Chief Executive Names Boeing’s McNerney ‘2015 CEO of the Year’

Q: Some analysts are skeptical about sustained demand for the 787 going forward in light of its current production costs. They point to the fact that United Airlines likes the 787, but withdrew its order for 10 Dreamliners, choosing older, less efficient, but less costly planes instead. Where does Boeing go from here?

JM: We are coming down the learning curve on the cost of the 787 and have more to go. This is typical as new planes roll out. The plane will be significantly less costly to build in the future. Secondly, we have so many orders for 787s, we don’t know what to do with them—we’ve got about eight years of backlog, which is too big. If we could produce more at [the same] quality and cost, we would. This is the highest-demand widebody of all time, and we’re at the highest production rates of a widebody ever for us. So this is a huge success.

The United case is a story of a successful customer who needed a bigger plane than he thought he was going to need on some routes. So instead of having a 310-passenger airplane, he needed a 360-passenger airplane. We were glad to accommodate him. The backlog of our company actually went up a little.

Q: You delivered something of a thunderbolt when you warned that Boeing would move manufacturing and engineering jobs out of the country if Congress doesn’t reauthorize the Export-Import Bank. Is this a hard-bargaining chip, or a prediction on your part?

JM: I recall this a little differently. ExIm Bank is a treaty among 60 countries where they agree on the running rules of providing export credit for everybody’s domestic champions. Quite frankly, this treaty curbs a lot of bad behavior in the sense that there are a lot of countries that, if not bound by this treaty, would subsidize the heck out of their indigenous champion. There are countries that will subsidize, to a far greater degree than the ExIm rules allow, their domestic champions, even though in the U.S. we don’t believe in that so much. So, the structure of the ExIm Bank controls bad behavior and allows the quality of the products to be the differentiator on a global basis, not who throws the most money at it.

If one of the 60 unilaterally withdraws, it puts your domestic players at a disadvantage. Many deals in the developing world require export credit financing or you’re not allowed to bid. So it’ll be a competitive disadvantage for us and the U.S. economy if we don’t have this facility. My point in answering that question was simply, there would be an inevitable bias for exporters to look at other places to build things if you could get this kind of support everywhere else in the world except the U.S. That was my point; it was not a threat. It was simply a statement of what economic incentives do.

Q: But there are at least two presidential aspirants and many congressmen who want to kill this, calling it a New Deal relic, a vestige of crony capitalism and saying that companies like Boeing, if they are as good as we think, should easily be able to get financing through the other means. 

JM: Look, I realize that we’re in the silly season right now. People are changing positions and finding new ways of looking at life, depending upon the race they’re in. Ultimately, though, I have confidence that the U.S. Congress will come together and realize that we have a level playing field out there. It’s been reauthorized by Democratic as well as Republican presidents, as well as liberals and conservatives. Let’s keep it. Also, this doesn’t cost the country anything. We don’t lose money. It’s not a spending program. This makes money for the U.S. government.

Q: Boeing is an icon of American manufacturing. It has considerable knock-on effects on American manufacturers. Give us your critical assessment of American manufacturers as a class. How good are we versus global competitors? Where does it most have to improve?

JM: It’s an important question. We’re in the beginnings of a renaissance in U.S. manufacturing, after having experienced a steady, slow erosion over the last couple of decades. American manufacturing has struggled with higher costs in the U.S. as compared to other places, which accounts for the offshoring. It has also struggled with a regulatory environment that is not as supportive as it’s been historically, which curtails investment. It struggled with the strong dollar recently. It struggled with a lack of STEM-educated folks to design things, and it’s struggled with the readiness of the workforce to build things.

For example, when a Boeing employee comes in to be a machinist, one of our assemblers, it used to take two weeks of orientation. Now it takes two to three months of orientation to address these readiness issues. So there have been headwinds that we’re beginning to address. We’ve tried to rationalize the regulatory process, to engage in education, to advance STEM and to work with community colleges and apprentice programs that help prepare worker readiness.

America is really good at the nexus between the design and manufacturing processes. There are countries that are good at the manufacturing process, and there are countries that are good at design. But very few are good at producing globally competitive products by marrying the two together. I see a lot of kids now beginning to come out of engineering schools that are taught to design for manufacturability. They’re now taught to do things that we need, as opposed to theoretical things. It’s going to take a while for this to show up. It’s darkest just before the dawn. American manufacturing is finding its way.

Q: What advice would you give manufacturers about where they most need to improve?

JM: Over the last 20 years, too many of us have pursued horizontal business models. To use the old Japanese term, we “hollowed out” our manufacturing and became horizontal in the sense that we controlled a lot of suppliers, but we controlled less vertical engineering and manufacturing. We became assemblers. In industry after industry, including our own, we learned some lessons: That it’s very hard to control quality, cost and delivery, which are three key fundamentals. There’s more discussion about re-vertical integration. We’ve got to get more control over more of the design-sensitive and manufacturing process-sensitive things.

For example, when I came here a decade ago, after we invented the carbon fiber material for airplanes, we farmed out the ability to make a fuselage and make an airfoil. I thought that was wrong. Again, it’s not just the design, it’s the ability to manufacture without learning curves and get to the next material fast. I had to literally repurchase some of our supply base, to bring them back into Boeing, to get them on this pursuit of design and manufacturing together. If you ask me where we’ve got to change, it’s getting more control over one’s design and manufacturing processes.

Q: What has been the single greatest accomplishment or thing that you are most proud of as a leader?

JM: Three things: Bringing the cultures together around one distinct culture. I am proud of our leadership development pipeline and take personal ownership for that. The 300 to 400 people that represent the future of this company are a better and more broad-gauged pool than the one we inherited a decade ago. I’m also proud of the business results, the revenue and earnings growth, and the change in our market position from losing market share to gaining market share over the last five years. This will set us up well for the 21st century.

Why Jim McNerney? A Discussion of the ‘2015 CEO of the Year’ Selection Process