Fast Airplanes and Tiny Transistors
Part 1 : Lessons from Douglas Aircraft Company
Commercial aviation in the United States began on January 1, 1914, with the first paying customer flying between Tampa and St Petersburg on a two-seater plane – it flew just 23 minutes at an altitude of just 15 feet over the open bay separating the two cities. It was only in the late 1940s, after the second World War when airplane manufacturing reached a scale that made commercial air travel a viable business. Over the next two decades, airplane cruising speeds steadily increased with innovations in engine technology. By 1970, following in the footsteps of military aviation, supersonic transport (SST) was seen as the next technology inflection in commercial aviation.
The modern day semiconductor industry began with the invention of the monolithic integrated circuit in 1960, with the silicon transistor as a foundational building block. In the six decades since then, transistor densities steadily increased, with minimum feature sizes on a chip shrinking from micron-scale to nanometer-scale. Semiconductor chip manufacturing today is at an inflection point, not unlike that experienced by the airplane manufacturing industry in the 1970s.
The evolution of commercial airplane manufacturing shares intriguing parallels to that of semiconductor manufacturing. This three part essay will articulate some of the relevant lessons from the aviation industry.
Speed and Density
For the first six decades, technological progress in airplane manufacturing ensued along multiple vectors, but the primary drivers of success were around engine efficiency and performance, enabling faster cruising speeds. Airplane cruising speeds doubled three times, reaching over 600mph by 1970. Similarly, semiconductor technology development over the first six decades ensued along multiple vectors, but the guiding success metric was and continues to be transistor density (i.e., packing more transistors within a given footprint).
In addition to being a complex engineering and physics challenge, breaking the sound barrier proved to be an economic limit for commercial aviation. Airplane cruising speeds have largely remained constant for over five decades now. Nonetheless, there have been tremendous advancements in all other aspects of aviation technology and the flying experience over this period.
A guiding principle when shrinking the transistor was Dennard scaling, which enabled transistor density to double while maintaining a fixed power density. Even after the breakdown of Dennard scaling around 2005, transistor densities continued to increase, albeit at increasing power densities. Following the breakdown of Dennard scaling, Moore’s Law, which continues to guide the evolution of cost-per-transistor and the economics of semiconductor manufacturing has also come under increasing strain over the last decade.
Capital Intensity and Consolidation
Airplane manufacturing and semiconductor fabrication are both among the most capital intensive enterprises in the world. The massive upfront capital investment requires enormous manufacturing scale (number of airplanes sold or volume of wafers shipped) to generate acceptable returns on the invested capital. The break-even times for the large investments are also very long (on the order of a decade, Link). As a result, over time, both industries have seen extreme consolidation, to the point where less than a handful of remaining players today command meaningful scale in either business (Link).
Volume and Unit Economics
While there are clear differences in the scale of production of airplanes and wafers, there are parallels in the evolution of the underlying unit economics. This is especially true now more than it was a couple decades ago. The complexity and capital required to build a new airplane model can be significantly larger than its predecessor (e.g., Airbus A380 vs 350) and the time required to assemble it is also longer. As a result, the unit volume required to break-even is larger and the time to break-even can also be longer. However, if the new plane has a significantly larger passenger capacity, then the demand profile (how many airplanes an airline needs) is also lower. For example, Airbus A380 can carry over twice the number of passengers than the A350, but the number of orders of the A380 are 4X lower than that of the A350. Similarly, the complexity and capital required to build the next semiconductor process technology (for example, TSMC N2) can be significantly larger than that for its predecessor (N3) and the volume required to break-even is also larger, magnifying the need for a larger demand profile (more customers and/or more end-applications consuming more silicon ) with every successive node.
East vs West Divide
Consolidation of critical industries along limited geographies usually leads to geopolitical tension. The western hemisphere is the epicenter of airplane manufacturing and assembly (Boeing in the United States and Airbus in Europe) while contract semiconductor chip manufacturing is now mostly centered in the Eastern hemisphere (Taiwan and Korea). The East-West divide is deeply driven by geopolitics. In fact, Airbus was formed as a consortium of European airplane manufacturers, funded by their governments to jointly compete against the dominance of the American giant Boeing. Geographic consolidation in semiconductor manufacturing has been a topic of intense debate over the last three years and is now viewed as a national security imperative in the United States and in Europe (Link).
