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UPDATE 3-Boeing's new avionics unit targets its suppliers' business

(Adds detail analyst comment, updates share price)

NEW YORK, July 31 (Reuters) - Boeing Co said on Monday it set up an avionics group to make aircraft controls and electronics that compete with its own suppliers such as Rockwell Collins Inc, United Technologies Corp and Honeywell International Inc.

The world's largest plane maker said the unit had already started work and aims to bring systems for military, civil and space vehicles into service after 2020, capturing more of an avionics market worth hundreds of millions of dollars a year.

Boeing said its systems would be lower-cost, higher-quality alternatives to existing products, and would deliver more services revenue to Boeing after a plane is sold.

The aim is to "further drive cost down and value up for our customers," Boeing Chief Executive Officer Dennis Muilenburg said in an internal statement to employees that was seen by Reuters.

Boeing said it will focus on products for its own planes, but could sell to other plane makers eventually.

The three suppliers did not immediately respond to requests for comment.

Boeing shares were up 1.2 percent to a new record, and surged amid analyst upgrades since it posted strong second-quarter earnings

Major supply contracts typically last for the life of an aircraft model or program, limiting what Boeing could absorb at first, said Richard Aboulafia, an analyst at the Teal Group.

But later, "Boeing may bring some avionics in-house, or at least use this threat to extract lower prices from suppliers," he said.

Current contracts also likely protect aftermarket sales, said analyst Robert Stallard at Vertical Research Partners, noting Boeing spent $550 million with Rockwell in 2016.

But that would change on future models. Boeing is mulling a new mid-sized aircraft that would enter service around 2025, and a successor to its best-selling 737 model after that.

In recent years, Boeing has brought propulsion, carbon fiber manufacturing and other key capabilities in-house to better control both technology and intellectual property. That strategy followed outsourcing of major systems to suppliers for the 787 Dreamliner that led to billions of dollars in cost overruns.

Boeing said the new group is absorbing its electronics products team, which include "vehicle management systems, remote data/remote interface units, secure computing systems and signal intelligence systems."

It expects the group to employ about 600 people when fully staffed in 2019, up from 120 now.

(Reporting by Alwyn Scott; Editing by Diane Craft and Lisa Shumaker)