With China in New Joint Venture
This
article was reported by David Barboza, Christopher Drew and Steve Lohr and written by Mr. Lohr
New
York Times
JAN.
17, 2011
As China strives for leadership in the world’s most advanced
industries, it sees commercial jetliners — planes that may someday challenge
the best from Boeing and Airbus — as a top prize.
And no Western company has been more
aggressive in helping China pursue that dream than one of the aviation
industry’s biggest suppliers of jet engines and airplane technology, General Electric.
On Friday, during the visit of the Chinese
president, Hu Jintao, to the United States, G.E. plans to sign a joint-venture
agreement in commercial aviation that shows the tricky risk-and-reward
calculations American corporations must increasingly make in their pursuit of
lucrative markets in China.
G.E., in the partnership with a state-owned
Chinese company, will be sharing its most sophisticated airplane electronics,
including some of the same technology used in Boeing’s new state-of-the-art 787 Dreamliner.
For G.E., the pact is a chance to build upon
an already well-established business in China, where the company has booming
sales of jet engines, mainly to Chinese airlines that are now buying Boeing and
Airbus planes. But doing business in China often requires Western
multinationals like G.E. to share technology and trade secrets that might eventually
enable Chinese companies to beat them at their own game — by making the same
products cheaper, if not better.
The other risk is that Western technologies
could help China play catch-up in military aviation — a concern underscored
last week when the Chinese military demonstrated a prototype of its version of
the Pentagon’s stealth fighter, even though the plane could be a decade away
from production.
The first customer for the G.E. joint venture
will be the Chinese company building a new airliner, the C919, that is meant to
be China’s first entry in competition with Boeing and Airbus.
For the most part, Western aviation
executives say the Chinese are simply too far behind in both civilian and
military airplane technology to cause any real fears anytime soon — although it
does put pressure on Boeing and Airbus to continue to innovate and stay
technologically ahead of China.
G.E., which said it had briefed the commerce,
defense and state departments on details of the deal, acknowledges that pairing
up with a Chinese firm is a delicate dance. But because the commercial aircraft
market in China is expected to generate sales of more than $400 billion over
the next two decades, it is not a party the company is willing to miss.
Eventually, G.E. executives say, China will
become a potent player in the commercial jetliner market, and the company wants
to be a major supplier to the emerging Chinese producers.
“They are committed for the long term and
they have every probability of being successful,” said John G. Rice, vice
chairman of G.E. “We can participate in that or sit on the sidelines. We’re not
about sitting on the sidelines.”
Mr. Rice also said that the Chinese joint
venture partner — the aerospace design and equipment manufacturer Aviation Industry
Corporation of China, or Avic — has supplied G.E. with some parts for jet
engines for years. And he said he had personally known Avic’s president for a
decade.
“This venture is a strategic move that we
made after some thought and consideration, with a company we know,” Mr. Rice
said. “This isn’t something we were forced into” by the Chinese government.
G.E.’s new joint venture in Shanghai will
focus on avionics — the electronics for communications, navigation, cockpit
displays and controls. G.E. will be contributing its leading-edge avionics
technology — a high-performance core computer system that operates as the
avionics brain of Boeing’s new 787 Dreamliner.
The joint venture has a ready customer in the
C919’s builder, the Commercial Aircraft Corporation of China, which is also a
government-owned enterprise. The plane will be a single-aisle airliner,
carrying up to 200 passengers, intended to compete with Boeing 737s and Airbus
320s. Although the Chinese hope to begin deliveries in 2016, analysts say the
schedule may well slip.
With or without the C919, the Chinese market
for commercial airliners is already huge and growing fast — a big market for
G.E. jet engines and other systems, as well as Boeing and Airbus planes. But if
the C919 grabs any significant slice of that market, it would represent a new,
expanded opportunity for G.E. The company has already been chosen to supply
engines for the Chinese plane, through its long-standing partnership with
Snecma of France. Though the world’s largest producer of jet engines, G.E. has trailed
other suppliers of avionics in overall sales, behind Honeywell, Rockwell
Collins and Thales, all of whom competed for the C919 business.
Several other American companies have also
been chosen as suppliers for the C919 aircraft, providing power generators,
fuel tanks, hydraulic controls, brakes, tires and other gear. The roster of
United States suppliers includes Rockwell Collins, Honeywell, Hamilton
Sundstrand, Parker Aerospace, Eaton Corporation and Kidde Aerospace.
In fact, the corporate competition for
contracts on the C919 became a “frenzy,” said Mark Howes, president of
Honeywell Aerospace Asia Pacific. The Chinese government, he said, had made it
clear to Western companies that they should be “willing to share technology and
know-how.”
But the G.E. avionics joint venture, analysts
say, appears to be the deepest relationship yet and involves sharing the most
confidential technology. And G.E.’s partner, Avic, also supplies China’s
military aircraft and weapons systems.
