This article is from WeChat official account:China Europe Business Review (ID: ceibs-cbr), author: Caoxin Bei, head from FIG: visual China

“The unfortunate time has come. We are forced to make involuntary layoffs. I hope there are other ways.” In a letter to all employees, Boeing CEO Dave Calhoun wrote.

But for today’s Boeing management, the “other methods” are too far away. Although “involuntary layoffs” are compelling, they are imperative. At the end of May this year, Boeing announced that due to the rapid reduction in air travel during the new crown virus pandemic, the company will start a layoff plan involving at least 6,770 American employees.

Boeing’s recent days seem to be particularly difficult. Its stock price fell from US$330/share at the beginning of the year to US$183/share today, and it has also been questioned whether Boeing is about to go bankrupt.

In fact, this is not Boeing’s first layoffs this year. Prior to the involuntary layoffs, 5,520 Boeing employees had accepted the voluntary resignation buyout program. Boeing had approximately 160,000 employees at the beginning of 2020, and it is estimated that 16,000 employees will be laid off, accounting for 10%.

Behind this Boeing crisis is the lack of core competitiveness caused by the game between good engineering companies and good financial companies. The seemingly lively brand building and market value management have finally become a passing phenomenon.

1. The rise of Boeing

With its core competitiveness, Boeing, which is “crazy for technology”, made a stunning appearance in the field of civil aviation, helping the company become one of the aviation giants.

Table 1 Boeing Memorabilia Data compilation: “China Europe Business Review”

The concept of core competitiveness was first proposed by Prahalad of the University of Michigan and Hammer of the London Business School. They believe that core competitiveness refers to the resources that can bring companies a comparative competitive advantage, as well as the allocation and integration of resources , And based on this, create unique business concepts, technologies, products and services that surpass other competitors.

The concept of business school is always profound and awkward, but if you look back at Boeing’s 100-year history of growth, it will be easier to understand how core competitiveness can bring advantages to an aircraft manufacturing company.

The earliest Boeing 7X7 series can be traced back to 1954. With the end of World War II, military aircraft manufacturer Boeing’s business became more and more difficult. The company turned its attention to civil aviation and built the prototype of the first commercial airliner powered by jet engines in the United States, the Boeing 707.

But Boeing, which switched from military to civil aviation, performed beyond everyone’s imagination.

On a short runway, Boeing’s test pilot Alvin Johnston not only demonstrated a short run and a large elevation angle off the ground, but also stunned all the audience at an altitude of 2,300 meters. Aerobatics-“Barrel Roll”.

Even today, when civil aviation aircraft have long been popular, we still can’t imagine that a civil aircraft rolls 360 degrees at a low altitude. After all, a civil aircraft is designed to carry passengers and has a large body. It should not be too large for safety reasons. Strenuous movements. Not to mention that 7000 meters or more is the usual altitude of a flight.

But 65 years ago, it was this huge civil aviation plane weighing 112 tons that staged a dazzling performance at low altitude that can only be seen in the military parade. This “near suicide act”, Not surprisingly, the audience was shocked.

After the flight test show, various airlines have continuously placed ordersFly into Boeing headquarters, and Boeing 707 became the world’s first mass-produced and widely used jet airliner.

If the 707 is Boeing redefining the jet civil aviation aircraft by virtue of its excellent technology, allowing the company to enter the civil aviation field from a military aircraft manufacturer, then the 747 has relied on an unprecedented and innovative super large cabin to save the suffering Boeing, suffering from the external economic depression, has established its position as an unshakable benchmark in the aviation industry.

In the 1960s, when the global economy declined and airline orders continued to shrink, Boeing’s finances had reached the edge of a cliff. In order to meet the huge cash flow, Boeing made an unprecedented amount of borrowing from the bank.

Moreover, in order to force the engine supplier Pratt & Whitney to be more dedicated to the engineers’ revisions, Boeing directly approached Pratt & Whitney’s boss and sent him to the 747 that was still being tested, and deliberately used two in the sky. The engine trembled, and Pratt & Whitney’s boss Schmikras was so scared that he repeatedly said: I know, I know.

This 747, which is twice the size of any aircraft in the same period, can accommodate 600 passengers at a time, and has diluted the cost of each flight. It has become the darling of major airlines vying to order.

Boeing’s “Technology Crazy” stems from its attitude towards technology as its core competitiveness. According to Prahalad and Hammer, the core competitiveness should first help the company enter different markets, and contribute greatly to the customer value of the company’s final products and services, and it is difficult to be copied and imitated by competitors .

For aircraft manufacturing companies like Boeing, technology is precisely the core competitiveness that best meets the above characteristics. It has enough malleability to allow the company to enter the civil aviation market unimpeded. It also has a large enough contribution to meet customer requirements, and allows the company to use the amazing 7X7 series time and time again to obtain a high enough moat.

