2010 Speeches

Jim McNerney

Chairman, President and Chief Executive Officer

"Maintaining a Competitive Edge in Today's Global Economy"

Northwestern University Kellogg School of Management IMPACT Series

Chicago

Global Insight Luncheon

February 19, 2010

It's great to see so many people here. I know that a number of distinguished business leaders have been a part of this series, and I'm honored to be here.

I think our topic -- maintaining a competitive edge in today's global economy -- couldn't be more timely. I believe we have arrived at a critical intersection between competitiveness -- particularly U.S. competitiveness -- and the changing global economy.

During a time when fast-growing, emerging competitors like India, China, Brazil and Russia are investing heavily to educate their people, compete in new sectors and expand their economies, the United States is actually losing global GNP market share -- and becoming less competitive by many measures. In particular, we're seeing alarming declines in education -- mostly in science, technology, engineering and math -- the very areas that are the seeds of innovation, sustained competitive advantage, and even national defense.

Economic trends also offer reasons for significant concern about this nation's financial strength. Even under the most optimistic projections, we will have debt equaling 100 percent of our economy in 2019 and exceeding it by 2020 -- that's what the current Administration's own estimates predict. That's on top of burdensome tax policies, an erosion of our industrial base (particularly in manufacturing), and a growing sentiment toward protectionism.

These trends pose several big questions to us and for us, as business leaders, and to our leaders in Washington, D.C.: How do we maintain our competitiveness and ensure a high standard of living for our citizens? How do we increase American exports to global consumers and create more jobs at home? And how do we get the message across that protectionism is not the right answer ... but that free, open and fair trade is? That's a tough sell because many people, especially in developed countries, have become disoriented by the pace of globalization and in some cases have adopted a "stop the world I want to get off" mentality.

Speaking as someone who has been involved for many years in the global marketplace, I believe that the reality is really very clear: that the benefits of growing economic integration far outweigh the costs -- for both developed and developing countries.

Boeing is a good example of how that works. Forty-two percent of our more than $68 billion in 2009 revenues came from overseas sales. That percentage will certainly increase over the next six or seven years because more than 80 percent of our commercial airplane backlog -- which totals more than a quarter of a trillion dollars -- is reserved for airlines outside the United States. And our share of international defense sales is growing rapidly.

Our customers are in more than 90 countries around the world, and we have employees in about 70 countries -- not to mention suppliers and other partners we have.

Having said that, the vast majority of our 158,500 employees are in the United States. But tens of thousands of those jobs would not exist if our company wasn't globally engaged and globally competitive.

It's not just Boeing that is finding so much international opportunity. Nearly half of the revenues and profits of the S&P 500 now come from international markets.

That fact is obvious to companies headquartered outside the United States, too. Take our industry, for example. While Europe's Airbus is our primary competitor in the global commercial-airplanes market today, in the future we won't have just one direct competitor. So we are preparing now to take on emerging challengers from China, Canada, Brazil, and Japan. I will describe how we are doing that in a minute.

First I want to make the point that, wherever you live or work, it is becoming increasingly likely that you will need to be global to be successful. And, with this audience in mind, that means tomorrow's business leaders need to develop a thoroughly global perspective -- something I know Kellogg works hard to do.

We at Boeing have long recognized the commitment to excellence at Northwestern University. In fact we see it firsthand every day in the many talented Northwestern grads we employ.

We see it in your students and faculty, too:

  • through our participation in the Ford-Boeing-Northwestern research alliance and our nearly million-dollar commitment to it over the last four years
  • through the two Northwestern students who won and placed second, respectively, in the 2009 Engineering Student of the Year competition sponsored by Boeing and Flight International magazine
  • and through the outstanding students we've helped to support through Northwestern's EXCEL program, which helps under-represented students in engineering develop their talents and leadership.

The history of excellence at Kellogg and at Northwestern more generally is part of what allows your institution to maintain its global competitiveness. We're trying to do a lot of the same things at Boeing to maintain our competitive edge.

For us -- and I think for the United States as a whole, and for any business that operates globally -- that comes down to two things: innovation and productivity.

Innovation is critical to business success in today's world, where globalization and information technology level-set many other competitive advantages of the '90s and '00s like cost, capacity and supply-chain management.