G.E. executives would not comment on the
details of the joint venture. But a person involved in the talks said the 50-50
venture is for 50 years. G.E., the person said, is putting in technology and
start-up capital of $200 million. Avic will initially contribute $700 million,
the person said, including the cost of a new research and development lab
already under construction.
To address American government security
concerns, the joint venture in Shanghai will occupy separate offices and be
equipped with computer systems that cannot pass data to computers in Avic’s
military division, G.E. executives say. And anyone working in the joint venture
must wait two years before they can work on military projects at Avic, they
added.
While Boeing and Airbus would probably rather
not see their suppliers help the Chinese so much, both those companies must
also constantly balance the risks and rewards of operating in China.
Boeing has subcontracted parts work to China
for many years, and it is expanding a joint venture in Tianjin that makes parts
with composite materials for several of its planes. And Airbus has built a
factory that assembles A320s in the same city.
Boeing has “opted to accept the reality of
both partnering and competing with China,” Boeing’s chief executive, W. James
McNerney Jr., said in a speech last year.
Indeed, China’s push into the commercial
aircraft industry will probably increase exports from American aviation
equipment manufacturers for years to come, according to industry analysts.
Whether China succeeds or fails, the state-owned companies will keep investing,
generating sales for the suppliers.
The real concern lies further head, according
to a study of China’s strategy
included in a report published in November by a bipartisan Congressional
advisory group, the United States-China Economic and Security Review
Commission.
The group concluded that China’s huge state
subsidies for its own industry, its requirements that foreign companies provide
technology and know-how to gain access to the Chinese market, along with the
close ties between its commercial and military aviation sectors all raise
concerns and “bear watching.”
The big aviation equipment makers say that,
by now, they are experienced at grappling with matters of technology transfer
in China. In Cedar Rapids, Iowa, Kent L. Statler, an executive vice president
for commercial aviation at Rockwell Collins, observes that his employees often
ask whether the company is trading its future for immediate sales in China.
“I think you’re naïve if you don’t take into
account that you could be standing up a future competitor,” Mr. Statler said.
Any company in a global business is in a race, he added, and staying ahead is
the only defense. “At the end of the day, our technologies and processes have
to continue to improve,” Mr. Statler said. “It comes down to who can innovate
faster.”
A
version of this article appears in print on January 18, 2011, on Page B1 of the
New York edition with the headline: Trading Technology for Sales in China.
*****************************
Boeing Goes to Pieces
Aerospace
execs sell their industry to Japan—one part at a time.
By • January 8, 2014
At a welcoming banquet in Japan in the 1980s,
Ford Motor chairman Philip Caldwell received a memorably double-edged
compliment. “There is no secret about how we learned to do what we do, Mr.
Caldwell,” said the head of Toyota Motor, Eiji Toyoda. “We learned it at the
Rouge.”
Toyoda was referring to Ford’s fabled River
Rouge production complex in Dearborn, Michigan. In the early days of Japan’s
rise, Ford and other American auto companies had been famously helpful to
information-gathering Japanese engineers. Know-how gleaned at the Rouge
evidently proved particularly valuable.
Similar stories can be told about the
complacency of other U.S. industries in the face of emerging Japanese
competition. Where Japanese industrial “targeting” is concerned, America never
seems to learn.
Now another industry is being
targeted—America’s last remaining crown jewel, aerospace. The Boeing Company in
particular has long been in Japan’s crosshairs. Yet, in what amounts to one of
the most outrageous sellouts in modern business history, the U.S. industry is
consciously cooperating in its own demise. Swayed by stock options, top U.S.
aerospace executives are increasingly prioritizing short-term profits over the
long-term health of their industry.
Japan is arguably already the world’s largest
aerospace player. Certainly it is the ultimate source of a vastly larger share
of the industry’s most sophisticated parts and materials than a reading of the
English-language press would suggest. And given that Boeing now subsumes most
of the erstwhile independent companies that put Neil Armstrong on the moon, its
eclipse constitutes a major part of a larger story of American decline.
In return for transfers of American
technology and manufacturing know-how, the Japanese low-ball their prices for
supplying an ever widening and more advanced array of components and materials.
In many cases, Japan’s state-controlled airlines further sweeten the pot by
paying top dollar for U.S. airframes and jet engines.
All this boosts the American industry’s
short-term profits. For the Japanese the seemingly steep upfront costs are a
steal given the enormous amount of learning-by-doing that would otherwise be
required to reinvent American production techniques. As for the American
national interest, the most obvious consequence is an endless stream of layoffs
of American blue-collar workers.
