Harry C. Stonecipher
The Boeing Company
"Outsourcing: The Real Issue"
Orange County Business Council
Annual Meeting & Dinner
Crystal Cove Hyatt Regency
June 02, 2004
It is a pleasure to be here tonight and to be talking about a subject that I think is on the minds of many of the people that work for you, that work for The Boeing Company, and in fact is on the lips of many Americans today. It's called outsourcing.
Let's go back three centuries ago to an author by the name of Daniel Defoe who wrote a book that became an instant sensation. Even at this early date - which takes us back before the Industrial Revolution, let alone the Information Revolution - the book's premise struck people as wildly out of the ordinary - What would life be like in a world in which there was zero outsourcing?
We still read this book today. All of you know it. It's called "Robinson Crusoe."
Cast away on a deserted island with little more than the rags on his back, Robinson Crusoe is forced to become a jack-of-all-trades because - literally - there is no one to trade with. Making his own tools, he hunts, fishes, plants crops, builds a house, and does everything that is needed to survive and, indeed, to prosper. Soon he is wanting for nothing except human companionship.
We can admire Robinson Crusoe as an exceptionally resourceful and inventive individual. But would you want to model your life . . . or business . . . on Robinson Crusoe? Would you want to be totally self-sufficient?
You would be very unusual if you did. Most of us pay others to paint the house, fix the plumbing or remodel a kitchen. Specialization is part of our daily lives. As individuals, we play two roles - acting sometimes as producers and sometimes as consumers or contractors. For businesses, it's the same, only the two roles merge into one. If I buy a TV set or a toaster that doesn't work, I may not like it, but it won't cost me my job. But if you are in a business and your suppliers aren't doing a bang-up job of giving you the right product at the right time and at the right price, you are dead in the water in terms of your ability to satisfy your customer.
To compete effectively, you need optimal value coming in the door from outside vendors, and you need optimal value going out the door after your own people have completed their work. That's true whether the company has five employees or whether - like Boeing - there are more than 155,000 employees (including 35,000 workers here in California).
Boeing is the world's largest aerospace company, with more than $50 billion in annual revenues. But we aren't self-sufficient. Not by a long shot. Just about 70% of the value added in most of the products that bear the Boeing name was put there by suppliers, not by our own employees, and that's up from around 60% a decade ago. We have an incredible network of suppliers feeding us and supporting us from all 50 states and many countries around the world. We couldn't begin to do what we do without them. And that very importantly includes some of you in this room. In 2003, Boeing accounted for $6.4 billion in supplier dollars to California businesses.
In contracting out for many of the things we used to do in house, Boeing - like a lot of other big companies - is moving up the value chain and focusing more intently than ever on a few core competencies. For us that chiefly means doing high-end design, engineering and systems integration. There are clear advantages in not trying to take a product (let alone all the elements in a complex system) from start to finish. Instead of a closed and vertically integrated structure, you want a supply chain that includes innovative, smaller companies that have proved in competition that they are the best in class. You want suppliers who are highly focused on core competencies of their own, continually striving to create additional value in everything they do.
Let me give you two examples of Boeing's upward migration. Over the past few years, Boeing has emerged as the leading industry partner to our government and the defense department in developing a "network-centric" view of the world and applying that to all kinds of conventional and non-conventional threats. Today's Boeing excels as a Lead Systems Integrator - putting together complex systems. With the Army's Future Combat Systems, for example, Boeing and SAIC are responsible for integrating the design and build of essentially all of the Army's future platforms, sensors and equipment - everything that moves on the ground, in the air or in space. The goal is to make everything work together as one - so that the Army is able to get the resources that are needed to the place they're needed . . . in time and most importantly every time. Our work on Future Combat Systems and other transformational, network-oriented programs is light years removed from traditional metal bending and bears little resemblance to any historic defense business.
My second example comes from our commercial airplane business - the newly launched Boeing 7E7 Dreamliner. The 7E7 is a true game-changer. It will be the first large airliner built with a composite fuselage and a composite wing, and it will provide economical and comfortable nonstop service connecting scores of new city pairs around the world. We needed a big order from a leading international carrier to launch the program, and we got it when ANA, or All Nippon Airways, placed an order for 50 7E7s. Does it help that Japanese companies will play a pivotal role in assembling the composite fuselage and the wing? Absolutely, it does. We have had close ties with Japanese industry for several decades and Japanese companies are real leaders in the area of composites. So sharing the work has brought us a dual benefit of access to technology and access to market and it has been a key factor in launching a program that we expect to underpin our leadership in commercial aviation for a generation to come. I might add that the 7E7 partner team includes 15 companies from at least 10 U.S. states and seven countries.
I hope that nothing I've said to this point sounds too shocking. In fact, it's fairly mundane. So what is the problem with outsourcing? You most likely like it when outsourcing means something is coming to Southern California, and particularly Orange County. Why are people suddenly so worked up over this issue?
