Boeing Navigates Nationalist Winds

This essay examines Boeing’s strategies in dealing with the effects of nationalist policies on its supply system.

With nationalist moods sweeping elections across the world, companies must prepare to compete by tailoring their supply chains to protectionist realities. By the nature of its international business model, Boeing finds itself highly exposed to these political winds. The commercial aircraft industry is dominated by a few key players, each of which constitutes a large portion of its home country’s aerospace industry. As companies tend to buy aircraft in bulk, competition is fierce for a small number of long-term contracts. Governments often enact policies to give domestic companies the competitive advantages needed to win contracts. However, Boeing’s management is learning that lobbying the U.S. government for such aid to compete with foreign competitors can be a double-edged sword with negative implications for its supply chain.

Boeing has accused its Canadian competitor, Bombardier, of selling abnormally low-priced versions of its aircraft in the U.S. to strike deals with Delta Airlines. These low prices were said to be enabled through Canadian government subsidies. The International Trade Administration ruled in Boeing’s favor in October, recommending an effective 300% tariff in response to Bombardier’s actions [1]. However, this confrontational strategy may have backfired, as the governments of both Canada and the U.K. have threatened publicly to forego purchases of Boeing defense aircraft, including the F/A-18 Super Hornet.

The loss of potential contracts over trade disputes could deal a blow to Boeing’s struggling defense aerospace business, which also recently lost the bid for the U.S. Air Force’s new long range bomber. The F/A-18 assembly line based in St. Louis has been on life support for several years, producing at a meager rate of two aircraft per month. As contracts of domestic buyers dwindle and the backlog of orders dries up, the production line could be forced to shut down permanently due to costly overhead burdens. Furthermore, without a fresh supply of orders on the horizon, the ordering of hundreds of millions of dollars of long-lead time material to support the production line becomes riskier [2]. These realities could force Boeing out of the defense aerospace industry altogether.

In response, Boeing has aggressively pursued foreign contracts for its defense aircraft, even bending to nationalist impulses by offering to build a new assembly line for F/A-18 aircraft in India. This move is in support of Prime Minister Modi’s “Make in India” program, which aims to develop a domestic defense industry. In international defense deals, it is rare for an aerospace company to set up a production line in a foreign country [3]. While certain parts of the aircraft would still be sourced from the U.S., fears have grown among workers at the St. Louis facility that a new, more efficient Indian assembly facility may eventually come to serve all foreign demand for F/A-18 aircraft. This dynamic could have negative implications for worker morale.  Boeing has already outsourced production functions for other aircraft in its inventory to India, which would provide economies of scale and a trained labor source [4]. The proposal to produce F/A-18 aircraft in India would surely explore new regulatory frontiers with respect to the export of classified defense technology. The burdens of complying with these regulations could complicate timelines and supply chain logistics in any such implementation.

An assessment of Boeing’s management in the protectionist environment shows mixed results. While Boeing may be justified in its suit against Bombardier, the plan to resolve the issue in such an overt and confrontational way is ill-conceived. A subtler approach might involve lobbying the U.S. government for subsidies of its own, so that it may compete with Bombardier on an even footing. Such an approach would avoid harsh, punitive tariffs and thus be less likely to provoke the Canadian government. Some may consider it politically risky for Boeing to propose building an Indian production facility for the F/A-18, an icon of American airpower. However, this a shrewd move by Boeing management. The U.S. government’s lukewarm interest in the future of the F/A-18 program gives Boeing the cover to offer state-of-the-art defense technology to India in a package tailored to support Modi’s infrastructure initiative. As the primary customers, U.S. government representatives would only be able to blame themselves for not buying more F/A-18 aircraft if they sought to turn the outsourcing decision into a political debate. Meanwhile, Boeing is serving U.S. policymakers’ agenda of developing closer ties with India in efforts to contain Chinese ambitions.

As Boeing moves forward, questions arise. Should the U.S. allow a company in its aerospace defense industry to develop a defense infrastructure for a foreign country? What level of trust should exist between nations before such interaction takes place?