Less obviously but equally debilitating, the
U.S. aerospace industry’s dependence on Japanese and other foreign suppliers
has greatly exacerbated U.S. trade imbalances. By extension, the U.S. Treasury
has become ever more dependent on East Asia to fund the trade deficits. (Trade
is the key to the real Japan—as opposed to the “basket case” presented in the
media. Judged by the current account, the most meaningful measure of its trade,
Japan’s surpluses have generally risen from the famously high levels they
reached in the late 1980s.)
Already Japan’s successes reach into the
aerospace industry’s every nook and cranny. A few examples:
Jet
engines.
Both Pratt & Whitney and GE Aviation now rely heavily on Japan for engine
components. A key supplier is Ishikawajima Harima Heavy Industries (IHI), a
little-known Tokyo-based corporation that today ranks as one of the world’s
most advanced aerospace players. (In common with several other leading Japanese
aerospace companies, IHI got its start in shipbuilding. Hence the seemingly
incongruous reference to “heavy industries” in its name.)
Avionics. This is the term of art for
a huge panoply of sensors, controls, flight-deck instruments and displays, and
communications equipment essential to modern aviation. The field used to be the
preserve of U.S. companies like Honeywell, Hughes, and Raytheon but
increasingly the serious manufacturing is done in Japan by corporations like
Panasonic, Sony, and Toshiba. The Japanese have also assumed leadership in
critical avionics materials. An example is gallium arsenide, a superfast
semiconducting material vital in advanced computer chips. Japanese companies
like Hitachi Cable and Furukawa Electric dominate the supply of gallium
arsenide.
Aircraft
wings.
Companies like Kawasaki Heavy Industries and Mitsubishi Heavy Industries are
now world leaders in wing-making, a specialty long considered one of the
aircraft industry’s greatest manufacturing challenges. In partnership with the
world’s top carbon-fiber producer, Tokyo-based Toray, Mitsubishi has pioneered
the manufacture of carbon-fiber wings for passenger planes. Such wings reduce
fuel consumption by up to 20 percent per seat-mile.
To be sure, the Japanese have so far confined
themselves almost entirely to components and materials, leaving Americans and
Europeans to affix their logos to completed engines and airframes. But
precedent suggests the Japanese may not be content to play second fiddle
forever. Mitsubishi is already working on a 90-seat regional jet scheduled to
enter commercial service in 2017. Although this plane will not present much
direct competition for the American airframe industry, it will stand in much
the same position to that industry as, say, the Honda Accord did to the U.S.
auto industry in the 1970s—the thin edge of a wedge.
♦♦♦
As Robert Scott of the Economic Policy
Institute points out, a little more than a generation ago Boeing planes were
still almost entirely American-made. In the 1980s, however, Boeing came under
increasing pressure to enter into “work-share” agreements with various
technology-hungry foreign partners, most notably the Japanese.
The
trend intensified as Boeing planned the 777, which entered service in 1995.
According to Boeing’s numbers, various Japanese companies took on, in
aggregate, about 21 percent of the 777’s airframe—up from about 16 percent for
the Boeing 767, which had been launched in 1982. Boeing allocated much of the
777’s fuselage to a government-led Japanese consortium.
Then came the 787, Boeing’s newest passenger
plane, which entered commercial service in 2011 in the livery of All Nippon
Airways. For several reasons the 787 constitutes a watershed not only for
Boeing but for the entire global aerospace industry. Otherwise known as the
Dreamliner, it is the most technologically advanced passenger jet ever built.
It is also the first progeny of a
portentously redefined relationship between Boeing and Japan. On the company’s
own figures, the Japanese account for a stunning 35 percent of the 787’s
overall manufacture, and that may be an underestimate. Much of the rest of the
plane is also made abroad, not least in Italy, Germany, South Korea, France,
and the United Kingdom.
The 787 story began more than a decade ago
when, in the manner of a man undergoing a mid-life crisis, Boeing suddenly
embraced a New Age redefinition of itself: it aspired to be primarily a
“systems integrator,” not a manufacturer. According to one online dictionary,
the term systems integrator connotes “an individual or company that specializes
in building complete computer systems by putting together components from
different vendors.” As the commentator Mark Tatge has pointed out, the term
suggests a largely service-oriented role similar to that of Dell Computer in
the PC industry. (Dell confines itself to the design and marketing of products
assembled in East Asia from components supplied under contract by countless
independent manufacturers.)
Wearying of trying to stay ahead of Airbus,
already then in the passing lane, Boeing would henceforth delegate many of its
most technologically challenging manufacturing tasks to a consortium of three
Japanese “Heavies”: Mitsubishi Heavy Industries, Kawasaki Heavy Industries, and
Fuji Heavy Industries. These rank first among equals as Boeing’s so-called Tier
1 suppliers and have been the recipients of much of Boeing’s most advanced
know-how.
Boeing’s changing view of itself dovetailed
with Tokyo’s agenda. For decades Japan had identified aerospace as one of its
most crucial industrial targets. At a stroke Boeing’s transition to systems
integration put the prize of global leadership in aerospace within Japan’s
grasp.
