Boeing Knows What It’s Doing Overseas

Boeing, the Seattle-based master aircraft builder, is giving a lot of people jitters these days, even though the company itself remains calm and clear-eyed about world markets and the future.

When Boeing announced recently that it would try to attract orders and go ahead with development of a new aircraft, to be called the 777, its stock dropped for three consecutive days on the New York Stock Exchange.

Focusing near term as usual, stock market investors fear that development expenses for the new aircraft--$4 billion, at least--will hurt Boeing’s current profits, which are due to rise sharply in the next few years as it delivers planes from its incredible backlog of $68 billion in orders for 737s, 747s, 757s and 767s.

Yet, when Boeing said it was discussing ways to share the 777’s risks and costs with its Japanese suppliers--Mitsubishi, Kawasaki and Fuji Heavy Industries--the reaction from trade and foreign policy commentators was equally nervous. There were cries that Boeing was giving away its know-how, even though the three Japanese companies already subcontract on the 767.

There were suggestions that Boeing would imperil its standing as the world’s leading aircraft maker--with 65% of the jetliners flying today--if it brought in Japanese partners.

So why is Boeing going ahead? Because it is looking to the late 1990s, when Asia will provide a market for a new plane to handle its explosion in air travel. It also knows that airlines in the U.S. market will need larger planes to accommodate more passengers through available airport slots.

The envisioned 777 will be a two-engine, 350-seat plane with a wingspan adaptable enough to allow a range of 4,800 to 6,000 miles. Boeing is counting on that flexibility, plus a wider body and higher speed, to help it against similar planes that Europe’s Airbus Industrie and McDonnell Douglas will have on the market before the 777.

Ties with Japanese subcontractors are likely to get closer, not looser, for the simple reason that Japan Air Lines and All Nippon Airways are among Boeing’s best customers, taking a third to a half of the jumbo jets delivered in a given year. That’s why Boeing subcontracts in Japan, just as it does in Italy and other countries that buy its planes.

The deal on the new aircraft will go beyond subcontracting, possibly to an equity participation in which the Japanese companies would put up as much as $1 billion, or 25% of the 777’s development costs.

And that sounds ominous to some. Rather than equity deals in Japan, suggests Clyde Prestowitz, author of “Trading Places,” Boeing should turn for help to the U.S. government and form a consortium with U.S. aerospace companies.

But that suggestion misses the point, says aerospace analyst Wolfgang Demisch, of UBS Securities. “It is not aircraft technology that is scarce, but access to markets. Having the market has always been important.” Demisch points to a long history of European countries trying to field competitive aircraft manufacturers with too slight a home market to support them. Not until France, West Germany, Britain and Spain got together in the Airbus Industrie consortium did the European effort know any success. Airbus has emerged as Boeing’s chief competitor.

But the newly growing markets will be in Asia, with Japan leading off. A nation of 120 million people in a region of literally billions of people, Japan will lead a long-term travel boom that will make Asia a giant new home market.

And that prospect has made Japan’s Ministry of International Trade and Industry determined to get into the aircraft industry. MITI knows that value added in manufacturing aircraft is higher than in, say, shipbuilding. It’s a matter of creating better jobs for Japanese workers, so it is a national purpose in Japan, where MITI has already given $80 million in development grants to Boeing’s subcontractors.

Down the road will come a Japanese effort at a supersonic transport plane--a 21st Century project that may be something for the U.S. government and aerospace industry to think about.

But Boeing knows that the 1990s, when world airlines will buy $400 billion worth of planes, will be crucial to its business. So it is going ahead with the new plane.

Sure, development will be costly, but Boeing can handle it. The stock market’s doubts don’t reflect how strong the company is. As Boeing delivers planes from its backlog, its revenue in 1990 alone may jump 40% to $24.5 billion. Its profits next year, says analyst Phil Friedman of Drexel Burnham Lambert, could go to $1.3 billion or $5.50 a share, from $760 million or $3.30 in 1989--when it had a strike. The rising trend will continue until at least 1993, Freidman says, when Boeing could earn almost $2 billion.

Boeing, in fact, could afford to build the 777 alone. But that might only drive MITI to seek help from Europe’s eager Airbus Industrie; it could surely hurt Boeing in the world’s largest emerging market.

So Boeing doesn’t think that isolating itself is a way to lead world markets. Maybe that’s why it’s the largest U.S. exporter and, arguably, the most globally competitive American company.