Edited transcript of interview with Jim McNerney, chairman, president and chief executive of Boeing , by Graham Warwick, Americas Editor of Flight International, in Washington, DC on 16 June.
Q: Are you concerned about the challenges you face in ramping up 787 to a higher rate than was originally planned? That you could end up experiencing issue similar to Airbus in getting this aircraft out to the customer. A: The programme is on track, doing well, but I worry about it every day. I'm impressed with how difficult these development programmes are, and I know the Airbus guys are currently struggling with the A380. It's a mammoth project. They're doing their best. And this can happen. I'm sure they'll sort it out. But we worry every day on 787 and other major programmes we've got. That's the only way you get through these things.
Q: Are you concerned that what's happening with Airbus makes it even more imperative to get an agreement on subsidies at the WTO? Because clearly they're going to lose revenues, yet they're still talking about launching another aircraft. They're still talking about going to the government for launch aid. A: I don't think it's good for either of us - or the industry – or the industry to have a big trade dispute hanging over us for years. I really don't. I'm convinced that the governments can reach a negotiated settlement here. I can't predict how long that will take. There are signs that there's a reengagement. Ambassador Susan Schwab [the US Trade Representative] was just sworn in, and she's taken two trips to Europe in two and a half weeks. She's trying to show that she's serious about it. I think our government is trying to engage. I think the engagement on the European side is a little more difficult because of multiple governments and multiple points of view. So it's a little harder. But I think we'll get there. I think they want to resolve it. We'd like to resolve it. But it's a government matter.
Q: Meanwhile, do you stand firm that you do not want to see anything go towards the next aircraft? A: Yes. I think launch aid in and of itself is our issue. And we think it was fine as Airbus developed and I think our government was fine with it. And it was our feeling after beaten us seven years in a row that maybe it's time for it to end.
Q: With the 787 being such a success, how much pressure are you coming under from customers to get that technology into the rest of the product line, 737 particularly? A: There is some discussion, but I don't think we're being beaten about the head and shoulders. We've got over a thousand orders for the 737NG, and orders are still coming in. Customers are making evaluation of what could be with some of the new technologies and what we've got. And they're pretty happy with what we've got. This is not a matter of customers saying ‘I'm never going to order another narrow body from you unless…’ We're not at that stage at all. Where we are is we're listening to our customers. And there will come a day in the future where their desire and our ability to have the technologies mature for the narrowbody - where those lines cross. And at that point we'll do a new family. But I don't think we're anywhere near that right now.
Q: You've spoken about growing the company. You could argue on the civil side it's going to grow because the market's in that phase at the moment, but Boeing was set up to be a balanced business. How do you see the defence side of the business performing? A: We'll grow on the commercial side because the market's growing and because we will take share. On the defence side, we're anticipating a slow-down in the markets and, therefore, a flattening out of our revenues with a holding on to our profit margins. So add the two together, and it’s a pretty good growth story
Q: Some of the other prime are moving very aggressively into government IT to balance that flattening of defence spending. How do you view that market? A: We're fortunate that we have a commercial business that is more closely related technically to our defence business than IT might be. So we already have the diversification that they're shooting for. And I like our kind of diversification because it's a little closer to home.
Q: The fundamental strategy of Boeing was to balance the business, move the headquarters away from either of the businesses and then grow into adjacent businesses. Do you consider the recent acquisition of Aviall adjacent of a core part of chat commercial wants to do? A: I think it's a core part of the services side, which in and of itself is an adjacent space in commercial. But story of Aviall is a story of accelerating plans we already had in place and finding a critical mass of distribution capability, as well as arrangements with other OEMs. And that's more an acceleration of what we were going to do. But the purchase of Aviall let us capture some synergies and have a higher return doing it that way.
