Wednesday, April 13, 2005
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Competition has been good for Boeing
The US-EU trade war over government subsidies to Boeing and Airbus -- well, mostly Airbus -- blows hot and cold, it's worth stepping back and seeing how the rise of Airbus has affected Boeing. Fortunately, the Chicago Tribune has been doing periodic stories on this very question in its "Battle for the Skies" feature. The latest installment by Michael Oneal makes two interesting points. One is the extent to which this competition is driven by the extent to which both companies cater and listen to their customers' needs:
The second interesting fact is that Airbus' success has prompted Boeing to do more than have Washington threaten a trade war. They've respnded to the competition by improving their productivity and their customer relations:
posted by Dan on 04.13.05 at 10:09 AM
Good article, although I'd question your "well, mainly Airbus" claim above: as a civil aviation firm, it doesn't benefit from the massive porcine cross-subsidies granted on US military aviation projects...posted by: john b on 04.13.05 at 10:09 AM [permalink]
Technology developed for defense work is not nearly as transferable to the civilian sector today as it was 50 years ago. So those porcine cross subsidies are mostly a thing of the distant past, (but not for lack of trying, as the recent tanker lease fiasco shows).
What infuriates me (besdides the porcine Airbus subsidies) is current Boeing management. They've spent more than $8 billion on stock buy-backs over the last few years, which means that they didn't think that any new product or process innovations would yield a better return on investment. If an aerospace company would rather pump up its stock price so that managers hit their bonuses than invest in technology it is doomed.posted by: Jos Bleau on 04.13.05 at 10:09 AM [permalink]
To be GM or not to be GM, that's Boeing's question.posted by: Richard Heddleson on 04.13.05 at 10:09 AM [permalink]
As a parochial American free-trader, I'm all for European taxpayers subsidizing my air travel through lavish launch subsidies. Cheap, high-quality aircraft will raise US productivity and increase our standard of living. Go French state capitalism!
As a student of business strategy, though, I'd like to point out that the "aggressive" sales strategy pursued by Leahy (and which Boeing is being forced to emulate) is partly funded by those subsidies. Offering to redesign an aircraft for a particular customer without regard to cost is not somehting firms do when they have to balance marginal revenue and marginal cost. Letting the sales force unilaterally impose operating costs on the manufacturing people bespeaks a less-than-optimizing perspective on competitive positioning. So Boeing's old "non-responsive" policy may have partly been sloth, but also partly economic rationality.
In a global economic sense, the Airbus subsidies probably skew resource allocation inefficiently. We end up with more aircraft and more aircraft design and production capacity, and less of whatever the crowded-out and more-valuable outputs would be, than in an ideal world. So the WTO rules on this stuff are not a bad idea if you care about Pareto-optimal resource allocation. From a parochial American point of view, though, the cross-subsidy transfer to the US probably swamps any losses due to inefficiency.posted by: steve on 04.13.05 at 10:09 AM [permalink]
It may be the high cost of oil that's really ended up changing the game for Boeing, suddenly efficiency becomes much more important to airlines. Boeing has been impressive of late as how they've developed a product which is something that the market is really going to seek. If oil was $20/bbl though, I doubt the 7(E/8)7 would be generating as much interest.posted by: Joel B. on 04.13.05 at 10:09 AM [permalink]
I have some friends that spent their entire careers at Boeing. They are not optimistic about the company's future. They mainly object to the technology transfer to Japanese suppliers. If Boeing gives up their wing-building secrets, then they become just an integrator.posted by: Mark on 04.13.05 at 10:09 AM [permalink]
Competition has been good for Boeing's customers if its driven Boeing to improve its customer relations. Competition has not been good for Boeing itself -- they are getting stomped.
Of course, the other issue is the extent to which Boeing has changed from a manufacturer of airplanes to a "systems integrator" -- 70% of the production of the 787 is taking place overseas.posted by: Walker on 04.13.05 at 10:09 AM [permalink]
Offering to redesign an aircraft for a particular customer without regard to cost is not somehting firms do when they have to balance marginal revenue and marginal cost. Letting the sales force unilaterally impose operating costs on the manufacturing people bespeaks a less-than-optimizing perspective on competitive positioning. So Boeing's old "non-responsive" policy may have partly been sloth, but also partly economic rationality.
Yeah, I had to laugh at that spin, also. Salespeople, who often work on commission, *always* promise stuff that companies can't deliver, and then the engineers have to scramble to live up to these promises, cursing the sales department the whole time.
This is not generally considered a good thing; it's a sales department out of control.posted by: David Nieporent on 04.13.05 at 10:09 AM [permalink]
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