To fund innovation on a long-term basis in a level-set world, the hard work of fundamental productivity improvements, year in and year out, is equally important because the ride is never smooth. The era of me-too products and services hiding in geographical or industry niches is over in many industries, and will be over in many of the rest sooner rather than later.

Correspondingly, depending on a cost advantage on the same basis has eroded as well. In business, innovation (while often rooted in technology) must be customer-inspired.

A great example of that is our own 787 Dreamliner, which is by far the most successful commercial airplane in terms of pre-delivery sales in the history of aviation (with 850 orders from 56 customers around the world). We began our journey on the 787 with a set of technologies we knew could change the game in commercial aviation for decades to come -- new advances in materials technologies through greater use of composites, new engine technologies that would reduce noise and fuel usage, and new technologies applied to create a better experience for passengers were all available.

Initially, we thought these technologies could best be applied in an airplane called the Sonic Cruiser, which emphasized speed in its value proposition to customers. But through careful engagement with out global customer base and listening closely to them, we discovered that the real value they were seeking post 9/11 was in efficiency, range, overall economics and environmental performance.

The 787 will use about 20 percent less fuel and be about 30 percent less expensive to maintain than the airplanes it will replace -- all of that in an industry where a three or four percent improvement is considered a breakthrough. It will provide passengers with higher humidity and lower cabin pressure for a more comfortable flight. And it will produce less emissions and noise for the environment. And it will fly 25 percent farther not faster, reducing the need to change planes in this security-intensive world, which is highly valued by customers. All in all, the 787 will be a tremendous improvement in productivity for the airlines that fly it, giving them a competitive advantage in their markets. The Sonic Cruiser, despite its performance, wouldn't have been successful in the marketplace. But we applied the same technologies in a different direction on the 787.

Now, game-changing innovation like we have in the 787 is never easy. And we've had our share of problems on what I call the bleeding edge of innovation. For many companies, the kinds of challenges we have faced on this program would have been financially overwhelming. However, our relentless focus on internal productivity improvements has been just as intense as our focus on innovation, providing us the financial headroom to absorb the impact and maintain a solid financial position because we know that innovation never goes exactly as planned.

Despite my firm belief in the power of operating and thinking globally, I acknowledge that this approach brings challenges. A number of commentators have used Toyota's recent troubles -- and some of the challenges Boeing has faced with regard to the 787 -- as examples of the problems that globalization brings.

But I would argue that the global economy we live in demands that we answer the challenges and find ways to overcome them rather than be intimidated by them. Notwithstanding these an other examples, the United States must overcome what Google's Eric Schmidt calls our growing "innovation deficit," or we risk falling behind the nations who invest in and promote innovation to a greater degree -- for example, China, India and increasingly the Middle East.

So it is absolutely critical that we address the tightly related issue of education and the readiness of our workforce. I'm sure it's no surprise to you that technology-based companies face an impending skills shortage. This is a global circumstance, by the way; no single nation can produce enough creativity, talent, or knowledge to meet today's marketplace challenges alone. But the problem is growing acute in the United States, where many seasoned and skilled workers are close to retiring, and insufficient numbers of capable workers are being prepared to replace them. I emphasize "capable," because in the United States today we face a skills shortage, not necessarily a labor shortage.

While countries like India and China are funneling more and more of their best and brightest into science, engineering and math programs (by some accounts doubling their production of three- and four-year graduates in these fields over a recent three-year period), the number of U.S. students graduating with engineering degrees, in particular, has stagnated.

In 2008, 10 of the world's 20 top Engineering/IT universities were outside the United States. In 2009, 13 of 20 were outside the U.S.

Meanwhile, more and more American kids are dropping out even before they finish high school -- or even grade school! These children are losing opportunities for life -- and the U.S. is losing a potential source of future innovation and competitiveness -- at a time when we need more workers with a broad combination of technical, social and analytic skills.

More than anything, we need greater support for the so-called STEM disciplines of science, technology, engineering and math. We need to get parents re-engaged, strengthen early-childhood education, incentivize teachers and excite a new generation of students.

