I think Boeing has lost it

[Colon™]

Originally posted by DanS


Well, to be fair, they're following their own prescriptions. They canned their own superjumbo.

As for making business decisions in the absence of a market, don't you think it's rather like playing Russian Roulette? Just because you did it last time and were successful doesn't mean you should do it this time.

Anyway, they are taking risks, just in a different area. The new 7E7 doesn't have any orders yet. But the risk is assumed to be smaller, considering that it targets discount carriers, a proven and growing market.

How do you conduct a market research on a market that doesn't yet exist? You can't. That was the genius of Boeing, they created new markets instead of staying within the boundaries of existing ones.
McDonnel Douglas was a firm that acted upon certain market demands and the result was that they discounted the viability of civilian jets. The result was that they lost market leadership in civil aviation, ultimately being taken over by Boeing.

IMO, in order to obtain and maintain market leadership in a market that demands a long term vision (and a long term is by definition uncertain) you're required to take big bets and keep on taking big bets.

I'm not claiming Airbus is a shining example when it comes to visionary projects. The superjumbo won't create a new market. However it does take civil aviation to a next level.
Take Boeing's Sonic Cruiser, it was a only reaction on an initiative of Airbus, and secondly they didn't pursue it. The extended 747 was laughable. So now they're pretty much left with nothing but a plane that promises to be more efficient that others. And I don't believe that such a project will ensure you market leadership with a decade or two.

[TCO]

People do market research for new innovations all the time duckie.

[Colon™]

Originally posted by TCO
I don't know that the recent scandals and such had anything to do with the decision not to do the superjumbo. I think it has more to do with conservatism (perhaps smart perhaps chickenshit) from the poor business in aircraft over the past few years.

I think both are symptons of conservatism. It's safer to cosy up up with govt officials and shareholders than to come up with revolutionary designs and pursue them.
I don't believe conservatism is dumb, it's just that conservatism won't bring you market leadership.

[Standup]

I think its difficult to argue that Airbus hasn't benefited from subsidies in the past but equally boeing has benefited from the closed nature of the US markets. The US defence industry with its very pro US outlook has easily provided the same sort of subsidies that Airbus has received - they're just in different forms> The US market is very protectionist and i think companies like BAe have suffered from having UK markets opened up.

A someone mentioned earlier Walmart is the 3rd (or now possibly 4th) biggest supermarket chain in the Uk now but they're not succeeding despite Walmart's massive buying power - the markets are just very different from the US. And apparently they abolished the singing of the company song pretty quickly

[TCO]

Originally posted by Colon


I think both are symptons of conservatism. It's safer to cosy up up with govt officials and shareholders than to come up with revolutionary designs and pursue them.
I don't believe conservatism is dumb, it's just that conservatism won't bring you market leadership.

they've also been pretty screwed up for a while. Since at least the early 90's, they knew that they were fat and inefficient. Maybe it's not conservatism. It's stopping being stupid. I mean look at all the companies that do stupid acqusitions. That may be anti-conservative, but it is also often negative NPV.

If you were a major shareholder, would you prefer them to make the superjumbo or not? Do you think the reward justifies the risk?

[Colon™]

Originally posted by TCO
People do market research for new innovations all the time duckie.

Doesn't mean market research is always right. I'm not a great believer in the strategical guidance market research can provide either how.

[TCO]

Originally posted by Standup
I think its difficult to argue that Airbus hasn't benefited from subsidies in the past but equally boeing has benefited from the closed nature of the US markets. The US defence industry with its very pro US outlook has easily provided the same sort of subsidies that Airbus has received - they're just in different forms> The US market is very protectionist and i think companies like BAe have suffered from having UK markets opened up.

A someone mentioned earlier Walmart is the 3rd (or now possibly 4th) biggest supermarket chain in the Uk now but they're not succeeding despite Walmart's massive buying power - the markets are just very different from the US. And apparently they abolished the singing of the company song pretty quickly

This was a very simple-minded post. go read some stuff by our poster, Adam Smith.

[Colon™]

Originally posted by TCO


they've also been pretty screwed up for a while. Since at least the early 90's, they knew that they were fat and inefficient. Maybe it's not conservatism. It's stopping being stupid. I mean look at all the companies that do stupid acqusitions. That may be anti-conservative, but it is also often negative NPV.

If you were a major shareholder, would you prefer them to make the superjumbo or not? Do you think the reward justifies the risk?

If you were a CEO do you believe you ought to follow every whim of the stock exchange?

Conservatism and sloppy management aren't mutually exclusive either.

[TCO]

Originally posted by Colon


Doesn't mean market research is always right. I'm not a great believer in the strategical guidance market research can provide either how.

Nor is market research in existing markets always a good guide. But when you say it is impossible to do it and it is a routine part of any new large R/D initiative, I have to correct you. And I'll bet some serious Euros that it was done for the superjumbo...

