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CEO Speaker Series: A Conversation with James McNerney Jr.

Speaker: Jim McNerney
Presider: David G. Bradley, Chairman, Atlantic Media Company
September 12, 2012, Washington D.C.
Council on Foreign Relations

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DAVID BRADLEY: Well, let me welcome the Council members. Let me welcome our guests. Let me welcome our guest of honor, Jim McNerney, who is the chairman and CEO of the Boeing Corporation.

Some of you will remember Bob Bennett, who is a large signature figure in the corridors of power here in Washington. Famously, he was President Clinton's personal attorney back in the unhappiness of the second term for the president.

He tells the story about himself. It was summer of 1998, and he and his wife were invited to have dinner alone with President and Mrs. Clinton in the family quarters of the White House. And he was instructed to drive to the south gate. So he drove there. And to his surprise the guard said, no, you're going to be driving in. Just drive straight up the driveway to the Southern Portico.

And up there, there was a guard. And the guard said, just park right here. And he parked. And as he was going in, the guard said to him, Mr. Bennett, are you from New York? And he said, yes, I am from New York. How did you know that? And he said, well, here at the White House, it's only the New Yorkers who lock their car doors on the way in. (Laughter.)

And I was thinking of that, sort of apropos of nothing last night, when I was writing these. But if you have to do a bridge, it would be signature power in these Washington corridors.

This is as close as we have to corporate royalty in the United States. So look at the stations of the cross. There's Yale varsity baseball. There's Yale varsity baseball with George W. Bush, Harvard Business School, McKinsey, General Electric, discovered by Jack Welch at General Electric and mentored by him, chairman and CEO of 3M, and then, since 2005, chairman and CEO of the Boeing Corporation, chairman of the Business Roundtable and chairman of President Obama's Export Council.

So this is the resume you want when you go back to high school reunion and you come across the girl who wouldn't go out with you. (Laughter.) And she says, oh, my gosh, Jim. What have you been doing all your life? (Laughter.)

Let me road-map the conversation now. I'm going to interview Jim for about a half-hour, and then we'll take the second half of our time together and open it up for questions and answers.

Housekeeping. The conversation today is on the record. Could I ask you all to turn off your mobile phones, not simply put them on vibrate? Apparently they interfere with the sound system here. And then the final announcement: On September 20th, Julius Genachowski, who is the chairman of the FCC, is going to be having lunch here, and everyone is welcome for that.

So it's very good to have you here, Jim.

JIM MCNERNEY: Thank you.

BRADLEY: Welcome.

MCNERNEY: Good to be here. Just move from vibrate to silent.

BRADLEY: Thank you.

So there was a famous Boeing PowerPoint shortly after your tenure began at Boeing. The general counsel put up a slide, and the slide had two long numbers on it. And he said these are not zip codes. These are the federal prison numbers of the former CFO at Boeing and the woman, the airport -- sorry -- Air Force officer whom he is accused of having bribed.

So right in the four years before Jim's arrival at Boeing, there were a series of scandals, some in a teapot scale, but the CFO left and two CFOs in a row left in a hard hour. And you were brought in expressly as a business and a moral turnaround artist.

So most of us are not going to be in that position in life. Just for a moment, as if it weren't on the record, pull back the curtain a little bit and tell us -- (laughter) -- so what is it like to be the CEO, to arrive. What's day one there? What did you find when you arrived at Boeing?

MCNERNEY: Well, first of all, just a big business opportunity, so just leave that aside. Boeing had a lot of strengths in its products and technology and its people. But there had been a cultural element that had produced some -- (audio break) -- the wrong things. And it was a very small number of people, but I've always held the view that even small missteps or big missteps by just a few people are reflective of the overall culture.

And so the approach was to start at the beginning --

BRADLEY: But let me just drill down for a moment. What's the cultural thing? What was it you found that was anomalous to --

MCNERNEY: Well, I mean, it's people that -- very few people who felt they were immune from the rules, OK. And that generally comes -- it can be a subtle form of arrogance. It can be we do things that are so important that we don't have to -- we don't have to play by the rules.

Now, obviously the vast majority of Boeing folks, even back at that stage, didn't view the world that way at all. They felt a huge -- it was a huge honor as well as responsibility to do the kind of work we do. But I think, as I came in, I had to -- I had to presume that the culture needed a ground-up discussion.

And so it was sort of one conference room at a time, you know, talking to our people, deciding what we wanted to be, a ground-up discussion not only for business strategy but the kind of attributes we wanted to have as leaders, the kind of values that were important to us.

Now, most people felt that this was a gratuitous discussion. I didn't. I mean, I thought that there are times when you -- in your life, whether it's a corporate life or a personal life, where sort of a ground-up examination and discussion to remind you what's important and what is foundational is a good thing. And that was a time in Boeing's history when we needed to do that. So it was a very personal mission.

I think the prison numbers -- that was the first large meeting I had, and I wanted to make the point that this is personal, that this is about how each and every one of us carry ourselves and the responsibilities we have and the fortune we have to serve our country. And to be involved with the technology that we're involved with carries huge responsibilities. So it was sort of a -- it was -- I viewed it as a leadership exercise.

