Dreamliner’s Nightmare

Did Boeing rush to market?

Can you imagine the pressure? You’re already two and a half years behind schedule, with your product hotly anticipated by your customers, your company’s shareholders, your global supply chain, and the world at large. Every problem you encounter with design, every hiccup in your production process, is an instant headline. Designing on the cutting edge is difficult enough. But doing so with the whole world watching? It must have been torture.

That’s what Boeing’s commercial aircraft division was faced with as they rolled out their first new jetliner in decades — the 787 Dreamliner. The Dreamliner was created to be the definitive twenty-first-century passenger jet — the first with a weight-saving all-composite design, the first to replace hydraulics with an electronic fly-by-wire system, the first to power its electrical systems with lithium-ion batteries.

And if you’ve been following the news lately, you know that last item might be a fatal (or at least fateful) Achilles’ heel.

The Dreamliner is now grounded worldwide as Boeing engineers try to figure out why those batteries are overheating. In at least one case, a Dreamliner battery sparked a fire on the tarmac at Boston’s Logan Airport, which took firefighters 40 minutes to extinguish. In a couple of other cases, pilots initiated emergency landings after smelling smoke or receiving automated warnings about electrical problems.

There have been no crashes as a result. No one has been hurt or killed on a Dreamliner. This is the good news.

The bad news is that Boeing’s reputation, and maybe even their ultimate destiny, is caught up with those forlorn grounded jets.

Was there a rush to market? We don’t want to rush to judge. But recognizing that intense pressure, in 2007, 2008, and 2009, as Boeing announced delay after delay, we have to wonder what shortcuts were taken. We’d like to think none. We hope that’s the case.

Boeing has been around since 1916. Their iconic Flying-Fortress and Stratofortress bombers helped save the world from fascism. Their commercial jetliners, from the early 707 to the ubiquitous wide-body 747, have defined the modern age of travel. Air Force One has always been a Boeing aircraft.

It’d be all the more tragic, then, if the Dreamliner failed and brought Boeing to ruin. And it would be tragedy multiplied if we learned it could all be traced to a rush to market.

The pressure to produce can be overwhelming. That pressure can lead to hurried work and imprecision. Depending on the nature of the product, the result can range from embarrassment and financial loss — to the truly horrific.

We honor Boeing and wish them the best. We hope for a perfected Dreamliner and prosperous days ahead for this great American company. Most of all, we hope they’re not fated to become just a cautionary warning, reminding us all to take our time and to get it right.

The C4:

1. The Boeing 787 Dreamliner rolled off the drawing boards in 2007 and flew for the first time in 2009. It entered commercial service in October 2011.
    
2. In the last half of 2012, Boeing started receiving reports of electrical problems with deployed Dreamliners. At least one caught fire. No injuries or deaths resulted, but in January, 2013, Dreamliners were grounded around the world. They remain so at the time of this writing.
    
3. As Boeing engineers focus on problems with the aircraft’s lithium-ion batteries, the question is being asked: Did Boeing rush this product to market?
    
4. We don’t know. We hope not. We hope Boeing solves this issue and moves beyond it. Regardless, we’re reminded that rushing is rarely good business strategy. We know that pressure can be hard to resist, but that methodical problem-solving is how masterpieces are created. If Boeing’s designers didn’t realize that when they built the Dreamliner, they’re surely realizing it now.

The Glitter That Makes Markets Jitter

Where’s the silver lining?

“Gold is a hedge against inflation.” 

That’s such a long-accepted trope you probably don’t remember where you first heard it. Historically, it’s usually been true. The price of gold rises and falls like anything else, but it normally stays fairly closely pegged to the inflation rate. One way to think of it is this: an ounce of gold has always been enough to buy a decent suit of clothes, whether in 1849 when gold was going for $20, or in 2000 when it was up to $300.

But a not-so-funny thing has happened since the 2007 financial crisis — the price of gold itself has become inflated, maybe even hyper-inflated, shooting up to an all-time high last year of nearly $2,000 an ounce.

That’s a pretty nice suit.

So, what was going on there? Was it a bubble fueled by panicky investors here in the U.S.? Talk radio and investing forums were thick with gold hype during the worst of those years. Gold brokers were springing up everywhere, selling dubious gold certificates and engaging in the even more dubious practice of buying gold by mail. This all doubtlessly played a part.

But what played an even bigger role was the chugging engines of Asian economies. China and India, especially, weathered well that financial storm. They had fresh dollars to invest, but Western markets weren’t exactly attractive opportunities. So they invested in what conventional wisdom said was a dependable hedge against inflation. For almost five years Chinese and Indian purchases accounted for more than half the gold consumption in the world.

In the last 12 months things have begun to change. The Chinese and Indian economies have slowed, and with them their purchases of gold. Since September 2011, the price of gold has fallen more than 17% to a still-inflated but somewhat more sane $1,600 per ounce.

Will the slide continue? Or is this an example of a market correcting itself? Time will tell. If anything it’s an abject lesson — perhaps a painful one — for investors. Beware bubbles. Beware hype. And if you’re hedging against inflation, don’t buy in at inflated prices.

