Monday, November 27, 2017

Boeing invests to mitigate long-term disruptive threats

Despite sitting atop a duopoly enjoying the longest, uninterrupted run of annual growth in history, Airbus and Boeing executives seem gripped by a heightened sense of healthy paranoia these days.

But it's not the likes of Comac, Irkut or Mitsubishi that seem to arouse the most concern in the corporate suites of Seattle and Toulouse. After decades of accumulated business wisdom, Airbus and Boeing know how to compete with that sort of external threat.

Rather, the paranoia seems focused in a different direction: namely, the 20-something software coder in a start-up somewhere in Palo Alto, Austin or Hyderabad, with a vision and an algorithm that in a decade could possibly change the way people move themselves or their belongings by air.
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In response, Airbus and Boeing are pouring financial resources into engaging and, perhaps, mitigating not a short-term competitive threat, but a long-term disruptive menace.

In mid-2015, Airbus established a venture capital fund in California's Silicon Valley called A3 (pronounced "A cubed"), luring former Google and Defense Advanced Research Projects Agency (DARPA) executive Paul Eremenko to lead it.

A year later, Eremenko – who strictly adheres to Silicon Valley's business uniform of T-shirt, jeans and designer sneakers – became chief technology officer of Airbus Group, while A3 continues to develop potential breakthroughs, such as a four-seat, vertical take-off and landing air taxi and a new concept for modular interiors for airliners.

Nearly two years later, it was Boeing's turn to make a move. The company announced the creation of the HorizonX business unit and venture capital fund in a 5 April news release, which also revealed the fund's first investment in a Seattle-based hybrid-electric aircraft start-up called Zunum Aero.

HorizonX vice-president Steve Nordlund met a group of reporters at the Dubai air show earlier this month and explained how the new business unit fits into the company's strategy and organization – and how it co-exists with relatively large units such as Phantom Works and Boeing Research and Technology.


Boeing's strategy remains focused on aerospace, but its recent foray into start-up investments was driven by the automotive sector.

Specifically, the business world's attention was caught by the rise of Tesla from obscure start-up in 2003 to the fourth most valuable automobile manufacturer. Protected by a high degree of technical complexity and barriers to scaling up production, aerospace manufacturers are often considered relatively safe from such a disruption.

But Tesla's ability to challenge several of the world's largest manufacturing companies convinced the aerospace world that new technology and business models can put any industry at risk of severe disruption.

"One of the reasons we stood up HorizonX is you see what's going on in the automobile industry. Frankly, a lot of the large automobile companies were caught by surprise," says Nordlund.

Tesla's rise was made possible by the confluence of three forces, he says. The first was the ascendance of Tesla's visionary new product. In 2003, it was still normal to laugh at the idea of making a commercially viable electric car. Second, new business models emerged, such as ride-sharing services, that disrupted the automotive industry's normal customer base. Finally, manufacturers witnessed a change in consumer behavior, as the millennial generation became teenagers and celebrated independence with smartphones instead of cars.

It took 14 years for Tesla to grow from start-up to a behemoth with a market value of nearly $53 billion. Could Boeing face a similar challenge in 14 years? The answer, according to Nordlund, is "Unlikely" – but only if you consider Boeing's traditional business model and products, like the single-aisle 737 family.

"I think the way I look at it is to broaden it," he says. "Will the single-aisle aircraft be disrupted? I think that's a harder obstacle to overcome. I think the next question is: will transportation be disrupted? Where will that happen? And how will that happen? And where will the value be created as that happens?"


To find – and deliver – the answers to those profound questions, Boeing turned to Nordlund, an eight-year veteran of business development and strategy positions across the company's portfolio of defence, space and commercial units.

Although he wears Boeing's suit-and-tie uniform rather than Silicon Valley's T-shirts and jeans, Nordlund is familiar with start-up culture. After working for Embry-Riddle Aeronautical University and IBM in the 1990s, Nordlund joined unmanned air systems start-up Insitu in 2002. The small company in Bingen, Washington pioneered the development of small tactical UAS for the military and was bought by Boeing in 2008.

"I know this from my Insitu days: it's really hard in our business to scale after you get past the initial proving the technology out," Nordlund says. "That's where us [Boeing] partnering with some of these companies that have some unique innovation can help them scale."

Nordlund's Chicago-based HorizonX has three avenues to engage with start-ups, nontraditional partners and ideas from internal and external sources. The most visible unit is HorizonX Ventures, a capital fund. Boeing has not disclosed the size of the fund, but Nordlund describes its investment strategy as typically Series A and Series B rounds from single-digit millions to about $15 million. The company plans to announce new investments on a roughly monthly basis.

"I haven't been concerned about our [financial] ability to make investments," Nordlund says.