BRADLEY: Was there a cinematic moment? Was there a moment where you had to not blink? Or was the culture ready to roll over already?

MCNERNEY: Well, no, I think the -- most people were very disappointed. And it was sort of -- this disappointment blended in with a little bit of a loss of confidence, a little bit of a loss of swagger. And I mean swagger in the good sense.

And so I think people were ready for this discussion. Remember, everybody, since 1960, were always the proudest ones at the cocktail parties because they worked for Boeing. I mean, this is an iconic American company. And so against that background, the disappointment probably hurt even more. So I think they were ready for this kind of discussion.

BRADLEY: March 2005 also would have been a good time to buy Boeing stock. It was up 40 percent across the next two years.

So let's move forward to the present. Boeing sells planes all over the world. Let's take commercial plane sales or back orders as a currency, as a metric. Looking at your sales around the world, what can you tell us about the global economy? Do you see it's coming back, or does it feel flat-lined?

MCNERNEY: I think, in sum, the global economy is growing slightly. But it's a tale of two cities, the developed world and the developing world. I think Asia, led by China, notwithstanding some discussion about China slowing down just a little bit, but I think Asia and the Middle East are growing mid to high single digits. And I see that as attainable.

I think the U.S. and Europe -- and they both have the same dynamics, which is some political stagnation as well as some economic stagnation, and the two are related. And I think -- I'm confident our country will get through this phase. And my guess is Europe will too, but it's -- but I think it's very slow growth in aggregate is what I see for the next five, six years.

BRADLEY: Here in the United States, is it any better or any worse than it was six months ago?

MCNERNEY: I would characterize it as about the same.

BRADLEY: And how about Europe?

MCNERNEY: I think Europe may be slightly worse, based on what I've seen. But I'm -- I don't have a -- my aperture isn't across the entire economy. But when you sum up conversations and personal observations, same here, slightly worse there. Now, here it's not good enough.

BRADLEY: If you had to guess what percent of Boeing commercial jets would be sold in North America and Europe across the next 10 years, as opposed to the rest of the world, where would you put that?

MCNERNEY: Well, I think the U.S. and Europe would probably be about half, and Asia, Middle East, Latin America would also be half. That's a dramatic shift from five years ago, for example, where it was two thirds, one third. So this is very reflective of the global economy and the progress the developing world is making.

BRADLEY: The current issue of Foreign Affairs has an article that talks about the United States loss in market share in the sale of arms around the world; that as recently as the 1990s, we were around 60 percent of global market share, and we're down to about 30 percent.

What's your insider's take on what's going on?

MCNERNEY: Well, again, I think it's -- there's all kinds of theories about why that is happening. Some theories talk about the loss of U.S. assertiveness around the world and the follow-on cooperation --

BRADLEY: In our foreign policy, military and foreign policy?

MCNERNEY: Yes. Yeah, yeah. I mean, that's -- I don't necessarily subscribe to that, but that's one theory. Another theory is that the developing world is producing more arms. And Europe no longer has a market for their own production. So you've got lots of production chasing business that is growing, but some of these -- some of the more advantaged people are folks in other parts of the world.

I think the -- so it's -- now, my personal view is I don't think it's quite that -- I don't think it's quite that dramatic.

BRADLEY: You don't -- (inaudible) --

MCNERNEY: I don't believe those numbers, I guess, is what I would say. It depends on what you do with those numbers. If you -- (inaudible) -- as well as fighters, then -- but most of the technologically advanced stuff, I'd say the market share has stayed roughly the same, OK, with the U.S. dominating. But that's a matter of the two of us sorting out the numbers.

But there certainly are more of the mid-tier and lower-tier armaments coming from other parts of the world than the United States than there used to be, that's for sure.

BRADLEY: Is this OK? Is that going to be OK with you?

MCNERNEY: I'm fine. I'm fine.

BRADLEY: If it isn't, then why don't we start over? (Laughter.)

I'm happy to welcome Jim McNerney. (Laughter.)

Let's use the -- if it's all right with you, let's use the Dreamliner as a way to get into the conversation about U.S. manufacturing. But let's start with the happy news of the Dreamliner. What did Boeing get right about this plane that Airbus missed?

MCNERNEY: Well, there was a fundamental choice to be made at the beginning of the last decade, analogous to the choice that computer manufacturers had 30 years ago, which is keep building bigger and bigger or build smaller, more capable. We chose smaller, more capable. And so -- and our worthy competitors chose bigger.

I think the results suggest that our choice was a good one in the sense that more people wanted to fly point to point, not through hubs, security lines. Fuel efficiency was more of -- was more built into our strategy. And so long range, point to point, 20 percent fuel improvement, which is a huge fuel improvement with new composites and new engines and things, as opposed to just take a 747 and make it bigger.

BRADLEY: Yeah.

MCNERNEY: So I think we made the right call. I think, reflective of their choices since then, it has been to sort of move in the direction --

BRADLEY: They're migrating your way.

MCNERNEY: Yeah. And we did.

