The Worst start to building The new age Commercial Plane was not Airbus’. It was Boeing’s. Its biggest project – The Dreamliner 787 – has turned a Nightmare. There are other problems too. What went Wrong with Boeing? & can CEO Jim McNerney play Captain America?
What caused Boeing’s health to deteriorate? McNerney has forever been known as a game-changer – a CEO whose radical change ways revived a corporation like 3M (it was under him that the company slimmed down, returned to profit-making and even dropped its old name – Minnesota Mining and Manufacturing). He tried the same at Boeing. To ensure that bottomlines improve, he adopted the outsourcing model. The idea was that instead of working with the traditionally accepted manufacturing practices, Boeing would work with engineers and labourers outside the company. It first started with the 787 program in 2005 and was then replicated on the 747s & 777s families. That meant trouble. A typical 787 (& 777) has 70% of its parts manufactured in Japan, Korea, Sweden, Canada, Italy, Australia, France, Germany and 15 other locations in US, that Boeing workers in Seattle put together. The entire exercise was destined to end up as a fragmented engineering act and a complex set of 50 confused suppliers, with minimum check on quality and overstretched supply-chain. McNerney took the big risk, Boeing took the beating. While its reputation & revenues did fall, the associated R&D costs have not only hurt bottomlines in the past year by up to $4.1 billion, but also threaten to erode the same in the years to come, as Robert Spingarn, analyst at Credit Suisse tells B&E, “Many bullish analysts and investors have been relying on declining 787 and 747-8 R&D to allow for meaningful earnings growth. But, even as these development programs inch closer to completion, the prospect of new R&D for a refreshed or new 777 and a clean-sheet 737 may offset any benefit. Either way, upside could be an issue if R&D cannot be tamed and if Boeing’s Defense business weakens beyond expectations.”
So what can Boeing do to expedite the process and ensure that cost control (outsourcing) and timeliness go hand in hand in future? Airbus, which contracts 52% of its aircraft body-making, is the answer. It assembles parts (in France & Germany) manufactured in 12 locations in the four nation cluster – Britain, France, Germany and Spain. And if cost reduction be the prime condition, Airbus’ assembly line for the smaller A320s in China is quite an example. The solution to convert Boeing’s global outsourcing mess into a strategic geographic advantage lies in creating regional assembly hubs. Like Airbus, it could begin with an assembly station in China for the new planes, to cater to the demand in the Asian region (like the $10 billion order from Air China & HNA Group for 5 747-8s, 6 777s & 32 787s received in March 2011). And considering that Boeing has to fast increase delivery pace in order to cater to a fresh demand, the newer assembly stations will only reduce its order-delivery lag. The question now is not whether it can cultivate a conservative approach to outsourcing or not. Rather, it is how Boeing can learn fast and act. Airbus, despite a more calculated approach saw its jumbo A380 suffer a couple of initial delays, resulting in $24.8 billion in added costs & lost orders between 2006 & 2009. Boeing has already lost many times more. Question is – will the hole in its pocket get bigger?
Fire on board, to software integration issues, to discovery of weak points in the composite metal used, to an in-flight engine shutdown, the Dreamliner has been more of a ‘nightmare’liner for Boeing. Though experts are of the opinion that this is not the end of the road for Boeing, and that revenues will continue flowing despite the fires and engine malfunctions of the 787s & 747s. The hefty order-log already recorded and expectations of huge demand from Asia and replacement orders in US & Europe will help its cause, as New York-based Alexandria Carroll of Goldman Sachs tells B&E, “For the near term, 787 & 747 challenges have the potential to create further volatility. However, we expect very strong new aircraft order demand, strong global air traffic, and the company’s supply restraint through the last cycle to all be larger positive drivers of the stock than challenges, which are a negative. The associated R&D tailwind catalyst are likely to be realised over the next few quarters.” Adds S&P’s Tortoriello, “Emerging economies in Asia and the Middle East will continue to improve, which should sustain demand for narrow-body aircraft, supporting Boeing’s total backlog of about 3,400 aircraft as of December 2010. In addition, US airlines continue to take deliveries to improve fuel efficiency of aging fleets. Further, the third-quarter 2011 delivery of the 787 should act as a catalyst for the stock, with about 850 aircraft recently on order.” While Goldman Sachs estimates revenues for Boeing in FY2011 to to touch $67.97 billion (a y-o-y rise of 5.69%), the figure as per Credit Suisse stands at $69.76 billion (rise of 8.48%).
Having said thus, McNerney has to realise that the storm will only gather over the coming quarters, faster and stronger than it did in the three years gone by. It’s more than half of his company’s revenues at stake (assuming that the Pentagon will continue to patronise Boeing’s Defense business as EU does to EADS-Airbus), and the clock for him is running backwards. He’s done nothing to make investors smile (Boeing’s Mcap has fallen by $2.13 billion since he took over in June 2005) and McNerney might be out before Boeing even gets out of this rut. In short, he has little time to prove that an intergalactic outsourcing strategy can work. If it hasn’t in seven years, it perhaps never will. Many airlines have bet their future on Boeing, and this equation can turn turbid sooner than expected, irrespective of how many dollars and elbow grease the new projects have called for. And it is already showing signs of that.