Q: So how do you feel about Connexion and Jeppesen, and their place in the picture? A: Just to take them one at a time. I think Connexion is a good product. I don't know how good the business is. We're going through an examination now to try to understand short-term investment versus long-term benefit. But it's a good product and it has good customer acceptance, even though it's gone a little more slowly than we had, I think, originally planned. I think Jeppesen has been a home run. And we're adding to it a couple of rich acquisitions, so we're feeling very good about Jeppesen. It's profitable. It's well led. It's a nice market for us.
Q: Are there any other adjacent spaces out there that you are particularly interested in? A: There's a whole host of them. Within the services thrust, you can find either some training or some niche technologies or some distribution, logistics capabilities and software. The theme is that we have a broad ambition and so what you’ll see us doing is filling out specific pieces. We have a robust pipeline of these opportunities and it will be a make-versus-buy assessment as we go through this. I don't see some big transforming acquisition. I think we've got a pretty good footprint in both the defence side and the commercial side.
Q: And you have said that you don't want to sacrifice organic growth for just going and buying things. A: Yes, and that’s the way I feel about it. You never want to acquire things because of your inability to grow yourself. You want to acquire things to supplement and accelerate the growth plans you've got. Hopefully we'll hold on to that discipline. That's certainly my intent.
Q: The initiatives you launched beginning of the year, Like Lean+ and Global Sourcing, are they beginning to pay off?
A: Each one's a little different. Look at Lean and Global Sourcing, the two you just mentioned. It's not as if there wasn't a lean capability in this company before I got here. And it wasn't as if we weren't worried about global sourcing before I got here. But we chose to lift them out, make them special, broaden and deepen and resource them more and put leaders in charge of them. It’s a matter of accelerating things that had been here and turbo-charging them. Leverage strength on strength is a line I use in the company with my people.
The other two initiatives are newer thoughts. One is Internal Services Productivity. This is all about our centrally managed costs, our indirect costs, our Shared Services organisation. We think there's an opportunity to be more productive there. James Bell is leading that initiative, while Alan Mullally is leading Lean and Jim Albaugh is leading the Global Sourcing as the top management sponsors. And we're really digging into indirect costs, which are those costs that aren't either in the things we build or the capital that makes them. And that's a big number. We really think we've got a long-term productivity play there. And then there's one that we call Development Excellence, which is all about raising the median and reducing the standard deviation of our results on new products and new programmes. That's the meat and potatoes of this company. So I'm trying to put a marker down, and say: ‘Look, this is what we do. Let's aspire to do better.’ And that has both growth and cost implications - growth from the standpoint of managing products and programmes better, and cost because the way you do that is standardise your approach in some circumstances. We tend to build entire infrastructures for every programme, every product. We’ve got to get over some of that. We're just starting, and this will go on for many, many years. And the theme will be boring consistency from the chairman.
Q: Have you found that there isn't yet the cross-over between the commercial and defence sides that you need to get this productivity? A: On the productivity side, Lean and Sourcing, there have been some synapses for them. On the product side, the growth side, you've obviously seen some commercial derivatives for military use. That's a natural advantage we have. But I just want to accelerate most things. It's not as if I have the first thought here. I just want to organise, sponsor and sort of execute it a lot more aggressively.
Q: Am I correctly understanding you're happy with the shape and structure of Boeing; you just want to … A: …operate and execute, yes. I think that's a fair statement. It's not as if Phil [Condit] and Harry [Stonecipher] weren't worried about execution, but they were managing during an era where stitching together a new company was the challenge. And I'm operating in an era where - there's still some final stitching to be done, by the way - but the leverage is really on executing good plans, finding new ways to leverage our size and our broad footprint, the initiatives, and leadership development to help people grow in their jobs. That's more of the theme. And acquisitions not as a game-changing acquisition, rather as a way to accelerate our plans.
Q: You talk a lot about the leadership development side of it. Is there more than could be done?
