Trading Bits to Move Iron: How industrial after markets influence profits

Yesterday's Wall Street Journal had a story about how Boeing purchased Aviall, one of the largest parts distributors and a host of an electronic marketplace for independent parts distribution and used parts, as well as related services.  As I mentioned in an early blog, on What do Movies and Junkyards Have in Common, the interplay between used and new, among markets and firms, is more important than ever.  Boeing does $9 billion in parts, and if they are like almost every other industrial company, there is much more margin (on a unit basis, and sometimes in absolute terms) in service and parts than in the core product.  This is true of elevators and jet engines for sure.  (See my paper on The Global Service Network: The next phase of competition for industrial companies.)

If Boeing can pull off this value of this purchase it will be a brilliant move, for it will give them strategic access to the market for aftermarket parts' which is central to their profitability.  Also, the flow of used parts, their price, and demand, is vital information for Boeing to understand how well certain planes are doing in the used fleet, and what services the customers running those planes require.  If you were to think of the market for aircraft parts as we think of the market for stocks and bonds, Boeing just bought the firm that "has the book" of orders for parts and thereby, service.  As anyone in a trading organization knows, owning the "book" is where you want to be for you not only have product to sell, but you can see demand better than others. 

This is a continuation of a long standing trend the aggregation of information, or in some cases the information about information, is more important than the information itself.  This is long known to us in the fact that at one point TV Guide (remember that brand?) was worth more than the three major television networks (yes grasshopper, there were three networks once upon a time).  See my blog about Google.  With interactive networks, we also see the creation of markets, for the things themselves, not just the information about the things.  iTunes, is a market, not just an information source. 

We are also seeing, on a global basis, the increase in the value of shares for markets around the world, whether it is the Chicago Exchanges, or those in Japan, the interest in the value of market making mechanisms is increasing.  (Fidelity recently unwound their equity position in stock of the London Stock Exchange [try saying that three times fast], so these stocks for stock markets may be fully valued - I don't know, but I do note the general trend toward increasing valuations for markets is still with us and will likely continue.)

Back to Boeing, by buying one of the largest parts markets not only gives them an over the counter market for products where they are a major buyer and supplier (not unlike Cargill in the grain business) but such access usually means if there are trading profits to be had, he who is on both sides of the trade can usually make money.  Even if the profit pools in the after market for airline parts are small, it will give Boeing a means to monitor behavior of those markets, which has a big impact on their profits for parts, and it gives them market intelligence on who needs what kinds of service.

If elevators and jet engines are a guide, there is more money in the downstream service and parts, than there is in the original sale.  Getting control of the aftermarket is a very important thing for any industrial company due to the late blooming nature of profitability in many industrial products.  Every big iron company should give this some thought.

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