Hey Mark, interesting analysis of Boeing's history:
Boeing’s nosedive: How
greed ruined a great American company
by Henry Johnston scseda@gmail.com
What was once essentially a
collective of engineers known for innovation and craftsmanship now operates in
the interests of Wall Street
On a sunny day in August
1955 Boeing test pilot Alvin ‘Tex’ Johnston was to take the Dash-80, the
prototype of the Boeing 707, out for a test flight at an annual hydroplane race
over Lake Washington near Seattle. The large crowd gathered for the event
included many of the top names in the aviation industry.
Rather than perform a
simple flyover, the swaggering Tex, who got his start flying crazy loops on
daredevil flights on a tri-motor plane across the dusty plains of Kansas, aimed
to impress the gathered luminaries. Instead, he put the plane into a stunning
barnstormer-like double barrel roll that left the crowd below astonished and
his boss, Boeing CEO Bill Allen, mortified that the newly crafted jet was out
of control and about to crash.
It was a fitting gesture
for a plane whose very genesis was the result of a huge gamble. As the 1950s
dawned, Boeing was at a crossroads. Having thus far thrived as a manufacturer
of military aircraft whose modest forays into commercial aviation had met
little success, the company needed direction as its defense contracts had
mostly dried up with World War II over and the Korean War winding down.
It was at this time that
CEO Bill Allen decided to bet the house – $16 million to be exact, a huge sum
in those days – on building a jet transport prototype. It is hard to overstate
how ambitious this project was. Not a single customer had committed to buying
the plane, and it was hardly clear that such an aircraft would be viable in the
market. “The only thing wrong with the jet planes of today,” said
the head of TransWorld Airlines around that time, “is that they won’t
make any money.”
Failure may very well
have meant the end of the company. It was a resounding success. After a few
lonely, uncertain years, an aircraft was built that would shrink the world and
usher in the glittering jet age. A few short years later, the company would
embark on another hugely expensive gamble that paid off when it undertook to build
the six-story-high, 225-foot-long Boeing 747.
In 1957, when the 707
made its maiden flight, fewer than one in ten American adults had ever traveled
in an airplane. By 1990, more adult Americans had flown than owned a car.
For many decades, Boeing
was a decidedly unpretentious, engineer-driven company with a culture
emphasizing both dazzling innovation and the sober virtue of impeccable
craftsmanship. It was a place where the top managers held patents and could
talk shop with the floor workers.
Even as late as the
mid-1990s, the company’s chief financial officer reportedly kept his distance
from Wall Street and answered colleagues’ requests for basic financial data
with a dismissive, “Tell them not to worry.”
In hindsight, this
principled aloofness has a bit of Shakespearean “last of all the
Romans” feel. The company would soon be transformed beyond
recognition.
Great companies
invariably embody some intangible quality of the nations that spawned and
nurtured them. Boeing came to represent in distilled and mythologized form
something that Americans had come to see as forming an essential part of their
national identity: unpretentious and focused on the task at hand. But if Boeing
was the quintessential American company on the way up, it came to embody many
of the country’s ills on the way down. Few companies have traced an arc of
ascendancy and decline that so closely mirrors the nation’s own trajectory.
The singular event cited
as marking the beginning of Boeing’s downfall was its 1997 merger with McDonnell
Douglas, which put it on a collision course with a culture steeped in
cost-cutting and financial performance. Somewhat perversely, although Boeing
had acquired McDonnell, it was the latter that took over. McDonnell’s
executives ended up running the company and its culture became ascendant.
Scores of cut-throat managers battle-hardened in the company’s perform-or-die
culture were brought in. A federal mediator once likened the partnership
to “hunter killer assassins meeting boy scouts.”
The self-effacing and
introspective Bill Allen, Boeing’s genteel CEO through the post-war era and the
man behind the 707 gamble, described his company’s ethos as “to eat,
breathe, and sleep the world of aeronautics.” But a new generation of
leaders was emerging who brought new priorities and a new vocabulary. It was no
longer about making great airplanes; it was about “moving up the value
chain.” What it was really about was maximizing shareholder value.
Now looming like a
colossus over Boeing was the figure of Harry Stonecipher, McDonnell’s CEO. The
blunt, hard-nosed son of a coal miner, Stonecipher was known for vicious
cost-cutting, emails written in all caps – and for jettisoning executives who
didn’t hit financial targets. But Stonecipher was a ‘winner’: McDonnell’s stock
price had risen fourfold under his tenure.
What predictably ensued
was nothing short of a complete transformation of Boeing from being a company
run by engineers to one that prized financial profit over all, and was willing
to cut all manner of corners to reduce costs and boost returns. The quality of
the product was, to put it mildly, severely compromised.
Downstream from these
changes are the spectacular failures we all know about: the outrageous cost
overruns, delays and production issues in making the Boeing 787, which ended up
being temporarily grounded for battery fires that regulators attributed to
flaws in manufacturing, insufficient testing and a poor understanding of an
innovative battery; the abject failure of the jimmy-rigged 737 MAX, which saw
two deadly crashes and, most recently, a harrowing incident in which a
sealed-off emergency exit blew out mid-air in an Alaska Airlines flight,
leaving a gaping hole in the fuselage.
It is possible to see
Boeing’s merger with McDonnell as simply an unfortunate mistake, and the rise
of the likes of Harry Stonecipher as simply an instance in which the wrong
person found his way to the top; and the outsourcing and cost-cutting as simply
a misbegotten strategy. But this would miss the wider trends at work in the
American corporate landscape at the time. Boeing was hardly alone on this path.
