Survival of the unfit corporates

A duopoly is where innovation goes to die.

In Vulture Capitalism, the author argues that much like Feudalism, which involves landowners abusing the workers, capitalism involves capital owners abusing the workers. The government picks winners and losers all the time on behalf of capital, but the entire process is couched in the language of free markets to make it seem like there is some kind of freedom involved.

The only purpose of Free markets is to allow Capitalists to get away with anything.

The term ‘free market’ was invented by the British because they were so pissed when the Chinese would restrict their ability to sell opium in China. They wanted to buy all the Tea that China could produce but had jack squat that they could sell in return. They produced Opium in India and sold it in China.

It was with the Free Trade argument that the empire entered into war with China aka the Opium Wars and delivered what the Chinese called the lost century.

In biology, they say diversity is necessary in a gene pool. Too much inbreeding makes the gene pool stagnant and eventually causes poor health and death.

The aeroplane manufacturing industry is a classic story of government-supported capitalism gone awry mixed with excessive consolidation (a.k.a. inbreeding) causing the ultimate calamity.

If you had taken a flight in 1980, chances are that you had a far more comfortable flight than if you take one today. The demise of innovation in this industry was swift. The only reason to innovate in any business is to stay ahead of the competition. When you have government-backed duopolies, there is no need to innovate. To call the innovation in aeroplane manufacturing incremental would be a tight slap in the face of incremental innovation.

Let us dig into these companies

Boeing

William Boeing a lumber industrialist founded the company in 1916, smack in the middle of the First World War. Their sales started with the Navy which bought the “flying boats”.

Once the war was over, survival was difficult. The company had to get by hauling mail across the country. Boeing realised that being just the end assembler of planes did not grant him a sufficient base to expand the top line.

The company began one of the greatest exercises in vertical integration. This included the purchase of several small aircraft manufacturers and Pratt and Whitney which supplied almost all of the engines in the US at the time.

As the airline business began to take off, Boeing started buying up airlines and merging them to create what became United Airlines. As a result of its ownership, the company was prioritising delivery of planes to United Airlines and many of its competitors were having to wait years for their orders to be delivered.

This resulted in the Air Mail Act which forbade the manufacture of planes and operations of airlines being under the same umbrella organisation. United Airlines had to be hived off in 1934. William Boeing lost all interest in his company after this loss. He resigned as chairman and sold all his shares in the company.

Their best days lay ahead of them. With the outbreak of the Second World War Boeing was roped in to produce almost 99,000 B-17 bombers. It firmly entrenched itself into the Defence Industrial Complex which appropriately abbreviates to DIC.

After the war, the company was heavily engaged in the development of high-speed jets meant for military applications such as the B-47 Stratojet and B-52 Stratofortress.

In terms of commercial aeroplanes, they still had healthy competition from the Russians and the British de Havilland Comet. This resulted in the development of the 707, 727, 737 and 747 through the 1960s. There was a need to stay ahead of the competitors so that its aircraft were preferred. Also, the company was being heavily funded by the US Congress to develop engine technology for military applications.

The barrier between the military side and the commercial side of the company was porous.

This has been the usual American tactic. When other countries provide subsidies and market protection - scream Free Trade from the top of the roof and setup a rubber stamp organisation such as WTO. When you do it yourself, just call it national security!

The current Chinese EV bans are simply a case of incompetence, but let me come to that.

As a result of government-financed R&D Boeing was able to deliver the 747, which outcompeted anything that the companies in Europe could produce. Boeing was selling thousands of 747s while De Havilland was struggling to get past 100 units sold and hence…

Airbus

The rise of American aviation after the Second World War was made possible by the Bretton Woods Agreement on the one hand and on the other hand, the debt that the British and Germans owed them. France was excused because without French money a country called America may not have existed!

Britain cleared its debts in 2006 and Germany in 2010.

It was impossible for these countries to print money willy-nilly or to divert the kinds of sums America was diverting into the DIC. The European governments were tired of watching their homegrown companies bite the dust.

They began to accept the fact that the only way out was through collaboration.

Eventually, Aerospatiale from France, Deutsche Airbus from Germany and Hawker Siddeley from the UK came together and requested their respective governments for funding.

This eventually resulted in the proposal to build a 300-seat aircraft called the Airbus 300 or the A300. As it was considered too large, it was then reduced to a 250-seat configuration and the A300B went on the drawing board. The first A300 flew in 1972 but even by 1979, only 256 planes had been sold. It was not until the 1980s when the A320 was launched that Airbus became a successful aircraft manufacturer. While you might think that is the end of the story, there is more.

As the 1990s swept around, the Berlin Wall fell, and German reunification took place. Western Europe wanted to create a DIC of its own. The European Aeronautical Defence and Space Company (EADS) was founded by combining Aerospatiale, Matra, Daimler-Benz (Aero Division), Dornier, Messerschmitt and CASA (Construcciones Aeronaticas SA).

Airbus was still run as a consortium and it was spun out as Airbus SAS and EADS got 80% ownership of the company. Like that Airbus became a government-backed behemoth that made planes amongst other things.

Now to the Duopoly

In the wide-bodied commercial plane manufacturing business there are just two companies. The reason is simple - the high cost of entry. Countries had to carve out budgets for these businesses to even exist. The fact that these companies are privately owned is a joke perpetrated on the taxpayers.

Now think about this - who supplies to the aeronautical industry? If you make a product, for which there are only two customers; what would you do?

Buy up all of your competitors.

Both companies buy their fuselage from the same supplier!

What should be a clear runway to world domination remains pock-marked with difficulties for Airbus — one of them an especially ironic one. Reuters reports that the French planemaker is disappointed in the production it’s getting out of Spirit Aerosystems…

[…]

It is especially ironic for Airbus because the window of opportunity that Boeing’s misfortunes opened was due to a fuselage constructed by Spirit, which Boeing spun out in 2005. In order to cut down on so-called “traveled work ,” a manufacturing process where plane parts are assembled out-of-order in order to speed completion, Boeing reabsorbed the non-Airbus parts of Spirit in July for $8.3 billion.

Source: Quartz

Just think about this a little. This is not even a duopoly…

Two players with clear turf, the same suppliers, and workers struggle to negotiate with them and the government seems incapable of touching them (by design).

This is organised crime.

Airplane manufacturers are not alone

The car industry in the developed world is an incestuous clusterfuck.

Everyone owns everyone. Thus there is no real competition. The car companies are nothing more than an incredible financial operation.

Cars are a depreciating asset for which you take a loan and pay higher interest than for real estate. If anyone comes up with a better scam, I will let you know.

This kind of structure is the real reason for the tariffs against Chinese car companies, not national security. The Chinese are innovating unencumbered by a monopoly-like structure. The American and European car companies are in no position to compete. So the Western governments have decided to protect them because in a Free Market, millions will lose their jobs.

Why?

Because their CEOs are incompetent and have been lulled into inaction because they believe that they are at the cutting edge of technology. They did not innovate because they thought there was nobody to compete with.

They go from crisis to crisis being bailed out by the government and providing colossal share buybacks when the times are good. Ditto for aeroplane manufacturers and airliners also.

Now they are left subverting free trade.