:: September 2010 Letter ::
Ten years ago, differences in economic philosophy between the US and Europe seemed to be narrowing. Now, they’re widening. Consider the protracted conflict between Boeing and Airbus that's still unfolding at the WTO. As the two aerospace giants blast away at each other at the WTO Corral, consider that each company comes from dissimilar socioeconomic universes. Even if the two WTO complaints were resolved, there would still be no hope of creating a level playing field. Boeing and EADS’s financial backers, like the societies they come from, have very different motivations.
You can tell a lot about a society by its angry mobs. A few weeks ago, not far from my house, a large rally was held on Washington’s Mall. The crowd, Tea Party types, protested against government spending and the threat of higher taxes. There have recently been rallies in continental Europe too. These protesters were against government spending cuts, seeking to protect pensions and health care. In the US, there’s a populist revolt against President Obama’s efforts to increase taxes (on the rich) and benefits (for all). In much of continental Europe, there’s a broad willingness to tolerate awful deficits and debt, as long as everyone can retire at late middle age. Thus, there are large angry mobs on both sides of the Atlantic, but they are motivated by exactly opposite goals. These mobs come from very different places.
In the US, social services and education cost a lot. Take it from me. I’m a US citizen. If I don’t invest in companies that provide decent returns, my kid doesn’t get educated, I can’t retire in comfort, if at all, and I could wind up with the US’s sad excuse for public medical access. US citizens need to fund these things themselves. So US companies bend over backwards to please us. If companies don’t make returns, they don’t attract cash.
In Europe, individuals don’t need to pay for that stuff. Health care, retirement, university tuition…all of this is either free or heavily subsidized. Not caring about paying for these things frees Europeans (and therefore Airbus) to care about other things. They prize jobs, national glory, technology, and market share (calculated by tail numbers, not revenue). Airbus is run by sales people. To Airbus, the term “losses” refers to “lost sales campaigns,” not “ruinous financial losses resulting from sales campaigns unprofitably won.”
Does Airbus (through its parent EADS) generate decent Return on Investment (or invested capital, or net assets, or equity)? Of course not. Does it matter? Nope. Investors don’t seem to care. EADS gets their cash anyway. The A380, A340-500/600, and the A400M programs were begun without meaningful criticism from the company’s ownership. In the US, investors would have quickly let the company know their displeasure. In Europe, ramping up A380 production is called progress. To an American, each A380 delivered is value destroyed, an unprofitable dilution of company profits.
Yet for European government ministers, hobbyists, and Euro-jingoists, criticism of Airbus is inexplicable. That’s because no matter where Europeans invest their cash, they enjoy a relatively high standard of living. For us Americans, if we invested in corporations that behaved like Airbus, we’d be able to retire at 95 with residency at a scandalously underfunded Medicaid retirement home.
US companies generally do better with returns, and Boeing’s financial record is quite good. Between 2005 and 2009 the company’s net income totaled over five times EADS’s net income. So, the US economic system is the right one, and Boeing is the virtuous and profitable jetmaker, right? Oh mais non. For the first half of the last decade Boeing was run by Gordon Gekko characters who short-changed new product development and decimated the engineering department. When they finally launched a new jet, they provided only minimal resources and signed up partners to do all the heavy lifting. We know how well that plan went.
Boeing’s story represents every European caricature of rapacious hyper-capitalism. Let’s see…short-term thinking? Check. Over-reliance on other people’s money at the expense of business fundamentals? Check. Failure to invest in the future while living high off the profits? Check. If Boeing can’t get the 787 and 747-8 right, then even a poorly-run company with a 550-seat albatross is going to look like a winner. This month’s new 747-8 delay reinforces an unpleasant message: even with today’s smarter management and a renewed focus on engineering, BCA’s road back to health will be long. And very expensive.
When not firing engineers, a few years ago Boeing management got the US Government to file a WTO complaint against European launch aid for Airbus. Boeing has a point about this, but no hope of achieving anything. Also, a WTO win wouldn’t change a very big advantage Airbus enjoys: having pension and health costs covered by the government. This advantage is quite legal and totally ethical. But most of all, the WTO can’t affect Airbus’s biggest advantage: investors with little interest in making money. This could give Airbus a key advantage in the next few years. Mired in the 787 and 747-8 program calamities, Boeing will have a tough time persuading investors to go along with a new single aisle product launch. Airbus, by contrast, can plow ahead with the A320 NEO despite the A380 and A350XWB. Their investors won’t protest. They never do.
What motivates EADS’s investors? It isn’t profits. It’s cash preservation (and tax avoidance). As a continental champion in an industry with high entry barriers, Airbus makes a good safe haven. Unlike Boeing, half of EADS’s ownership isn’t even floated on equities exchanges. Much of EADS’s ownership consists of banks, government agencies, and other corporations. The important thing is that EADS/Airbus, unlike Boeing, isn’t beholden to large numbers of individual and institutional investors clamoring for decent returns. Politicians talk about level playing fields and free trade. They think the WTO can harmonize rules for this industry. But even a series of decisive and respected WTO rulings couldn’t change the basic fabric and fundamental social and economic makeup of each side. These jetmakers aren’t in the same economic universe.
At this point you’re reaching for your copy of Tom Friedman’s The World Is Flat and saying “Wait a minute. Capital and ideas cross borders, and people share common economic motivations. How can you say that investors in Europe and the US are so different?” Normally I’d say it’s just a hunch (plus the very different goals of those angry mobs), but there’s data to back me up. According to UK-based Data Explorers, US investors have stepped up short selling of European equities by 17% since early 2008. By contrast, European investors have reduced short selling of European stocks by one-third in the same period. Two groups of investors with very different perspectives. The world looks anything but flat.
The Big Picture offers no easy answers. Americans have much greater opportunities to move up in the world, and lower taxes too. They're also at a greater risk of falling economically to a much worse place, and they seldom think about the psychological impact of the fear that risk produces (for a discussion of how the US got here, see the late Tony Judt's Ill Fares The Land, published earlier this year). The greatest irony with the Tea Party crowd? They're responding to a fear of falling by demanding less protection for those who fall.
Until then, Teal Aircraft report updates this month include the C-17, Rafale, AH-1, Super Puma, Tiger, Ching Kuo, F-2, and the Avanti. Enjoy the midterm elections circus.
Yours, ‘Til President O’Donnell Abolishes Medicare,
© Richard Aboulafia 1997-2006, All rights reserved.