What is the cost if we don't do this? A recent study by The Center for Labor Market Studies at Northeastern University in Boston highlights the consequences in a pretty dramatic way. The Center analyzed the labor conditions faced by income-grouped U.S. households during the fourth quarter of 2009.

In the face of one of the worst economic environments in memory, those in the highest income groups had nearly full employment levels, with just a 3.2 percent unemployment rate for households with over $150,000 in income and a 4 percent rate in the next-highest income group of $100,000-plus.

The two lowest-income groups -- under $12,500 and under $20,000 annually -- faced unemployment rates of 30.8 percent and 19.1 percent, respectively.

Generally speaking, those at the lowest income levels are the least educated -- meaning technology-based companies like Boeing cannot hire them to fill the good numbers of business, accounting, engineering, or other technology-related openings that we have, even in today's tenuous economy.

The unrelenting reality is that jobs in today's global economy are created and sustained only through increasing innovation and growing a highly educated workforce. And, over time, jobs will be most plentiful in those regions and countries where employment and related business conditions support rather than impede those two driving forces. Where conditions inhibit the capacity of companies to go head to head with a growing list of lean, efficient and innovative global competitors, job growth will be constrained.

Which brings me to the current situation here in the United States: I attended the jobs summit at the White House in December, and I believe it was a sincere attempt on the part of the Obama Administration to engage the business community in a discussion about how to best jump-start the U.S. economy and expand employment.

I think any government plan to create jobs needs to focus on three areas that support global innovation: education, tax policy and trade policy.

I've already talked about education and don't have enough time here today to go into tax policy -- except to say that we need to be mindful of retaining a level global playing field with our tax policy and to incent rather than penalize the upfront investment in global innovation.

But I would like to say a few words about that third component which is fundamental to successful job creation: free, fair and open trade.

Trade is a good example of a policy issue where business, labor and government leaders should join hands for mutual benefit. After all, in 2008 trade represented about 30 percent of U.S. GDP. And in the fourth quarter of 2009, as it has for most of the past five years, exports accounted for 40 percent of GDP growth -- facts that underpin the Administration's goal of doubling exports over the next five years.

We can compete successfully in the global market, but to do it we need government's help to both break down trade barriers and enforce current international agreements.

The President set a strong policy course in his State of the Union address, when he said the United States cannot sit on the sidelines while other nations are negotiating free-trade agreements to give their companies and workers a competitive advantage over ours. He was right and now it's time to execute on the plan.

An aggressive and competitive trade policy will sustain economic growth and create jobs if it includes, first, an enforcement program to make sure our trading partners live up to their existing agreements (which the Administration is now doing); second, commercial diplomacy initiatives to help our exporters and their workers win new customers (which the Administration has started to work on and, in fact, has exercised on behalf of Boeing in a number of cases); and third, a negotiation strategy to break down new barriers and provide fair-trade opportunities for our exporters and workers who need a level playing field (this is now higher on the Administration's radar screen, based on the State of the Union address, but the action hasn't come yet).

The United States has pending free-trade agreements with Korea, Panama and Colombia. These are languishing while our competitors are moving forward with their own FTAs with these countries and with new bilateral and regional negotiations to give their exporters and workers a competitive advantage. Both the EU and India now have an FTA with Korea. Canada has an FTA with Colombia, and its FTA negotiations with Panama are almost completed.

In short, the United States, which was once ahead in providing an aggressive and competitive advantage to its exporters and workers through trade agreements, is now at risk of falling behind. Enforcement programs and commercial diplomacy initiatives alone will not be enough to help American exporters and their workers overcome, for example, the advantage EU exporters and workers will have in Korea when they will pay a zero import tax and ours will have to pay on average a 12 percent import tax. Action on these FTAs is an absolute imperative for our country.

I want to see people in the United States succeed. I also want to see people in India, China and other countries succeed. That can only be good news for the U.S. and global prosperity in the long run. We all benefit from more trade and greater positive interaction between people of different nations.

It is, however, up to each of us as business leaders or as business educators to provide our people with the perspective necessary for companies to be both globally minded and globally successful, to foster both innovation within our organizations and education within our nations.

These are among the main leadership challenges in business today.

And, frankly, I am confident in our future because I know that great institutions like Kellogg are preparing tomorrow's business leaders with the skills to take on these issues.