The problem is jobs. Rightly or wrongly, many people are worried about the elimination of jobs in the U.S. and the electronically enabled outsourcing of those same jobs to offices or plants in poorer countries. The news media has been filled with stories on this topic. One hears of everything from low-level call centers in India to sophisticated laboratories or diagnostic centers there and other countries populated by engineers, doctors and other professionals who earn a small fraction of what their counterparts in the U.S. would get. Suddenly, it seems as though every job has wings.
Let me say from the outset that I am a strong proponent of globalization. Without question, in every region of the world the countries that are faring the best are those that are the most attuned and plugged into the world economy - not the local economy, the world economy. The U.S. has significantly outperformed Europe and Japan over the last decade precisely because our business sector has been less sheltered and more open and oriented to global competition. That has made us more flexible and more adaptable. I 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.
In his new book - and I recommend it highly, it's called "In An Uncertain World" - Robert Rubin, who was Treasury Secretary in Bill Clinton's Administration, makes the point: "Virtually every household in America has a better and cheaper TV, or toaster, or computer, because of imports." Most people don't stop to think of the amazing benefit of being able to buy the best products at the best price from around world.
The Boeing Company is really wired together, and no one knows that better than Rick Stephens, who runs our Shared Services Group. I think we probably have 180,000 computer seats, and we only have about 155,000 people. We're wired! We buy all of those computers from Dell. We may be Michael Dell's biggest customer. And I understand from one company here tonight that Michael Dell is their biggest customer. Well, there's a connection. The other day my laptop, which had been on for a long time and sitting on the glass top, felt a little hot. So I turned it over and noticed all of the patents on the back. Guess where the computer's made? Taiwan. Michael Dell, who's an icon in industry today, turns inventories 100 times. Boeing turned about 3.2. Some really good companies turn about 8 or 10. But, Michael Dell turns it 100 times. Great success story, great American company, right? He's outsourced fairly well. He's providing a great service and great products at a great price that keeps the productivity of our nation and our industries moving. And there are lots of companies like that.
But it is also true, as Rubin goes on to say, that protecting industries is often politically appealing because "the negative consequences of free trade are (highly) visible while the benefits - though much greater - are diffuse." It's true.
Certainly, anytime you talk about an issue that touches upon jobs, you are talking about the deepest concerns of people - their ability to put bread on the table, to put a roof over their heads, to send the kids to college and to afford medical insurance. I don't think it hurts to admit that we've had it so good for so long in the United States that it is a little frightening to think that we might actually have to compete mano a mano for certain desirable jobs with a lot of smart and highly motivated people in parts of the world that are less affluent than our own. So this really is an emotional issue and an emotionally charged subject.
I can relate to you an experience that I had shortly after I came to McDonnell Douglas in St. Louis as the CEO. I started looking at cost and efficiencies. We were moving some work because we were making wiring harnesses in St Charles, Missouri and we were also making wiring harnesses in Mesa, Arizona. The next thing I knew, I had a lot of agitated Congressmen, a senator, and some labor union people in the board room, and they were saying: "you're shipping jobs to China!" I said: "I'm moving jobs from St. Charles, Missouri, to Mesa, Arizona." For reasons of efficiency, we were moving the work to Mesa, Arizona. But, really, it had the same impact to workers in St. Charles, Missouri, whether we were sending their jobs to China or whether we were sending them to Mesa.
Within the United States, the migration of jobs has been going on for a long time, and we've learned to accept it, for the most part - as a necessary if sometimes painful adjustment to changing economic realities. I can remember when there was great concern over the movement of a lot of factory work from New England to the South; and it was moving there to take advantage of low-cost labor and the availability of cheap electricity from the TVA. People and businesses in New England have somehow adjusted to that. But, it was pretty painful at the time. Now the same kind of thing is happening today with the migration of many entrepreneurs and smaller businesses from the two coasts to smaller cities and towns in the interior where it is possible to live twice as well - in terms of affording a house or other amenities - on half the income.
However, there are a couple of things that are different today - the first one being the international dimension of outsourcing. Again, there is a telling remark in Bob Rubin's book, and any corporate CEO could make a similar comment. I quote: "Decades ago, when Treasury Secretaries traveled abroad, they visited London, Paris, Bonn, and Tokyo. In my tenure as Treasury Secretary, among the countries I traveled to were Argentina, Brazil, China, India, Indonesia, the Ivory Coast, Mozambique, the Philippines, Ukraine, and Vietnam."
Without a doubt, U.S. business and the U.S. economy are far more closely interlinked with many other parts of the world than they used to be. However, if you look at the big picture in both manufacturing and services, you find that the real impact on net employment due to cross-border sourcing is not that great. Companies outside the U.S. are putting as much or more work here as U.S. companies are putting in other countries - which might explain why we've just been in an economic downturn, and the unemployment rates stayed below six percent. For many years, I didn't believe you could have unemployment that was lower than six percent in times of peace. And that, in fact, used to be pretty conventional thinking. Now, it's about five to five-and-one-half percent. So, we've been through quite an economic downturn and the jobs have stayed.
Toyota, is now the fourth-largest automaker in the U.S. and growing fast. It produced 1.2 million cars and trucks in the U.S. last year. Through its plants, suppliers and dealerships, it supports almost 200,000 jobs in the U.S.
