Content Published Last Week

1. RESEARCH: TransDigm: Boeing vs OEM Supplier Bargaining Power

2. Boeing Propulsion: OE and Aftermarket Strategies

3. Honeywell, Boeing GoldCare, & the Aero Aftermarket

4. Vitec Software: Aloc Opco, Product Development & Integration

5. Atlassian: Partner Ecosystem, Server Migration & ITSM

6. IMCD: Customer Value-Add

7. Mister Car Wash: Competitive Dynamics & Store-Level Operations

8. Wayfair: CastleGate and Last Mile Delivery

9. Nubank & Brazil Neobanks: History, Credit Models & Management

TransDigm: Boeing vs OEM Supplier Bargaining Power

In 2016, Boeing communicated plans to triple its Global Services businesses from $15bn to over $50bn by 2026. It combined its commercial and defense services business into a Global Services division (BGS) and specifically targeted clawing back ownership of the commercial aftermarket. Boeing went so far as sending letters demanding aftermarket royalties from OEMs:

Boeing began to assert that all the intellectual property (IP) was theirs. They were sending out letters to large and small companies alike, including Honeywell, demanding royalty payments. The direct assault was the letters stating that companies were leveraging their IP to sell in the aftermarket. In a way, they were correct. - Former EVP at Honeywell

Although Boeing’s current CEO has walked back the $50bn target, persistent supply chain challenges, losing to Airbus in the middle market, and the potential competitive risk from COMAC is increasingly pushing Boeing to capture more of the commercial aftermarket profit pool.

Last month we attended MRO Europe and we’ve spent the last 12 months interviewing Former Boeing, TransDigm, Honeywell, and other commercial aerospace executives to understand the durability of TransDigm and Tier 1 suppliers’ commercial aftermarket earnings.

Why and how does Boeing and Airbus allow companies like TDG to earn consistently higher operating margins?

And what can the airframers really do to take back ownership of the commercial aftermarket?

This analysis walks through how a TDG valve and a Honeywell APU is sold as original equipment to new planes and in the aftermarket. We share details of how Boeing aggressively tried to recoup aftermarket royalties from OEMs with its GoldCare integrated maintenance plan and the potential impact on supplier PBH revenue.

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We also explore Boeing’s recent program to reverse engineer TDG parts after several complaints from airlines about TDG pricing:

In 2012 or 2014, Jim McNerney had gone in a conversation with Wall Street on an earnings call. He said that TransDigm was this horrible company that was jacking up prices and creating chaos in the industry, and that began an ongoing tit-for-tat between the companies…Where the idea came from of this specific battery was Boeing had said we need to take TransDigm out of the picture. So, being an engineering company, their idea was let's reverse engineer TransDigm parts. Let's identify these egregiously priced TransDigm parts, and we will make a Boeing version that we can offer the customer at a lower price. - Former Managing Director at Aviall, Boeing

We also walk through how Boeing displaced a TDG battery and how this may translate into a risk for the wider portfolio. This piece of research is over a year in the making and is an output of our exploration to handicap the bargaining power between Boeing and suppliers and the durability of TDG’s aftermarket earning power compared to a Tier 1 like Honeywell.

Vitec Software: Aloc Opco, Product Development & Integration

We recently published an interview describing the acquisition process for one of Vitec's largest acquisitions. In this interview with a Former CEO of Vitec OpCo, who was present pre and post-acquisition, we explore Vitec’s operational philosophy in more detail:

They were primarily focused on recurring revenue. It was quite intriguing to meet with Vitec because their perspective, once understood, was very much in line with our strategy execution. Initially, it took me a few discussions with their then head of M&A, Lars Eriksson, to comprehend their mindset and their thought process. But the primary focus was on recurring revenue. - Former CEO of Vitec OpCo

Vitec’s results illustrate how recurring revenue is a focus post-acquisition; in 2022, recurring revenues were ~85% compared to 77% in 2016. The interview discusses in more detail how Vitec approaches recurring revenue growth and integrates operating companies into their structure.

