By Alwyn Scott
SEATTLE (Reuters) - Spirit AeroSystems Holdings Inc <SPR.N>, a major supplier to Boeing Co <BA.N> and Airbus <AIR.PA>, is demanding steep price cuts from its hundreds of parts suppliers, forcing them to re-bid for their current work against global competitors, according to a document seen by Reuters and three sources familiar with the matter.
Spirit is asking for price cuts of 15 to 35 percent in meetings this week in Wichita, Kansas, where it is based, according to the sources and to a Feb. 13 letter Spirit sent to suppliers.
Spirit declined to comment in response to questions from Reuters, beyond repeating a statement issued last month about its supplier negotiations.
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"All new contracts are on the table including local, domestic U.S. and international supply agreements," the statement said, noting Spirit is reviewing more than 50,000 parts it may move to new suppliers. The statement made no mention of specific price reductions Spirit is seeking or plans to move work overseas.
Executives at supplier companies said Spirit is telling them in the meetings that they are bidding against U.S. and overseas rivals and against Spirit's own fabrication facilities.
"They say, 'If you don't do this, we have other suppliers that will.' That's the leverage," said the chief executive of a U.S. metal parts supplier who met with Spirit recently. "There's a massive threat of offshoring and an additional threat of insourcing."
Many suppliers learned about the re-bidding from Spirit's letter last month, according to the sources, who spoke in recent days and on condition of anonymity because they were not authorized to speak publicly about contract details.
At least one supplier already has lost all its work with Spirit, worth millions of dollars annually, to Asian suppliers who bid with lower prices, one of the sources said.
Spirit's statement from last month said it is not tearing up existing contracts.
"Spirit honors its contractual obligations. Our focus is on negotiating new contracts - well in advance of expiration," said the statement.
But many Spirit contracts contain "termination for convenience" clauses that mean they can be ended at will, according to the sources and industry consultants.
Spirit said its target prices for more than 50,000 parts are based on what materials, labor and overhead should cost if companies are sourcing efficiently and using the most modern production equipment. "We work collaboratively with our suppliers to help them achieve those targets," it said in the statement.
If suppliers cannot hit the target, Spirit will outsource to others or take work in-house, the company said, noting plans to hire workers in Wichita for insourcing and to meet rising production at Boeing and Airbus.
POLITICAL AND PRODUCTION RISKS
Shifting work offshore risks drawing a critical tweet from President Donald Trump, whose "America First" policy is intended in part to bring factory jobs back to the United States. It is also unusual, and risky, in an industry that relies on long-term agreements to ensure millions of complex, highly engineered parts reach aircraft factories on time.
Many aerospace manufacturers have moved work to low-cost countries such as China, Mexico and Morocco. But Spirit's shifts to new suppliers could disrupt production at Boeing, Airbus and others if parts are late or defective, analysts and consultants said.
The changes come as Boeing and Airbus are ramping up production and slashing costs to battle on price for orders, as airlines slow their purchases of new aircraft.
Spirit Chief Executive Officer Tom Gentile discussed some details of supplier actions at a Feb. 9 investor conference.
But the Feb. 13 letter goes further, saying Spirit "has launched a company-wide Strategic Sourcing Initiative" and asking suppliers to send "decision-makers" to Wichita the week of Feb. 27 "or have them available remotely" so Spirit can "have each proposal ready for a contract by the end of the day."
"Suppliers shall be awarded contracts based on results from an intense bid and contract award process," Spirit wrote in the letter, signed by Wendy Crossman, Spirit's director of supply chain management contractors.
Since Spirit spun off from Boeing in 2005, it has gone from being a Boeing factory to making parts for Airbus, Mitsubishi Heavy Industries Ltd <7011.T>, General Dynamics Corp's <GD.N> Gulfstream, Bombardier Inc <BBDb.TO>, Textron Inc's <TXT.N> Bell Helicopter, and Lockheed Martin Corp's <LMT.N> Sikorsky. It has facilities in three U.S. states, plus the UK, France and Malaysia.
Its massive Wichita facility produces 42 fuselages a month for Boeing's 737 program, the complete front section of the 787 Dreamliner and many other Boeing components.
Spirit said about 90 percent of its supply chain spending is made in the United States, including about $1.2 billion annually to more than 500 suppliers in Kansas and surrounding states.
Gentile, who took over last July, has pushed for lower costs on the two-thirds of its overall spending that is made in the supply chain. In December, Spirit warned about 85 supplier contract administrators in Wichita that their jobs were at risk of being outsourced. Spirit later kept the work in-house. In February, Gentile noted many suppliers have "very strong margins" in structural airplane pieces.
"That's an opportunity for us to take advantage of that and capture some of that margin," Gentile said.
The company reported an operating margin of 10.7 percent in 2016, slightly below the industry average, according to Thomson Reuters data. Its 2016 revenue totaled $6.8 billion. Spirit's drive for greater profit margins is in line with Boeing, which is trying to double its margins to mid-teen percentages by 2020.
Spirit's lower prices have already prompted some current U.S. suppliers to give up work. Spirit's targets are lower "than what I gave them the last time," said the U.S. metals supplier chief executive, referring to past negotiations.
"It's bankruptcy-level pricing," he said.
Spirit's ability to change contracts also bars companies from investing in new machinery, because they risk losing the work before earning back their costs, said the U.S. metals supplier chief executive.
The chief executive of another U.S. company that makes metal aircraft parts said Spirit's actions were unprecedented in his decades in the industry.
Said the executive, "I've never seen anything like this in my career."
(Editing by Matthew Lewis)