Will Services Truly Go Global?

Mr. Joseph Sternberg edits the Wall Street Journal Asia's Business Asia column and recently wrote an editorial entitled Now Comes the Global Revolution in Services.

Of course this has been a feared development by many in the US economy, since our services sector is so large. The first such globally competitive service which probably comes to mind is call centers.

Sternberg wrote,

"Asia has been a big winner from the development of global manufacturing supply chains. Japan and the four tigers—Hong Kong, Singapore, South Korea and Taiwan—showed how cheaper shipping could create opportunities for factories far from the intended market. As supply chains have grown more complex, the benefits have spread. Components now travel from Thailand, the Philippines, Malaysia and Taiwan to a factory in China, where they're assembled before hitting the shelves of an Apple store in New York as a finished iPhone.


Even as the manufacturing supply chains continue their evolution, a new question confronts Asia: How to profit from increasingly sophisticated supply chains in services? Despite all the political hype in the West about the ills of outsourcing and the perceived ubiquity of overseas customer-service call centers, services supply chains are still in their infancy."

It's thought-provoking to realize how the economics of various manufactured and assembled parts of goods such as an iPhone make it affordable to ship the incomplete item around so much of the world simply to take advantage of lower labor costs. Sternberg then contends,

"We're heading for a day when a Malaysian architect will sketch out a new office tower for London, a Philippine architect will prepare detailed renderings, and a Chinese engineer will assess the structural soundness of the designs. Or a specialist firm in Bangalore will administer health benefits for a Kansas company. Indeed, such things already are happening on a modest scale.

That's particularly apparent on the infrastructure front. Ask experts what a government needs to do to develop a services- outsourcing industry, and the first answer is usually "provide more reliable electricity" or "lay fiber-optic cable." True, but more important will be the human intangibles. Educating a sufficiently skilled work force—no small task in itself—is only the start."

Sternberg's example sounds simple enough. But will it really occur? Are language barriers really so easy to overcome that complex building design will be piece-parted out as he describes?

He concluded with this passage,

"Manufacturing supply chains applied modern transportation technologies to a millennia-old principle that if someone in a neighboring village can make a good more efficiently than you can, you should buy it from him. Service supply chains derive a new principle—that you no longer need to be geographically near the person providing you a business service—from modern communications technologies. Now countries need to figure out how they fit into this trend, and how to profit from it."

Personally, I believe Sternberg is far too optimistic about the globalization of high value-added services. Especially services involving high levels of complexity.

Why?

Well, for one, globalization of product manufacture and assembly has a simple test. Does the resulting product function at a competitive price? The proof is easy to see.

Services aren't so simple. The success of a globally-designed building or other complex system using services provided in so many countries and languages might not be apparent for years. And they tend to be one-off projects, rather than, like products, things of which millions are sold and used.

Even the lowly call center has seen a reversal of outsourcing overseas from the US. Too many problems with language and basic service quality levels has resulted in some firms regaining an edge by relocating their call centers back in the US.

Then there's the recent comments of Boeing CEO Jim McNerney on CNBC. In answer to questions concerning the Dreamliner's continuing delays, McNerney confessed that the firm had overreached with its design outsourcing. He said that they won't be doing that again, focusing instead on more onshore engineering and design.

If one of the most sophisticated engineered systems we have, a modern jetliner, has failed to be reliably designed and produced globally on time, what are the prospects for equally-sophisticated systems? At least the Dreamliner results in a testable product on which quality control may be performed before it actually goes live in its initial commercial flights. And Boeing has been building such systems for decades.

I think it says a lot that they got the mix and management of global design of the various parts and subsystems of their newest jet fouled up, and are planning to move back to more centrally-sourced services in the future.

Thus, it's my guess that Sternberg's concerns and visions are very premature. And a big chunk of US exports in the service-based sector remains somewhat safe for a while.

Boeing's Vulnerability

Yesterday's Wall Street Journal carried an article discussing Boeing's newly-vulnerable single-aisle airplanes. If only because this type of piece has become a vanishing breed in the Journal, it was welcome.