On the surface, Boeing’s strategy seems like
any other case of outsourcing, and to mainstream economists—if not to
blue-collar American workers—outsourcing is a good thing that helps nations
allocate their capabilities more efficiently.
There is, however, another side to this
story, as Ralph Gomory points out. A former director of research at IBM who is
better known these days for his mathematical debunking of the traditional case
for free trade, Gomory observes, “If the world economy were working in textbook
fashion, Boeing’s technology transfer policy would not make sense. The
Dreamliner story illustrates in high relief a fundamental, hitherto generally
unnoticed, flaw in the theoretical case for globalism.”
For a start, in contrast to the standard case
for outsourcing, Boeing’s increasing reliance on Japan can’t be explained as a
search for cheap labor. Japanese wages are high—probably, when all is said and
done, higher than American levels. Labor costs in several other nations where
key Boeing suppliers hang their hats—Germany, France, and South Korea, for
instance—are also high.
Even more anomalous is Boeing’s acquiescence
in other nations’ requests for technology transfers. Gomory argues there is no
place for such transfers in the standard case for free trade. After all, if
American corporations have a comparative advantage in plane-making, they should
keep it. By transferring production know-how to overseas partners, the American
aerospace industry is cutting its own throat, and why would anyone do that?
Dick Nolan, an emeritus professor of Harvard
Business School, notes that Boeing’s traditional policy had been to use foreign
suppliers merely for what’s called “build-to-print”: they supplied components
and subcomponents made to Boeing’s detailed specifications, an arrangement that
enabled Boeing to keep to itself much if not all of its serious know-how.
Even before Boeing redefined itself as a
systems integrator, keen observers had noticed a weakening in its resolve to
resist Japanese pressure for technology transfers. As recorded by the British
author Karl Sabbagh, by the early 1990s Boeing’s willingness to reveal closely
held manufacturing secrets to the Japanese became so notorious that Boeing
employees vulgarly referred to it as the “open kimono” policy.
Today, not the least surprising thing about
the Dreamliner’s work-share arrangements is that the foreign-made sections
arrive in Boeing’s final assembly plant in Seattle not only fully “stuffed”
with systems and sub-components—a radical departure from previous
arrangements—but already certified and tested. Certification and testing had
previously been considered core functions that should never be delegated to
foreign partners. In a Harvard Business Review blog, Nolan acerbically
commented, “Boeing effectively gave Tier 1 suppliers a large part of its
proprietary manual, ‘How to Build a Commercial Airplane,’ a book that its
aeronautical engineers have been writing over the last 50 years.”
♦♦♦
Perhaps the single most controversial aspect
of Boeing’s partnership with Japan is that the 787 flies on Mitsubishi wings.
These are no ordinary wings: they constitute the first extensive use of carbon
fiber in the wings of a full-size passenger plane. In the view of many experts,
by outsourcing the wings Boeing has crossed a red line. For a start, as Stan
Sorscher points out, the strategy has required the transfer to Mitsubishi of
much of Boeing’s invaluable wing-making technology.
“The value of the technology and know-how
transferred is probably around $500 million—that is what we call in the
business a scientific wild-ass guess,” says Sorscher, a former physicist at
Boeing and now an executive of Boeing’s main white-collar union. “Boeing built
the tooling for a full-scale prototype of the 787 wings in Seattle and then
gave all of that to Mitsubishi. It was a huge boost to Mitsubishi.”
And that was only the beginning. “Boeing gave
Mitsubishi the materials technology and the manufacturing processes—the layup
processes, temperature and pressure conditions for the autoclaves, for
instance,” says Sorscher. “Boeing also transferred its tooling and assembly
expertise, and there is a lot of expertise in assembling a wing.” Previously
Boeing had regarded wing-making as its ultimate core competency. By keeping the
wings largely or totally in-house, Boeing minimized the risk that the Japanese
consortium could become a future competitor.
The assumption in the industry is that
carbon-fiber wings will be standard in forthcoming passenger jets. By engaging
the Japanese to lead the move to carbon-fiber, Boeing may thus be committing
the industrial equivalent of assisted suicide. As Richard D’Aveni of Dartmouth’s
Tuck School of Business observes, the risk is not only that Boeing will lose
the ability to make state-of-the-art wings but that, as it loses touch with
manufacturing, its ability even to conduct design and systems integration will
atrophy.
His concerns seem to be being belatedly
heeded inside Boeing. In recent months, the company has indicated that it wants
to bring more manufacturing back in-house. This is implied, for instance, in
plans for the new so-called 777X, a stretched version of the 777 which is
expected to enter service around 2020.
