The Grounding Of The Dreamliner

…is a sign of a threat to innovation:

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.

I think this is why Elon has backed off on what were originally rumored to be his plans for an IPO this year.

Gee, someone should write a book about the consequences of extreme risk aversion for human spaceflight.

24 thoughts on “The Grounding Of The Dreamliner

  1. cthulhu

    Hmmm…I confess I’m having a hard time thinking that the 787 grounding (pun sort-of intended) is, at most, anything more than Boeing’s just desserts for letting the beancounters insist on farming out too much of the design and engineering to suppliers. Boeing’s core problem on the 787 has been that it expected component suppliers to grow the skills needed to deliver fully functional and tested assemblies, not just components, and that is a non-trivial job.

    And it may yet turn out that this is nothing more than a bad batch of batteries.

  2. Jardinero1

    I think this analysis is fine as far as the aviation industry goes. But for other industries, not so much. Take oil/gas exploration and development. The companies in that sector have, historically, had an adverse relationship with government. The people in the industry are conditioned to think big, think bold and think profit and keep the government at bay. The same goes for refining of petrochemicals and even the pipeline industry. Yet all these companies still have ready access to capital when they need it and they manage some very big, big, multi-billion, decade long projects, all financed privately.

    Back to aviation, the aviation industry, basically, has its mouth sutured to the government teat and the corporate culture tends to reflect the value system of its beneficent supplier of sweet milk.

  3. Godzilla

    Growth is usually incremental anyway. Even things we perceive as breakthroughs in aviation like the jet engine were being attempted decades before. Eventually the technology gets more useful or cheaper than the old products and common enough and that is when it is considered to be a “breakthrough”. Just see the pain Heinkel had to convince the Reich Air Ministry to accept jet aircraft. Goering said jets were a waste of time and resources given the existing war. The funny thing is Goering was actually right since jets made no meaningful difference to the outcome of WWII. The first major war for jet engines was Korea. We often discuss the Whittle engine as a historical breakthrough but the axial-flow jet engines, using a different design, won over his design rather quickly.

    Usually breakthroughs are a combination of slightly incremental improvements where the result ends up being greater than the sum of its parts.

    As for the Dreamliner getting grounded that is nothing new. It happened to the Comet and Concorde.

    What needs to happen is the government needs to work more on prototypes of technology demonstrators rather than so rapidly commiting to megaprojects where the technology is not proven. In general it should be easier for a corporation to seek private funding. When I read about Silicon Valley in the 1970s and 1980s… people were there selling their own stock on the street like they were selling lottery tickets. The environment was just totally different. Banks have stifled it all.

    IMO there were several major breakthroughs recently I consider to be disruptive:
    smartphones and tablets, crowd funding sites like kickstarter and indiegogo.

    1. Rand Simberg Post author

      It wasn’t banks that stifled it — it was government regulations, and the Securities and Exchange Commission. Sarbanes-Oxley has been a disaster.

    2. Paul Milenkovic

      Um, the MiG-15 used a radial-compressor engine, a knock-off of the Rolls Royce Nene, supplied by the British Clement Attlee government.

      The MiG-15 flew higher and faster than the F-86 Sabre, although the MiG and other lightweight aircraft like the Zero from an earlier war may have suffered from aeroelastic flutter.

      It took good training and skills from the U.S. pilots to fight the MiG.

  4. Der Schtumpy

    “I think this reflects the insanity of our country, that anything non-incremental is seen as insane…”

    And I think that’s not a new thought.

    Any time someone had a new idea, the great majority thought it was a fad, or too expensive, the public isn’t interested, or some other goofy thinking along those lines. I’m betting the guy who first thought of creating the spear, was guffawed at by the guy who thought throwing rocks at rabbits was all that mankind would ever need to have technologically.

    The list of things thought to be too expensive, faddish or the public doesn’t care about includes trains, planes, automobiles and ships driven by anything but sails, radio, FM radio, talk radio on AM, talk radio on FM, streaming radio, movies, talking movies, color movies, television, color television, large screen TVs, VHS tapes, VHS recorders, DVD players, DVD recorders, blue ray players, and I’m sure I’ve forgotten something.

    Oh yeah, the internet.

    I can remember business people complaining when I was installing thin client gear. I had a number of big chain department store managers telling me they’d be glad when all the ‘internet’ stuff went belly up and they could go back to running their stores “like we always did”.

    20 years later, the stores are dying and the internet has a foot on the throats. Funny how things work, eh?

    1. Trent Waddington

      The vast majority of industry still runs on the “fax us an order form and we’ll send you a quote” system.. and those are considered the sophisticated ones. The majority won’t give out prices over the phone, because you might shop around (no really).

      Why don’t innovators come in and take over?

      1. rickl

        Well, I hate it when people call up to get prices over the phone. They always seem to interrupt me when I’m actually trying to do stuff. In many cases, it’s not just something I can read off a price list. I have to sit down and calculate it. Sometimes it involves calling a supplier to get their prices. When it is something simple that I can read off the price list, I don’t mind a bit.

  5. Dennis Wingo

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

    Dreamliners problem is related to quality control at a subcontractor and the lack of an understanding of the requirements that have to be imposed on those subcontractors. It has nothing to do with innovation.

    1. Thomas Matula

      Dennis,

      I agree. The more you outsource the more risks you take in terms of quality control, which is why the trend is towards doing things more in-house in many industries.

