The broader question is how many other leaders in how many other businesses have made similar miscalculations. JL
Richard Aboulafia comments in Forbes:
During tough labor negotiations, Boeing executives often cited competition from China as a rationale for their hard line on terms.Yet aviation is not like other industries. There are cost pressures, but this is a capital-intensive business with high barriers to entry. Labor costs just don’t matter as much.Productivity improvements often come from the shop floor.
The announcement that Jim McNerney was retiring as Boeing BA +0.02% CEO wasn’t a major surprise – everyone knew he’d leave within a year or so – but it was rather abrupt and the timing was unexpected. He probably jumped, but there are certainly reasons to believe that he may have been nudged along in his move.
Under McNerney, Boeing’s stock price did very well. Cash flow was generally strong, and investors like short-term metrics like these. But he also leaves behind a toxic legacy that future leadership will need to deal with.
The company continues to lose tens of millions of dollars on each 787 it builds. These recurring production losses (on top of 787 development costs) stood at over $26 billion in January and will likely reach $30 billion, and possibly beyond.
Boeing is using a 1,300 aircraft accounting block for the 787. Let’s assume that 1,000 future 787s will bear this burden (that is, let’s assume the company starts breaking even on each jet it builds just after it delivers its 300th Dreamliner). That means a $30 million tax on each of these 1,000 planes, in order to break even on the program.
This terrible drag on profitability would have been partly avoided if Boeing management had taken a different approach to labor. Rather than the McNerney formula of eliminating pensions, cutting wages, and shifting production to new facilities, the company could have proposed a partnership with their workers. After all, productivity improvements often come from the shop floor. That means getting the people who build aircraft to figure out ways to reduce scrap, improve work flow, and eliminate defects.
To encourage the process improvements that happen in a factory, a workforce should be incentivized with profit sharing or other compensation. At a minimum, machinists and engineers need to feel that their work is valued. Taking away pensions at a time of record sales is a terrible way to motivate workers to go the extra mile.
McNerney’s focus on the company’s stock price and cash flow at the expense of the long term wasn’t merely due to short-sightedness and greed. It was also likely due to a misunderstanding of how the aviation industry works. If a CEO comes from a different industry and doesn’t try to learn what makes aviation distinct, he’s likely to apply a one-size-fits-all template. For example, he might conclude that, as in many other industries, competition from China and other low cost manufacturers is creating tremendous cost pressures. McNerney’s previous CEO post was at 3M MMM +0.75%, a company that does face pressures from lower-cost producers. During tough labor negotiations, Boeing executives often cited competition from China as a rationale for their hard line on terms.
Yet aviation is not like other industries. There are certainly cost pressures, but this is a capital-intensive business with very high barriers to entry. Labor costs just don’t matter as much compared with other industries, and most producers and major subcontractors are domiciled in high cost countries.
China has been trying to enter the aircraft business for decades, with exactly zero signs of progress at the prime level (or even the major subcontractor level). Last year, China was the ninth largest supplier of aircraft components to the US, just behind Australia. Instead, this is an industry based on experience. This is why nobody, except Brazil’s Embraer Embraer, has successfully entered this business since World War Two.
An experienced and motivated workforce, therefore, is the most important asset a company has. McNerney failed to recognize this important fact, and the company has suffered as a result.
Dennis Muilenberg, the incoming CEO, is an aerospace industry veteran and a respected engineer. He needs to learn the unique dynamics of the commercial side of the business, but given his very strong industry background he should be able to make Boeing a better company. But he will also need to cope with that $30 billion 787 deferred costs overhang and a Boeing jetliner labor-management relationship that’s worse than anywhere else in the aerospace industry.
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