The question is whether Boeing is closing the
barn-door after the horse has bolted. Certainly, as William Lazonick, head of
the University of Massachusetts Center for Industrial Competitiveness, points
out, the Japanese are looking increasingly formidable. He explains:
Japan’s competitive advantage is its deep
expertise in machining, its know-how with advanced materials, and its capital
goods. Where you are looking for very high-quality engineering, and labor that
maintains its capabilities over long periods, the Japanese are superior.
This sort of work has been abandoned in
the United States because the Japanese are there to do it. They have tremendous
expertise in precision engineering using complex materials—materials that have
to be dealt with in a particular way such as getting the weight down to a
minimum. They will low-ball their prices to get work because they know they
will keep it.
The problem for a systems integrator is that
technological progress is very rapid. “Once you fall behind in advanced
manufacturing, the costs of catch-up are just too great, and a chief executive
aiming to maintain quarterly earnings cannot afford to incur them,” explains
Richard McCormack, editor of Manufacturing & Technology News.
Why is wing-making so crucial? For a start,
wings have to pack the strength to withstand occasional extreme buffeting, but
at the same time they must be instantly and smoothly responsive in routine
conditions—and they have to do all this while weighing next to nothing. If
components don’t fit perfectly, this greatly increases wear and can lead to
catastrophic failures in flight.
Wings for large passenger jets pose unique
challenges because the larger a part is the greater the difficulty in machining
its surfaces to required tolerances. Given that some wing parts these days can
be as long as 100 feet, only a few factories in the world have the massively
expensive machinery and rich endowment of tacit knowledge to meet the task.
In the case of carbon-fiber wings, the
challenges are compounded because carbon fiber is a notoriously fickle
material. Extremely strong in normal aeronautical use, it can be brittle if
mishandled. A few tiny cracks invisible to the naked eye can doom a plane.
♦♦♦
In outsourcing so much of the Dreamliner,
Boeing has flouted the opinion of its own top engineers. The company received a
particularly well-argued caution at an in-house conference back in 2001. One of
Boeing’s senior engineers, John Hart-Smith, delivered a paper on the dangers of
excessive reliance on outside partners. Referring to the American aerospace
industry’s ever increasing outsourcing, Hart-Smith asked, “Is it really all
that difficult to comprehend that, along with the work involved, the revenue
and profit associated with it have also been outsourced?” He added: “One must
be able to contribute in some way to products one sells to avoid becoming
merely a retailer of other people’s products.”
Hart-Smith’s views were probably shaped by
the fact that he had previously worked for McDonnell Douglas, a once brilliant
company that flamed out after decades of increasing reliance on foreign
partners. It eventually succumbed to a merger with Boeing in 1997. Hart-Smith
had joined McDonnell Douglas at the height of its success in the 1960s, when in
many ways it still overshadowed Boeing. He subsequently watched its commercial
aircraft business outsource itself to death. A key problem was that designers
became so out of touch that they no longer understood basic manufacturing
realities.
Hart-Smith’s message should have packed a
special significance for Boeing’s future chief executive, Harry Stonecipher. A
classic “numbers guy” who had come out of Jack Welch’s General Electric,
Stonecipher had served as chairman of McDonnell Douglas and presided over a
particularly toxic outsourcing fiasco involving technology transfer to China.
By 2004 he was CEO of Boeing and oversaw the early stages of the 787’s
development.
How does Boeing justify its retreat from
manufacturing? The company refuses to comment and a spokesman declined even to
confirm information gleaned from independent sources. He would not
“fact-check” this article, he said. (The defensiveness is not confined to
Boeing. One outspokenly pro-manufacturing U.S. Senator, a Democrat from the
Mid-West, at first ignored this writer’s requests for comment and then, after
repeated reminders, offered a few irrelevant platitudes that avoided
criticizing Boeing.) The company and its Washington surrogates seem
increasingly uncomfortable with well-informed questions. The result, in the
words of the prominent Washington-based aerospace analyst Richard Aboulafia, is
that watching Boeing these days “resembles Kremlinology.” The company does have
some excuses, albeit weak ones. A significant factor are so-called offsets,
which are requirements by foreign air forces and government-controlled foreign
airlines to favor their nations’ manufacturers in outsourcing aerospace
contracts. No nation has benefited more from offsets than Japan, and the
Tokyo’s ability to manipulate the U.S. aerospace industry is legendary.
But this does not mean that Boeing had to
roll over. At all stages it held the high ground. In buying full-size passenger
jets, the Japanese have had only two choices, Boeing or Airbus, and Airbus, as
a prime manifestation of German-French industrial policy, has no inclination to
transfer technology or jobs to Japan. And as Matthew Lynn, author of Birds
of Prey: Boeing vs. Airbus, has shown, the Japanese have long been under a
strong geopolitical obligation to buy from Boeing to help reduce their nation’s
chronically large bilateral surpluses with the United States.
