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6 The Hidden Costs of Political Sponsorship of Industrial Firms Paul Seabright 6.1 Introduction When in the spring of 2005 the Airbus A380 made its maiden flight, there was an upsurge of enthusiasm in Europe about the Airbus project as a testimony to the virtues of publicly supported, internationally collaborative industrial policy. This enthusiasm was not confined to France, but it found particularly heady expression there: President Chirac described the flight as “a magnificent result for European industrial cooperation and an encouragement to pursue this path of building a Europe of innovation and progress.”1 At the A380’s unveiling three months earlier, in an even more lyrical flight of prose, he had hailed “the success of a European industrial policy, which has helped make Airbus the world’s leading aircraft manufacturer.” He continued: “Let us pursue the success of Airbus in other fields. Let us achieve the same outcome for the energy of the future, for tomorrow’s transport and telecommunications, for the medicines of the future. Let us do it together, with a truly European ambition. . . . It is to rise to this challenge that France recently decided to establish an agency for innovation in industry. To my mind, this is the first step in what should be a major European undertaking, underpinned by the strength of our companies and our laboratories, to put European industry at the cutting edge of innovation and at the heart of tomorrow’s markets.”2 The sequel is now too well known to need spelling out in painful detail. Little more than a year later, a combination of the falling dollar, in which Airbus sales are denominated, and delays in delivery of the first aircraft, triggering large financial penalty clauses, caused significant losses to Airbus and its parent company EADS, leading to a 26 percent fall in the share price and eventually to the resignation in July 2006 of Airbus CEO Gustav Humbert (as well as to that of his boss, 120 Paul Seabright EADS joint CEO Noel Forgeard, in the wake of revelations about his making large profits from the sale of EADS shares). Since then, the bicephalous management structure of Airbus has been reviewed and extensively reformed (though the importance of French or German nationality, and a rough balance between them in determining eligibility for top jobs in the company, does not seem notably to have diminished ). A restructuring program called Power 8 is involving a reduction of some 10,000 jobs, though there is still strong resistance, both within the company and among its various political sponsors, to rationalizing the production map in a way that makes no reference to political geography . And the continuing gyrations in the value of the dollar raise important questions about the viability of the Airbus model of geographically concentrated production with and internationally diversi- fied sales. There are two questions that might strike even a moderately curious observer about these events. First, why should Airbus have faced a crisis of such magnitude at a time when demand for its products had never been higher (the problems significantly predated the onset of the recent economic crisis)? Restructuring programs, resignations of CEOs, and so forth, are typically symptoms of industries in either structural or temporary decline. Second, even if the fall of the US dollar against the euro were hard for the Airbus management to foresee and offset, the inability of Airbus to meet some highly foreseeable delivery deadlines for aircraft, as well as the banality of the reasons given for this failure (cabling problems at the Hamburg assembly plant), seem super- ficially to suggest an alarming degree of incompetence in a firm that, after all, makes extraordinarily safety-critical products. How confident can a detached observer feel that a firm that is unable to solve a problem of timing in its cabling can make aircraft that will not one day fall out of the sky through some malfunctioning in their highly sophisticated software, electronics, or composite materials? This short chapter will suggest a broadly reassuring answer to the second question, which also in passing answers the first. The gist of the answer is that the problems at Airbus have little or nothing to do with incompetence and everything to do with conscious, strategic decision -making under uncertainty. Managers of assembly plants facing deadlines subject to stochastic shocks will choose their rhythm of work to balance the costs of working faster or better against the benefits of avoiding...

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