Thursday, January 24, 2013

(BN) Boeing 787’s Grounding Highlights Threat to Innovation

(Bloomberg ) By the standards of commercial airplanes, the Boeing (BA) 787 was supposed to be a modern marvel.

Its carbon-fiber body and new electrical system give it a reduced weight, which allows it to burn 20 percent less fuel than the midsize airplanes it's meant to replace.

The interior cabin features cathedral-like archways to reduce the sense of claustrophobia and enlarged windows that dim at the touch of a button. Because of the new, stronger composite materials, the cabin can also be maintained at higher pressure and humidity, so travelers feel fresher at landing.

The airplane even has a soaring name, the Dreamliner, the winning submission in a naming contest held on America Online 10 years ago.

Now the Dreamliner has turned into a nightmare for Chicago- based Boeing Co. and the airlines that paid a list price of more than $200 million per airplane. It suffered problems typical for new planes, ranging from brake malfunctions to computer glitches. On Jan. 16, the Federal Aviation Administration grounded the fleet after the battery on a 787 that had just landed in Boston caught fire and another produced a fault that forced an emergency landing by an All Nippon Airways (9202) flight bound for Tokyo, with the passengers evacuating via inflatable slides.

The grounding of the 787 was in many respects inevitable for a project marked by missed opportunities, narrowed visions, and, yes, dreams deferred. It's also a dispiriting example of the shrinking tolerance for risk among corporate executives and government regulators, which is stifling innovation and threatening America's competitive edge.

Past 'Advances'

"I often wonder, if society existed as it does today with the media, politicians, and lawyers and managers focused on not missing earnings by two cents per quarter, whether we would have made the advances of the past," says Bob Bogash, who retired after a 30-year career at Boeing and now writes a blog about aviation,

The skies have long been a showcase for America's genius for invention. More often than not, Boeing, founded in 1916 on the shores of Seattle's Lake Union by a lumberman named William Boeing, was right in the thick of it.

During World War II, the B-29 Superfortress had a pressurized cabin and remote-control guns. The 707 ushered the U.S. into the Jet Age in the 1950s, and the 747, introduced in 1970 as the world's first wide-bodied aircraft, revolutionized long-haul air travel. All of these efforts had teething problems even worse than the 787's.

747 Problems

"The 747's windshields used to crack so often that when I was based in Honolulu as a field service engineer I had two spares in my home garage, just in case," Bogash says.

And yet each time, Boeing made the necessary fixes and plunged ahead with the next big bet.

The Dreamliner was born out of the ashes of the Sonic Cruiser, a plane that was planned to fly near the speed of sound with twice as many passengers as the Concorde, until airlines squelched the idea, saying they couldn't afford to pay for that luxury in the post-9/11 era.

Boeing turned its sights to fuel efficiency, a worthwhile goal and not a particularly enthralling one which drove almost every design decision. Boeing decided to use carbon-fiber composites -- essentially plastic—for the body and wings -- and to reserve titanium and other heavy metals for the landing gear, engines, and some small parts.

New engines from Rolls-Royce Holdings Plc (RR/) and General Electric Co. (GE) were designed to give more thrust with less fuel. The lithium-ion batteries, the focus of so many of Boeing's current troubles, were selected because they could hold more energy and be quickly recharged.

Trimming Costs

The electrical system replaced the traditional pneumatic systems that used hot air off the engines, for a more streamlined approach that lowers maintenance costs.

During the Dreamliner's development, Boeing's board was focused on holding down costs. So it came up with a plan in which suppliers would become partners and would finance and produce entire sections of the 787, taking on greater risk as well as a larger share of revenue from each jet sold.

Half a dozen main suppliers were put in charge of building big sections of the plane that were to be flown, fully completed, to Boeing's factory in Everett, Washington, then snapped together in three days and delivered to customers. The plan was for Boeing to make 30 percent of each 787 and buy 70 percent.