The C4:

1. Since the start of the 2007 financial crisis, we’ve seen some disturbing fluctuations in the price of gold; it shot up to an all-time high last year, reaching about $1,900 per ounce. Now it’s begun one of its steepest ever declines, dropping 17% in 11 months.
2. Looking back, there was clearly some gold fever here at home. Conspiracy theorists advocated hoarding while fast talkers were begging us to sell them grandma’s jewelry. That was the start of the bubble.
3. Asia is where the bubble blew up. India and China were just as hungry for gold, and they could afford much more. They started buying more than half of all gold on the market…until their economies started to slow. Which brings us to today.
4. Is gold still a hedge against inflation? History, as they say, is no guarantee of future performance. The price of gold will probably stabilize and it might even become a decent hedge again. But investors would be wise to remember: gold is a commodity, as susceptible as any to inflation and deflation. Markets have behaved irrationally when it comes to gold, and there’s no reason that won’t happen again.

Beware of Greeks Bearing Debt

A symptom of a flawed attempt to unify.

Casual investors, beware: your world has been turned upside-down.

Stocks have become the relatively safe parts of your portfolio. Bonds, which used to be your hedges of first resort, have changed entirely.

Top-rated bonds are all but useless for growth, and will pay practically zero interest for the foreseeable future. Sovereign-debt bonds, a sterling investment just a few years ago, are now almost too risky to contemplate.

What’s changed? It’s easy to oversimplify, but we’ll forge ahead: Greece. Greece has changed everything.

We’re not blaming that incubator of modern democracy, only pointing to it as a symptom. Greece is demonstrating all the perils of the Eurozone, an unprecedented experiment in a multinational currency. Greece is showing how difficult it is for 17 nations to share monetary policy while maintaining economic independence.

There are no easy choices for the Greeks. If they stay in the Eurozone, they embrace another generation of fiscal austerity — strangling any chance of economic growth. If they revert to the drachma they’ll almost certainly default on their national debt.

You say you own no Greek debt? Hold tight anyway. A Greek default, managed in the best possible fashion, will only encourage other teetering European economies to follow suit. Spain, Portugal, Italy, maybe even France, are all at high risk. This scenario, which is unfortunately one of the better possible ones and probably the most likely, means the bottom is going to fall out of the sovereign-bond market.

Forewarned is fore-armed. Think seriously about adjusting your portfolio accordingly. And spare the kindest possible thoughts for our friends and allies across the pond, who are guilty of nothing except a flawed attempt to unite their continent.

The C4:

1. The Greek debt crisis is demonstrating the vulnerabilities of the Eurozone, and pointing to a grim future of cascading defaults.
2. That likely result, coupled with already historically low interest rates on “safe” bonds, means we can no longer rely on the bond market as our hedge against other investment losses.
3. Casual investors (all investors, in fact) need to rethink their strategy. This is a slow-motion crisis that’s giving us time to adjust. Use it or wallow in regret.
4. But don’t blame the Greeks, nor the rest of the Eurozone. They tried. Economic unification is simply an idea ahead of its time.

Indies v. Old Hands

You can't always tell a book by its, ummm, format.

One of the most interesting emerging markets — emerging in the form of a deluge, that is — is ebooks. Kindle is king, but Amazon’s competitors (Nook, Kobo, etc.) contribute a healthy percentage of global sales, which will probably top a quarter billion units moved this year.

The interesting bit is the number of those units published by absolute independents (indies): content creators as editors, designers and Amazon-partnered media moguls.

That means a lot of dross gets in, but it isn’t all dross. The top-performing indies — Amanda Hocking, J.A. Konrath and Scott Nicholson among others — are completely outperforming the publishing powerhouses.

Traditional publishing is lost at sea with ebooks. They’re pricing them wrong, formatting them poorly and marketing them not at all. The best indies have mastered formatting, have found the sweet spot of pricing (.99 to 4.99), and are marketing like the self-interested creative types they are.

And they're cleaning up.

What comes next will be driven by technology, by the inventiveness of indies and by whether or not the traditionals get competitive. They could crush the indies if they simply dumped their entire backlists into the .99 e-bin.

Conversely, indies will probably better ride the next wave of innovation. The potentials are limitless. F'rinstance, since most ebooks are read on tablets, what’s stopping publishers from inserting video into ebooks?

And who sounds more likely to try that? The indie or the old hand?

The C4:

1. Ebook sales are huge and growing, with over 115,000,000 units sold by Amazon alone last year. 
2. Direct electronic publishing technology means we're all potential ebook sellers. 
3. The market is straining under this flood.
4. Motivated independents are seizing their opportunities and outperforming all competition — including the powerhouse New York book publishers.

Steady at The Helm

A tsunami in Asia can bring us to the brink of recession, and a rumor of agreement among European financiers can send our markets soaring. An odd side effect of our global interconnectedness is that so much of our economic fate seems beyond our control.

Maybe so. But that's no excuse for us, as businesspeople, to take our hands from the tiller. Fair winds or foul may blow from beyond our horizons, yet we remain captains of our own ships.

Or how about a landlubber's metaphor: go ahead and see the forest for the trees, but remember the trees still matter. Tend to your basics: take care of your customers; buy low and sell high.

Global markets will bring the unexpected. Temper that by controlling what you can, and by always applying your best business practices.

Distant gales might still rock your boat, but you'll be better prepared than most to ride them out.