What Went Wrong at Boeing: My Two Cents

[unhappycamper]

http://www.forbes.com/sites/eamonnfingleton/2013/01/21/what-went-wrong-at-boeing-my-two-cents/

What Went Wrong at Boeing: My Two Cents
Eamonn Fingleton
1/21/2013 @ 6:01AM

My colleague Steve Denning’s commentary today on Boeing’s 787 problems is on the money in identifying a key managerial wrong turning a decade ago. Boeing decided at the outset to rely on outsourcing for 70 percent of the plane’s manufactured content. As Steve shows at length, this greatly increased the managerial complexity of the project and almost certainly helps explain why the project ended up three years late (with consequent damage not only to Boeing’s reputation but, thanks to contractual penalties, to its immediate bottom line).

Even more troubling, however, has been the long-term cost in weakening Boeing’s competitiveness. This is something I identified in “Boeing, Boeing….Gone,” a cover story for The American Conservative, as far back as 2005. The point is that among the things Boeing has outsourced has been the wings and the wing-box. These are by far the most technologically advanced elements of an airframe and they were outsourced to a Japanese consortium led by Mitsubishi Heavy Industries. Part of the deal was that much of Boeing’s secret wing-building know-how had to be transferred to Japan. The decision was highly controversial with Boeing workers who saw it as a direct threat to their jobs. Outraged at the prone position they were asked to adopt towards their information-gathering Japanese counterparts, they were quoted by author Karl Sabbagh as vulgarly referring to Boeing’s technology-transfer deal as the “open kimono” policy.

Of course, you might think that what was outsourced yesterday can be insourced today. Actually this rarely happens in the real world, at least not where seriously technologically advanced manufacturing is concerned. In this case a key problem is that the 787?s are made of carbon fiber. The learning curve in putting this tricky new material to work has been climbed by Tokyo-based Toray and Mitsubishi, not by Boeing. Unfortunately Boeing seems to have negotiated no effective access to the industrial secrets the Japanese have acquired. In effect Boeing has been left behind by its suppliers and cannot catch up without major costs that, given the relentless pressure for short-term profits in corporate America, will never seem to be worth incurring.

As a practical matter, the Airbus subsidiary of Netherlands-based EADS, will use Japanese-made carbon-fiber for the wings of its next major plane. The net effect is that the Japanese have suddenly bootstrapped themselves to leadership in the jetliner industry. (It should be noted that Japan’s aggregate contribution to the 787 comes to 30 percent, the same as that of the United States.) All this is the more piquant because Mitsubishi seems to be planning in the long run to enter the fray as a direct competitor to Boeing and Airbus in building full-size commercial jetliners. Already Mitsubishi is working with Toyota Motor to launch a 90-seat regional jetliner in 2017.

[xchrom]

1. du rec. nt

[CincyDem]

2. This is how America lost the Steel Industry

Clayt Christensen is a Harvard prof who studies and has written extensively about competitiveness and innovation. He tells a story of the US Steel Industry that, in its first steps, looks very much like what's happening to many US industries and airframes in particular.

Apologies in advance to those who understand the technical nuances of the steel industry - it's been a while since I've heard the story.

The Empire State Building was build from first shovel to office occupancy in just under a year. There were many reasons for the speed of construction but part of it was the fully integrated steel mill. Send the drawings to US Steel/Bethlehem/Newport/whoever and they figure out all the rebar/low grade i-beam/high grade i-beam/sheet steel necessary for the project and deliver it to the job site.

Now rebar is the steel rod material that goes into cement. You see it everywhere on commercial jobs. Pillars, sidewalks, flooring...everywhere. And it's slag steel - the cheapest of the cheap, worst of the worst, and cheapest of the cheapest. And it's easy to make. So easy that the Koreans figured out of to make it very efficiently from remelted crap after the war. Instead of these huge steel mill facilities like the US, they ended up with very small "mini-mills" that only made rebar and made it cheap. Much cheaper than the US.

The smart guys at the US Steel Companies noticed this. They also noticed that they made very very little money on rebar. So little in fact that they could stop making rebar and their margins would increase because every minute (and dollar) spent on making rebar was time and money not spent on making something more profitable.

So the US wanted to get out of rebar because it was "beneath" them and the Koreans wanted to get into rebar because it was better than nothing.

Before long - 100% of rebar production moved to Korea and everyone was happy...for a while. When the last US producer of rebar called it quits, the market price collapsed and even thought the Koreans made rebar inexpensively, the profit evaporated. BUT...bu then they had figured out how to make low i-beam, the next easiest thing to make. See...their experience making rebar trained them for the next level of steel making.

Again, the smart US Steel Companies noticed this. And they were making very little money on low grade i-beam. Wash - Rinse - Repeat and before long the Koreans own the low grade i-beam market.

Again with high grade i-beam.

At this point, the US companies are pretty much only making rolled sheet...and that's hard to get right. But, the Koreans figured that one out too. But this time, when the US Steel guys looked at the books they realized "hey wait a minute, if we don't win in rolled sheet...we're toast". And toast they were.

What they hadn't realized is that "asymetrical motivation"...the fact that one firm wanted into a business at the same time on firm wanted out...had irrevocably shift the CAPABILITY to make steel competitively.

I'm sure the Boeing guys thought they'd just let external suppliers make the simple stuff...but the definition of simple continued to change over time and eventually it reaches a tipping point where you can't go back and make the simply stuff yourself because you've lost the skills and talents.

The US led in Steel, Televisions, Stereo Equipment, Computers, all sorts of stuff. But the lure of outsourcing has toasted all of them.

And it happens at a company level too. Management falls in love with the cheap short term benefits of outsourcing and fails to see that it's eroding internal capability to the point of no return. I think it's this week's Business Week cover story that asks the question - "Will we ever invent again". Depends on who the "we" is...we're hollowing out the core that create the big industry creating innovations of the past. Not sure where they'll come from in the future.

[phantom power]

3. A theory: we keep making this mistake because the CEOs never suffer for it

You know, like a lot of mistakes these days.

As bad as this is for "american competitiveness," the fact is, when the dust settles, the CEOs are as rich, or richer. So any other considerations become inoperative.

[Duckhunter935]

4. correct

In the long run the workers end up losing out.

[Demo_Chris]

5. It wasn't a mistake when your only goal is immediate profits