FYI: I think you are wise to realize that strategic planning does not cause certainty and that sometimes people get lulled into thinking that their guesses have more certainty to them than they really do, just based on all the work they did. Still, this does not mean that you get better answers by never studying the business problems logically and attempting to do analysis to support your decisions.

[TCO]

Originally posted by Colon


If you were a CEO do you believe you ought to follow every whim of the stock exchange?

Conservatism and sloppy management aren't mutually exclusive either.

I don't understand your first question. What is it in refernce to? I would have to make this investment decision even if the company were private. I'm asking if you think the project is positive NPV.

On the second, absolutely. No argument.

[Standup]

Simple minded? ouch.

In what way ? There's an on going debate which seems to be have sunk to the level of "you cheat, no we don't".

If its a closed big ie only open to US companies then this is just another form of subsidy. There is no competitative market.

[TCO]

Originally posted by Standup
Simple minded? ouch.

In what way ? There's an on going debate which seems to be have sunk to the level of "you cheat, no we don't".

If its a closed big ie only open to US companies then this is just another form of subsidy. There is no competitative market.

And you supplied nothing new and not even a response to Adam Smith's post which is on your point. And Adam Smith is a Ph.D. trained economist and a pretty insightful microeconomist.

[Standup]

Oh well obviously my fault for not having enough letters after my name.

The general level of the debate is not at the level of trained economists and i'm willing to be told why i'm wrong in saying that having a guaranteed market doesn't offer a competitative edge in the same way a subisdy does ?

But why not trying being polite about it ? And in simple terms so i'm able to follow - sadly my Phd is in something else but if someone doesn't follow the aregument i see no reason to take them to task over it.

[TCO]

My Ph.D. is in something else too. but I can recognize sophistication versus triteness.

[DanS]

FYI: I think you are wise to realize that strategic planning does not cause certainty and that sometimes people get lulled into thinking that their guesses have more certainty to them than they really do, just based on all the work they did. Still, this does not mean that you get better answers by never studying the business problems logically and attempting to do analysis to support your decisions.

Yup Yup

[DanS]

One thing to note is that there might not be much advantage to being first to market. Looked at one way, Boeing is relying on Airbus to prove the market on the superjumbo. Once and if the market for superjumbos is proven, they can put out a superjumbo of their own.

[DanS]

IMO, in order to obtain and maintain market leadership in a market that demands a long term vision (and a long term is by definition uncertain) you're required to take big bets and keep on taking big bets.

I think it just depends on the business. You might be right that Boeing benefited from creating markets. On the other hand, Boeing has had several near death experiences. I guess they have a healthy fear of the whims of the market in part because of these experiences.

[Mazarin]

Originally posted by Adam Smith
If the US military pays Boeing to do R&D for a technology which also turns out to have commercial application, then the military and commercial applications are said to be joint products of the R&D. Once the technology is developed either application can use it. The commercial application is NOT being subsidized because there is no economically or logically defensible way to assign the costs of R&D to either product. I.e., there is no way of determining how much of the development cost each buyer "should" pay.

You are absolutely right in a perfect market: companies will take the expected benefits from the technology develloped into consideration and reduce their bids accordingly...You will certainly admit that defence markets are not perfect, Airbus has very bad chances of being accepted by the Pentagon...just like it has advantages when dealing with European governments. Since the US spends much more money on military equipments than Europe, Boeing has a clear competitive advantage over Airbus. This advantage has been acknowledged by the EU-US agreement mentioned above.

[TCO]

Originally posted by Mazarin

You are absolutely right in a perfect market: companies will take the expected benefits from the technology develloped into consideration and reduce their bids accordingly...You will certainly admit that defence markets are not perfect, Airbus has very bad chances of being accepted by the Pentagon...just like it has advantages when dealing with European governments. Since the US spends much more money on military equipments than Europe, Boeing has a clear competitive advantage over Airbus. This advantage has been acknowledged by the EU-US agreement mentioned above.

yeah...but this only applies with airframes and such. If boeing sells a bomb or a service contract or semiconductor r/d and they do, then there is no synergy anyway.

[TCO]

Standup, Mazarin actually understands this issue and made a cogent response that showed some knowledge of microeconomics. you on the other hand should stick to washing test tubes.

[Mazarin]

Originally posted by TCO
yeah...but this only applies with airframes and such. If boeing sells a bomb or a service contract or semiconductor r/d and they do, then there is no synergy anyway.

Surely, but it is not only abour r&d synergies. Boeing's strong position in the not-perfectly competitive defence market allows better ratings when borrowing money, it allows better prices when bying raw materials etc. This is quite a tricky issue which we've had to do a lot with in Germany when our de facto monopolists Deutsche Telekom and Deutsche Post were privatised: the second has been able to use its strong position in its original segments like delivery of letters to quickly build up a fully integrated logistics company. Though these companies are controlled by federal authorities it is extremely difficult for new companies to be able to compete and gain market shares from companies that have huge starting advantages.

