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Op-Ed: Drawing Lessons from Boeing and BAE |
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(Source: defense-aerospace.com; published Jan. 29, 2004)
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by Giovanni de Briganti
PARIS --- When top executives from BAE Systems and Boeing secretly met in London last summer, the mere suggestion they were discussing a merger made stock analysts swoon as they anticipated potential profits, and caused industry observers to fall over themselves in their haste to praise great Transatlantic industrial powerhouse that would result.
Just six months later, both companies are reeling after taking a succession of body hits, and even their long-term survival is no longer taken for granted.
There are many parallels between Boeing and BAE, and they provide an interesting lesson in how not to manage a major defense company.
Indeed, it is ironic that the two teamed in an ill-fated bid for the Royal Air Force’s Future Strategic Tanker Aircraft competition. For in losing this $24 billion competition, Boeing also lost its long-standing monopoly on the aerial tanker market, while BAE lost the biggest defense contract ever awarded by its domestic customer.
Historically, Boeing and BAE are both the result of mergers originally intended to create dominant players in their national defense market and to provide diversification into new businesses. By merging with McDonnell Douglas, Boeing bought into the combat aircraft, tactical missile, space launcher and helicopter market, while eliminating a competitor in the commercial airliner business.
British Aerospace became today’s BAE Systems by buying the defense arm of GEC Marconi, which allowed it to dominate the UK defense market, to acquire substantial defense business in the US, and to enter the defense electronics and naval shipbuilding industries.
Both mergers, however, created more problems than they fixed. Boeing lost the Joint Strike Fighter program to Lockheed Martin, sold off most of McDonnell Douglas Helicopters, and has so far failed to win significant new business in the missile field. BAE’s entry into naval shipbuilding has been a disaster: it has written off 750 million pounds on the Astute nuclear-powered submarine, it has lost most of the design work on the Royal Navy’s future aircraft carriers to France’s Thales, and has had to share work on the new Type 45 destroyer with the VT Group.
In the meantime, both BAE and Boeing have wrecked their relationships with their national defense ministries, which remain their single biggest customers. BAE tried to force its way of doing things and its prices onto the British Ministry of Defence, thereby generating such a level of hostility that it was forced to abruptly fire chief executive John Weston in attempt to make amends.
Boeing’s failings are similar: it tried to ram through the outrageously expensive tanker lease despite strong opposition in Congress and in public opinion. It also earned the dubious distinction of being disqualified from some Pentagon contracts, and of being stripped of contracts it had already been awarded, for unethical behavior.
In fact, unethical behavior is another trait the two companies share. In addition to the contract disqualification, Boeing also tried to hire a top US Air Force procurement official, which led to the firing of CFO Michael Sears and, ultimately, of CEO Phil Condit. (UPDATE: Harry Stonecipher, Condit's successor, said on Jan. 29 that since taking over he has had to spend most of his time "dealing with this perception that we are a bunch of crooks.")
BAE has been accused of financial improprieties in several export deals, notably in Saudi Arabia, South Africa and most recently the Czech Republic. In 2001, it was investigated by Britain’s Serious Fraud Office after reports that it maintained an arms deal slush fund, although the Ministry of Defence did not pursue the investigation. (UPDATE: "BAE Systems rigorously obeys the laws of the United Kingdom and all the countries in which it operates. BAE Systems vigorously rejects any allegations of wrongdoing," a company spokesman said Jan. 29.)
At various times, BAE and Boeing have shown arrogance and disdain for their domestic defense customer, and demonstrated a stunning belief that they, and not their customers, called the shots. Since the summer, the Pentagon and Britain’s MoD have convincingly reminded them that they are mistaken.
The two also demonstrated a high degree of complacency, which EADS and its Airbus unit have shown to be unjustified by overtaking beating Boeing at its own game on the airliner and tanker markets, and by snatching Britain’s largest-ever defense contract under the nose of BAE.
Boeing and BAE have come to disastrously epitomize the excesses of which huge defense contractors are capable when they attain an overly dominant position. The obvious lesson is that the consolidation process in the defense and aerospace sectors has gone far enough.
The second lesson is that, in the defense business as well as elsewhere, excessive power in the hands of any one entity is bad for taxpayers, bad for the armed forces, bad for shareholders and, ultimately, bad for the company itself.
The conclusion is that defense ministries everywhere should guard against any one contractor gaining excessive power, just as managers should understand that domination of their market is but the first step towards corporate implosion.
-ends-
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