 

Sources:

  1. “Boeing v. Bombardier: Tariff Is Now 300%.” CNNMoney, Cable News Network, money.cnn.com/2017/10/06/news/companies/boeing-bombardier-trade-ruling-tariff/index.html.
  2. “The Navy Could Throw Boeing’s Fighter Jet Business a Life Preserver.” Fortune.com, Fortune, http://fortune.com/2016/03/03/boeing-navy-super-hornet.
  3. Gallagher, J. (2016, Dec 11). Boeing wants to build super hornets in India. Should St. Louis worry? TCA Regional News Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1847615106?accountid=11311.
  4. Chowdhury, Anirban. 2017. “Boeing Doubles Outsourcing From India To $500 Million In A Year – Times Of India”. The Times Of India. https://timesofindia.indiatimes.com/business/india-business/Boeing-doubles-outsourcing-from-India-to-500-million-in-a-year/articleshow/51019768.cms.

Previous:

The Axis of Change: Navigating the Digitalization of India’s Banking Industry Value Chain

Next:

Let’s Get Digital, Digital!

10 thoughts on “Boeing Navigates Nationalist Winds

  1. Good questions. It appears indeed quite risky to have classified defense technologies being built in another country, even though the said country is an ally for now. As an American, I would feel quite uncomfortable seeing the production of US military equipment completed elsewhere.

    On another topic, it appears as though Boeing is grasping at straws in its claim against Canadian Bombardier, who manufactures large portions of its C-Series in the United States anyway, and hasn’t received governmental subsidies per say. It has rather received traditional equity investments, for which it has a fiduciary duty. I am questioning whether Boeing might be trying to take advantage of the “anti-foreign” climate created by the Trump administration to try and gain an edge against foreign competition, whether their claims are substantiated or not.

  2. Although the result of Boeing suit against Bombardier might be far from ideal (given that Airbus has purchased 50% of the program for 1€ [1]), I believe Boeing was right to proceed in this way. A few decades ago, Airbus was in the same position as Bombardier is now, receiving government subsidies to develop new innovative aircrafts, resulting in the European manufacturer achieving ~50% market share in the large commercial aircraft market [2], which used to be dominated by Boeing. Allowing Bombardier to do the same amid Boeing inaction would be making the same mistakes two times, particularly given the very punitive tariffs the US government agreed to impose on Bombardier, practically closing the US market for this aircraft.

    On the India issue, I agree that Boeing is making a good move to increase its sales, but I would be highly concerned about IP. If India is willing to build its own industry, there will be very large temptations to use Boeing patents and processes for the benefit of rivalling Indian companies and manufacturers, thus decreasing the value of Boeing in the long-term. How is Boeing planning to protect and enforce its IP in this new offshoring venture?

    [1] Benedikt Kammel, “Airbus Boss Nails Bombardier Timing”, Bloomberg, Oct 2017: https://www.bloomberg.com/news/articles/2017-10-17/airbus-boss-nails-bombardier-timing
    [2] Alan Tovey, “How Airbus achieved the miracle of keeping a European project flying”, The Telegraph, Oct 2016: http://www.telegraph.co.uk/business/2016/10/22/how-airbus-achieved-the-miracle-of———keeping-a-european-pr/

  3. As Boeing, I would be incredibly concerned with the current nationalistic trends as they are a company that must serve a worldwide audience to survive. Reactionary government subsidies and tariffs are stifling free markets and entrenching companies into their own domiciles, whether or not those domiciles are where they can operate most efficiently. Businesses like Boeing with divisions that directly have impacts on nations’ security own the IP and should absolutely be able to sell to any country that the US has not deemed a specific terrorist threat if they believe it is in the best interest of Boeing shareholders. Should global companies be “citizens” of any one country? I argue they are their own entities and the free market will dictate who will come out on top.

  4. Awesome article!

    From an economic perspective, it makes sense to me to expand the F/A-18 program internationally. As demand dries up in the U.S. Boeing must turn to other countries to find customers. Although the program is an older one, with the first McDonnell Douglas F/A-18 Hornet created back in the 1970s, the fighter has been enhanced throughout its lifetime and brandishes the latest and greatest technology. Its leading edge technology is desired by many countries, making it a reliable revenue stream for Boeing.

    From a political perspective, I am more concerned with selling F/A-18s to other countries. Obviously, the U.S. would rather provide attack fighters to allies than enemies, but history has taught us that allies and enemies do not stay constant for long. Allies can become enemies and enemies can become allies.

    Political concerns worsen when we consider that Boeing will move the production to India as well. This means India will have access to Boeing’s IP and may be able to replicate the technology in the future. At this point, Boeing could lose its competitive advantage and India may want to produce fighters on their own. As a result, when choosing countries in which to produce the F/A-18, Boeing should prefer not only countries which will be long-term allies but also countries that will not be able to replicate Boeing’s technology in the future.

