If you follow airline production at all, it quickly becomes clear that airliners are sold to airlines at something very close to zero profit margins. The profit comes from supporting these aircraft throughout their lifetimes.
It appears that in its never ending MBA short-sited quest to maximize return on capital, Boeing is looking to abandon the physical part of support, and try to make its money from IP related rents.
I understand where these guys are coming from, they look at the return on capital for software companies and it makes them salivate like Pavlov's dogs would if the Russian physiologists was playing flight of the bumblebee on a Glockenspiel.
The problem is, as
I noted almost exactly a decade ago, this simply does not work, instead it sets in motion a process of decline.
(Quoting with slight edits here)
- Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing.
- Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies.
- Without the ability to develop such new processes, they find they can no longer develop new products.
- In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.
Whether they know it or not, Boeing is making a conscious decision to leave the only part of airline manufacture that makes money.
It is also worth nothing that this was exactly the same strategy with its, "Risk Sharing Partners," on the 787, where Boeing had to reverse itself, and the quality issues remain to this day:
Boeing’s reshaping of its business amid internal struggles and the global passenger traffic downturn is touching nearly every aspect of the company’s air transport-focused operations, including parts of its services unit. One result appears to be added emphasis on leveraging proprietary elements and less focus on growth by aggregating aftermarket services.
“I expect services to continue to be a mid-single-to-double-digit growth portfolio,” President and CEO Dave Calhoun tells Aviation Week. “Our digital platform will be a double-digit grower and will take a lion’s share of our investment appetite with respect to services.”
………
BGS has not been spared in the company’s revamp. Once tapped by Boeing executives as a business that could hit $50 billion in annual revenue by the end of the decade, BGS is being retooled. While growth remains a goal, BGS will focus more on investing in products and services with high-capital-return potential, Calhoun says.
By this, they mean software and other IP controlled items, as opposed to physical product.
………
Boeing also will continue to generate aftermarket revenue from its own intellectual property (IP), including parts for its aircraft programs. However, the company is less focused on capturing as much work as possible and will take the most prudent approach on a case-by-case basis.
Boeing hopes to extract rents from whoever makes the parts, as opposed to making the parts.
………
While parts distribution will remain part of BGS’ activities, the days of it being a core focus may be coming to an end. Boeing has built a massive distribution business, primarily through its Aviall and KLX acquisitions. But Calhoun’s strategy may see further growth as not worth the investment.
“There are pieces of our portfolio that I am not likely to continue,” he said at the Bernstein Strategic Decisions conference in early June. “That really relates to delivering somebody else’s parts with no value added to a customer and suggesting that we add value, especially when it means I’ve got to invest a lot of capital underneath it. That’s not my idea of a big win,” he added.
Note that his idea of a "Big Win" is extracting rents through government subsidies in the form of IP regulation.
It's another corporate giant sucking up public money.
………
“With respect to new airplanes and control of the [intellectual property], control of the technology, there’s an opportunity for us as we move forward to ensure Boeing gets its rightful share of the services opportunities attached to our IP contribution,” Calhoun says. “I think it will be significant.”
And here is the problem: If you stop being involved in the process, your IP will over time become obsolete and irrelevant, and you will have lost the capability to generate new innovations upon which you could extract profits.
Eventually, Boeing's only product will be stock buybacks, but their return on capital will be stellar.
0 comments :
Post a Comment