After last year’s crashes of the Boeing 737 Max caused the plane’s grounding worldwide, I decided to take a quick look at Boeing (BA) on the idea that the selloff might be an overreaction. BA is a stock I’ve never owned. And although I appreciate the power of the BA/Airbus commercial aircraft duopoly, it’s not an area I keep tabs on.
I was surprised to find that BA looked a lot like a US auto company to me–that is, an assembler of parts and components made by others (who own–my guess–the bulk of the engineering intellectual property I’d mistakenly thought was in BA). Billions spent on share buybacks, too. What’s left inside BA? …a brand name, a distribution network and a group of airline customers who have organized their maintenance operations around BA aircraft. My conclusion: BA is a shell of its former self, a product of MBA-ish financial legerdemain rather than a center of engineering excellence. Why is this bad? …because hollowing out the company creates good times now at the expense of diminishing ability to generate future profits. As with the auto industry in the US, innovation now resides with suppliers, who are where the superior profit growth is to be found.
What made me think of BA now is the surprising announcement from Intel (INTC) that it has not only lost the big engineering lead it had over the rest of the semiconductor fabricating industry just a few years ago but also is now about a year behind TSMC (yes, the nm numbers are different between the two, but that’s not so important). More than that, the company is mulling over whether to outsource manufacturing to TSMC. When I owned INTC shares in 2012-14, the company was trading at book value of $19 and yielding 3%. Yes, the world was passing the company’s x86 design by. But manufacturing was still excellent. I thought there was limited downside and that INTC was working to catch up with semiconductor rivals. The stock doubled while I owned it. At some point, though, it looks like INTC, too, opted for the business school financial engineering solution, which would be the really bad news in the INTC announcement.
Why do companies abandon the technical excellence that made them great in the first place? I think there are three related reasons:
–in an established company, the status quo is very powerful. This is even more true if the founding management is still around.
–CEO tenure is usually very short. Pay is astronomical, and is tied both to profit growth and the stock price. Someone who has spent thirty years getting to the top hoping for a gigantic payoff has little incentive to lead a (necessary) restructuring that will produce, say, two years of losses and a potentially depressed stock price
–in mature companies, CEOs tend to be marketers who have little technical background or understanding. They emphasize what they know.