BRADLEY: To the manufacturing side, I was chatting with Jim Fallows, whom you know, before -- sometime last week about this. And he said ask the question about what did Boeing learn about outsourcing where the manufacture.

MCNERNEY: Well, we learned -- we learned what every industry learns, which is when you go too far, it's a problem, OK. And I think --

BRADLEY: What are you referencing?

MCNERNEY: I'm referencing to outsourcing too much.

BRADLEY: Mmm hmm.

MCNERNEY: And we not only outsourced manufacturing to a somewhat greater degree than we had on previous models, but we outsourced some of the engineering. And so we lost some control of the configuration. Of course, we didn't think we were doing that at the time.

BRADLEY: Right.

MCNERNEY: But I think, in a practical world, we went a step too far. And so I think we're looking at more vertical business models now where we regain some control over some elements of the manufacturing, as well as the design.

The good news is with the 787 is we got the product right.

BRADLEY: Right.

MCNERNEY: We did the right product. We stumbled on the implementation. We learned from it. And in subsequent new models, a new model on the 87 plus our new narrow-body model, it's more reflective of greater control over some of these elements and requires a little more capital. But it's -- it gives us much greater control over our costs, our delivery and our quality.

BRADLEY: Is that an important distinction between the engineering and the pure manufacturing --

MCNERNEY: Well, in these --

BRADLEY: -- as to this issue?

MCNERNEY: In these kinds of products it is, because, you know, an airliner, commercial airliner, is 4 million individually designed parts.

BRADLEY: Yeah.

MCNERNEY: Now, you can always make the argument that, hey, you do those 50,000 parts and you do those 30,000 parts. But when it all comes together, there's very few computer models that -- we got a little bit seduced that it all would come together seamlessly and the same design rules would be applied everywhere in the world, and corners wouldn't be cut and financial realities wouldn't hit certain folks. And so --

BRADLEY: (Inaudible.)

MCNERNEY: Yeah. Yeah. And so it's -- in this kind of product, more vertical control is needed. And we just went too far and had to learn the hard way.

BRADLEY: Yeah. Moving -- shifting to your hat of chairman of the Export Council --

MCNERNEY: Yeah.

BRADLEY: -- what is your thought on the competitiveness of the United States as to the pure manufacturing of manufactured goods?

MCNERNEY: Well, I think the -- there has been a lot of discussion about how we're losing competitiveness in manufacturing. For many of the industries that really count, I don't think we are. I think we are in some --

BRADLEY: Enumerate.

MCNERNEY: And when I say count, I'm not trying to suggest that there's great industries and then there's lousy industries. What I'm trying to suggest is those industries where we are globally competitive, we still do a lot of it ourselves. Aerospace is one. Electronics, medical equipment, tend to be the more technologically advanced software. Those kinds of industries we tend to maintain good strength in, both the development and the manufacturing and fabrication of it.

I think we've been hollowed out, and we've done it with some of our own policies -- hollowed out the lower-valued manufacturing. Now, that's -- there's a tension there with jobs and joblessness, so there has to be a political reality that's addressed there. You just don't want to ship every work activity somewhere else. I mean, you lose control over quality. You lose control over your supply chain. That's a consideration and a learning from the 787. But it's also a political reality that you have to deal with.

So we support policies in this country that are favorable to U.S. manufacturing.

BRADLEY: Does it matter to you whether it gets manufactured in the United States or overseas?

MCNERNEY: Yes. I mean, I think the -- but it's not a simple answer, OK, because, you know, we're a very global company that has global markets and global governments that we work with. And so they're insisting on work placement that is beyond our capacity to place work there. But there's a tension there.

But our view, particularly post-787, having a little more direct control, having a common culture across vital parts of our manufacturing, suppliers that are proximate to us. The value of that is -- has become clear to us in our cycle; so a little bit more shading in that direction.

BRADLEY: There's talk about the United States reviving as a manufacturing country. Does that feel like just this moment in time? Or would you say, no, I can see how we can be like Germany and --

MCNERNEY: I think we're -- we were not the only industry that hollowed out too much. I think we all learned -- many people in my positions across many different big American companies have learned the lesson of going too horizontal.

BRADLEY: Yeah.

MCNERNEY: And so I think a number of us are bringing it back. And it's not necessarily because of political pressure. It's because of satisfying our customers. I mean, we let our customers down with these horizontal, far-flung supply chains. We're still going to do that, but not for everything, and -- because we lost control of our quality, cost and delivery. And those are the fundamentals. And that's what our customers need.

So it's -- I think -- I think the linchpin right now, the bottleneck right now, is education. I mean, I think -- and you may want to get onto that, and I'll just jump into it.

BRADLEY: No, go ahead.

MCNERNEY: I mean, big manufacturers -- you need Ph.D.s to design the airplanes. You need graduates to lead large chunks of your organization. But we need vocational training as well to build and assemble these -- and service these and maintain these airplanes, which in and of itself is high-value work. And we're falling down a little bit. And I know the administration and others are beginning to get focused on vocational training.