In the circumstances it should have been easy
for Boeing executives to hold the line. Their failure to do so seems all the
more surprising for the fact that Japan’s work share in Boeing planes has long
been far greater than the proportion of final sales accounted for by Japanese
airlines.
As Barry Lynn, a senior fellow at the New
America Foundation, points out, Boeing’s policies appear to be at odds with its
obligations to the American public. “Much of the technology that Boeing has
transferred abroad was subsidized by the U.S. taxpayer and it was entrusted to
Boeing to look after,” Lynn says. “Instead Boeing has sold it off. There has
been a substantial amount of cashing out and top executives have treated
themselves extremely well.”
By one estimate, in the three decades to the
mid-1980s more than 70 percent of the U.S. aircraft industry’s development
funding came from Washington, D.C., mainly thanks to spinoffs from military and
space projects. More recently, Boeing benefited from low-interest finance from
the U.S. government. According to the industrial geographers David Pritchard
and Alan MacPherson, Boeing also received a $3.2 billion subsidy package from
the state of Washington in support of the Dreamliner program.
A factor often mentioned in mitigation of
Boeing’s outsourcing is a perceived need to enlist financial partners who can
help fund the development of new planes. In the case of the Dreamliner, the Japanese
Heavies provided much of the funding. But did Boeing need such help? As William
Lazonick observes, Boeing had plenty of in-house financial muscle. It chose
instead to use its cash to reward shareholders via rising dividends and—even
more irresponsibly—huge buybacks of its own shares.
“Most of the buybacks came in two periods,
first between 1998 and 2001, and then between 2004 and 2008,” says Lazonick.
“Boeing’s buybacks cost more than $20 billion in total. And it is not as if
they were not paying dividends. They were paying substantial dividends. I
reckon between the beginning of 1996 and the end of 2007 their dividends
totaled $8 billion. When you add it all up, buybacks plus dividend payments
totaled $29 billion.”
“This is not atypical for major U.S.
companies these days,” he adds. “They are looking for every way to cut what
they spend on investment. Boeing could have done all the investment they
wanted. Boeing’s buyback policy is a big difference with Japan. Companies there
do very little buying back of their stock. They reinvest in their businesses.”
Boeing’s stock has done well. Measured from
the end of 1997, it is up more than 170 percent. The rising stock price has in
turn powerfully boosted executive stock options. Thus, Boeing’s current chairman,
Jim McNerney, made $27.5 million in 2012—compared with a total of $1,725,000
for then chairman Phil Condit in 1997.
♦♦♦
The Boeing story strongly suggests that
America’s defense base has eroded. It is further evidence of a trend identified
in a little-noticed 2005 report by the Defense Science Board. The board’s focus
was mainly on the electronics market, and it found that even among suppliers
who mainly or solely served the U.S. defense industry hollowing out had reached
shocking levels. According to the report:
There is no longer a diverse base of U.S.
integrated circuit fabricators capable of meeting trusted and classified chip
needs. From a U.S. national security view, the potential effects of this
restructuring are so perverse and far reaching and have such opportunities for
mischief that, had the United States not significantly contributed to this
migration, it would have been considered a major triumph of an adversary
nation’s strategy to undermine U.S. military capabilities.
In discussions of the unintended consequences
of globalism, the transfer abroad of valuable production technology is the
elephant in the room. It is consistently ignored in all standard theoretical
accounts of free trade. In an era when information can move around the world at
light speed, this is an oversight of epochal importance. Almost everyone
assumes that no matter how fast American industrial know-how leaks abroad, an
abundance of new production methods and new industries will keep bubbling up to
provide additional sources of prosperity. Not only do people not stop to
consider whether this assumption is valid, they don’t even realize they are
making an assumption.
Many of America’s most sophisticated
competitors do not run their trade policy on a free-market basis, argues Ralph
Gomory. By intelligent use of trade barriers, among other things, they can hope
to finagle advanced production technologies out of the United States. Employers
in such nations are often under considerable pressure—political, economic, and
societal—to keep their own most advanced production technologies at home and
well away from the risk of theft by foreign rivals.
A historic ratchet effect is at work. With
high-value jobs disappearing never to return, America’s imports and current account
deficits rise with each succeeding economic cycle. The deficits have to be
financed—and this means ever greater reliance on major creditor nations, not
least China and Japan, but also Saudi Arabia, Russia, and Germany. On present
policies, the United States is continuing down a spiral of indebtedness similar
to that of the late Ottoman Empire. The tale can end only in bankruptcy—or a
drastic change of course.
Eamonn
Fingleton is the author of In
Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is
the Key to Future Prosperity.
****************************
Boeing Chairman: China no Threat to Airplane Manufacturers
China’s
aviation industry is at least a generation away from competing with U.S. and
European manufacturers, Boeing’s chairman said Thursday
By
Robbie Whelan
The
Wall Street Journal
Sept.
