What was once essentially a collective of engineers known for innovation and craftsmanship now operates for the benefit of Wall Street
The first Boeing 707 long-range narrow-body, four-engine commercial jet arrived at London Heathrow on April 29, 1960
On a sunny day in August 1955, Boeing test pilot Alvin Brown Alvin 'Tex' Johnston prepares to fly the Dash-80, the prototype of the Boeing 707, to the annual seaplane competition in Lake Washington, near Seattle, for a test flight. The large crowd that attended the event included many of the top figures in the aviation industry.
Rather than make a simple flyover, the swaggering Turks began flying in a frantic circle in a three-engine plane across the dusty Kansas Plains with the aim of impressing the celebrities who gathered together. Instead, he made the plane tumble in shocking binoculars, much to the surprise of the crowd below, while his boss, Boeing CEO Bill Allen, was ashamed that the newly built plane had lost control and was about to crash.
This is an appropriate gesture for an aircraft whose birth was the result of a big gamble. At the beginning of the 50s of the 20th century, Boeing was at a crossroads. To date, the company has thrived as a manufacturer of military aircraft, but its small-scale attempts in commercial aviation have had little success, and with the end of World War II and the end of the Korean War, the company's defense contracts have largely dried up, so direction is needed.
It was at this time that CEO Bill Allen decided to bet his family – $16 million to be exact, which was a huge sum at the time – to build a jet transport prototype. It is difficult to overstate the ambition of this project. None of the customers promised to buy this aircraft, and it is difficult to determine whether such an aircraft is viable on the market. The head of Trans World at the time said: "The only problem with today's jets is that they don't make money. ”
Failure could well mean the end of the company. It was a great success. After years of loneliness, uncertainty is the creation of an airplane that will shrink the world and usher in the glorious jet era. A few years later, the company took another costly gamble and paid off when it built the six-story, 225-foot-long Boeing 747.
When the 707 made its maiden flight in 1957, less than one in 10 U.S. adults had ever flown in an airplane. By 1990, more U.S. adults were flying than owning cars.
For decades, Boeing has been an unpretentious, engineer-led company with a culture that emphasizes the sober virtues of dazzling innovation and impeccable craftsmanship. Here, top management has patents and can discuss the actual situation with the workers on the shop floor.
Even in the mid-90s of the 20th century, the company's CFO reportedly distanced himself from Wall Street and answered his colleagues' requests for basic financial data with dismissiveness, "telling them not to worry." ”
In hindsight, this principled indifference has a bit of Shakespeare's "last Roman" feel. The company will soon be unrecognizable.
Great companies always embody some of the intangible qualities of the countries that nurture and nurture them. In a refined and mythologized form, Boeing represents what Americans believe constitutes an important part of their national identity: unpretentious and focused on the task at hand. But if Boeing is the quintessential American company on its rise, then it embodies many of the country's ills in the process of decline. Few corporate trajectories of rise and fall so closely mirror the trajectory of the nation's own development.
The only event believed to mark the beginning of Boeing's decline was the 1997 merger with McDonnell Douglas, which brought the company into conflict with a culture focused on cost cutting and financial performance. Somewhat paradoxically, although Boeing bought McDonnell Douglas, it took over the latter. Macdonald's executives eventually took the helm of the company, and the company culture emerged. Dozens of brutal managers who had been battle-hardened in the company's "make it or die" culture were brought in. A federal mediator once likened the partnership to "a hunter-killer, an assassin meets a boy scout."
The humble, introspective Bill Allen, Boeing's mild-mannered CEO during the postwar period and behind the 707 gamble, described the company's ethos as "eat, breathe, sleep in the world of aviation." But a new generation of leaders is emerging, bringing new priorities and new vocabulary. It's no longer about making great planes; It's about "moving up the value chain". Its real purpose is to maximize shareholder value.
Now, the figure of Harry Stonecipher, CEO of McDonald & Company, looms like a behemoth over Boeing. Stonecifer is a straightforward, stubborn son of a coal miner known for his vicious cost-cutting, all-caps emails, and ditching executives who have failed to meet their financial goals. But Stonesea was a "winner": MacDonald's share price rose fourfold during his tenure.
Predictably, what follows is a complete transformation of Boeing from an engineer-run company to one that values financial profits above all else, and is willing to take shortcuts to reduce costs and improve returns. To put it mildly, the quality of the product was seriously compromised.
Downstream of these changes are the astonishing failures we all know: cost overruns, delays, and production issues to build the Boeing 787, which ended up being temporarily grounded due to a battery fire, which regulators blamed on manufacturing flaws, inadequate testing, and poor quality. Learn about innovative batteries, the 737 MAX with Jimmy Maneuvers has suffered a serious malfunction, the plane has been involved in two fatal accidents, and recently a harrowing incident: the closed emergency exit of an Alaska Airlines flight blew up in mid-air, leaving a large hole in the fuselage.