A: I think so. Again, Phil and Harry valued leadership development. So what I want to do is tie it a little bit more directly to our HR [human resources] processes, and to our values and to career progress. I just want to take the next step. Because, if we can overlay strong general management leadership capability on top of the superb functional and technical capability this company has, it will be wonderful company. When you get to the root cause of a lot of program failures, it's less about technology, less about product definition, less about did you choose the right supplier or not. And it's more about was the team well led? Was information flowing up and down, side to side, or was it a command-and-control environment where no one was allowed to speak up? Were customers looked after and listened to and made part of a seamless team? Yes or no? Were suppliers just handed functional specs and told to show up in two years with something or were they made part of the team, put on the same IT system, made to feel important as opposed to just bought by the pound? This is all about leadership. You discover well-run programs all have those characteristics and poorly run ones often don't. And so that's why I'm trying to get at leadership.
Q: And if you create that culture will it spread ethical behaviour or do you have to enforce it or the leadership leads to it?
A: Point number one is that you can't have a set of leadership values that don't incorporate all the ethical values that you want. Because people trade them off. You've got to make it clear that you have to have both. We all have to aspire to those. So first thing you've got to do is define them. We went through a big exercise on what we want our leaders to be, both in terms of the values they have and in terms of the characteristics as leaders we want from them. We spent six months defining what those are. We have six leadership attributes, one of which is a clear definition of ethical behaviour.
Then you've got to go through a period of where you just talk about it with employees. You just walk around and you talk about it and listen to their concerns. Because when you talk to employees it's not a matter of you've got bad people and good people. It's you've got people under stress trying to execute. Corners can get cut unless you make it very clear that you don't want that. And you listen to their concerns. You talk about it. You begin to develop themes in the company. Then there is putting a public face on it. I have gone public in speeches and in interviews like this that I want to make ethically compliant behaviour a competitive advantage for the company, not just something that remediates problems with the past and we tend to wipe our hands of it. Because I think we make big, important technical things, but when a customer buys from us, they're buying that plus the person who sold it to them, plus the values the person has sold to them. I think that's really important. You go talk to any customers, and the values of the people who sold it to them is a big deal. And I want that to be dripping from every pore. Now, am I going to create a church out of the Wild West? No, that's not my objective. Because we are a company. We're in a money-making business. But I think you can expect both.
Q: How do you enforce beliefs?
A: You embed. You embed assessments of people, and have them be meaningful in terms of how they're paid and promoted and the slates they're on and all these things. And have the courage when someone steps out of line to deal with it. It's that simple. I'd like to tell you it's more complicated. But if the organisation sees me over the next five years wink at ethical problems or - when clearly someone's not behaving properly - I don't deal with it right away, then they'll know it's not as valued as I say it is. So we've taken these six leadership attributes, and we’ve made it a subject of a discussion between every supervisor and every employee in the company. That's beginning to roll out. We started with top management this year. Now that we've all experienced it, we're now going to throw it out into the company. Because there's nothing that substitutes for a candid discussion between a supervisor and an employee and knowing that one of the things you're going to talk about is your values as a leader and as a person. That's how you enforce it. Because people want to be good, by and large. And if they've got concerns, a supervisor has to let them talk.
Q: When you finally agree the ethics settlement that's going through with the US government, will it include closer oversight of you but the DoD customer or will it remain a voluntary? A: Well, incorporated in it will be some oversight from our government customer, the Air Force in particular, that's already in place. We're out ahead of that. And so the settlement is incorporating an extension of that, which is proper, which is what I would do if I were in their shoes.
Q: Are there any businesses within Boeing that are still causing problems? The space business for several years wasn't performing. How is that now? A: We're going through a review now. We obviously got through a number of issues last year. We're in the midst of reviewing all of our major products and programmes to assess where we are. We've got to get level set. I don't think we're going to find what we found last year in terms of the issue, but we're going through it with a critical eye right now.
