Boeing Is Labor Intensive, Capital Intensive, Or Both. Has Boeing Established The “Network Effect” For Their Product
After reading the article “Boeing’s Secret” and watching the video “How a Boeing 787 Dreamliner is Built,” discuss in 400 Words if you believe Boeing is labor intensive, capital intensive, or both. Has Boeing established the “network effect” for their product?
ORDER A SIMILAR PAPER
Video:
Article:
On Dec. 11, 1996, Boeing Chairman Philip M. Condit closed the deal of his career. After a relentless three-year courtship, he persuaded the initially reluctant directors of defense giant McDonnell Douglas Corp. to agree to a merger. The combination would create the world’s largest aerospace company — the first manufacturer ever with the ability to build everything that flies, from helicopters and fighter jets to space stations. “This is, I believe, a historic moment in aviation,” Condit proclaimed at a Dec. 15 press conference.
But far from the glare of TV cameras, a disaster was quietly unfolding inside Boeing Co.’s sprawling factories — one that would ultimately wind up costing billions of dollars, cause several executives to lose their jobs, and lead to claims of accounting fraud. Facing an unprecedented surge in orders because of a booming economy, workers were toiling around the clock, pushing the assembly line to the breaking point. At the same time, the company was struggling to overhaul outdated production methods.
These pressures were building up to what was, in essence, a manufacturing nervous breakdown. In the weeks after the merger announcement, parts shortages and overtime approached all-time highs — triggering red warning signals in Boeing’s colorcoded system for monitoring factory health. As costs went through the roof, the profitability of airliners such as the 777 swooned. A special team formed to study the crisis in May, 1997, issued a report with a blunt conclusion: “Our production system is broken.”
ORDER A SIMILAR PAPER
If investors had understood the scope of the problems, the stock would probably have tumbled and the McDonnell deal — a stock swap that hinged on Boeing’s ability to maintain a lofty share price — would have been jeopardized. But shareholders never got the full picture until well after the merger was completed on Aug. 1, 1997. Top executives “were hoping against hope that none of the problems would bubble up before they got the deal done,” says a Boeing ex-official.
Their wish came true, and the deal sailed through. Recognizing that the bad news would have to come out eventually, company leaders started debating how it should be released. One public-relations manager lobbied for disclosure on Sept. 6 or Sept. 13 — the dates of the funerals for Princess Diana and Mother Teresa — when a grieving public would presumably overlook the story. Those proposals were nixed. On Oct. 8, former McDonnell CEO Harry C. Stonecipher, by then Boeing’s president and chief operating officer, shot an e-mail to Condit. “We do know for certain that there is a big surprise coming, and I think we owe the Street a heads-up. We have an unmitigated disaster on our hands and need some very candid damage control,” he wrote in an e-mail that was disclosed in a securities-fraud suit filed against Boeing in Seattle.
Condit, who in his 32 years at Boeing had yet to experience a failure, responded that the disclosure should be delayed. “My bias is to soften the third-quarter hit with some warning,” he wrote. “Assuming the scale of the problem remains, use the fourth quarter to prepare the Street to take the real hit then.”
On Oct. 22, Condit made the bombshell announcement: The company’s massive production problems would force it to write off $2.6 billion — by far the biggest charge in Boeing’s history. Overnight, shares fell 8%, to $49.88, wiping out about $4.3 billion in value. As investors digested the scope of the mess, the company lost years of hard-earned credibility and the stock fell a further 12%, to 43, by Oct. 27. The stock stayed in a trough throughout 1998 and won the dubious distinction of being dog of the Dow that year.
The story of how Boeing kept its 1997 production disaster secret has never been made public. Although the company subsequently fixed the assembly-line problems — and it has recently received praise for its diversification efforts — the tale provides a sobering view of how easily management can keep investors in the dark. It also sheds light on the little-known “program-accounting” method used in aerospace to this day. A controversial system that many analysts criticize for its lack of transparency, it continues to give Boeing broad leeway to goose earnings — and to make it one of the toughest companies in America to evaluate. In a deal approved by U.S. District Judge Thomas S. Zilly on Feb. 20, 2002, Boeing settled a private securities-fraud suit over the 1997 episode for $92.5 million. The company did not admit guilt. Although some of the evidence uncovered by the plaintiffs’ lawyers was revealed in court documents, the vast majority was locked under seal at Boeing’s request.