  5. Nice article! I agree that building the FA-18 fighters in a foreign country is concerning to an extent from a security perspective. However, it seems like the nationalist trends which you have outlined in this piece have forced the hand of Boeing management. Also, as you’re of course aware, we already sell FA-18s (and a number of other advanced military aircraft) to allies across the world. Moving the manufacturing operations to an ally seems like a reasonable step. I think your suggestion that Boeing should lobby the U.S. government for support is interesting, although it seems like the federal government must have already known that this type of outsourcing was a potential outcome. In any case, as an organization built on a global supply chain, I imagine that leadership at Boeing are deeply troubled over these burgeoning nationalistic trends.

  6. You noted that you think Boeing’s decision to build defense aircraft in India is a shrewd decision. I am curious to know how you perceive the risks inherent in that strategy. If nationalization is a trend that has led to isolationist trade policies, what risks exist for firms operating in foreign lands? Is there risk that Boeing will face extreme political risk in India if nationalist sentiments come into a position of influence in the nation? What can Boeing do to mitigate this risk? If Boeing substitutes much of its domestic production for foreign production, does that pose a threat to the U.S.’s image on par with buying foreign-made defense equipment?

  7. Really interesting article and unique angle on how strategy for corporations is especially confined by nationalistic boundaries when playing in the defense industry. Here we see the impact of seemingly short-term thinking on behalf of the US government, whose actions indicate an apathy to the health of the domestic aviation aerospace players. As you keenly noted,this rationale and consequent policy decisions leave Boeing’s production facilities vulnerable, ultimately leading to a possible supply shortage domestically should demand increase. Especially because this company has provided the US with a competitive advantage in the past, I agree that it would be in the best interest of both parties to collaborate to secure and encourage continued R&D, production, and contracts here and abroad. Without collaboration, what guard rails would exist to keep Boeing accountable to key country of production decisions aligned with their home country?

  8. This is an interesting take on Boeing’s predicament. While I don’t believe Boeing should outsource the current production of the F/A-18 to India, it’s clear Boeing’s current model isn’t working. But why? Why isn’t Boeing competitive in defense aerospace? With recent contract losses of both the long-range bomber and the F-35, I find it challenging to justify why U.S. defense aerospace is an area Boeing should continue to explore. Further, I find it unreasonable that a company reliant on globalization for its commercial business should be constrained to U.S. defense. If the company can guarantee U.S. national security secrets will remain secure and potential technology creep between Boeing programs will be isolated, then I think it is reasonable for Boeing to develop and build aerospace defense assets for U.S. allies inside that nation’s borders.

  9. It’s ironic that while the US government is tilting towards protectionism, its flagship companies have to pursue globalization to stay competitive. It may seem concerning that Boeing, a company intricately tied to US national security interest, is moving some of its intellectual properties and manufacturing capabilities to a foreign country, but it’s a case of plain economics triumphing over narrow-minded protectionism. Finding lower costs and easier access to markets leads to better business and greater shareholder values – Boeing is simply pursuing a compelling business rationale. So long as US national defense secrets and capabilities are not leaked to the Indian government, I don’t see why the starting manufacturing in India for a fairly old model of fighter planes should be a big concern for US national security. It may actually also be better for US national security because if Boeing, domiciled and accountable to the US government, doesn’t step up to fill in the Indian market demand, Airbus may, which would a loss for US economy and potentially for US national security. Alternatively, Boeing not being in India might also give an unchecked space for local manufacturer to experiment and develop competitive capabilities, not a positive news for US’s relative defense capabilities.

  10. Very interesting essay, Nick! While I understand the concerns around Boeing having to set up manufacturing facilities and build defense structure for other countries in order to secure contracts, my perspective would be that Boeing ultimately has fiduciary duties to its shareholders (not the US government) and management must pursue what it thinks to be in the best interest of its shareholders in the long-term. Given the difficult financial position of Boeing’s defense unit, the company does not seem to have other viable choices than to invest in India, which can come in many forms. Setting up a local manufacturing plant could be one route, but if the company is worried about the leak of R&D capabilities, it could also partner with various existing OEMs in India for individual parts (like how Boeing sources parts for its commercial fleets) to minimize the risk. In the long-term, diversification of Boeing customers could also be beneficial for the US government because Boeing can continue to exist as a sustainable partner in the defense sector.

Leave a comment