Global Supply Chains
Both industries rely on highly complex global supply chains, requiring thousands of components, materials and highly specialized toolsets (Link). These complex supply chains themselves are consolidated along technological domains as well as geographies.
Multiple Inflections
Just as aviation technology progressed through several inflections (piston engines to jet engines, narrow-bodied to wide-bodied, single-aisle to double aisle, wood to metal to composite fuselages), so did transistor technology (bipolar junction transistor to metal-oxide-semiconductor, silicon dioxide gate dielectrics to Hi-K gate dielectrics, planar transistor to three dimensional FinFET to name a few). Incumbents that did not navigate these inflections well went out of business or got acquired by competitors.
The transition from water-cooled piston engines to air-cooled jet engines was one of the first major inflections in aviation technology that saw the demise of several incumbents. Notable among them was the largest incumbent, Douglas Aircraft Company itself.
From Monopoly to Near Bankruptcy
Douglas Aircraft Company was founded by Donald Douglas in 1920 in Long Beach, California. By 1950, it had grown to become the largest commercial aircraft manufacturer and dominated the industry virtually without a challenger. By the start of the second World War in 1939, nearly 90% of the world’s commercial airline traffic was flown on Douglas aircraft.
The company created a storied line of aircraft including the Douglas World Cruiser (first plane to circumnavigate the globe), many fighters and bombers for the US Army Air Corps and the US Navy and the famed Douglas Commercial (DC) line of aircraft including the DC3 (the first modern airliner). Douglas was a prime beneficiary of US military spending during the second World War. Between 1942–45, the company produced a total of 30,000 aircraft and employed over 160,000 people! Following the war, as military contracts were cancelled, the company turned its attention fully to commercial aviation and went on to produce highly successful piston powered planes, the DC6 in 1946 and the DC7 in 1953. Even though the company was late to introduce jet engine technology, it did so with the DC8, launched in 1959 and continued to do well in the market. It also designed the DC9 and had an order backlog of over $3B and growing, well into the 1960s. It had begun designing the DC10, when in 1967 it astonishingly, and quite abruptly, ran out of money. With mounting development costs, and no way to pay for them, the company realized that it was less than a year away from going bankrupt! Douglas was forced to sell itself to McDonnell Aircraft Corporation in 1967.
There were 4 main reasons for this epic fall despite having highly innovative and successful products in a high demand, booming market.
Innovator’s Dilemma : Pistons or Jets
Douglas enjoyed a near monopoly in piston-powered airplanes and faced the classic Innovator’s Dilemma when considering the move to jet engine technology. The company decided to wait for jet engine technology to mature and figured it could continue to reap profits from piston engine airplanes until then. This opened the door for Boeing to take the lead in the development of jet engines with the Boeing 707.
To be fair to Douglas management, they enjoyed a close relationship with their airline customers and the largest of these customers, American Airlines and United Airlines both assured the Douglas CEO that the time was not yet ripe for jets. American Airlines even placed an order for the piston-powered DC7 to get Douglas to delay the launch of the jet-powered DC8. Boeing on the other hand, was the challenger, with no position in the piston airliner market and had little to lose so went all in on jet engines and the development of the 707.
Boeing wasn’t the first mover to jet engines itself – and despite the delayed start, Douglas and Boeing both won a similar number of orders (73 and 70) for their respective jets by the end of 1955. Being late to jet engines was thus one reason, but not the primary reason for the eventual downfall of Douglas.
Platform vs Product : Economies of Scope
The company’s strategy leading up to the second World War was to focus on producing just a few types of unique aircraft, rather than creating a wide range of models. As the market exploded after the war, there was a shift in consumer demand and needs. Boeing responded to this shift by quickly iterating on its designs and producing a range of aircraft to satisfy a variety of market needs (range, capacity, fuel efficiency, etc.). While Douglas focused on building distinct, custom products, Boeing focused on building a platform that catered to a range of requirements. This was a key factor in Boeing’s rapid success and enabled it to execute efficiently and shorten time to market. As the cost of developing large aircraft ballooned from tens of millions of dollars for piston engine aircraft to well over a few billion dollars for jet engine aircraft, Boeing was able to effectively use its resources and shorten the payback periods by leveraging economies of scope. Douglas on the other hand, paid a hefty price for its single product strategy. It should be noted that Douglas’ investment in the DC8 was the largest privately financed project by any single company at the time.