[TCO]

Originally posted by Mazarin

Surely, but it is not only abour r&d synergies. Boeing's strong position in the not-perfectly competitive defence market allows better ratings when borrowing money, it allows better prices when bying raw materials etc. This is quite a tricky issue which we've had to do a lot with in Germany when our de facto monopolists Deutsche Telekom and Deutsche Post were privatised: the second has been able to use its strong position in its original segments like delivery of letters to quickly build up a fully integrated logistics company. Though these companies are controlled by federal authorities it is extremely difficult for new companies to be able to compete and gain market shares from companies that have huge starting advantages.

now you are on dangerous ground and starting to bullshit. An advantaged position in one market is no reason for an advantage in another. Each proejct has its own WACC and its own NPV. See Copeland Valuation. Read it!

[TCO]

Oh...and that better borrowing...that sounds so Enron. They used to talk all that crap.

[TCO]

The cost of borrowing for the entity as a whole is irrelevant. Situation is same for a conglomerate with SBUs in risky businesses. they are still economically judged using a WACC based on cost of capital overall. Only if you get specific subsidized loans for the SBU or if the amount of your defense subsidies is based on you keeping production going in domsetic civilian business or the like is there an advantage.

[TCO]

It's a common fallacy when viewing colglomerates. People make it even when there is no issue of governemtn. bottom line is each project has its own beta unless there are dependancies. Just having a comglomerate in and of itself is no advantage.

[gopher]

Boeing has taken some lumps recently, but do not count it out of the ballgame. First of all, as mentioned previously, Boeing has the Mcdonnel-Douglas Military contracts, which are worth a pretty penny in many marketplaces. Also, Boeing has one of the best lobbies in the USA. A few states are militant Boeing fanatics (ex: Washington EDIT: The State). Boeing has friends all over congress and the Pentagon.
I highly doubt Washington (EDIT: The City) will let Boeing fall. Stumble, perhaps, but the US has made it clear it considers Boeing a national security industry for Space/Aerospace/Military, and protected by government. Plus, Congress is not pleased to loose the US's most important aerospace company to what is seen as a french/EU megaconsortium.

[gopher]

My last point is proven by the yavoon/spiffor debate
Just move the argument from Poly to Washington/Tolouse (sp?)

[gopher]

Originally posted by DanS
One thing to note is that there might not be much advantage to being first to market. Looked at one way, Boeing is relying on Airbus to prove the market on the superjumbo. Once and if the market for superjumbos is proven, they can put out a superjumbo of their own.

Sorry to nitpick, but I have to disagree. In the area of Aerospace, this is not really true. The R/D, design time, and time for retooling the plants is increadably long. Boeing better be really planning a superjumbo for awhile, otherwise Airbus will be the only ones selling the superjumbo for 10 years or so. If it is feasable, which will be found in 1 year, then Airbus owns the market. And, since when the airline buys the plane, it expects 20-30 years of service through overhauls, the airline has satisfied the demand for that class for quite awhile. Boeing cannot quickly emerge with a similar market product and expect to compete. It happened before with the DC-10 and L-1011, IIRC. Lockheed got trounced with the late Eurohopper and stayed in Defense/Defence (For our friends on the other side of the pond).

[TCO]

that's a good point.

[Adam Smith]

Originally posted by Mazarin
You are absolutely right in a perfect market: .....You will certainly admit that defence markets are not perfect, ...

Defense market certainly are not perfect. My point, however, was that as long as the products are not produced in fixed proportion to each other (e.g., two steaks and one hide from each cow) there is no way of determining how much of the cost each product "should" pay. It doesnt matter if the markets are monopoly, oligopoly, competitive, whatever. Same conclusion applies.

Originally posted by Mazarin Boeing's strong position in the not-perfectly competitive defence market allows better ratings when borrowing money, it allows better prices when bying raw materials etc. This is quite a tricky issue which we've had to do a lot with in Germany when our de facto monopolists Deutsche Telekom and Deutsche Post were privatised: the second has been able to use its strong position in its original segments like delivery of letters to quickly build up a fully integrated logistics company. Though these companies are controlled by federal authorities it is extremely difficult for new companies to be able to compete and gain market shares from companies that have huge starting advantages.

Your analogy, while instructive, falls apart when you realize that entry into these segment of the airframe industry is not likely to come from an entirely new firm, but rather from a branch of an already established firm. In terms of DT and DP, German regulators should have allowed firms like UPS and Fedex in sooner, rather than trying to drum up de novo entrants (or trying to protect DT and DP profits as long as possible).