If you're talking just about American manufacturing, vocational training is something that this country needs to refocus on. And we're seeing examples of it. In Chicago, Rahm Emanuel, who's got his plate full with other things today, but Rahm is focused on vocational training. And there's other initiatives we're beginning to see around the country. But I think that's important.

It's not unlike the German model, where vocational training is highly valued societally as well as in the business community. We've lost a little bit of that capability. It's often referred to as the middle class. I've lost track of what the middle class means now.

BRADLEY: Yeah.

MCNERNEY: But it's -- but we need to focus a little bit more there. We have to train the people that come to work for us to do assembly maintenance and technician kind of work. We spend two or three times as much time training them as we used to, because we're not finding people that have got these basic skills.

BRADLEY: If you were not an American company and you were just operating out of some tax haven somewhere -- Netherlands Antilles -- would you be able to find, for this kind of labor, not the Ph.D. but the service man?

MCNERNEY: Yeah.

BRADLEY: Would you be able to find that labor better and cheaper? How many other countries would you be able to find that better and cheaper than in the United States?

MCNERNEY: Well, it's hard for me to give you a hard answer. I mean, I think the -- I think -- let me answer it this way, David. I think we've lost a relative advantage there with that kind of worker.

BRADLEY: Yeah.

MCNERNEY: And that's really the point. I mean, and I think the developing world is doing a better job of producing people with a base level of education, with an expectation that they can ladder up from where their parents were and be happy with that kind of work. I think we just need to refocus there, because there's a lot of places around the world where that can be done. And in many cases, I'd rather do it here.

BRADLEY: Just before we leave that topic altogether, I have three sons who are really good at that sort of thing. And if you wouldn't mind, as we lift it up -- (laughter).

Let's go to China. So China is both a --

MCNERNEY: We'll see how the interview goes, David. (Laughter.)

BRADLEY: Did you hear the part about Boeing stock up 40 percent -- (laughter) -- within the first two years of --

MCNERNEY: (Laughs.) Getting better. Warmer, warmer.

BRADLEY: (Laughs.) So China is both a customer and a potential competitor. I'm gathering -- I don't want to prejudge it, but I'm gathering you'd prefer them as a customer than a competitor.

What is -- what's it like to deal with the Chinese?

BRADLEY: Well, you're dealing with -- you've characterized it right, David. We have to accept the reality of both competing with them and partnering with them. Their market is too big to not partner with them. And they're too good not to end up competing with. And so you just can't get trapped in these either-or kind of paradigms. You just have to live in the world.

They are highly -- to answer your question directly, they're highly competent. They are increasingly well-educated. And they are very motivated. And I think --

BRADLEY: What do you mean by that?

MCNERNEY: They want to improve their lives, you know. They want to improve their lives. And their parents want them to improve their lives. And the family unit is strong. And so, of course, there are issues. They have the huge issue of the rural-urban migration, housing costs, inflation. They have issues like everybody else has issues.

But they've got some fundamentals -- education, motivation, scale, money, ability to export for foreign exchange. And they're wrestling with, obviously, the dichotomy of a political system that is a little -- remains a little top-down and a market system that wants to be bottom-up. But they're showing signs of --

BRADLEY: Can you see the elements of the top-down still?

MCNERNEY: Oh sure, sure.

BRADLEY: How does that present?

MCNERNEY: Well, I think more decisions are made by the government in the normal course of business in China than here. And the -- I mean, one example would be when we sell an airplane to China Eastern, there are two steps to the process.

Step one is convincing the airline to buy our airplane, and then step two is working with the airline to gain government approval for the sale. And that's the way they do business. And in the United States, the airline can simply make the decision on their own. But that's -- I don't want to judge it. I mean, we just want to line up to support the way they want to do business, and --

BRADLEY: When we were talking before, last week, you mentioned the fact that you can sometimes read in Chinese conduct, as to Boeing, signals that are being sent to the U.S. Would you explain that?

MCNERNEY: Well, yes. I mean, I think because chunks of our business are so big, when we typically do a deal, it's somewhere between $1 (billion) and $20 billion. And so occasionally we find ourselves as -- occasionally find ourselves in a position of one government wanting to send a message to another about the status of the relationship. And obviously we want to be honest brokers in the midst of all of that and want to be judged only on our capability. But there are times when that happens. And you see that in big projects in other things.

BRADLEY: Cybersecurity. It's a hot issue to read about. Is it, in fact, a real problem? And give us --

MCNERNEY: Yeah.

BRADLEY: How big a thing is it at Boeing?

MCNERNEY: It's very big. I think cyber warfare, to just parrot the term that's increasingly being used, is real. I mean, I think there are an increasing number of cyber incidents in this country. And so there is an industry that's beginning to grow that prepares institutions to defend themselves from this. And it's -- but it's -- I can tell you it's real. It's a reality that most big institutions, companies and otherwise, have to spend a lot of time and resources on to fight and mitigate it.

BRADLEY: Not for actual data, but just order of magnitude, are we talking about a dozen times a year, a hundred times a year?

MCNERNEY: Thousands.

BRADLEY: Thousands.

MCNERNEY: Exactly.

BRADLEY: And roughly from how many countries?

