Boeing Wins by Taking Risks Its Rivals Won’t

With all our troubles over trade and competitiveness, a truly ominous threat arose recently.

Foreign airlines complained publicly about the quality of Boeing airplanes. Japan Airlines said some Boeing aircraft were delivered with fire extinguishers turned the wrong way in the cargo cabins, and British Airways chimed in with criticism of quality control at Boeing plants. The complaints moreover were leaked to the press--intentionally sullying the reputation of a company that just about qualifies as a national treasure.

Boeing, the Seattle-based aircraft builder, is almost a trade balance unto itself. It exported $5.5 billion worth of commercial airliners last year, $6 billion worth in 1986 and $5 billion worth the year before that. The company is far and away the United States’ biggest exporter.

That such a company was being criticized was serious--and Boeing reacted seriously, sending top executives to deal directly with customer complaints and holding a news conference in Seattle to answer the charges. Blame centered on mistakes occurring because of strain and a lot of overtime work at one of its Seattle plants.

Backlog Is Rising

But it was mostly a false alarm, according to others in the industry, who gave a variety of reasons for the public flap--including internal Japanese politics, new employees and managers replacing retirees in Seattle and the suspicion that some of its airline customers were trying to intimidate Boeing into lowering prices on its planes.

When you’re on top you’re a target, and Boeing’s dominance of the business--already at 60% of global aircraft sales--is growing. Demand is stronger than ever for its planes, from the globe-girdling 747 to the smaller, short-range 737, and production is running flat out--which helps explain the overtime and strain in Seattle.

Boeing received $20 billion in plane orders last year, and its backlog is climbing. Korean Air Lines’ purchase of a half-dozen 747s last week is typical.

“With Boeing, you don’t have to wonder whether the lower dollar will benefit the business,” comments analyst George Shapiro of Salomon Bros., “it’s already happening.”

Meanwhile, Boeing’s competition is troubled. Airbus Industrie, which is owned by European governments, is suffering big losses because of the shift in exchange rates. Losses are more than $350 million, and Airbus’ owners are curbing expansion plans.

Boeing’s other competitor, McDonnell Douglas, is ticking along but that’s about all. Its plan to bring out a long-range, 320-passenger plane called the MD-11 received a blow last year when Boeing persuaded Scandinavian Air System to switch an order to its 747.

Dominates the Market

There is speculation that McDonnell Douglas and Airbus will collaborate on a long-range plane to compete with Boeing, but Wall Street analysts doubt that a new 300-seat aircraft has a chance when Boeing is in the market with a plane that can carry 412 people nonstop from Los Angeles to Sydney, Australia. It’s the kind of situation that keeps Boeing dominant.

How does Boeing do it? By not paying excessive attention to the “bottom line” as so many U.S. companies do. Instead, Boeing takes big risks time after time to bring out new products in a business where developing an all-new airplane can cost $5 billion today and where profit on any product comes only after many years, if ever.

The key to the business is not annual profit but dominating the market, as Boeing does with planes ranging from the 737, which carries from 146 to 159 passengers, through the 757, with 186 to 240 passengers, and the 767, 290 passengers, on up to the 747 at 400-plus.

The 757 was developed simultaneously with the 767 in the late 1970s-early 1980s. Boeing, which then had less than $2 billion in equity capital, spent $2.6 billion to do both.

But it was a competitive move more than a reckless one. For the 757 was the plane--according to “The Sporty Game” by John New house, a good book on the industry--that deterred the more cautious McDonnell Douglas from developing a new plane.

Japanese companies do business that way--although they have so far refrained from challenging Boeing--but not enough U.S. companies do. Most make timid excuses about investor focus on the short-term stock price.

Does Boeing’s stock price suffer? Not excessively. It goes down moderately when the company is at maximum risk, and goes up strongly when the risk pays off--as it is about to do again, say industry analysts. “The outlook is fantastic,” says Christopher Demisch of First Boston Co., who predicts that Boeing will be earning a lot more money in the next few years as it delivers the airplanes now being ordered.

And after that? No doubt Boeing will take its winnings and bet them again on more new products. You can’t win if you don’t bet.