Boeing loses Mega-Contract to Northrop Grumman

March 1, 2008

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The US Air Force announces it is to award a giant procurement contract to Northrop Grumman and its European partners. Boeing had been expected to win the estimated $40 billion of business for delivery of mid-air refuelling planes for the US military. The decision seems likely to raise questions of factors that influenced it

Northrop Grumman has snatched a $35 billion Air Force contract to build refueling planes in a surprise victory over Boeing, the company that has supplied such tankers for 50 years.

The Los Angeles-based Northrop Grumman and its partner in the competition, the European Aeronautic Defence and Space Co. of France, plan to do most of the tanker assembly work in Mobile, Ala., some frame work in Europe and the refueling systems at Northrop Grumman’s new facilities in Bridgeport, W.Va.

“The tanker is the number one procurement priority for us right now,” General Duncan McNabb, vice chief of staff for the Air Force, said Friday [February 29th 2008] in announcing the bid winner. “Buying the new KC-45A is a major step forward and another demonstration of our commitment to recapitalizing our Eisenhower-era inventory of these critical national assets.”

The contract gives Northrop Grumman an opening to further future billions of dollars because the Air Force wants to replace its entire fleet of 600 refueling tankers. For EADS, the maker of Airbus planes, the victory is an entry into the lucrative U.S. military market.

The Loser without doubt is Boeing

Business Week makes it clear, and even points to an explanation

The decision represents a major coup for a European aviation behemoth—and a major blow for Boeing, considering that the business was firmly in its grasp four years ago but slipped away in a scandal that led to the departure of the company’s chief executive. … Nevertheless, there was outrage in Washington State, where Boeing’s commercial jetliner operations are based. “We are shocked that the Air Force tapped a European company and its foreign workers to provide a tanker to our American military,” Senator Patty Murray (D-Wash.) said in a statement. “At a time when our economy is hurting, this decision to outsource our tankers is a blow to the American aerospace industry, American workers and America’s military.”

Scandal? What scandal?

The scandal story can be traced back to events over the last six years.

The Decatur Daily account paints the gruesome details

Boeing Co. CEO Harry Stonecipher, brought back from retirement 15 months ago to boost the aerospace manufacturer’s tainted image, has been forced out because of a new ethics scandal involving an affair he had this year with a female company executive.

In a stunning announcement that left the exact circumstances behind the ouster unclear, Boeing said Monday the 68-year-old president and chief executive officer had resigned at the board’s request a day earlier for improper behavior while carrying out the consensual relationship.

The emergence of another ethical flap is an embarrassing jolt to a company that had been trying to put two years of scandal behind it.
Stonecipher’s predecessor, Phil Condit, resigned Dec. 1, 2003, as a result of the defense contracting controversies that ultimately sent two Boeing executives — ex-Air Force procurement official Darleen Druyun and chief financial officer Mike Sears — to prison.

These controversies resulted in the U.S. Air Force suspending Boeing for about 20 months, the longest such suspension of a large defense contractor in procurement history.
Boeing had thousands of documents belonging to Lockheed Martin Inc., documents the Air Force said gave Boeing an unfair advantage in bidding for rocket contracts.

As the LA Times put it

The surprising award [to Northrup] is likely to add to one of Pentagon’s more sordid and tangled procurement scandals that evoked the wrath of a presidential candidate and led to prison sentences for two Boeing executives.

The European Dimension

In Europe the coup was hailed as a success for EADS, partnering Northrop Gumman. American commentators noted Northrop Grumman as LA based, and partnering EADS.

Louis Gallois, EADS chief executive, said on Friday night the contract was a ”breakthrough for EADS” in the biggest defence market in the world. ”To win against Boeing is just great,” he told the FT.

As recently as Friday afternoon the EADS team had been convinced that Boeing would take the contract. Mr Gallois, about to leave Paris for a mountain holiday, said he had simply not believed his ears when informed at 10.25pm local time last night. ”I think it is the best contract I have won in my life.”

So Louis was as surprised as commentators outside the company.

In America more is made of the role played by Ronald Sugar, CEO of said international firm Nothrup Grumman. Mr. Sugar is a business leader who has operated largely away from the headlines.

As well as a successful business career he is extremely well connected through his efforts for prestigious charities, including the post of national fundraising chairman of the Pearl Harbor Memorial Fund. He is a past Chairman of the Aerospace Industries Association, and earlier was appointed by the President of the United States to the National Security Telecommunications Advisory Committee. He is a national trustee of the Boys & Girls Clubs of America, a director of the Los Angeles Philharmonic Association and a trustee of the University of Southern California.

The Morphing of International Companies

The differing treatments of the story around the globe is instructive. Globalization is acquiring its special features. One is the capacity of a global firm to represent itself somewhat selectively. Retention of ambiguity is made easier when international contracts are operated from a consortium. In the United States, a consortium arrangement may be presented as American as Apple Pie, while in Tokyo as Japanese as Sushi …

So in this instance, in America, emphasis is placed on planes that will be built in America. In France, the venture is French-led.

I am reminded of international business executives who hold several passports, more for convenience than deception. They avoid the double-sided business card in two languages in favour of several cards, each with a specific corporate location, and often with different job handles for the executive.

Acknowledgement

The image is from the industry journal Space Mart