MCNERNEY: Well, I mean, there's a lot -- there's -- it's hard to know, because a lot of these institutions or individuals do a pretty good job of masking where they're coming from. And that's part of the game. But I'd leave -- I'll leave the press to speculate on where all this comes from.

BRADLEY: We're good at that. We're happy to do that. (Laughter.)

MCNERNEY: And I could only get in trouble. (Laughter.)

BRADLEY: As part of your work, you get to meet heads of state around the world. And I can't imagine they don't want to ask you questions about the United States, about the president, about the election. What do heads of state ask about the United States these days?

MCNERNEY: They really would like us to get our house in order. You know, I think --

BRADLEY: Referring to the deficit?

MCNERNEY: Yeah. I mean, I think sometimes it's framed as the U.S. presence here or there isn't as strong as it used to be, or sometimes you get the other discussion, which it's too interventionalist here. But I think what they really want is a strong United States.

I mean, I think -- and the conversation eventually gets around to this -- we are a stabilizing influence around the world and a -- whether it's military deterrence -- that could be framed that way -- or whether it's economic strength -- it could be framed that way -- whether it's diplomatic intervention, even-handedness representing free market, rule-of-law kind of trade.

You know, we tend to represent a lot of things that are reflected in others' behaviors when we're stronger. And so I think it -- I was anticipating this question, so I thought about it. And that's really what it gets down to. They'd like to see us get by our current divisiveness, settle on what we settle on, and I have an abiding faith that the United States is going to pragmatically resolve the differences that seem insurmountable today. I just really believe that. And I think when that's done, I think everybody will feel a little more comfortable about us.

And that may be a little bit of a leap, based on your question, but I think that's what they really want.

BRADLEY: Jim, if you can lock in on a particular conversation that you've had, like this one -- don't mention with whom, but something that's vivid in your mind. Help us understand, what's the tone that these questions are asked -- in sadness, in astonishment? Is there a presumption already that the United States is in decline? What does it feel like in the conversation?

MCNERNEY: It's usually framed from a consequence that's happening that wouldn't have happened before. I mean, it could be a smaller country that is troubled by another big country's presence -- or military, economic, whatever -- that might not have happened with a -- with a stronger America. Something like that.

But I think -- for example, I spent some time in the Pacific earlier this year, and I think the Obama administration is aware of this. And the sort of the assertiveness you're beginning to see in Asia, for example, is designed to mitigate some of that in a part of the world where our relationships are going to be critical for the next 100 years, absolutely critical.

But again, I get back to just -- and I know I'm being a little boring here, but a strong United States. I mean, everything -- and I'm going to sound like a businessman now, and I am one -- really, most of our country's strength flows from our industrial and economic base. And that is a sort of -- that is foundational. And other kinds of strength and influence really can't happen without that. That's why I go back to that as a root cause, even though we're in a foreign policy forum here. And we could talk about FTA's and we could talk about export control and we could talk about commercial diplomacy and all the other elements that I focus on in the Export Council. But the most meaningful thing, in my view, is just getting on to what we do best.

BRADLEY: If -- this will be the last question, and then we'll open it up. If we were taking a poll of the Business Roundtable and asking them to give a grade to how well they think Washington is performing -- I don't mean the current administration; let's take it across the last eight years, so it's Washington more generally. What would be your guess on -- what's the grade Washington gets?

MCNERNEY: Well, I think the grade would be -- well, most business leaders are disappointed and think we can do better, let's put it that way. I think the -- and you know what that's embodied in, quite frankly? I think most business leaders like myself are more ready for a compromise on a lot of the -- across the political divide here than our political leaders are. I mean, the -- I don't know whether it's Simpson-Bowles or whether it's some other proposal that shades in one direction or another -- I'm convinced that's where we're eventually going to end up.

It's -- and I think we would trade the certainty of some resolution, even if it's not perfect from our point of view, with the uncertainty of continuing to die -- both sides dying on the cross. And so I think this certainty thing, which I know sounds amorphous and it sounds like an excuse on an earnings call -- (laughter) -- but it is important.

And what I think will happen -- because I do have an abiding faith in us, I think what will happen is there will be some compromise after someone gets elected here. And six to 12 months, I don't know, there will be some compromise forged. It will not be too different than the compromise we looked at two and a half years ago. (Laughter.) And it's a little bit of a lament, which is, gee, couldn't we have gotten on with this a little bit earlier?

BRADLEY: Let's open it up to questions. If you would, it's protocol here, please raise your hand and wait until a microphone comes to you. And then if you'll give us your name and affiliation -- and if you will keep questions or comments to a reasonable length.

Why don't we start with this gentleman here on the aisle, and then let's go to this woman here in the blue. So whoever else; I think we've got two microphones. Could we bring one up here for the woman in the front row.

QUESTIONER: Bob Winter, with Arnold and Porter. Sir, you mentioned your focus on the strength of the economy. And at one point, in discussing Boeing's own experience in going too horizontal, you mentioned, but that would have required more capital -- or the solution requires more capital.

