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Bombardier Case Study

Using a 1994 case study as a foundation, examines the 2003 and previous 10 years at Bombardier, including industry analysis, economic factors, social factors, political factors, technological factors and environmental/economic factors.

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Introduction Bombardier initially made a name for itself in snowmobiles but todayis one of the world's largest manufacturers of aircraft and rail cars Itmay well exit the snowmobile business during although rumors to thateffect have circulated in the past The company has encountered difficulttimes in the ten years since the case study was prepared with a stockprice at an all-time low increased competition in its markets and anoverdependence on a single market segment aerospace that replaced thedependence on snowmobiles during the company's

Diesel Progress North American Edition, p. In early 2 3, the company announced a two-seat ATV, a product that Bombardier is the first of its kind ever marketed(Fone, 2 3). Itmay well exit the snowmobile business during 2 3, although rumors to thateffect have circulated in the past. 556). (2 1, August 6). (2 2). The company has successfully built a niche market within that industry,but industry downturns in other segments have made Bombardier's traditionalniche vulnerable to competition from Boeing and others. Although the WTO agreed with Bombardier, thesubsidies allegedly continued, and the Canadian government stepped in withsubsidies of its own to help Bombardier win key contracts with AirWisconsin and Northwest; this, in turn, prompted Brazil to file a complaintwith the WTO ("The Dogfight," 2 1). Its smalleraircraft meet or exceed regulations for pollution and noise, and should aircarriers choose to replace commuter aircraft with new aircraft, Bombardierwould certainly be one of the vendors considered. Throughstrategic acquisitions and aggressive marketing, Bombardier ended the 199 sas the third largest manufacturer of aircraft in the world, behind Boeingand Airbus ("The Dogfight," 2 1). A Showpiece for a showplace. It has foundinnovative uses for its products, and marketed existing products for newuses, and it continues to be a pioneer in the segments in which itoperates. The following chart illustrates the globalcontribution to revenues in 1997 (Schlein, 1997): [pic] By 2 2, the contribution of the North American market (United Statesand Mexico) had grown significantly while Europe's contribution shrunk. 549): [pic] The aerospace industry is the most troubled of the industry segmentsin which Bombardier participates. The move recognizes that agribusiness ismoving away from large equipment for moving materials and workers aroundfarms and toward smaller, more efficient products. Aerospace now contributed most of thecompany's revenues and profits (65 and 87 percent, respectively), while thecompany's financial services lost money in 2 1. ECONOMIC FACTORS The United States and Mexico accounted for 47 percent of the company'ssales in fiscal 1997 (the fiscal year ends January 31) with Europeaccounting for 31 percent. (2 3). The system was built through apublic-private partnership, and Bombardier was chosen for the project inpart because of the technological innovation--including the efficiency ofits system--that it brought to the project (Stone, 2 2). In addition, the competitive landscape changed as thenumber of viable providers of aircraft dwindled. The challenge for Bombardier will be to lessen its dependence onaerospace without compromising its position and reputation in that market. References2 1 Annual Report. Bombardier continues to be an innovative participant in therecreational products market. During the 199 s, the aerospace industry as a whole underwentsignificant change. For example, Boeing acquired its lastsignificant American rival when it purchased McDonnell-Douglas. INDUSTRY ANALYSIS As illustrated by the financial performance of the aerospace businessunit, Bombardier quickly learned how to succeed in this new market.Although the company only entered the aerospace market in the early 199 s,it quickly became a significant participant in that market. Thiswas the small commercial aircraft market. The system combines quiet and ecologically-friendly transportation with convenience. Bombardier has also become a leader in monorails, which are gaining inpopularity for urban mass-transit options. This is because another of the company'sproducts, the Acela, failed to deliver on time and had technical problemsonce it was delivered. 