We can dismiss the merger of Boeing with McDonnell Douglas as an unfortunate mistake, and the rise of the likes of Harry Stonesever is just one example of the wrong man making it to the top. Outsourcing and cost-cutting are just one wrong strategy. But that would miss the broader trend in the American corporate world at the time. Boeing isn't the only company on this path.
Writer David Foster Wallace once wrote, "America...... It is a country full of contradictions, and one of the great contradictions for a long time is the contradiction between a very radical form of capitalism and consumerism and the so-called moral or civic impulses. ”
What is obvious is that from about the 70s of the 20th century, this "aggressive form of capitalism" was in the ascendant in the United States and for a long time overwhelmed – arguably still – "moral and civic impulses". However, if it is only seen as moral turpitude, the greater economic pressure at work is overlooked.
In the words of historian Judith Stein, the '70s were "a pivotal decade" that "enabled the transformation of society from industry to finance, from factories to trading, [and] production to consumption." The United States achieved undisputed manufacturing supremacy after World War II, but within just a few decades, American companies began to lag behind. Japan, Germany, and later China invested heavily in their industrial bases in the post-war period, while the United States began to emphasize innovation at the expense of capital investment. In the 70s of the 20th century, Japan, an emerging industrial powerhouse, completed the so-called "quality revolution", which largely bogged down American manufacturers.
Bloated and increasingly uncompetitive U.S. companies need a path forward, and that path forward can be most succinctly summarized as a shift in resource allocation strategies from value creation to value extraction. In the past, highly vertically integrated U.S. companies practiced a "keep and reinvest" approach, while the new system adopts the phrase "streamline and distribute" coined by economist William Lazonick.
Depending on the view, this can be described as either maximizing the company's value or divesting the company's assets for the benefit of executives and shareholders – which in turn leads to employee turnover.
The rationale for this shift comes from economist Milton Friedman's Chicago School, which argues that executives have a "fiduciary duty" to maximize shareholder returns. According to Friedman, a company has no social responsibility to the public or society; The idea that companies exist to maximize value for shareholders has become so ingrained in our thinking that we barely realize that there are other ways in which it can be.
If, as Stein asserts, the United States goes from "factory floor to trading floor," then this necessarily means that the status of Wall Street analysts rises and the status of factory managers declines – or, in the case of Boeing, the status of engineers. So what do Wall Street residents want? They want to see hulking industrial giants generate a better return on assets – in financial terms, they want a higher RONA.
Now, a naïve observer might think that the way to achieve this lies in using one's assets more efficiently to generate more money. But it turns out that there is another way to increase RONA, and this method is much easier: to generate (approximately) the same amount of money with fewer assets and lower costs. Dividing the constant numerator by the smaller denominator gives a larger number. Outsourcing does exactly that: it takes assets off the balance sheet, and that's exactly the path Boeing and many other companies have taken under the "lean and distribute" model. The problem for Boeing is that the supply chain for manufacturing aircraft is so complex that it makes it nearly impossible for the company to maintain quality standards.
Boeing's embrace of this new regime can be described as wholeheartedly. The numbers are staggering. Over the past decade, the company has returned an incredible 92% of its cash flow to shareholders in the form of dividends and buybacks.
Since 1998, the company has spent a staggering $63.5 billion on share buybacks. Financial analyst Scott Hamilton said that at today's cost, this equates to about four wide-body aircraft programs and five or six narrow-body aircraft programs.
But Wall Street doesn't need airplanes, it needs dividends. Hamilton recounted how CEO David Calhoun sent conflicting signals about the new aircraft program and the return to dividend policy at the company's annual shareholder meeting in April 2020. The next day, Melius Research gave a typical Wall Street view in a note to clients: "It's hard for us to see how the business case for a new aircraft is going to end right now. This is a vote on dividends. In other words, today's profits trump the company's future.
Given the extremely complex, interconnected, and often contradictory economic forces pushing and pulling in the '70s of the 20th century and the decades that followed, it is perhaps not surprising that such a system emerged in the United States. We've already mentioned that the U.S. economy is weakening, but the flip side of the equation is that this has been happening as the U.S. continues to use the world's reserve currency during a period of deepening financialization.
Historians and economists will have to parse the impact of a country's rising manufacturing base at a time when its manufacturing base is declining, but it's hard not to push the whole system into the arms of Wall Street.
At the same time, it is even more incomprehensible that a generation of leaders, represented by Harry Stonecipher, seems to have fully embraced this transformation of the American economy.
In 2004, in an interview with the Chicago Tribune, he said, "When people say I've changed the culture of Boeing, that's my intention, to make it run like a business and not a great engineering company." ”
What is surprising is not Stonesever's behavior at Boeing, but his casual exposure of his motives. If he was out of step with the zeitgeist of the time, he might still pursue the same goals out of personal motives (such as greed), but he would have done it even more sneakily for fear of being condemned. He felt he could unabashedly spread the destruction of Boeing's decades-long carefully crafted culture, which said as much about the country as it did about the man.