Since April, HorizonX Ventures has met 1,800 start-up companies, averaging about eight a day. So far, Boeing has decided to make seven investments, including one that remains in stealth mode but more details of which are in the pipeline.

Nordlund's organisation also includes a unit called New Business Horizons, which is focused on identifying and developing new business models. The unit will "bring new capabilities to current markets, and current capabilities to new markets" by developing "nontraditional partnerships", according to Boeing's website.

A third unit, Disruptive Horizons, stages accelerator and incubator programmes to support new ideas from external and internal sources. For example, Boeing partnered with Hyderabad-based incubator T-Hub to host a pitch day for Indian aerospace. Boeing plans to select three start-ups to join T-Hub's incubator. Meanwhile, HorizonX will also solicit proposals from Boeing India employees, with the top three also set up to join T-Hub, Nordlund says.

If the single-aisle aircraft is not quite ripe for disruption, what is? Nordlund suggests one clue comes from his recent trip from London to Moscow. The 1,390nm (2,570km) flight lasted 3h, but the 56km (35 mile) commute downtown through congested traffic from the airport took 2h.

"So the question is: in the future, how do people want to travel? And how does connected transport happen? And how does that happen through a multi-modal effort? And what disruption does that create? So, our organisation is created to be looking out there so that we can find the early indicators of disruption, so we're not caught off guard like some of the automotive industry was," Nordlund says.

In a way, Boeing appears to want to catch the automotive industry off guard again. Any disruption caused by shortening Nordlund's taxi ride from the airport to city centre to downtown is no threat to Boeing's large commercial aircraft.

If someone invents a viable way to safely and affordably transport people by air over the same distance within a city, that technology will pose yet another disruption to the makers of cars. By launching HorizonX, Boeing declares that it wants to be involved in that disruptive force.

"I do think that within the next 15 years there will be a disruption in transportation," Nordlund says. "It's just unacceptable. We have to overcome the traffic problems that we have. The skies are less dynamic than the ground."

Enabling such a shift in transportation will not be easy. The transition from cars to flying vehicles implies breakthroughs in autonomous control and navigation, vertical take-off and landing propulsion and electric power generation and storage.

In June, Eremenko unveiled Airbus's detailed roadmap for developing a series of new electric and hybrid-electric powered demonstrators, ranging from the four-seat CityAirbus to a 100-passenger concept vehicle in two decades. Airbus also has detailed plans not only to make the aircraft, but also to offer the transportation as a service.

Aside from placing the investment in Zunum, Boeing is not quite ready to reveal any specific plans for developing a series of similar demonstrators. In the 14 November meeting with reporters in Dubai, Nordlund remained guarded as to how Boeing planned to counter the Airbus roadmap, but he acknowledged that Boeing would evaluate becoming a transportation service provider.

"I think when we look at long-term opportunity and growth and how the world evolves and what could happen, you've always got to sit back and look at where do you want to play in that value chain. So we'll always keep that on the table," he says.

Boeing has not released a product roadmap like Airbus, but several of the investments by HorizonX Ventures and other units of the US company offer a general direction. In October, HorizonX made an investment in Near Earth Autonomy, a spin-off of Carnegie Mellon University which has developed a way for UAS to precisely navigate without using GPS.

Separately, Boeing's corporate-level technology organisation acquired Aurora Flight Sciences, which specialises in autonomous flight controls and rapid prototyping of new air vehicles.

"You marry [Aurora's technology] up with the work that Near Earth Autonomy has done, you're starting to put the package together," he says.

It's not just passenger transportation that could be ripe for change in the future. The same inefficiencies caused by traffic congestion on the ground also interfere with logistics operations. Moreover, ground-based infrastructure for providing internet service is expensive and difficult to expand to remote areas. In both cases, converting ground-based technology to an airborne service is becoming a popular pursuit.

"What we see transforming business is that other companies and industries are trying to figure how to leverage things that fly," Nordlund says. "Where would you go to in Boeing for that? Now you come to HorizonX. We're now the front door for this emerging marketplace."

HorizonX is not just to keep Boeing involved in disruptive technology in the commercial business. For three years, the US military has also courted Silicon Valley, seeking to leverage the same software-enabled technologies for weapons and intelligence-gathering. Concepts such as the US Air Force's Project Maven seek to leverage the new theory called algorithmic warfare, in which the integration of data analytics, machine-learning and other software-enabled tools could transform the way the military operates on the battlefield.

Such interests are partly why Boeing last June decided to invest in Austin-based SparkCognition, an artificial-intelligence start-up. "Now we're getting down to final completion of a new agreement with Spark to expand our relationship beyond an investment," Nordlund says. "Because we see the importance of artificial intelligence emerging really in all aspects of our business to include the defence and security piece of it."

(Stephen Trimble - FlightGlobal News)

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