Lessons from the fall of Boeing and GE

A primary reason for Boeing’s surprising descent is its relentless pursuit of “numbers.”

Lee Kwang-hyung The author is president of KAIST and head of the fourth industrial revolution committee of the JoongAng Ilbo’s Reset Korea Campaign.

“If it’s not Boeing, I’m not going.” The aircraft behemoth still sells T-shirts, caps and cups inscribed with the famous pun. But these days, it’s being replaced by “If it’s Boeing, should I be going?” Ahead of my business trip to Canada last week, I was quite nervous, as implied by the dramatic reversal of the pun about the world’s largest aircraft company.

Following the series of Boeing’s aviation incidents in the past few years, a gaping hole opened on a 737 Max commercial plane’s fuselage while ascending — and even an engine cover fell off during a takeoff — earlier this year. Such off-track episodes continue. Boeing is now outpaced by Europe’s Airbus in order backlogs, deliveries and market cap. What went wrong with the uncontested aviation technology leader over a century anyway?

A primary reason for Boeing’s surprising descent is its relentless pursuit of “numbers.” The company excluded engineers — the core of the aerospace company — from its key decision-making process after financial experts took the management leadership. Boeing brought misfortune on itself, as it didn’t place top priority on technology and aircraft safety.

To comprehend Boeing’s remarkable swoop, we must bring back Jack Welch, the legendary CEO of General Electric (GE), who orchestrated the impressive innovation of the company from 1981 to 2001. He pumped up GE’s market cap through bold sales of underperforming businesses and drastic M&As. His management philosophy aimed to maximize shareholders’ interests by elevating GE’s market value through intrepid restructuring and financial business expansion was successful. When Welch was to retire, financial services accounted for 40 percent of GE’s total sales and 60 percent of all its profits.

But his success factors turned into stumbling blocks to GE’s growth from the 2000s. GE Capital, the financial services division, started to shake the entire conglomerate after the 2008 global financial crisis. After losing the unchallenged technological leverage it once had, GE took a pitiful downturn, as evidenced by its share price plunge to just one-fifths of the level in 2000. In 2018, one of the most iconic U.S. companies was removed from the Dow Jones Industrial Average. GE ended its proud 132-year history after being split into three companies.

McDonnell Douglas, Boeing’s major competitor in the aircraft industry since World War II, was also in bad shape. To rescue the company from its deepening financial hardship, Harry Stonecipher, who worked at GE for 27 years, was recruited as CEO of McDonnell Douglas. After borrowing the Welch-style management, he embarked on radical restructuring and started so-called “data-based management.” After McDonnell Douglas’ stock price once quadrupled, his recruitment was deemed successful. In 1997, he merged his company with Boeing at a good price. At that time, he and other executives from GE moved to Boeing. Many of them — who prioritized finance and outsourcing over technology and production, just as they did at GE — were promoted fast at Boeing, including Stonecipher who served as president.

For 20 years since then, Boeing was commanded by three CEOs from GE. They boldly outsourced underperforming businesses and expanded well-performing categories. But departments related to R&D, production and quality control couldn’t be properly evaluated, because their performances were difficult to quantify. If employees pointed out problems with production process, they were often disciplined or even fired, as revealed during the recent hearings on Boeing’s safety culture in the Senate.

Boeing’s skilled engineers whose performance couldn’t be quantified had no place to go. That eventually caused serious defects in aircraft systems, as illustrated above. Boeing’s current CEO Dave Calhoun said he will resign at the end of the year. All the alarming developments at the aircraft company point to a doomed path originating from Welch’s unique managerial style cherishing shareholders’ interests over product quality.

The once-mighty Daewoo Group was dismantled in 1999 after its defaults on loan repayments amid the Asian financial crisis. Many experts attribute it to the conglomerate’s expansive management even in the face of the liquidity crisis. Others link the tragic fall of the group to the government’s tightened regulations on loans to Daewoo. But there is a more fundamental reason behind the conglomerate’s demise.

In 1994, a joint academic seminar hosted by the Korean Institute of Industrial Engineers and the Korean Operations Research and Management Science Society was held in Jeonju, South Jeolla. The keynote speech by Daewoo Group Chair Kim Woo-choong had very obfuscating lines. “Don’t envy sophisticated technology too much. If you need it, you just can buy it. We can sell products we made with our current technology to global markets. The world is vast and there’s so much to do,” he said. I later discovered that Daewoo’s electronic products were mostly an upgrade of their earlier versions rather than brand new ones. That was a big difference from Samsung and Hyundai which were bent on acquiring original technologies at the time.

A company was a leader in the cellphone market in Korea. Until the mid-2000s, the company’s phones were called “one of the three top cellphones of the world” together with Finland’s Nokia and Samsung Electronics. At that time, the Chocolate Phone, Prada Phone and Cyon were the big hits of the company.

The company recruited its CEO in 2007, when Apple Inc. released its first smartphone. The CEO enthusiastically applied “data-based management” to the company. Based on advice from a consulting firm, he pushed for “management rationalization” to change the electronics company into a leading marketing company — a dangerous transition from tech-centered management to marketing-oriented management. In the process, the share of R&D in its investment shrank remarkably while marketing expenses rose sharply.

After Apple dominated the mobile phone market with its first release of iPhone, Samsung entered the race after judging smartphone could turn the tide. But the aforementioned Korean company failed to read the trend and lost timing for technology development. The company may have thought it could cover the loss with its boosted marketing ability. It hurriedly released a smartphone, but it was long after Apple and Samsung dominated the market. In 2021, the company declared it would withdraw from the prospering smartphone market in 2021.

Samsung also has to confront tough challenges from the AI-driven — and rapidly-changing — chip habitat. In the AI chip alliance led by Nvidia, Samsung’s positioning is ambiguous. In the fierce competition for high bandwidth memory (HBM) chips, Samsung is far outpaced by SK hynix when HBM technology holds the key to the AI revolution. But Samsung disbanded its HBM research division in 2019 after dismissing the need to invest in unpredictable areas. At that time, Samsung downsized its Advanced Institute of Technology and placed the institute under the business division to concentrate on profit-making businesses, not on basic research. If this happens, researchers are increasingly discouraged from launching any ambitious projects. That sounds loud alarms as Samsung was no different from others. That reminds us of Samsung founder Lee Byung-chull’s unflinching faith that only those companies with strong fundamentals can deal with the change of the times.

In that sense, universities are no different. Their essence lies in education and research. But education is often outweighed by research because the results of research can be measured more easily than those of education. Most world university rankings reflect the quality of research, not education. If professors bring more research programs from outside, it helps fatten their school’s coffers. As a result, university owners or presidents tend to stress research over education. I also did the same at a meeting in my campus two weeks ago.

But clearly, there is no need to follow in the footsteps of GE and Boeing in academia under the banner of promoting management efficiency.

Translation by the Korea JoongAng Daily staff.