      I also think it was a mistake moving the Boeing headquarters to Chicago instead of leaving it in Seattle near where the products are developed. When you bet the future of the firm on a single project as is the case with jet airliner development you need to keep a short distance between the CEO and the folks doing the work.

    2. Larry J

      Getting subcontracted parts to fit properly has been an issue for a long time. The more subcontractors involved, the harder the challenge. In aerospace, there are political factors involved. Defense contractors will deliberately subcontract to as many congressional disctricts as possible to make it harder to cancel a contract. For international programs, many other countries want a portion of the weapon (and now, airliner) to be built in their country before placing an order. All of this makes integration harder.

  6. M Puckett

    Seems like going whole-hog with the subcontractor thing is the diametric opposite of what Spacex is going for with vertical integration.

  7. M Puckett

    Seems to me subcontracting makes sense when one subcontractor can ‘plug-n-play’ for another one and you can re-compete them against one another occasionally on a price-point like a screw manufacturer.

    I doubt there are bunches of companies lined-up who can build something like the tail section on a 787 who coupld spool-up to do such on a short notice.

  8. Martijn Meijering (@mmeijeri)

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

    I don’t understand what Thiel means. It seems to me that a lack of incrementalism is precisely what’s wrong with NASA, and that massive use of incrementality is absolutely crucial to the approach New Space companies are taking. In my opinion, it is precisely what makes them successful.

    It is certainly true that Congress thinks space is unimportant, or they’d be willing to take more risks. But risk aversion is not even close to being the the limiting factor, and it is far from self-evident that more risk would be useful. In fact, it seems pretty clear that there is such a thing as needless risk and equally clear that taking needless risks is unwise.

    There is so much progress we could make in tiny incremental steps in rapid succession. The problem with the powers that be in Congress is that they are a bunch of thieves that want to safeguard their pork.

    In a space program run according to free market forces, it would be firms making choices about allocating resources and choosing the correct mix of risk and reward.

    1. Karl Hallowell

      I agree. Looks to me like the real issue is substantial obstructions to any sort of change. The threat isn’t incrementalism, but stagnation.

  9. Dick Eagleson

    All the commenters here have decent points to make. But the threshold of trouble allowed before the government yanks smartly on the leash has undeniably moved hugely downward over the years. Large lithium-ion battery packs are a relatively new technology for use in aircraft, but not remotely as much so as were large-diameter, high-bypass-ratio turbofan engines back in the 1960’s. During the first five years the 747 was in revenue service there were a bunch of incidents involving engines catching fire, exploding or even tearing completely off their pylons in flight. As with the recent Dreamliner battery fires, some scary moments were had by those aboard, but safe landings were achieved and nobody died nor were any aircraft lost. And the FAA did not ground the 747 fleet.

    1. Thomas Matula

      Dick,

      But ten years later the FAA did ground the DC-10 fleet when a crash caused by an engine falling off killed every one on board.

      But I agree its nothing new, just the usual problems from the introduce of a new technology.

      1. Larry J

        The DC-10 had the misfortune of being involved in many serious accidents. There was the Turkish Airlines Flight 891 in 1974 crash where the ground crew didn’t close the cargo door properly, causing the plane to rapidly decompress at altitude. This caused the cabin floor to collapse, taking out the control cables. That killed 346 people and was attributed to faulty design of the cargo door.

        Some of the other crashes were not so much due to faulty design but did lead to a lot of bad publicity. The American Airlines Flight 191 crash in Chicago was due to faulty maintenance (using a forklift instead of an engine hoist). However, it showed that when the plane lost hydraulic pressure, flight control was seriously compromised. This was again shown in the United Airlines Flight 232 crash at Sioux City, IA. The engine failure took out all of the plane’s hydraulics making it extremely difficult to fly.

        There were two other DC-10 accidents in 1979 that had nothing to do with the design of the plane. One was flown into the side of a mountain in Antartica and the other was landed on a closed runway. However, 3 fatal accidents so close together did cause many in the public to fear the plane. It was said that the average air traveler couldn’t tell the difference between a C-3 (by Aeronca) and a C-5 (by Lockheed) but could identify a DC-10 on sight.

        1. Daver

          I had heard that Boeing had designed its aircraft so their engines could be manipulated by fork lifts rather than specialized engine hoists. It makes a nice story, I have no idea if there is any truth to it. If it were true it would be good engineering on Boeing’s part (design the planes to be easy to maintain), but it’s easy to see how mechanics could overgeneralize and decide that what works for Boeing should work for McDonnell-Douglas.

  10. Thomas Matula

    The finding that innovation drops after an IPO is not surprising. Once a firm does an IPO it comes under the tyranny of the Wall Street analysts who focus only on quarterly earning reports.

    The result is that upper management is forced by the market to move from long term strategy to a short term focus on their financials to “meet” the analyst’s expectations. Otherwise the stock is punished by the institutions that only trade based on the relation of the stock to the analysts prediction. The result is that firms start to avoid risk taking and radical innovation in favor of low risk incremental development of traditional technology.

    Yes, I am not surprised that Elon Musk is delaying the IPO for SpaceX. Quite honestly if he doesn’t need the capital he should avoid doing the IPO at all as once he does it he will come under the pressures of Wall Street analysts to milk the existing technology instead of developing new systems.

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