I wonder if you would comment on the potentially negative impact in American industry and finance on focus on trying to undertake business and finance activities with a minimum of capital. A lot of people have thought that that was a serious factor in the financial crisis and I think your comment suggests that that may have been a significant factor in the hollowing out and going too horizontal in the economy as well more broadly.

MCNERNEY: Yes. I'd never connected those dots the way you just did it with your question, but you're right. I mean, a lot of these financial structures basically had the effect of piling more debt on less capital, whatever the structure was. And you could argue that horizontal manufacturing structures have some of the same element to it.

I think -- look, I think we went too far in both areas. The business models are seductive, OK, and I think the -- there may be a little more learning on the financial services side than there is on our side, but it's a little bit of a management 101 lesson. And it's all about your customers.

If you frame it, you get the politics and the ideology out of it when you focus on, are you delivering to your customers or not effectively. And with our more horizontal business model, we were not delivering to our customers. So we need to regain control. We need to spend more capital. We're going to spend more capital. There will be some disappointed suppliers who are doing somewhat less work for us because we're doing it for ourselves. But we're going to have better products, higher quality products that are more expeditiously delivered.

But it's an interesting way to frame that.

BRADLEY: We'll go to the front row.

QUESTIONER: This has been a -- I'm Missy Warsheim, with the Naval postgraduate School. This has been a fascinating experience for me this last hour because I joined IBM in 1981 when it was considered the best corporation in the world; I was there two weeks and realized it was on a downhill slide. But anyway -- (laughter) --

I want to ask about education. I think there are some basic things missing from our general education system, which turns out to be process systems, context and consequences. Doesn't exist. And I think unless you have that kind of foundation to look at problems, it's very hard to know how to address them. As a corporation, and clearly as a national leader, how do I get you to start talking about some of this so we can move the educational system into being what I consider 21st century competitive on a global basis?

MCNERNEY: Well, we do a lot of talking about it because I share your view, and we spend a lot of money on it. But I don't think we're being effective yet, OK, and I share the frustration with you totally. And it gets down to families and local school systems eventually and that has a different set of dynamics than you and I are used to dealing with. And you're seeing it played out in Chicago today. I mean, it's a tussle between a school system that wants to be run a little bit differently and a union that resists it. And that discussion goes on everywhere around the country.

So we've got to -- I think once we get through this political season we're in right now, I think both presidents want to address this issue. I really do. I think President Obama does. I also think Governor Romney does. And I think once we get through this, we have a chance to focus on it. And I think the solutions involve some money, they involve some focus. May involve doing some things at the local level that the local level doesn't want to do to ensure some quality.

But it looks to me like whoever ends up winning the election, we have a chance to deal with it. But hope springs eternal.

BRADLEY: If you'd give the microphone to that gentleman right there. And would you give this microphone to Mr. Rall beside you.

QUESTIONER: Good afternoon. I'm Jonathan Hopkins. You mentioned the importance of certainty, and I think a lot of us might agree with this. But could you give us tangible examples that help us think about this fiscal cliff coming up at the end of this year. And we have an uncertainty problem with the debt downgrade and the lack of a debt deal earlier last year -- or this year.

Could you give us a tangible example of decisions that you made different, or if you held more capital as a result of knowing these problems were not getting solved, so we can understand how this affects business tangibly?

MCNERNEY: Yes. I mean, we are laying off more people in our defense business than we otherwise would because of the uncertainty around sequestration. I mean, there is some capability that we'd like to retain, and if we knew which way it was going to go. So that's one example. And I'm not the only one in the defense industry. I think long-term capital spending, that's less of a Boeing issue. Our industry is a little stronger than some, but when you listen to Alan Greenspan speak, he'll tell you the data he looks at shows long-term capital investment going down.

When you don't know the tax rate, when you don't know the government policy, when the regulatory environment is, in the view of some, not as friendly as it could be, people get nervous. And he's presented to me numbers that show -- and long-term capital has an R squared with long-term employment of about 95. I mean, it's a biggie.

And I think those are two pretty good examples. I think the smaller the business, the more this -- the more this plays because that's -- are often -- the small company that, and so you're nervous already and when a lot of these factors you don't know, it's -- so we've just got to get through this. Certainty -- as I pointed out, compromise involving certainty has higher value than the answer you want.

MR. : You had a great frame for this as soon as we walked in. You said, referencing the fact that layoffs have to take place, considering the possibility of sequestration, that for American corporations sequestration is already here.

MCNERNEY: Yes. Well, I mean, that's -- it is already here. I mean, it's been with us for a year. I mean, just imagine sitting in front of your board -- and I'm looking at John Bryson here -- Secretary Bryson was a board member of Boeing many years ago -- and saying, John, by the way, you now, there's a fiscal cliff that might be coming and we're going to keep spending, we're going to keep hiring. That's not the discussion you have.

And so -- but you know, Secretary Bryson, it's great to see you here. We're talking about global trade policy and there was no firmer champion of some of that stuff than you, so it's good to have you here.

BRADLEY: Mr. Raul?

