PrintFebruary 2, 2007
Airbus and foolish competition
Mr Lifson,
Thank you for once again providing excellent coverage of Airbus and the A380 program. Your articles are always insightful and provide valuable perspective on the industry and the politics behind it.
I would like to add a point to your latest article where you mention the effect that delays in the A380 schedule will have on Airbus's suppliers. I have some experience here since my career is in the semiconductor capitol equipment industry which, like commercial aerospace, is dominated by a few large competitors manufacturing very complex and expensive products for a limited market.
I have seen many examples of a competitor (or my own company!) producing unsuccessful products; and while its always better to have a foolish competitor than a clever one, I have often found myself preferring they would do nothing at all. A desperate or failing company can be damaging to suppliers, competitors, and even customers in such a market. You briefly make this point in your penultimate paragraph, but it bears further emphasis.
There is a common perception that money wasted by one company somehow helps its competitors. Or that in the Airbus case money wasted in France will magically pop up as good fortune in Chicago or Seattle or Shanghai or wherever. My experience and simple economics tells me that this is often not the case.
Of course, the customer always benefits from a market which is well matched and where all competitors are making decisions that lead to products which the customer wants to buy. Also, the customer is disadvantaged when there is an effective monopoly with only one company providing a product with no viable replacement.
What I have found however, is that a destructive and wasteful competitor can often be worse for the customer than no competition at all. The damage of a failed product such as the A380 hurts everybody. (I call it a failed product since by the measure of revenue and ROI a delay of two years is nothing less than catastrophic failure.)
Suppliers often work closely with the manufacturer on such a product. Thus, development costs as well as lost revenue burdens the suppliers and increases their costs. Suppliers also have limited R&D resources so there are opportunity costs as well. Since in such an industry many suppliers are shared by competitors, those costs are inevitably passed on to Boeing as delays in technological improvements, reduced supplier base for components, and increased component costs.
The customers can benefit if they buy the A380 at fire-sale prices, but that benefit is limited to the actual value of the product to the customer. A marginal benefit considering that separate from the delays the A380 suffers from an undersized market in the first place. Customers which do not buy the A380 will no doubt pay higher prices for other Airbus offerings in the long term. Even with forgivable loans from the EU governments, the A380 will leave a legacy at Airbus of of inefficiency, insufficient resources, and higher overhead that will take many years to resolve.
Boeing, for its part, is probably making product decisions in response to the A380 that it wouldn't have made otherwise. Decisions which are defensive in order to maintain market share and revenue. Decisions which to some extent compromise efficiency and profit. This too would have been better for the customer if the A380 never existed and Boeing (or Airbus) had chosen to build a product that better fit the product lineup and technology roadmap of the industry. The 747 upgrades for example appear to be on an accelerated schedule and does not take full advantage of the technology being developed for the 787.
With any disruption there are some who will benefit from others misfortune (perhaps the Russian or Chinese workers,) but in a mature and essentially closed industry like commercial aerospace the cost of waste is often spread around to the entire industry. suppliers, customers, and even competitors.
John Chris Pagano
Business and Engineering Consultant
Tokyo, Japan
Business and Engineering Consultant
Tokyo, Japan