To be perfectly candid, Toyota has done a lot more in the way of international work sharing than we at Boeing have. While 70% of the commercial airplanes we build are destined for airlines outside the U.S., more than 80% of the content of those airplanes is made here in the U.S.
We hear a lot about the huge bilateral trade deficit that the U.S. runs with China. It used to be that China in the 1990s took 15 percent of the total production of Douglas, Airbus and Boeing combined every year. The trade deficit with the U.S. and China amounted to $124 billion last year. But did you know that China is now running a trade deficit with the outside world as a whole? It amounted to $11 billion in the first quarter of this year. China has a trade deficit.
With all the talk of exporting manufacturing jobs to China, you might expect to see a huge bulge in manufacturing employment in that country and other parts of the developing world. Well, the data says differently. According to a recent article in Foreign Affairs, between 1995 and 2002, China had a 15% decrease in manufacturing employment and Brazil a 20% decrease. The figure for manufacturing jobs lost in the U.S. was identical to that for the world as whole - at 11%. What is remarkable, however, is the fact that global manufacturing output increased 30% over this same period of time.
That brings me to the #1 cause of job losses - especially in manufacturing. It isn't outsourcing. It's growth in productivity. It's all kinds of technological advances. Think of the amazing shrinkage in machine tools. There are fewer and fewer of them on the shop floor, and they keep getting smaller and smaller, yet more and more powerful. I joined the board of a machine tool company in 1991. In the first review of the strategy, everyone talked glowingly of the redesign of literally every machine tool that we manufactured. The brochures were wonderful. They said something like: this new machine tool (replacing your old five-axis milling machine) would take up one-third the floor space and do ten times the work. At the same time, this was going on, we began to see material substitution. You could now cast and forge metal parts to near net shapes. Something that once took 35 machines hours to convert to a useable part now took less than an hour. So, the machine tool industry (as we knew it) disappeared not because of outsourcing, but because of the productivity of the very machines that were designed to replace them.
The plain, simple truth is, as technology continues to advance, fewer and fewer workers will be needed to build a given number of cars, trucks, or anything else you want to name.
As productivity has increased in manufacturing, it has created the wealth that has driven growth in services. At the same time, the dividing line between manufacturing and services has grown increasingly blurry, due to the contracting out of overhead functions, the movement of IBM, GE and others into service businesses, and the sheer growth of services. For all those reasons, the Fortune 500 now includes service providers as well as industrial companies. And Wal-Mart, a retailer, tops the list.
In fact, Wal-Mart - which is simultaneously the nation's largest private employer and its largest importer - is a great example of the relentless drive for improved efficiency and higher productivity that is transforming services as well as industry. Everyone I know of in business is trying to get productivity improvements of somewhere between four and eight percent year after year after year.
If you're not doing that, you've probably got too many employees and your business is very likely in trouble. Of course, anytime a company goes out of business, everyone loses a job. That's the ultimate outsourcing.
So how are we to do shield against job losses without undermining competitiveness?
First, we have to accept that the whole purpose of being in business is to create value for customers and shareholders. As I have said over the years to employees at several different companies, the only one who can guarantee your job is a healthy and satisfied customer. However, if we are good at what we do, and if we exercise the ingenuity and drive that are part of our national character, U.S. businesses will create great real value (both internally and within supply chains), and in doing so it will continue to support growth in both jobs and incomes.
Second, we have to embrace the continuing need for change and improvement. If I may borrow a quote from an old colleague: The only way to protect your technology is to move very, very fast.
And third, we have to understand that the go-it-alone approach doesn't work in today's world. Companies will increasingly focus on their core competencies. As they do, they will source (a) where the markets are, and (b) where the best people to do the job are. Both technology and capital are very transportable today. To a certain extent, they will also source where they can find low-cost labor. But one should not exaggerate the importance of this last factor (low-cost labor). If wage levels were the most important determinant, most of global manufacturing would be situated in the poorest countries in the world. And that clearly is not the case.
So here's the real issue - the real challenge - for U.S. companies: People need to learn, unlearn and relearn as technology and careers advance in the global marketplace. As a business leader, it is part of your job to make sure that people in your company are always looking at and preparing for future opportunities not just for the company but for your people. It's an investment that you should be expected to make.
At Boeing we take that responsibility very seriously. We have something we call the Learning Together program. If you are working for the Boeing Company today . . . in any capacity . . . you can be anything you want to be because we will pay for all the education you want to get. You can retrain yourself to be a surgeon, if you want to, and we will pick up the cost of your education. It's a recruiting tool of ours. We may only have you for a little while, but while you're there, you'll be energized as a learning employee.
I began with Robinson Crusoe. I will end with him, too.
I don't suggest that it's a good idea to set out with the idea of becoming a solitary worker bee. We live in an increasingly interdependent world. There will be a lot of outsourcing . . . and a lot of in-sourcing too. We all need to work with others. But we would do well to emulate the example that Robinson Crusoe set in his determination to master new skills and to keep on learning something new every day. In that sense, Robinson Crusoe does present one heck of a good role model.
Thank you very much for your attention.