of aerospace systems this decade, we must overcome two challenges:
We must build the next generation of contract manufacturers. These new technology-driven facilities are already emerging in the form of advanced part manufacturing startups, but must ultimately include the role of final assembly and integration for their aerospace customers.
We must rebuild the trust between aerospace companies and their manufacturing partners. This means leading with radical transparency and a realignment of incentives, from cost structures to Design for Manufacturing.
If we are able to succeed, we will see an armada of new, lean aerospace companies emerge, whose economics are once again tied to their core competencies.
Only when we tear off the band-aid and renounce the Myth of Verticalization may we truly begin to rebuild the Arsenal of Democracy.
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