The piece noted an unanticipated consequence of the expensive, overdue, over-budget Dreamliner project. That is, Boeing is being pressured by airlines to replace its 737 with a new airplane. But, according to the Journal piece, Boeing can't afford the cost of such a new development project at this time.

Meanwhile, Canada's Bombardier has developed an all-new plane, the CSeries, which can service the lower end of the 737's market.

Now, Boeing faces erosion of a very profitable, old cash cow when it still needs those profits to offset the Dreamliner woes.

The nearby price chart for Boeing and the S&P500 Index for the last five years shows that the company has squandered whatever outperformance it managed to effect by 2007. Now, Boeing is barely positive and outperforming the index over the period.

This can't bode well for the firm, as one would expect Dreamliner sales to already be factored into its equity price.

Whether losses of volume on its 737 are also already "in" the equity price is unclear, but quite possibly not yet fully understood.

Who would have guessed that Jim McNerny's failure to get the Dreamliner on track and budget earlier would end up complicating the company's defense of a bread and butter segment, the short haul, single-aisle jet market?

The article contends that neither Boeing, nor Airbus can easily design a brand new plane just now. Allegedly, needed technological breakthroughs are a few years away. Thus, in what has been a duopoly since Boeing bought McDonnell-Douglas 13 years ago, the multi-line Canadian transportation manufacturer seems to be sneaking into the big leagues of jet airplane production.

Could it be that the scope of larger, longer-range jet design and manufacture is changing the nature of competition in the sector, leaving smaller, simpler jets to be profitably built by smaller, newer entrants? Is a full-scale Schumpeterian evolution afoot in airplane design and manufacture? Will we soon see Asian entrants, as well?

The nearby chart, stretching back to the early 1960s, illustrates that Boeing's period of significant, consistent outperformance of the S&P500 primarily occurred between 1971 and 1980. After that decade, while Boeing has enjoyed a slightly steeper slope in its equity price curve, compared with that of the index, the observed volatility certainly has substantially offset that slight advantage.

Given Boeing's struggles to offer shareholders a reason to buy the company's equity over the past half decade, or even the past thirty years, one wonders if its seen its best days already.

Boeing's Problems Extend to The 747

I wouldn't have expected to be writing another post about Boeing so soon, after this one in August.

In that post, I commented on Boeing CEO Jim McNerney's apparent inability, during his 4-year tenure, to get the company running on all cylinders. Two months ago, the news was more delays in the Dreamliner project.

Yesterday's Wall Street Journal reported that the company's troubles have now spread to its 747 redesign.

Apparently, the production problems with the Dreamliner have so sapped talent at the company that engineering skills shortages are now affecting the 747-8 program.

The chief of the commercial airplane division, Scott Carson, was eased out on September 1st, replaced by a Boeing military programs executive, James Albaugh. So much for bench strength in the formerly-premier Boeing commercial side of the business.

Apparently the delays on the 747-8 jet have become severe enough that the company announced a $1B charge and, like the Dreamliner, delayed the first flight of the redesigned wide-body until next year.

Meanwhile, economic conditions will probably delay both planes' profitability, as airline customers struggle with decreased demand. Cargo versions of the 747-8 are much more in demand than the passenger versions.

As the nearby 5-year price chart continues to show, as in August, McNerney's Boeing can't seem to outperform the S&P500 Index.

In fact, the company's slide from its price peak in early 2007 has been much more rapid than the index's. For the past 18 or so months, the company's equity price has pretty much tracked the index.

That doesn't say a lot for McNerney's management prowess. As I mentioned in the August post, for the sort of risk one takes in holding an indvidiual firm's equity, shareholders expect and demand a better return than simply tracking the equity markets.

I wonder how long it will be before Boeing's board concludes that McNerney just doesn't have the horsepower to move Boeing's performance up above the index for the long term, and eases him out.

More Boeing Dreamliner Headaches

Last Thursday's Wall Street Journal reported Boeing's latest troubles with its Dreamliner 787 airplane program.

Now running over two years behind schedule, the plane is running into sagging demand and affordability issues by customers.