II. Boeing Trek

In order to better cope with the ever-changing external environment, Boeing, which was originally immersed in technology, started the transformation from a crazy tech geek to a Wall Street enthusiast, but in the process, it gradually forgot its original core competitiveness.

Behind Boeing, which is gradually being overtaken, is the lack of core competitiveness. But core competenceIt cannot be made overnight, nor can it be lost in a short period of time.

If we go back to the source and explore the gradual decline of this core competitiveness, we can go back to 1997. At that time, the “technical and crazy” enthusiasm of Boeing geeks was defeated by the abrupt and unpretentious reality.

From 1994 to 1997, Boeing, which had the most cutting-edge aircraft manufacturing technology, had an average profit margin hovering around 2%. Greedy Wall Street investors were obviously not satisfied.

They hope that Boeing has stronger profitability and anti-risk ability. In the face of the external economic cycle, in addition to relying on a group of talented engineers with extraordinary technology to build the Boeing 747 and save the company There are still more coping options in the water and fire.

Boeing’s “more response plan” is simple-strengthen market value management. Mike Sears, who became Boeing’s chief financial officer in 2000, is a loyal supporter of this plan. He said: “Now, the world wants to start talking about value, but the aviation industry is still talking about products. .”

So what Harry, the then CEO of Boeing did, was to make Boeing “operate like a business, not a great engineering company.”

Market value management is a strategic management behavior for listed companies based on the company’s market value signals to comprehensively use a variety of scientific and compliant value management methods and methods to maximize the company’s value creation and optimize value realization.

For listed companies, optimizing financial reports and improving market value management is a common model. A good market value can ensure that the company can raise enough money in the secondary market and have sufficient cash flow in times of crisis. Protect against risks.

But the market value management done by Boeing is more like “pseudo market value management” that has been rushed. If we look carefully at Boeing’s actions since 2000, we will find that it was to blindly cater to investors. Excessive pursuit of short-term beautiful financial figures has fallen into the trap of lack of core competitiveness.

1. Repurchase

In order to make the financial figures more beautiful, the first thing Boeing did was share buybacks.

Boeing repurchase program started with1998. Share repurchase refers to the company’s repurchase of the company’s shares issued or circulated according to certain procedures. It is a defense method to change the capital structure by buying back the shares issued by the company on a large scale.

In simple words, as the business of the year came to an end, when a company found that it had sufficient cash surplus, it could consider share repurchase, which could better maintain the company’s stock price.

For example, when the stock price is too low, the company’s repurchase can greatly boost investor confidence, thereby encouraging more people to hold or buy the company’s stock.

But the question is, is Boeing’s cash surplus enough?

Not actually. In 1998, Boeing’s net profit margin was still hovering at 2%. What’s more, the stock repurchase announced by Boeing at that time was worth US$4.5 billion. In 1998 and 1999, Boeing’s net profit was respectively 1.1 billion and 2.3 billion U.S. dollars, less than 4.5 billion in total.

For companies, after earning profits every year, there are usually three ways of operating: returning to shareholders, reinvesting retained profits, and a combination of the above two.

The methods of repaying shareholders include cash dividends and repurchases. Since the capital gains tax for stock repurchase is lower than the dividend tax for cash dividends, from a financial point of view, stock repurchase is more cost-effective High model, this is also the reason why Boeing has launched a repurchase plan.

But what Boeing did wrong was that it was blindly aggressive towards repurchase.

Boeing did not use its net profit for product R&D investment in the following year or to recruit more outstanding talents, but used it for secondary market stock repurchase. Purchase their own stocks through the company’s hands, boost market confidence and drive stock prices to rise.

Boeing suffered a loss in net profit at the end of 2019. When the net profit in 2000 decreased by 6.28% year-on-year, the market value increased by 123% compared with 2000 (Figure 1 ).

Figure 1 Boeing’s net profit and total market capitalization in 2000 and 2019. Source: Choice data, “CEIBS Business Review”

Tianfeng Securities Research Institute stated: If the dividend rate + repurchase rate is simply used as the rate of increase in the stock price, from 1990 to 2019, the two together contributed 3.2 times the increase in the stock price.(Figure 2).

Figure 2 Boeing’s repurchase rate and dividend rate

Moreover, in order to maintain the beauty of this market value figure, Boeing is very generous.

If you look at Boeing’s financial report, we can find that since 2014, Boeing has used nearly 90% of its operating cash flow to please investors, cash dividends and stock repurchases. In matter.

In 2015, its ratio was as high as 98.93%. In 2019, operating cash flow was negative. When the company did not have enough funds to withdraw, Boeing still missed market value management and spent 73 on repurchases and dividends. 100 million US dollars (Figure 3).