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BPO Journal

Saturday, February 24, 2007

The Price of Economic Nationalism

Last April, I blogged about how Boeing (NYSE:BA), for the first time, was outsourcing more than half the structure of its 787, pieces of which were being manufactured in six different countries. Over the past year, this outsourcing initiative has helped Boeing streamline operations and acquire a slew of new orders for the "Dreamliner" jet, re-establishing the company as the number one commercial aircraft company.

Contrast this with the experience of its competitor, Airbus that has suffered delays on its A380, will have to spend heavily to design, from scratch, a competitor to the 787, and suffers from incurring costs in pricey euros while generating revenues in cheap dollars, in which jets are bought and sold. Airbus is also paying a heavy price for economic nationalism that renders it difficult for the firm to mitigate process inefficiencies and reduce costs through competitive measures as bringing in in new partners and outsourcing work outside Europe. For example, French president Jacques Chirac emphasized that restructuring efforts must maintain "absolute equilibrium" in employment and technology. Given the conflict between the roles of the government as owner and regulator, Airbus will always find it more difficult than Boeing to enhance efficiency and trim costs:

Airbus has some 57,000 workers and another 30,000 employees of contractors under its wing. Half the job losses will hit the latter group while Airbus itself will lose 5,000, mainly in Germany and France where most production happens. Strict European labour laws and political sensitivities dictate that the cuts will come through natural attrition. The bulk will be split roughly evenly between Germany and France (though Britain and Spain will share the pain). But before any ink was dry union leaders were already threatening to block reforms. (The Economist, Feb 2007)

And the difference is evidenced in the difference in the stock price of these companies. Perhaps, this discipline of international financial markets is what will ultimately prevail over economic nationalism. Meanwhile, it's more evidence that outsourcing creates financial value.

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