As an example, Boeing built the 707 with options for three different fuselage lengths, two different wings and three different engines and carried forward the same fuselage diameter on the 727, 737 and 757. Douglas built four versions of the DC8, but for the DC9 it chose a completely different fuselage exclusively designed for the short range market, thus giving up its platform leverage.
Supply shortages : Vietnam War
The Vietnam war created a large demand for military aircraft, which in turn created severe shortages in material, parts, and labor for the commercial aircraft industry. Engines and landing gear were in short supply, which led to inventory write-downs and resulting cost increases at Douglas and Boeing. Since airplanes are built on fixed price contracts, this led to increased costs to produce the planes, and reduced profits. Given that the war affected Douglas, Boeing, and indeed all the other manufacturers, it cannot be the root cause of Douglas’ downfall. The war, however, did bring to the fore inefficient execution and planning practices at the company.
Poor Execution : Overcommit and Underdeliver
The Douglas sales team was highly aggressive in winning deals for the DC9 – but the manufacturing team simply couldn’t keep up – Douglas failed to execute to their committed timeline.
In 1963, at the start of the DC9 program, Douglas expected to sell 400 planes over the next decade. But their sales team was so successful that in 1965 alone, they booked 209 sales. By the end of 1966, they already exceeded their 10 year sales projection with 424 sales. A key reason for these sales was attractive pricing (even in the absence of direct competition from Boeing) and the promise of early deliveries. However, their sales exceeded their resources and their capability to produce. In January 1966, to keep up with growing sales, the company increased planned FY 1966 deliveries to 93. By mid-year, this number dropped to 78. Douglas finally delivered only 64 planes in FY 1966, 30% fewer than the target set just 10 months earlier.
Assembly hours on the first 150 DC9s produced through August 1967 were 2.2X longer than planned. Most of this increase (69%) was attributed to longer production cycle times. These production delays would increase Douglas’ assembly and inventory costs by $27M in FY 1966 and increased wage costs by $32M, wiping out most of its expected profits for the year. To make matters worse, the company was forced to issue short term debt to meet growing costs.
Astonishingly, a recently reorganized decentralized management structure led to Douglas executives being the last to learn that their teams could not meet promised delivery dates or projected financial returns. In 1965, the company reported a robust pre-tax profit of $25M and well into 1966, forecast a profit of up to $17M. But they ended the year with a stunning loss of $52M, large enough for investors to force them into getting acquired by McDonnell Air Corporation in the following year.
Semiconductor Parallels
Douglas’ failure was attributed to a combination of several factors – delay and hesitancy in committing to the next technology inflection, adopting a product-driven strategy to compete with a platform-driven strategy, misinformed management, poor planning and inventory control, and a lack of coordination systems that allowed it to overcommit and then be forced to underdeliver to customers. The Vietnam war only served as a catalyst to highlight their poor execution.
In semiconductor manufacturing too, several foundries were forced to give up market share and, in some cases, even give up their business entirely because they were either late in adopting technology inflections, bet on the wrong technology inflection or were unable to afford the cost of the next technology inflection (e.g., ST Microelectronics (Link), NEC, Renesas, (Link) Fujitsu (Link), UMC (Link) to name a few).
More recently, GlobalFoundries struggled with execution on their 7nm technology (Link) and was forced to give up on advanced logic manufacturing entirely, while Intel struggled with the transition to 10nm (Link) and 7nm (Link) nodes. TSMC struggled with the transition to strained silicon and high-k / metal gate stacks at the 40nm and 28nm nodes (Link) but recovered on the transition to FinFETs as it benefited from the mobile wave of computing.
After early stumbles, TSMC learnt to effectively leverage economies of scope by offering a wide platform of technologies (Link) and features on a single base process node to cater to a vast range of customer requests quickly and economically. As transistor scaling becomes increasingly challenging and expensive in the coming years, this ability to create a wide platform of technologies with a minimal set of changes to efficiently serve a broad range of customers will be critical to the success of semiconductor manufacturers.
The views expressed herein are my own.
References
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