QUESTIONER: Alan Raul, from Sidley Austin. My question is about the impact of federal regulation on the economy. It's an article of faith among many in the business community that, left to its own devices, Washington will over-regulate business and have a negative impact on the economy.

President Obama issued several executive orders echoing his predecessor's interest in cost-benefit analysis, including one on streamlining regulations and harmonizing with the rest of the international community. Could you address what the impact is that you see on Boeing and other corporations for federal regulation, how you interact on Washington to rationalize that process.

MCNERNEY: Well, I mean there's always a tension between the business community and the regulatory environment. There's always a tension. And I think the business community has had some very direct and occasionally heated discussion, particularly early in the administration here. It was constructively received. I mean, I think -- I'm remembering particularly on the energy side, some on the labor side. We had a little dust-up down in South Carolina that some of you may remember -- (laughter) -- where we thought we were getting a little over-regulated.

And I've seen some progress on a couple of these places. The medical world is up in arms occasionally. But I think we've seen more signs over the last year and a half or so that the administration is trying to meet us halfway in a couple of spots. I think at the end of the day we still feel -- we still feel if you just let us run, we know how to create jobs, we know how to be globally competitive and there's sometimes a few too many steps. And so we'd like to see more progress made and we'll keep advocating for that and working with the administration to do that.

BRADLEY: The gentleman in the back -- and the lady in the back in red.

QUESTIONER: Hello. Frank Finelli, from the Carlyle Group. But thank you very much for your comments. As you look at the multiple hundred billion dollar backlog of commercial aircraft at Boeing, how do you see aircraft financing and leasing unfolding, given the stress in the banking system in Europe and the emerging markets, some of your traditional sources of financing?

MCNERNEY: Well, Carlyle probably has a modest interest in how it's all going to turn out. (Laughter.) Say hi to my friends there, please. So far what's happened is, and Europe -- my guess is you're somewhat aware of this -- is that we're seeing the European banks back away a little bit. We're seeing the capital markets step in, and we're beginning to see some financing out of Asia, particularly China, as they've teamed with some Singaporeans and Hong Kong to set up some pretty good-sized leasing companies.

So, so far, that math has worked. So -- but having said that, do we want the European banking crisis to get sorted out in a hurry? Yes, OK. Meanwhile, though, the capital markets at Asia have pretty much -- have pretty much made up for it, and actually more than made up for it. So we're not in extremis yet.

QUESTIONER: Greta Lindbergh, NSS. I'd be interested in your perspective on Russia PNTR. Thanks.

MCNERNEY: Well, I think most of the American business community favors it. The WTO without PNTR equals not much, and so we need to reform that, keeping in mind America's security interest as you do it. But I think it needs to -- I think we need to get there, we need to get there more quickly. I spend a lot of time advocating for it. I'm a little biased in the sense that Boeing has a lot of business there. We have a number of joint ventures there.

I'm aware of the perils of doing business there, but again, you know, I sound like a dinosaur but engagement is generally the way into the end zone with entities that aren't like you and aren't perfect, and just try to work it. Especially at a time when we need jobs and we need growth and they need our stuff.

BRADLEY: The gentleman right here -- and how about this woman up here.

QUESTIONER: Hi. Cameron Carey of General Counsel, at the Commerce Department. I want to circle back to the opening subject, the history of bribery and development of a corporate culture to change that. You're in a sector that's been particularly susceptible to those issues globally. One of the things we've been working on at the Department of Commerce and across the government is to try to level the playing field for the United States through mechanisms like the anti-bribery convention, trying to get trading partners to enforce or adopt a clause against transnational bribery.

Are you seeing an impact of those efforts in the corporate cultures and the business practices of competitors around the world?

MCNERNEY: Yes. I think -- I think American and European companies, not withstanding the doubling of scrutiny -- I'm just guessing a doubling -- you know, FCPA and other things, the amount of environment, notwithstanding all that, I think the behavior I see is better for American and European. I mean, this -- there were a couple of incidents in Europe, Siemens, BAE and some others, where they were pretty aggressively dealt with. I mean, it was discontinuously dealt with in Europe, which I think helped. And now they're part of some more international efforts. And so I see, I see improved behavior there.

It's hard to assess other parts of the globe and it's not as visible, the entities aren't public and so you're sort of left with anecdotal rumor and things like that so I hesitate to sort of jump in. I would say in the developed world the answer to your question is yes. Still not good enough in some cases, but yes.

QUESTIONER: Hi. Andrea Shalal-Esa, with Reuters. And I just wanted to ask you today, while you've been sitting here, there's been a lot of discussion in Europe about a merger of EADS and BAE Systems. And I wonder if you can speak to that and what the impact will be on Boeing particularly, from having basically Airbus now in your backyard to a specific facility coming, whether you're concerned about that?

MCNERNEY: Well, listen, I just caught those rumors this morning myself --

QUESTIONER: It's been confirmed, so --

MCNERNEY: And so, OK -- I think from my perspective -- and I'm thinking about it quickly here -- I have a pretty deep and abiding faith in our company's strength, OK, so I don't see this as something that is going to threaten us fundamentally. It does reflect a global consolidation that is beginning to happen.