Atlassian: Partner Ecosystem, Server Migration & ITSM

Atlassian announced their server offering would no longer be supported from February 2024. In this interview with one of Atlassian's top partners, the impact of the migration is discussed:

They're largely ignoring us. We've been reaching out and we still have around 300 accounts of non-migrated server customers. I suspect Atlassian will extend the deadline because it's not just our list of customers, there are many others. These are the largest accounts because for them to migrate to the cloud, it means a significant change as the features across the cloud hosting are different than the server. Many things that used to work will stop working, causing a major disruption within their organizations. I estimate it will take us at least another two years to migrate these customers. - Atlassian Partner

This account from the executive shows how difficult it is to migrate large accounts to the data center or cloud. The executive explains the reasons behind this inertia.

The challenge lies in the server automations, which are not transferable to the cloud. Atlassian has not done an adequate job matching their server capabilities, making it difficult for us, as app vendors, to align our functionalities from server to cloud. - Atlassian Partner

The question is how quickly Atlassian can address this and move customers will to the higher priced cloud version.

IMCD: Customer Value-Add

One of the main responsibilities of a specialty chemical distributor is to consult their end customers on specific blends of molecules to use in recipes. This differs from chemical suppliers specializing in offering individual components without developing the expertise to combine them with other molecules.

"Most of our business involved adjusting existing molecules and blends to make them workable for customers. For example, a blend that works perfectly in the Netherlands due to the mild weather may not be suitable for a Norwegian customer, where winter temperatures can drop to minus 15 degrees. This is where the expertise of antioxidant blenders comes in. - Former Director of Sales, IMCD

In this interview, a former director of sales at IMCD sheds light on the added value of distributors in the specialty chemicals value chain

Mister Car Wash: Competitive Dynamics & Store-Level Operations

Mister Car Wash is a publicly traded roll-up of express car washes. It went public in 2021 as the largest car wash chain in the US. A Former Senior Operations Executive at MCW, with over 35 years of experience, discusses the competitive dynamics and local market economics of the car wash business:

The choice of competitor and demographic in the area I'm operating in are crucial. For instance, if I'm competing with Mister Car Wash, I first consider the demographic within a three-mile radius, or a nine-minute drive time. This radius might not equate to nine minutes in cities like Houston, Texas, or Atlanta, but it could in smaller cities like Austin, Texas. I also consider the competitor's presence in the area. For example, if someone proposed building stores in El Paso where Mister Car Wash has 25 stores, I might be hesitant. However, I might be more inclined to build in Pensacola, Florida, where the only competitor has three stores. If I build five stores there, I would control the market. This decision is significant because building in either El Paso or Pensacola costs $6 million per store. - A Former Senior Operations Executive at MCW

Wayfair: CastleGate and Last Mile Delivery

In this free podcast (Apple / Spotify / Other players), we discuss our recent piece of research on Wayfair CastleGate and its logistics offering to suppliers. We explore:

1. How furniture dropshipping compares to Wayfair CastleGate logistics

2. Potential advantages of Wayfair CastleGate vs dropshipping

3. Challenges driving CastleGate penetration

4. How we're exploring Wayfair logistics unit economics vs competitors

5. More on our upcoming furniture supplier survey

Nubank & Brazil Neobanks: History, Credit Models & Management

Nubank is a Latin American success story. Founded in 2013, the Brazilian neobank has gained over 80m customers with minimal customer acquisition costs. This interview with one of Nubank's early executives describes how Nubank approached product development, customer acquisition and credit modeling:

Nubank started very slowly with credit. So, there was no rush to grow customers. Let's grow as fast as we can within our comfort of credit bands. I’m mega conservative. It started with friends and family. Send an email there, then these guys recommend it to someone. So, if I sent you 10 invitations, who would you send them to? For your wife, for your friend there, who likes technology, I don't know. At the end of the day, it's the same credit profile. So, basically, the risk was almost zero. If someone doesn't pay, they can't give it to anyone else. So, we started to do it very carefully. And then, every time we had a lot of security, we lowered the band. The horizontal credit curves went a little further. Stop, come back, understand, tidy up. - Former Nubank VP, Operations