The writer David Foster
Wallace once wrote that “America… is a country of many contradictions, and a
big contradiction for a long time has been between a very aggressive form of
capitalism and consumerism against what might be called a kind of moral or
civic impulse.”
What is evident is that
starting roughly in the 1970s, this “aggressive form of capitalism” became
ascendant in the US and for a long time overwhelmed – and is arguably still
overwhelming – the “moral and civic impulse.” However, to view
this as simply a moral failing is to miss the greater economic pressures at
work.
The ‘70s were, in the
words of historian Judith Stein, the “pivotal decade” that “sealed
a society-wide transition from industry to finance, factory floor to trading
floor, [and] production to consumption.” America had emerged from
World War II with unquestioned manufacturing supremacy, but within a few short
decades, US companies had begun falling behind. Whereas Japan, Germany, and,
later on, China invested heavily in their industrial bases in the post-war
period, the US came to emphasize innovation at the expense of capital
investment. The 1970s were when nascent industrial powerhouse Japan pulled off
its so-called ‘revolution of quality,’ which went a long way toward putting
American manufacturers on the back foot.
Bloated and increasingly
uncompetitive American companies needed a way forward – and that way forward
can most succinctly be summed up as a switch in resource-allocation strategies
from value creation to value extraction. Whereas the highly vertically
integrated American companies of old practiced a ‘retain-and-reinvest’
approach, the new regime was one of ‘downsize-and-distribute,’ to use a phrase
coined by economist William Lazonick.
This can be described,
depending on one’s point of view, as either maximizing the value of the company
or asset-stripping it for the benefit of executives and shareholders – with a
corresponding hemorrhaging of the workforce.
The intellectual
underpinning for this change in approach came from economist Milton Friedman’s
Chicago School, whose theory that executives had a “fiduciary duty” to
maximize shareholder returns fell on fertile ground. A company, Friedman
argued, has no social responsibility to the public or society; its only
responsibility is to its shareholders. The idea that a company essentially
exists to maximize value for shareholders has become so engrained in the fabric
of our thinking that we are scarcely aware that it was ever any other way.
If, as Stein asserts,
the US went from “factory floor to trading floor,” it
necessarily meant a step up in prominence for Wall Street analysts and a step
down for the factory managers – or, in Boeing’s case, the engineers. So what
did the denizens of Wall Street want? They wanted to see the unwieldy
industrial giants generate a better return on their assets – in finance lingo,
they wanted a higher RONA (return on net assets).
Now, a naive observer
might assume that the path to achieving this lies in using one’s assets more
efficiently to generate more money. But there’s another way to increase RONA
that proved a lot easier: generate (roughly) the same amount of money with
fewer assets and lower costs. A constant numerator divided by a lower
denominator gives a higher number. Outsourcing does exactly that: it removes
assets from the balance sheet and that is precisely the path Boeing
and many others went down under the ‘downsize-and-distribute’ model. The
problem in Boeing’s case was that the supply chain for building an airplane is
so complex that it made it practically impossible for the company to maintain
quality standards.
Boeing’s embrace of this
new regime can be described as nothing short of whole-hearted. The figures are
staggering. Over the past decade, it has directed an incredible 92% of its
cashflow back to shareholders in the form of dividends and buybacks.
Since 1998, the company
has spent a staggering $63.5 billion on share buybacks. This, according to
financial analyst Scott Hamilton, is equivalent to about four wide-body and
five or six narrow-body airplane programs at today’s costs.
But Wall Street doesn’t
need airplanes, it needs dividends. Hamilton recounts how at the company’s
annual shareholder meeting in April 2020, CEO David Calhoun gave conflicting
signals about a new airplane program and also about a return to a dividend
policy. The following day, Melius Research gave the quintessential Wall Street
view in a note for clients: “We struggle to see how the business case
for a new airplane closes favorably these days.” It was a vote for
dividends. In other words, today’s profits trump the company’s future.
It is perhaps not
surprising that such a system arose in the US given the vastly complex,
interrelated, and often contradictory economic forces pushing and pulling in
the 1970s and extending forward over subsequent decades. We have mentioned
America’s economic competitiveness waning, but the other side of that equation
was that this was happening all while the US continued to wield the world’s
reserve currency at a time of increased financialization.
Historians and
economists will have to parse through the implications of a currency gaining in
stature precisely at a time when a country’s manufacturing base recedes, but
such a circumstance could hardly fail to push the entire system into the arms
of Wall Street.
Harder to comprehend,
meanwhile, is how the generation of leaders exemplified by the likes of Harry
Stonecipher seemed to have completely embraced this transformation of the
American economy.
In an interview with the
Chicago Tribune in 2004, he said: “When people say I changed the
culture of Boeing, that was the intent, so that it’s run like a business rather
than a great engineering firm.”
What is startling about
this is not so much Stonecipher’s actions at Boeing, but that he felt free to
absolutely lay bare his motives. Had he been out of sync with the zeitgeist of
the time, he may have still pursued the same aims out of whatever personal
motives – such as greed – but, fearing opprobrium, would have done so much more
furtively. That he felt he could unabashedly broadcast the destruction of
Boeing’s finely hewn, decades-old culture says as much about the country as it
does about the man.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Full post disclaimer in left column. PCN Home Page is located at: http://pcn.homestead.com/home01.html