I think this may be a matter of -- from an EADS standpoint maybe some increased U.S. market access because BAE's entity here, and the entity, when it's put together does look a little more like us. And that's been a steady theme in EADS's development over the years. So I wouldn't want to comment beyond that because I really haven't studied it.

BRADLEY: The gentleman on the aisle here. And I was going to say, there's somebody over here, but --

QUESTIONER: Hi. Mike Mosettig, with the PBS Online NewsHour.

You mentioned health care. How much are businesses like your affected by this uncertainty of what kind of a health care system we're going to end up with? And how do your health care costs compare with that of Airbus? (Laughter.)

MCNERNEY: Well, first of all, we're making the assumption that the current health care system that's law will happen. That's our assumption. And the -- how our health care costs compare with Airbus, I must admit in a public forum, I'm not sure. They have a completely different health care system there and I'm not sure how the money moves around, quite frankly. And it's -- but as to the -- our health care system, there's a law on the books that we're working toward complying with.

BRADLEY: This gentleman here and this woman right here, if you will.

QUESTIONER: David Slade; Allen and Overy. On the subject of how well the U.S. government does supporting American business abroad, I was talking with someone from the State Department recently who made a comment to the effect that it takes two to tango, and that there are sometimes some markets -- I think he was referring in particular to northern Africa, where he wished there was more American business interest to support.

I was wondering if you could comment on that. Should American business be more aggressive around the globe, or is there -- are there times when you feel like the government would like to take you places where you don't really want to go?

MCNERNEY: Listen, we get pretty good support from our government, whether it's Secretary Bryson's Commerce Department, where the support is fundamental businesses processes, boots on the ground, advocacy here in Washington influencing the administration in a way that's favorable to us. Or whether it's the president himself advocating for major projects or Boeing aircraft when -- when he has the opportunity. We get pretty good support.

Now having said that, there are countries -- and China's a good example -- that has multiples of that kind of support, you know, and it's -- I think they're viewing it as a start-up. Africa's a good place. I'm sure China might have been the country you were referring to, where when there are major projects to be had and there's a Chinese competitor they're very aggressive. There's lots of people.

Now we happen to think our technology's better. We don't think we need as many people there to convince people of that, but it's -- it is a factor out there that we have to deal with and we're seeing that more and more.

QUESTIONER: Thank you. I'm Genie Nguyen, with Voice of Vietnamese Americans. Would you share with us the vision about the TPP -- and with that Trans-Pacific Partnership.

As a negotiator, what would be a few important points you want the U.S. to emphasize? And how -- do you have hope that we will get what we want?

MCNERNEY: Well, I do have hope that we'll have a good agreement. I think the important thing is to minimize the exceptions and have consistency, which of course is hard. But I think that's what the U.S. needs, is few country-by-country exceptions. This is a -- TPP is huge. I've forgotten exactly how many of the world's consumers are involved in TPP but it's by far the biggest trading partnership that has ever been attempted.

And it is critical because many of our competitors in the developed world have relationships with these countries and we don't. So on a competitiveness basis it's important. I think consistency so you didn't end up where you started -- which every country is different -- is important. And I think the American business community wholeheartedly supports TPP, including myself, and we're working hard to support it with the administration and on the Hill.

BRADLEY: Jim, I'm going to reserve the last question for myself.

MCNERNEY: Sure.

BRADLEY: My mother, age 91, told me on the phone this last spring that she had just had a tour of the Dreamliner, and I'd always wanted to see the Dreamliner, and I asked, how did you get to go see the Dreamliner? She said, those nice executives at Boeing gave me a tour of the Dreamliner. So for those of us who've not been invited aboard the Dreamliner -- (laughter) -- could you tell us what the passenger experience is? How's it going to be different than what we're seeing? (Laughter.)

MCNERNEY: What's going through my mind is, you know, with all the delays we had -- I won't say it. Look, for a passenger, you can go -- it opens up 450 city pairs that were not connected directly before. Remember, smaller airplanes, 767-size airplane. And I'm making up the cities, but this is an example. You can go from St. Louis to Guangzhou, as opposed from St. Louis to Minneapolis to Hong Kong to Guangzhou. So not going through security lines on long international fights is a big one, and we got a lot of feedback.

Secondly, because the composite materials that we make this plane with are stronger than aluminum, you can carry a bigger pressure differential from the outside of the airplane to the inside, so you're effectively flying at lower altitude, which allows us to put more humidity into the cabin, which has a direct relationship to how you feel when you climb off the airplane.

And then there are a number of creature comforts. The entertainment system is wireless, which leads to more capability. The windows dim automatically and then there's all kinds of atmospherics we've got. And you're paying less for a ticket if the airline passes along the savings -- (laughter) -- because they're flying a plane that is 20 percent more fuel efficient and 30 percent more efficient on a total operating cost, which includes maintenance and capital. So it's a pretty big breakthrough.

So just get on one when you can. United is flying one this week for the first airline in America.

BRADLEY: Well, it's a privilege for the Council to have you here. Thank you very much.

MCNERNEY: Thank you, David. Enjoyed it very much. (Applause.)

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