In these two posts last year, here and here, I commented on Boeing CEO James McNerney's continuing inability to manage the Dreamliner problem. Essentially, Boeing's board bet that a guy who ran the unit that built engines for airplanes could...run an airplane company.

So far, that's not working out too well. As the nearby 5-year price chart for Boeing and the S&P500 Index shows, the airplane company hasn't outperformed the index over the period.

Figure that you need some extra return from a single issue to adjust for risk, and Boeing's actually behind the index's performance.

What, exactly, has McNerney done for the company? Right now, shareholders would have been no worse off by simply holding the index.

Meanwhile, the gaffes which have become public in Boeing's Dreamliner program would make one ask just how competent the company has been with its vaunted new production and assembly concepts?

Somebody has to take responsibility for Boeing's lackluster total return performance and the Dreamliner's continual launch date. It would seem, after about four years, McNerney would be that person.

Being Used...And Loving It

I've been used! And I loved it!

Last week, I wrote this objective piece in regard to a Wall Street Journal article reporting on Boeing's latest snafu, the further delay of its 787 Dreamliner.

To my great surprise, it was picked up by this engineer's union website. As of Monday morning, November 10, as I write this, my blog post has slid off of their 'News Clips' section. But visitors to my blog from that site accounted for at least 50% of the near-record 217 visits here on Friday.

The record was 315 on the day I posted this piece about the commercial bank aspirations of GMAC, Goldman Sachs and Morgan Stanley.

It's not hard to see why the engineer's union chose to publicize my piece. And it's very instructive concerning modern media and not only business, but politics, as well.

The Wall Street Journal might highlight the Dreamliner's problems, but, due to its need for continued access to sources and advertising revenues, it was unlikely to be brutally honest about how badly Boeing's management has messed up the Dreamliner.

I, however, have no such constraints. So, as do thousands of other bloggers, I objectively opine on news articles, adding a bit more bite and candor to softer business news stories already available in the general media.

For the engineer's union, my post must have seemed like a gift. I focused responsibility squarely on the company's surprisingly-unaccomplished CEO, Jim McNerney, and the management which allowed fastener specifications to be made with too little specificity.

For a labor union to find an objective business writer taking this position is sweet, indeed. Rather like Bill O'Reilly finding my blog to be, in the words of his producer, the only place where an objective assessment of Jeff Immelt's dismal misleadership of GE, and the firm's awful performance under his oversight, were available among all the print and electronic media they canvassed.

When I was discussing my blog with a friend at my fitness club recently, he asked why I wasn't trying to find a paid, syndicated writing gig somewhere. As I considered his question, I replied that I guessed I'd first have to approach someone like King World, to get syndication.

I can't imagine that is very easy. Probably a lot like getting your first book published.

Then there's the question of how much the shrinking pool of print media would pay for my writing? The Wall Street Journal doesn't use syndicated writers, and they don't need another Holman Jenkins, whose work my own closely resembles. Neither, I'm guessing, do the best-known business weekly or monthly magazines, such as Forbes, Fortune and Businessweek.

What's left? USA Today and a few large city dailies?

After a few remarks about this, I told my friend, Larry, that probably my best bet would be to hope to be hired as a contributor to either Fox Business News or CNBC, based upon their reading of my columns.

It's an interesting revelation that, were I to want to attempt to make a living writing as I do on this blog, it's not clear that it is really possible anymore. And, ironically, I write more frequently than your average WSJ columnist, because they editorialize weekly, while I write daily.

Multiply me by a few thousand, and you essentially have the free availability of reasonably informed and educated opinions on business ruining the for-fee business editorial market.

In the meantime, the combination of Google's search engine and its free blogging platform have allowed it to affect a large element of business and, as importantly, political writing.

The emergence of person-to-person communication, in a thoughtful and respectful manner, will certainly continue to augment and, perhaps eventually, in the not too distant future, even supersede print editorials.

Thus is Brian Wesbury's 'internet time' arriving at an accelerating pace.

Dreamliner Delayed Again: McNerney's Continued Troubles At Boeing

Wednesday's Wall Street Journal described the new delays in its 787 Dreamliner. I last wrote about this continuing problem here, last April.

