Government Intervention at Boeing and Airbus - Case Study Example

?The case demonstrates the phenomenon of government intervention which has been the of heated debates over several years as far as international business and trade is concerned. The debate is rested on practices that encourage free trade versus those that are protectionist or supportive in nature. A subsidy represents a benefit in cash or kind allocated by the government to businesses to ensure their survival in the competitive, global marketplace and is seen as a supportive policy. These subsidies represent a major country or political risk in international business (page 203) (Cavusgil, Knight, & Reisenberger, 2012). The case rests on the fundamental movements today-globalization which gained momentum in the 1980’s (page 33) (Cavusgil, Knight, & Reisenberger, 2012). Globalization led to the cross-border free flow of capital, labor, information and other resources. Countries began to realize that the only way to reap the fruits of comparative advantage was to compete internationally. FDIs and generation of government revenues were common results of international business in technology intensive areas (page 33) (Cavusgil, Knight, & Reisenberger, 2012) and, thus, the collaboration of various European governments in this respect can be attributed to this reasoning. The major reason behind Boeing’s complains is that the provision of subsidies by the EU government to its competitor Airbus is preventing both the companies to compete on equal footing. It is seen as an unfair trade practice by the U.S, although, the case reflects that the country itself is offering protection to its airline Boeing, albeit, in a different way. Thus, although the U.S government is not providing outright subsidies to Boeing, it is still protecting its business by bestowing it with military contracts (Cavusgil, Knight, & Reisenberger, 2012). The key elements highlighted in the case are those of intervention through provision of subsidies, development of infrastructure, tax rebates and strategic national contracts. Part of the explanation underlying government support for Airbus is grounded in the democratic socialism political system of the EU. As learnt in the text, this form of system called social democracy is characterized by government intervention in private enterprises and in business activities (Cavusgil, Knight, & Reisenberger, 2012). To this extent, as pointed out in the case study, the governments of various EU countries including the French, German, Spanish and British governments have embarked on a mission to enhance the international competitiveness of its national airline, Airbus, through the provision of subsidies primarily. A major implication of globalization has been that in the midst of cut-throat competition, companies often find themselves competing on costs. The text also supports the fact that the costs of doing business are relatively higher in the EU which is largely because of high corporate taxes (page 178) (Cavusgil, Knight, & Reisenberger, 2012). This is a major reason behind the government rationale to support Airbus financially. To this extent that the cost of capital in EU is higher than that in U.S, the government’s intervention in Airbus’s operations is justified. The defensive rationale of government intervention manifests itself along these lines of thinking by claiming that protection of the national economy is a major factor behind government intervention (page 204) (Cavusgil, Knight, & Reisenberger, 2012). The offensive rationale is also applicable here, since one of the major reasons for government intervention in the case of Airbus was to protect the infant industry that could not compete effectively with the two giants (Mac Douglas and Boeing) and the creation of tax revenues. Also one of the fundamental justifications for the same was the generation of jobs and employment opportunities that were created once Airbus had its operations all over Europe (Cavusgil, Knight, & Reisenberger, 2012). Furthermore, this move of European governments to support Airbus and make it internationally competitive has positive implications for Boeing. Competition always brings out the best, and in this case, the competitiveness of Airbus means that Boeing shall be forced to cut its costs, revamp its operations to make them financially feasible and, perhaps even revise its business model. Thus, competition here acts as a thrust to ensure that Boeing does not end up having a monopoly in international markets. On the other end, however, it is interesting to question where this money (that the governments of EU are using to support Airbus) is coming from? Since these countries are highly taxed, and based on the basic economic notions of generation of government revenue through taxes, it is argued that this money is inevitably a product of the European citizens’ taxes. Thus, the success of Airbus is not a free lunch; it is most certainly at the cost of some reduction in the standards of living of those citizens that do not consume the services of Airbus. However, as learnt in issues pertinent to special interest groups, an interesting observation that comes out is that businesses that are in competition are apprehensive to the idea of foreign competitors (page 186) (Cavusgil, Knight, & Reisenberger, 2012). It is this very fact that manifests itself in the cases of Airbus and Boeing being brought to the WTO respectively. Thus, some uneasiness always exists when borders are open and international exchanges take place which is due to the cost, quality and other differences prevalent across countries that benefit some players in the market, while hurting others. A crucial aspect highlighted by this case is that of the innovation and improvement in products that emerges as a result of international alliances, subsidies and other financial and non-financial incentives by the government. In the case of Airbus, this innovation is best illustrated by the launch of A380 in 2007 which was a state-of-the-art aircraft and which bypassed the seating capacity of Boeing through more efficient use of space. This could not have been possible without the EU governments’ funding of the R&D. Also, the same is applicable to Boeing’s "787 Dreamliner" which was built in partnership with Japanese giants. Thus, competition in this case has stirred a chain of improvements as both companies intend to outperform each other. This chain of innovations has ultimately benefitted to the customer who has more comfort, luxury and convenience of air travel. This trend is now being followed by China Commercial Aircraft Co that has decided to outperform both Airbus and Boeing by 2026. Thus, the creation and competence of Airbus has prevented the aircraft market from being monopolistic, and has enabled this market to become competitive which, ultimately is in sync with the free trade argument that WTO proposes. To this end, therefore, the means (subsidies and government intervention in the case of Airbus) maybe incorrect according to WTO, however, the end (free trade and competition) is not. Free trade cannot exist without competition. Another focal area of this case is that of outsourcing. Outsourcing or delegation of non-core operations to outside vendors is an international entry strategy followed by focal firms (page 68) (Cavusgil, Knight, & Reisenberger, 2012). It is believed that most global giants, especially those in the Western world, are outsourcing at least a part of their operations to the less developed world, such as India and China. According to the case, Airbus and Boeing have considered outsourcing their operations to India in the aftermath of the global financial crisis of 2008. This in itself presents a myriad of opportunities and threats to both giants. For one thing, however, both companies can gain the cost advantage over the upcoming Shanghai based China Commercial Aircraft Co which has decided to give tough competition to the two giants. A critical source of revenue for airlines is passenger traffic and a fall in the same can topple entire businesses. Hence, it is viable for these two companies to look for outsourcing as a solution. Indeed, outsourcing is one of the fruits of globalization- a trend that has gained momentum over the years. Although several decades ago the Boeing and Airbus could not have thought of outsourcing, today it has become a common practice. This may offer some challenges to both companies as far as quality is concerned. Aircrafts are a heavy investment product; they require high degree of technical soundness and manufacturing as well as engineering capability. Countries such as Germany have conventionally been known for their high quality of workmanship and technical advancements. Thus, the outsourcing of certain aspects of operations may present challenges as far as the perception of quality is concerned. This is an advantage lost to the two aircraft giants. Furthermore, the notion of outsourcing proposes major ethical considerations. Will the outsourced operations in less developed countries comply with the same ethical boundaries that the companies attempt to stay within in their local regions? Unfortunately, this has not been the case with most MNCs in the past. The case of Nike and Gap, interestingly, point out the temptation of foreign companies to exploit workers in less developed nations by denying them basic rights of proper working conditions, pay etc. It is a major challenge for Airbus and Boeing to retain their ethical code of conduct in the countries to which they outsource. Another major challenge would be deciding what to outsource? If they outsource the entire production, that would expose them to huge risks associated with inferior quality and loss of brand image. Companies buy an Airbus because they know it’s backed by European technology, and the Boeing because they know it adheres to high-quality American standards. Will this advantage be retained if they outsource a part of their operations? To conclude, this paper has attempted to analyze the case in the context of international business dynamics. It is tempting to take a one-sided view of government interventionist policies by claiming that they offer an unfair advantage to some players in the market. However, one must not forget that competition often always results in better quality, prices and other advantages to customers. References: Cavusgil, S. T., Knight, G., & Reisenberger, J. R. (2012). International business: The new realities. New Jersey: Prentice Hall. Read More