Temporary Fasteners

How well did it work? Boeing executives scheduled the first aircraft for delivery in time for the 2008 Beijing Olympics. When the first 787 rolled out of the factory in July 2007, it was held together with temporary fasteners because the real ones had yet to be delivered. After the event, Boeing had to roll it back into the factory.

The company acknowledged three months later that it was behind schedule because of parts shortages and suppliers that weren't keeping up.

That setback was only the first of seven delays to the Dreamliner, which finally went into service in the fall of 2011. An attempt to reduce the financial risk associated with next- generation technology created a spiraling series of problems, all of which contributed to the issues that finally prompted the FAA to ground the fleet.

"Thanks to that overreliance on other people, you had these ridiculous delays, which meant there were too many planes built up front, and that was a recipe for defects," says Richard Aboulafia, a consultant with the Teal Group, an aerospace research firm.

SpaceX, Tesla

The Dreamliner's troubles reflect a wider trend. Innovation in mature economies such as America's seems stuck in a perpetual holding pattern.

Venture capitalist Peter Thiel has warned about this slowdown for years.

"There is so much incrementalism now," Thiel said in a recent interview with Bloomberg Businessweek. "Even back in the '90s there were companies like Amazon that were willing to do big things. That has gone out of fashion now."

Thiel points to Space Exploration Technologies Corp. and the electric car company Tesla Motors Inc. (TSLA), both run by Elon Musk, as the rare examples of recent attempts to leap forward boldly. Yet Musk often gets portrayed as a quixotic dreamer.

"I think this reflects the insanity of our country, that anything non-incremental is seen as insane," Thiel says.

Who's responsible for this perceived downturn in innovation? One obvious target is overweening government. Some Boeing defenders have charged that the FAA wildly overreacted by grounding the Dreamliner.


"They are trying to make us too risk-averse," says Gordon Bethune, a retired airline executive who worked for Boeing and later ran Continental Airlines. "The FAA is teaching Boeing something. Are we sending the right signals to our innovators in automobiles, airplanes, appliances, that the heavy hand of God is going to come down on you if you have so much as one question wrong in a hundred-question exam?"

Yet an even more important factor than excessive regulation is that the public markets simply don't reward big risks. While going public theoretically should give companies more access to capital to finance research and development, it turns out that an initial public offering actually tends to discourage bold bets.

More than 20 years of patent citations show that on average in the five years after a company stages an IPO there's a 40 percent drop in the quality of innovation, says Shai Bernstein, an assistant finance professor at the Stanford Graduate School of Business, who has studied the trend.

Michael Dell

This happens partly because a company's best inventors tend to cash in their chips and head to smaller entities with more upside, and partly because managers become more inclined to pursue the incremental projects that won't spook investors.

Too often at a newly public company "suddenly everyone is mindful about bottom-line profits rather than just building a great company,"Bernstein says.

Consider the swooning PC maker Dell Inc. (DELL), which pioneered the selling of personal computers over the phone and the Internet. For years its founder, Michael Dell, openly taunted rivals that spent heavily on research and development.

While Wall Street loved Dell's lightweight, capital- efficient business model, when consumers moved away from desktops to mobile devices, the company stumbled and proved ill- equipped to come up with any new technology to meet changing tastes. The former Wall Street darling is now said to be in talks to go private.

Space Shuttle

After the explosion of the Space Shuttle Challenger in 1986, U.S. President Ronald Reagan addressed the nation from the Oval Office.

"I know it is hard to understand, but sometimes painful things like this happen," he said. "It's all part of the process of exploration and discovery. It's all part of taking a chance and expanding man's horizons. The future doesn't belong to the fainthearted; it belongs to the brave."

Less than three decades later, NASA has pulled back from manned space exploration -- yet another sign of how the benefits of risky endeavors have been trumped by cost concerns and the fear of failure.

The Boeing 787 will inevitably fly again; it may already be back in the skies by the time you read this. Still a future full of innovations braver than dimmable airplane windows remains just a dream. 

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