Interestingly, nowhere in Wednesday's article was any mention of Boeing's CEO, Jim McNerney. Yet, this latest setback seems to continue the company's woeful failures of management in its most visible, bet-the-company project.

You'd think McNerney would be at least addressing it personally, if not in public. As I noted in the earlier post, McNerney hasn't exactly left a trail of successes in his prior positions. And Alan Mulally, although having his hands full at Ford, is probably feeling that his erstwhile senior management is getting its just desserts for passing him over for a guy who never ran something so complex as an airplane maker.

This latest snafu on the Dreamliner involves the improbable widespread use of the wrong special fasteners on dozens of parts fabricated by the many subcontractors for the plane spread around the globe. According to the Journal's article,

"Boeing's Ms. Leach said engineers traced the latest problem to "specifications that weren't specific enough.""

You cannot make this stuff up, can you?

Wouldn't you have guessed that Boeing would have its own quality control employees in a few pilot subcontractor plants to supervise the entire process? This sounds like an overall failure of program management at Boeing. If this process was allowed to continue in this manner for so long, what does that say about the capabilities and effectiveness of Boeing's middle- and senior-management?

Thanks to this latest delay, and the little matter of Boeing's recent strike, the first Dreamliners aren't expected to be ready for delivery until 2010.

Any guesses as to how many more of these delays Boeing can take before McNerney is asked to take the fall for them?

Boeing's & McNerney's Continuing Bad "Dream"

Today's Wall Street Journal reported the story which broke on cable news networks yesterday. Boeing announced more delays for the Dreamliner, its newest jet. It seems that delays continue to plague this plane, whose delivery has now been pushed into 2009.

Is McNerney up to this job?

He arrived at Boeing in late 2005, as noted in this post on various former GE executives now heading other companies. As I wrote in that post, last September,

"But McNerney got there after Alan Mulally, now Ford CEO, had put the company back on track to success. The firm McNerney left GE to head, 3M, hasn't exactly set the world on fire.

And now, after McNerney's been at Boeing long enough to make an impression, the company falters. As the Yahoo-sourced price chart nearby reveals, Boeing's performance since late 2005 has begun to stall, as the S&P closes in on it."

Somewhere in the Detroit area, Alan Mulally must be laughing. The nearby chart shows Boeing's and the S&P500 Index's prices for the past five years. Mulally's efforts on the commercial side of Boeing had contributed to its nicely-rising stock price from 2003 through when McNerney arrived. Passed over for the top job, Mulally was vulnerable to the offer to be Ford CEO.

Now that Mulally, a genuine airplane guy, is gone, Boeing seems to have gradually wound down, performance-wise.

The nearby two-year price chart for Boeing and the S&P shows that the former no longer steadily outpaces the index. Instead, the index has ended the last two years handsomely up, and positive, relative to Boeing's roughly 5% price decline.

For just the past 12 months, it's similar. Though the S&P is also negative, it still comfortably beats Boeing's loss of more than 10%.

It's tempting to conclude that Boeing simply moves with the index, but, judging from the first chart, I don't think that's necessarily the case. The company had a solid path of outperformance through the middle of this decade.

Now, that's clearly gone.

Maybe McNerney should be, too.

As I discussed this post with my business partner last night, I thought about the logic Boeing used to recruit McNerney from 3M, where he had a similarly-lackluster, though very brief, tenure, to Boeing.

I wrote this post in June of 2006 concerning 3M and McNerney. In it, I wrote,

"All in all, an ironic track record for McNerney. It appears that under his leadership, 3M's stock price path remained pretty consistent, suggesting that investors didn't really see much difference with McNerney running the company. The only significant changes were bad ones- the dips in price in this decade."

3M's price trajectory hasn't really changed much since McNerney's departure in 2005. So he didn't appear to have markedly improved, or damaged the firm.

But in bringing McNerney to Boeing, the company's board cited his longtime experience heading GE's aircraft engine business.

On first blush, that sounds really relevant, doesn't it? That a guy who builds your engines can come run your company?

Then you stop and think....wait a minute!

That's sort of like saying the guy who runs Goodyear could run companies that used tires.

