(The following column by Eric Reguly appeared on the Globe and Mail website on March 18.)
TORONTO — Paul Tellier is undoubtedly one of the most astute and aggressive corporate bosses in the land. He seems to be doing all the right things at Bombardier, where he has been CEO for 14 months. The stock has more than doubled since this time last year. Still, he can’t shake the impression he’s in command of an overladen ship with a busted compass in a hurricane.
No one said fixing Bombardier was going to be easy, but more than a few investors figured the man who made the pig fly at Canadian National Railway, formerly a fed make-work project, now one of the planet’s most efficient transportation companies, could work the same magic at Bombardier. Mr. Tellier may have saved Bombardier from near death through his whirlwind revamp efforts last year. The problem is, every one of the company’s businesses is so complex, so mired in national and international politics, so capital intensive and faces so much competition that it’s hard to predict whether the Tellier-inspired changes will restore Bombardier’s fortunes. This is another way of saying it’s hard to predict the company’s ability to generate profits.
Take yesterday’s announcement about the overhaul of the big train division, home of the disastrously expensive Adtranz acquisition, made in 2000. Again, it seemed like the right thing, and the inevitable thing, to do. At the same time, it didn’t exactly convince you that it would work.
Bombardier is taking a meat cleaver to the train division. Seven production sites in five European countries are to be closed, leaving 28 European factories. The division will lose 6,600 jobs, most of them in Europe. That’s the equivalent of 18 per cent of Bombardier’s global work force. The cost of the production crunch will be $777-million, of which $457-million will be charged in the fourth quarter.
With some train factories running at 50-per-cent capacity, and pretax profit margins in the division running at 1 per cent, something had to be done. The restructuring process won’t stop here. Mr. Tellier said the European train factories lack centralized purchasing for material such as steel. He also hinted the division was pumping out too many products, from subway cars to locomotives, suggesting the portfolio might have to lose a few items. If the train crunch works, Bombardier says its cost savings will be $600-million a year.
Here’s the problem. There’s a reason Bombardier (and competitors such as Alstom, builder of the aircraft-fast TGV trains) have so many factories in so many countries. It’s because the vast bulk of the business comes from city, regional and national governments, which have a long history of trading orders for local jobs. Sure we’ll buy, but what’s in it for us? Indeed, German Chancellor Gerhard Schroeder used the lure of orders for the state-owned railway to keep Bombardier’s Ammendorf factory open. Ammendorf, started in 1823 and now the maker of the high-speed ICE trains, didn’t survive the cut. Neither did Pierre Lortie, the Bombardier train chief who was ousted in December and who had seemed intent on protecting Ammendorf and other European plants.
Bombardier is killing factories in Germany, Portugal, Sweden, Switzerland and three in Britain. There is bound to be political retaliation. Competitors will use the Bombardier closings to their advantage. European infrastructure unity is still a myth. Politicians in each country, each region, still get elected on local votes.
Bombardier’s glam business — aerospace — has even bigger political problems. The division, maker of the ubiquitous regional jets and a variety of business jets, actually had a good fourth quarter, with $118-million in operating profit against a loss of $376-million previously. The turnaround, if you can call it that, is the result of more aircraft deliveries, cost reduction and capacity tweaking. But the quarterly profit is no indication the worst if over.
Where to start? How about Brazil, maker of the Embraer regional jets, which are moving up the value chain with bigger models and bagging more and more orders, thanks in no small part to fat government financial support (see World Trade Organization battles passim). In effect, the regional jet market, once owned by Bombardier, is bifurcated, with airlines now splitting their orders between the two companies. The buyers’ goal is to keep both players alive, all the better to play the Canadians and Brazilians, and their governments, against each other. So long as this game persists, Bombardier’s aerospace margins will be squeezed.
While Bombardier is fighting the Brazilian government, it is also fighting the Canadian government. Bombardier needs a bigger jet, one with 100 seats or so, to match the newest Embraer E-Jets. Developing the new series will cost billions and won’t happen unless federal and provincial governments subsidize the effort. If the governments balk, Bombardier’s regional jet line will be in trouble. How about that for a political problem? The fact is, Bombardier cannot be an aggressive player in this market unless the government has an aggressive policy to make it a player.
Meanwhile, the U.S. airline sector is still a mess in spite of the economic recovery. Note that roughly 30 per cent of Bombardier’s regional jet deliveries are to go to USAir and its feeder airlines this year. Also note that USAirways, which emerged from Chapter 11 bankruptcy protection a year ago, recently warned that liquidation is not out of the question if losses continue and its ability to finance regional jet deliveries is impaired.
A bit more than a year ago, Mr. Tellier’s life was different. He had fixed CN to the point he was bored of delivering dollop after dollop of good news. At Bombardier, he has, for the most part, been the bearer of bad news, such as the “bitter disappointment” — his words — about the train division’s performance. It must be a shock for him. It must be a bigger shock that so many aspects of the turnaround he so desperately wants to deliver are beyond his control.