Boeing: In Search of a Big Bear Hug

Few U.S. businesses are as well positioned as Boeing to capitalize on improved relations between the U.S. and Russian governments. Over the past decade, the Chicago aerospace giant has pumped over $1 billion into the Russian economy, a substantial chunk of the total $7 billion in U.S. direct investment so far. Thomas R. Pickering, Boeing Co.'s (BA ) senior vice-president for international relations, was U.S. ambassador to Russia from 1993 to 1996. In April, Boeing Chairman and CEO Philip M. Condit was the first Westerner to receive the Russian Space Star, the country's highest aerospace honor.

Boeing executives view Russia as a crucial component of the company's worldwide strategy. Russia offers a deep pool of aerospace engineers and scientists at bargain prices--and a potential market for hundreds of new planes over the next 10 years. Boeing has yet to score a big commercial airplane order because most Russian airlines today can't afford to replace their aging fleets, but, ever hopeful, the company has been quietly positioning itself for such a day. "There is a rich pool of talent in scientific and engineering skills in Russia that has produced real cost-savings benefits for us already," says Condit.

LONG SHOT. Boeing's Pickering recently returned from a trade mission to Russia. The biggest item on his agenda: discussing the possible purchase by Aeroflot of up to 70 planes. A multibillion-dollar deal would go a long way toward keeping Boeing's production lines running during the falloff in orders following September 11. It's a long shot, though, and unlikely to happen this year. Punitive tariffs of 40% make imported planes expensive for Aeroflot. Any deal would need Putin's involvement: coughing up government funds or rolling back tariffs.

Either action is bound to generate protest in Russia, especially from the country's own beleaguered aerospace industry. That's one reason why Boeing is courting its Russian counterparts. In June, the U.S. company agreed to consider assembling a 75-seat regional jet in Russia with Sukhoi Civil Aviation. Boeing rival European Aeronautic Defense & Space Co. (EADS), too, is outsourcing in Russia. In July, it signed a $715 million agreement with Putin to build components for Airbus jets at Russian plants.

Boeing has moved into many businesses in Russia over the past decade, from the International Space Station to a sea-based satellite-launching venture. The Boeing Design Center in Moscow employs 650 Russian scientists. In one project, Russian engineers redesigned the overhead bin for the Boeing 777, cutting the number of parts and assembly time.

The idea of Russians taking American jobs doesn't sit well at home, where Boeing is cutting up to 30,000 staff. But do the math and it becomes clear why Boeing execs want to triple the size of the Moscow staff. Boeing's U.S. engineering employees each earn between $5,200 and $6,000 a month, compared with $400 to $900 a month for a senior Russian engineer.

Agree or disagree with the merits of outsourcing, Russia is a model for Boeing's ambitious strategy--and perhaps a model for Moscow and Washington as they explore what Pickering calls a "mutually productive relationship." For Boeing, it still comes down to selling airplanes. The company needs to prove to investors that such a relationship can pay off for them, too.

By Stanley Holmes in Seattle, with Catherine Belton in Moscow

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