Or maybe Starbucks could be run by the guy, or woman, who heads up the paper cup supplier that the coffee maker uses.

Ford hired Mulally because they respected three things:

-his reinvigoration of Boeing's commercial plane marketing

-his leading the turnaround of that unit

-his long experience with a maker of complex large moving objects, i.e., airplanes.

I'm not sure that I see how Boeing's reasons for hiring McNerney were as valid.

As always, time will tell. But right now, I don't see McNerney having had a positive impact on keeping the Dreamliner and/or its program mangers performing up to expectations and promises.

More Failure Among GE's Spawn: McNerney's Troubles at Boeing

Last year, in June, I wrote this piece regarding Boeing CEO, James McNerney. Arriving in 2005 from GE, via a brief, undistinguished stop at 3M, McNerney was heralded as the savior of Boeing, post-Harry Stonecipher's departure amidst messy and embarrassing circumstances.

In that post, I wrote,

"All in all, an ironic track record for McNerney. It appears that under his leadership, 3M's stock price path remained pretty consistent, suggesting that investors didn't really see much difference with McNerney running the company. The only significant changes were bad ones- the dips in price in this decade.

What is not evident in the McNerney era of 3M is a break with its own past stock price path. It failed to noticeably ignite sufficient investor confidence or interest to move its stock price trajectory above the long term path it has been on for 30 years. That is, until recently when it has uncharacteristically flattened.

Does this portend anything for Boeing? From where does McNerney's credibility come, if this is his recent post-GE track record? Surely Boeing's recent stock price performance doesn't yet reflect McNerney's actions. For the record, it hasn't really changed, either, in several years.I know of nothing negative about Jim McNerney. The comments attributed to him in the WSJ piece seem promising. However, that's about all there seems to be on file to suggest he will lead Boeing where it has not been before this. If 3M is any indicator, I'm not sure I expect Boeing to show any signs of unusually better performance than before McNerney arrived."

Then, last Thursday's Wall Street Journal carried a page-one article discussing Boeing's official admission that delivery of its breakthrough plane, the 787 Dreamliner, will be delayed some six-seven months, arriving in December of 2008.

Indirectly, then, it's been a tough year for ex-GE Chairman Jack Welch. Welch's hand picked successor, Jeff Immelt, as Welch's replacement at the diversified industrial firm, has failed to beat the S&P500 over his tenure. "Iron Mike" Zafirovski, the CEO of Nortel, another former GE star, is struggling. Bob Nardelli was cashiered from Home Depot, becoming the rather inexplicable choice to become Chrysler CEO.

Maybe Jack's way wasn't so good. The only really good performer among companies headed by ex-Welch lieutenants is Boeing.

But McNerney got there after Alan Mulally, now Ford CEO, had put the company back on track to success. The firm McNerney left GE to head, 3M, hasn't exactly set the world on fire.

And now, after McNerney's been at Boeing long enough to make an impression, the company falters. As the Yahoo-sourced price chart nearby reveals, Boeing's performance since late 2005 has begun to stall, as the S&P closes in on it.

Could it be that McNerney is Boeing's "Chuck Prince?" Recall that he came in and extricated the airplane maker from some sordid messes involving bribery on government contracts, as well as simply not being Harry Stonecipher, the disgraced departing CEO.

However, McNerney didn't get the nod at GE. He didn't make a positive impact at 3M. Now, Boeing begins to buckle more than two years after McNerney takes the top post.

The Dreamliner's delay is the highest profile, potentially most damaging setback the firm has had since Alan Mulally left for Ford.

Perhaps McNerney isn't cut out to be an operating CEO. Maybe he's better at various 'softer' tasks, rather than driving significant corporate performance that leads to consistently superior shareholder returns?

People gave Chuck Prince of Citigroup quite a few years after he cleaned up the regulatory mess left by his predecessor, Sandy Weill, before realizing he wasn't cut out to make the financial giant perform.

I guess the next year or so will tell us whether McNerney has similar traits. Or whether he can lead Boeing to better peformance, both fundamentally on the financial statements, and in shareholder returns.