Q: Do you need the United Launch Alliance [joint venture with Lockheed Martin] to go through to make the Delta business viable long term? A: I don't want to sound too disingenuous, but we think our country needs it. It’s a much less expensive way to do it. We've tried to craft it in a way that doesn't give the country fewer options, product-wise. We just think it's good. It's not as if this is the first time this kind of thing has happened. There are joint ventures where you've got these heavy infrastructure costs and heavy inventory costs. The [launch] business has not been particularly profitable before, it’s sort of gone in and out of profitability, so I think this also improves our cost position. I'm hopeful that it will get done over the next few weeks.
Q: Are you increasingly confident that the C-17 line will not come to a screeching halt? A: We’re obviously good through '07. But I continue to be concerned. We have to work with our customer and the people who decide on the money to make the case. I mean, you know, we firmly believe that the country needs it. We're working on it every day.
Q: Are you, Boeing, continuing to invest to keep C-17 production capability on line through pre-buying parts? A: Yes. We're taking some financial risks from time to time and our government occasionally finances the pre-buying for us or catches up. But we have faith in this thing.
Q: Can I ask about the [US Air Force] tanker competition? Your competitors have made it clear that they don't think the WTO situation should be included in the acquisition process. What is your position? Is it a separate issue or a related issue? A: I think there are people in our legislature who have made it a related issue. Listen, everybody always puts themselves on the side of the level playing field argument. But that's all we're looking for. We're looking for a level playing field on the civil side, and we're looking for a level playing field on the tanker procurement. There do exist in our procurement processes less oversight for foreign providers of technologies, so we are sympathetic to the argument that says we should all have the same ITAR export rules, the same sign-ups on transparency and other things. That's all we're arguing for. Now, people view that as being tied together [with the WTO], and I think there are some in the Congress that do tie it together. We haven't made that argument specifically. We think our government wants to have a competitive tanker choice and it's hard to disagree with that. We look forward to competing and hopefully win.
Q: You're offering more than one platform at the moment, we understand. A: It's sort of an open-ended RFP. It depends which way our customer wants to go. We've obviously got deeper planning done on the 767 derivative, but the current RFP has forced us to look at the larger one, too. It's a different machine, so there are going to have to be some significant costs there. But as soon as we get some clarity on which way our customer wants to go, we're ready to go.
Q: Can I just go back a little bit? You were offered the CEO-ship the first time, is that right? A: I was formally offered this job once. Okay? And I took it. Okay? Which is not to say there weren't informal approaches. There were, but I cut them off because I wanted to do the job at 3M. Then after five years I surprised myself a little bit when I decided this is what I really wanted to do.
Q: You have said that Boeing is similar to 3M in that it needs to have some energy injected into it. A: Someone asked me once: "Aren't you impressed at the massive differences between GE and 3M and Boeing?" And there are huge differences. There are big differences in terms of products and services provided. But there are also a lot of similarities. And I happened to be at the centre of all three companies in one form or another wrestling with the issue of a proud-culture, high-performing company that had gotten a little inward. But 3M and Boeing, they're great people. There's a couple of generations of the best chemical engineers in the United States went to 3M. And the same thing on the aeronautical side here at Boeing. So it was more a matter of re-engaging, facing the company outward again, whether it's customers or ethics and compliance or all the things that the outside is asking of us that we should be doing anyway. I think GE 20 years ago went through a similar thing, and I probably learned from that.
Q: The company has gone through a difficult time. What’s your sense of the morale within Boeing?
A: I think the Boeing folks never lost faith in themselves and pride in their products. I think they were very disappointed in some of the things that went on and wanted to address the issues. I found them willing to address the issue. I sat down in town hall meetings and raised the issues that we had, talked about ways forward, about attributes and values. And I found them very responsive. I probably would be kidding myself if I said that everybody in Boeing was totally rejuvenated after I've been here for a year, because that's not true. But I think there's a broad acceptance of the change agenda. We're all working it. It's early days. These things take many, many years. But it's more re-tapping into a fundamentally ethical culture that had lost its way in a couple of areas than it is having to recreate a new culture out of the ashes.