RichardAboulafia.com 

:: September 2006 Letter ::

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Dear Fellow Sudden Car Industry Watchers,

Job interviews bring out goofy things in people. You hear weird, self-important nonsense, like “I earned a black belt in Total Project Transformation Management.” or “I saved my company $10,000 in gardening bills by encouraging employees to shoot gophers.” But for the ultimate job interview moment, consider a hypothetical Alan Mulally line in his interview to be Ford CEO: “I saved capitalism and the whole concept of a free market economy. And by extension, Western Civilization as we know it.” But he might have a point.

Think about Boeing over the past eight years. After the 777 and the great production line screwups of 1997, the company drifted. While giving billions to shareholders, Boeing short-changed new product development, outsourced heavily, and ceded market share at an alarming rate to Airbus. After Sonic Cruiser died a deserved death, you could be forgiven for thinking Boeing was gradually exiting the jetliner market.

To many, this represented a crisis of capitalism. If a competitive powerhouse like Boeing could lose its way while its investors made off with the profits, what hope did the free market have? Perhaps government directed and supported economies stood a better chance. Governments could take a long-term view, putting business growth over immediate returns. And perhaps governments should manage trade, too, erecting barriers to other state-backed firms. Maybe globalization, driven by market economies, was a dead end.

But Boeing’s success over the last three years proved that shareholder interests and free trade are totally compatible with long-term company prosperity. They sized the 787 exactly right, and started spending the cash to make it happen. Outsourcing turned out to be a positive, attracting outside capital, cutting production costs, and getting risk off the books. This success galvanized the company’s entire product line as customers noted Boeing’s obvious commitment to the future. Airbus cooperated by concentrating on the A380, giving Boeing the breathing room it needed. But Boeing’s owners agreed to spend the money needed to return the company to market dominance.

Mulally deserves a lot of credit for this success. He built the global industrial partnerships necessary to launch the 787 and 747-8, got the board to launch the new products, slashed supplier and labor costs, and kept the unions in check while their ranks were decimated.

Can Mulally save Ford? Dunno. I’m no car industry analyst, but this sounds like a seriously tough fight. Looking at what he accomplished at Boeing, he’s got a legitimate claim to be the best man for the job. But it would really help him a lot if Toyota and Honda committed all their resources to a 550-seat car.

Speaking of which, it isn’t that I love Boeing and dislike EADS/Airbus. Rather, I want EADS/Airbus to be more like Boeing. So do many far-sighted EADS/Airbus executives. Looking at the A380 program’s latest setback, the company resembles the Department of Motor Vehicles trying to build an aircraft. For starters, EADS needs to transition from a company of large government and industrial stakeholders to a freely floated company. Widely held companies are far closer to the market. The A380 would not have happened if EADS were freely floated. If widely held companies invest in dumb projects, their stockholders let them know, fast. Their executives are appointed to satisfy these investors; sycophantic political appointees need not apply.

Which brings up this 5% EADS equity stake, taken by Russia’s government-owned Vneshtorgbank (VTB). Many folks are worried about the impact of this, especially since EADS wants to tap into US defense spending.

I’d argue that the real concern about this stake isn’t security; it’s the arrival of even more state equity. EADS might be jumping out of the fromage, sauerkraut, and gazpacho pot and into the borsch frying pan. Worse, the leftier governments behind EADS might exaggerate the Russian threat, using it as an excuse to increase their own equity position. Spain’s clueless socialists are already racing France’s socialists to this seriously dumb goal.

There’s also the character of the new state investor. Russia, for all its cultural virtues, is degenerating into a resource extraction economy with miserable governance and too much money, basically Nigeria with fewer scam emails and more useless tractor factories. And intercontinental nuclear weapons. This is not a politically neutral source of state equity.

To EADS’s great credit, they moved to minimize the damage, stating, “It would not be in the interest of the company to change corporate governance or enlarge the group of industrial shareholders.” To EADS’s even greater credit, they recognized the importance of diversifying the private sector float. Company officials told Scott Hamilton’s ever-useful leeham.net website “there are several mainly Anglo-Saxon and US funds who have accumulated single digit percent stakes in EADS.”

Unfortunately, Russian government officials have hinted they want a larger role. And unquestionably, there are some current EADS stakeholders that would find more Russian cash an easy answer. They can get out if Russia is allowed in. Russian cash would also help solve Airbus’s massive product development funding problems. As a scholar once said of the Roman Empire, the barbarians, after all, were some sort of solution.

So, EADS/Airbus faces two futures: it can be widely held, commercially responsive, border crossing and globally competitive, or it can be a ward of the state. What are its odds of becoming the first? Well, the fight could go either way. That’s something Alan Mulally probably hears a lot these days, too.

This month: that late Rotorcraft Overview. And Military Transports, too: the overview, and the C-17 report. Other updates include Tiger, Super Puma, AH-1, Mirage F1, Ching Kuo, Avanti, and Rafale. Have a great month.

Yours, ‘Til Ford Builds The Sonic Explorer,
Richard Aboulafia

 

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  ~  Last updated on January 08, 2006