ORDER A SIMILAR PAPER
In a three-month investigation, BusinessWeek has reconstructed this hidden chapter in the company’s history — and analyzed its current implications. New details supplied by several inside witnesses indicate that Boeing did more than simply fail to tell investors about its production disaster. It also engaged in a wide variety of aggressive accounting techniques that papered over the mess. Critics say the company should have taken charges for the assembly-line disaster in the first half of 1997, even if it meant jeopardizing the McDonnell merger. They also claim that Boeing took advantage of the unusual flexibility provided by program accounting-a system that allows the huge upfront expense of building a plane to be spread out over several years — to cover up cost overruns and to book savings from efficiency initiatives that never panned out. “Boeing managed its earnings to the point where it got caught,” says Debra A. Smith, a partner at Constraints Management, a Seattle-area manufacturing consultancy, and a former senior auditor at Deloitte & Touche who worked on the company’s account during the early 1980s. “Boeing basically decided in the short run that [managing earnings] was a lesser evil than losing the merger,” adds Smith, a onetime accounting professor at the University of Puget Sound in Tacoma, Wash.
At a time when investors are asking themselves how far Corporate America can be trusted, the Boeing saga provides rich new evidence that companies have much greater leeway to manipulate their numbers than most people suspect. The aerospace giant was a widely held blue chip that had a huge short-term incentive to prop up its stock price. Taking advantage of an investment community willing to tolerate the company’s opaque reporting system, executives managed to conceal fundamental operational problems for nearly a year. Some of these officials, including Condit, are still at Boeing. To this day, they insist that they had no obligation to disclose cost overruns when they occurred in the first half of 1997 — which raises the question of how swiftly they would let investors know if a similar problem arose today.
ORDER A SIMILAR PAPER
As is often the case, none of the outside watchdogs ever barked. The board never forced Condit to come clean about the company’s production problems. Stock analysts and business journalists underestimated them. And although the company’s auditor, Deloitte & Touche, raised red flags about Boeing’s troubles, it doesn’t seem to have put much pressure on its big client to share this information with investors (page 120). As a result, Boeing’s financial reporting in early 1997 bore little relationship to its business reality. When the company finally disclosed its problems, “I was stunned,” recalls Richard J. Glasebrook II, managing director of Oppenheimer Capital, owner of 5% of McDonnell at the time. “I thought that Boeing had the building of commercial aircraft down cold.”
For its part, Boeing insists it never misled shareholders at all — and that critics and plaintiffs’ lawyers are holding the company up to unreasonable standards. Noting that the construction of planes is an incredibly complex and expensive endeavor, it says that managers told the public about the 1997 production problems as soon as they were legally required to do so. It also points out that the Securities & Exchange Commission never filed charges. Boeing defends program accounting as a legitimate way to report performance and notes that its accounting decisions were approved by Deloitte-which was not named in the fraud suit. All of the key players in the drama, including Condit, Stonecipher, and former Chief Financial Officer Boyd E. Givan, declined to comment. “Boeing and its senior management always tried to do the right thing,” the company wrote in a letter to BusinessWeek. “Boeing and its executives frequently disclosed Boeing’s production difficulties.” Deloitte also insists it acted properly.
So why did Boeing spend $92 million to settle fraud claims? General Counsel Douglas Bain says the company did not want to risk litigating complex accounting issues in front of a lay audience. He adds that because the case would have been tried in Seattle, which felt stung after Boeing moved its headquarters to Chicago on Sept. 1, 2001, company lawyers feared a vindictive jury. Instead, it was willing to accept the settlement — which Bain says is totally covered by the company’s insurance policies.
ORDER A SIMILAR PAPER
THE ROOTS OF THE PRODUCTIOH CRISIS
If the Boeing lawsuit had gone to trial, jurors would have heard a story that begins around 19%, when Boeing was facing a strategic crisis because of shrinking defense business. Condit had a choice: either acquire a bigger share of the market or drop out of it. Since defense provided stable income to offset roller-coaster commercial plane sales, Condit chose to grow, buying Rockwell Aerospace…