24, 2015
Chinese manufacturers are decades away from
competing globally in the airplane manufacturing industry, Boeing Co. Chairman Jim McNerney said Thursday.
China will remain a large buyer of
American-made airplanes and a supplier of parts, Mr. McNerney said at an
aviation industry event in New York. Boeing announced on Wednesday that Chinese
airlines had agreed to buy 300 new jets from the company, and that it would
open a facility to perform finishing work on 737 jets built in the U.S. and
flown to China.
“We are going to invest more in innovation
going forward,” he said. “We lose if don’t maintain that innovation edge.”
Mr. McNerney, who stepped down as Boeing’s
chief executive in June, also said he expects Congress to reauthorize the U.S.
Export-Import Bank. The bank’s mandate expired on June 30, and it’s unclear
whether supporters have enough votes to revive the institution, which provides
loans and guarantees to help overseas customers of U.S. companies finance their
purchases. Industrial and aviation companies, including Boeing, General Electric Co. and Caterpillar Inc., have been among the
bank’s biggest beneficiaries.
Companies argue that shutting the bank
strengthens overseas competitors that continue to have access to
government-backed financing in their own countries. Last month, Boeing said
that the closure had cost it an $85 million satellite contract with a
Bermuda-based telecommunications firm, which said it would look elsewhere for
financing. GE said Thursday that it would move 1,000 new energy jobs to the
U.K. after winning export financing from the Ex-Im Bank’s UK counterpart.
“Customers require guarantees. Europe has
them, and we don’t,” Mr. McNerney said. He added that without the bank, Boeing
is at a disadvantage on roughly 10% of the business for which it competes. “You
have to evaluate some parts of your supply chain being able to access financing
(if it) isn’t available in your country.”
Mr. McNerney said he was “frustrated” that
members of Congress were pressuring House Speaker John Boehner to prevent the
reauthorization from coming to a vote.
“It’s a triumph of the inside game over
what’s good for the country,” Mr. McNerney said. “It really is a sign of the
dysfunction that exists in Washington.”
Mr. McNerney said that Boeing is pursuing
innovation in the types of materials used to build airplanes and jet engines,
as well as in keeping manufacturing costs down.
“You look inside a jet engine today, and
you’d be shocked at the amount of non-metallic material,” he said.
Boeing's deal to open an aircraft-completion
center in China, which has drawn the ire of critics including Donald Trump,
continues a relationship dating back nearly a century. The WSJ's Eva Tam looks
at the long history between Boeing and China.
Longer-term, the next wave of innovation in
the aviation industry will occur when manufacturers start building vehicles
that “blend atmospheric and space travel together,” Mr. McNerney said, a
milestone that is technologically within reach today.
“When
that day comes, and you’ll be blending supersonic and space travel, then you’ll
see some very different designs,” he said. He also praised entrepreneur Elon
Musk, whose Space Exploration Technologies Corp. has added competition to the
space travel and satellite industry, though Mr. McNerney added that Mr. Musk
has not achieved enough scale to become a serious competitor to Boeing.
Write
to Robbie Whelan at robbie.whelan@wsj.com
********************************
Aerospace & Defense
China, Russia take step closer to new long-haul jet
REUTERS
By
Brenda Goh | ZHUHAI, China Wed Nov 2, 2016
ZHUHAI, China China and Russia took a step
closer on Wednesday to the joint development of a long-haul jet to challenge
Boeing and Airbus, displaying a model of the
unnamed plane that would compete with Western rivals.
State-owned planemakers Commercial Aircraft
Corporation of China (COMAC) [CMAFC.UL] and United Aircraft Corp (UAC) of
Russia said they had started the hunt to find suppliers, as they presented a
mock-up of the wide-body jet at Airshow China.
Neither firm gave details on financing or
technical specifications for what Western analysts call a politically-driven
initiative that will be difficult to pull off and is likely to carry a high
price tag.
China opened the show on Tuesday in the
southern city of Zhuhai with a brief flypast of its J-20 stealth fighter, in a
demonstration of military clout.
Both countries are currently developing
smaller narrow-body jets to compete with the best-selling Airbus and Boeing
types.
Guo Bozhi, general manager of COMAC's
widebody department, said a 50-50 joint venture based in Shanghai will start
operations this year.
First announced in 2014, the project has so
far been slow to materialize. The firms have said they want conduct a maiden
flight in 2022 and begin deliveries in 2025 or later.
Western industry analysts consider the target
challenging, but more realistic than recent aircraft programs that sought
results in 5-7 years and came in late.
"A wide-body jet is an extremely
complicated product, which will require a lot of skills (to develop) and
require broad industrial knowledge," Guo told reporters. "China and
Russia each have their own advantages."
Descriptions accompanying the model showed
the firms ultimately envision three variants, based on a basic version that
will seat 280 and have a range of up to 12,000 kilometers (7,500 miles).
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The decision to base the venture in Shanghai
was a "mutual decision", Guo said at the event, attended by COMAC
Chairman Jin Zhuanglong, UAC's Chief Executive Yury Slyusar and Russia's
Minister of Trade and Industry Denis Manturov. Guo declined to say how much
each party had invested in the project.
A global effort to assess potential suppliers
is now under way, said COMAC, which is separately pushing its own C919
narrow-body passenger jet towards a long-delayed maiden flight, now aimed for
the end of 2016 or early 2017.
U.S. firms Honeywell and United Technologies
Corporation UTC.N said on Wednesday they discussed the China-Russia jet with
COMAC officials at the airshow, without commenting on the nature or subject of
the contacts.
"We will choose suppliers who have rich
experience in development, whose products are competitive globally, and who can
continually guarantee quality from the development stage until the planes go
into operation," Guo said.
A key decision will be what engines to use.
Industry sources speculate the jet could use Western engines.
Another potentially tricky issue will be how
the work should be divided, a subject which caused years of wrangling at
Europe's Airbus, which began in 1970 as a consortium of nations and took more
than two decades to make a significant impact.
Though a 50-50 JV, analysts view the Chinese
side as being the more influential in the project.
The firm's Shanghai headquarters tells
"where the balance of power is going to be and that reflects the size of
the Chinese domestic market," said Sash Tusa, analyst at London-based
consultancy Agency Partners.
(Editing
by Kenneth Maxwell; Editing by Ruth Pitchford)
*******************************
Boeing
helps create an eventual rival in China
By
David Nicklaus St. Louis Post-Dispatch
Oct 2, 2015
Boeing knows how to make airplanes. China
wants to learn. It must have been with some trepidation, then, that the
aircraft giant announced plans for a factory in the Asian nation.
The plant, described as a completion center
for the Boeing 737, was part of a deal to sell 300 planes to Chinese airlines
and leasing companies. Workers there will install carpet, seats and other
interior components.
It is a major departure for Boeing. The
company had previously bought components and subassemblies from foreign
suppliers, but kept assembly work in the U.S.
Some old hands at Boeing probably remember
that their former competitor McDonnell Douglas tried building passenger jets in
China. It wasn’t very successful, building about 35 MD-80s and two MD-90s
before Boeing bought McDonnell in 1997 and ended the Chinese venture.
The relationship led to an embarrassing
incident in which some U.S.-made machine tools, licensed for export to the
civilian aircraft plant, showed up at a military facility. McDonnell was
cleared of wrongdoing but agreed to a $2.1 million fine.
One lesson from that episode is that China
doesn’t just want manufacturing jobs. It wants aircraft technology and
know-how, which are hard to control once you export them.
Airbus, Boeing’s European rival, opened a
Chinese assembly plant in 2009 for the A320, which competes with the 737.
Airbus announced plans this summer for a second plant to build the larger A330.
Boeing has sold about 1,500 airliners in
China over the years, but analysts say the government has become more insistent
about getting help toward its industrial goals.
“Boeing had to do something to keep up with
Airbus in terms of satisfying the Chinese desire to not just buy good planes,
but also to produce them domestically,” says Loren Thompson, president of the
Lexington Institute in Arlington, Va.
As aircraft factories
go, Boeing’s China plant won’t be especially high-tech. “We’re giving away our
nation’s vitally strategic carpet stapling technology,” quips Richard
Aboulafia, an analyst with Teal Group in Fairfax, Va.
He thinks Chinese authorities probably became
more adamant about a manufacturing presence after the Chinese stock market
tumbled this summer. “I don’t think this does a whole lot of anything except
provide political cover,” Aboulafia said.
China does, however, have its own commercial
jet in the works. The Comac C919, which is expected to make its maiden flight
next year, is being built by the company that is Boeing’s partner on the 737
plant.
Every skill the Chinese can master — even
something as minor as installing the in-flight entertainment system — will help
them eventually build better planes.
“They are making all the moves in the
direction of having a viable aircraft manufacturing industry,” says Scott
Hamilton, a consultant at Leeham Co. in Issaquah, Wash. “This is a part of the
jigsaw puzzle.”
Hamilton predicts that Boeing will someday
put a final assembly plant in China. The market — estimated at 6,300 jetliner
orders in the next 20 years — is simply too large to ignore.
Domestic planes such as the C919 may meet
some of that demand, but not nearly all of it. “It will be a long time before
China can market a globally competitive airliner,” Thompson says.
So, as in the rest of the world, Boeing and
Airbus will duke it out for orders. In China, competing means going along with
the government’s desire to build an aircraft industry, while trying to stay a
few steps ahead of the rival you’re helping to create.