12.Schlein, M. After Bombardier lost several majorcontracts to Embraer because of subsidies--in Bombardier's opinion--it tookthe issue to the World Trade Organization (WTO) where it charged Embraerwith unfair trade practices. J. (2 3, March). The company, renamed Bombardier, Incorporated in1978, issued its initial public offering on Canadian stock exchanges in1981, and has continued to grow through acquisitions, including theacquisition of Learjet in 199 . The following chart illustrates the segments'contributions to revenues and profits in 2 1 (Schlein, 2 3, p. Encyclopedia of Global Industries, 3rd edition, Farmington Hills, MI: Gale Group.All aboard the jet train. [pic] In fact, over the past ten years, sales increased at an average annualrate of 18.5 percent while earnings increased at an average annual rate of19 percent. John Deere also producedsnowmobiles from 1972 to 1984, which gave rise to the company slogan,"Nothing Runs Like a Deere." Under the alliance, Bombardier and John Deerewill co-operate to create wheeled vehicles designed for both therecreational and utility market. This gave buyersincreasingly less bargaining power with their suppliers and concentratedpower in the hands of suppliers. Since it already sells larger aircraft to many of the world'sairlines, it already has relationships that can be leveraged to favor thesmaller business jet market, as well. Deere, Bombardier align for utility vehicles. Rather than seeking to enter the large aircraftmarket that serves large commercial air transport carriers such as AmericanAirlines and Delta on their long runs, Bombardier recognized a niche thatwas traditionally underserved by the aircraft manufacturing industry. However, thecompany's earnings dropped significantly in 2 1 over 2 , and are notexpected to return to 1999 levels in 2 2 (Schlein, 2 3, p. This reflects a shift toward a more consumer-oriented strategy by Bombardier. Business Week, p. 7 B.Fone, R. Innovation alone may not be enough to protect Bombardier in comingyears. Monorails do not impede streettraffic, and are useful for providing transportation within urban centers.Popular in resort areas and perhaps most closely identified with Disneylandand DisneyWorld, monorails are used to provide alternatives to busses,taxis and private vehicles within relatively small geographic areas.Bombardier provided the monorail system now in use in Las Vegas along thefamous Las Vegas strip. The first project, to be available in North America by theend of 2 3, will use Bombardier all-terrain vehicle (ATV) technology butwill carry the John Deere brand. Bombardier, Inc. Boeing hasconsiderable resources that it can bring to bear, and is a formidablecompetitor. (2 2, November). The company has strong product offerings ineach of its major segments; the challenge will be for the company to managethose products successfully. (2 2, September/October). In addition, the acquisition provided Bombardierwith access to technology--including monorails and switching equipment--which the company believes can give it greater access to markets around theworld that are seeking ecologically-friendly transportation systems("Annual Report," 2 2). Monorailsmeet these requirements, and Bombardier is a leader in the monorail market. However, under the alliance, bothcompanies will be able to benefit from the expertise of the other inspecific areas. This researchexamines the company's performance strategy at the time the case wasprepared, the company's performance since that time, and analyzes theexternal environment and the effect of that environment on the company'sprospects. The company has encountered difficulttimes in the ten years since the case study was prepared, with a stockprice at an all-time low, increased competition in its markets, and anoverdependence on a single market segment--aerospace--that replaced thedependence on snowmobiles during the company's history. [pic] The company's strong stock performance until 2 1 and its three stocksplits in ten years indicates that the company has gained favorableattention in the Canadian stock market. The current company came into existence through the merger ofBombardier Limited and MLW-Worthington Limited in 1976. Technological Factors Bombardier's success in the aerospace was due largely to the marketthat Bombardier pursued. Although the company is no longer dependent on snowmobilesfor its success, it is highly dependent on the volatile aerospace industry. The rest of theworld's contribution to revenues remained relatively stable at 11 percent(Schlein, 2 3, p. If the company is able to work with others, as withJohn Deere, to gain access to markets which were previously unavailable, itcan decrease its cost of entering new markets and can gain market sharewithout having to take on the costs associated with acquiring othercompanies. (1997, October 3). Following the attacks of September 11,2 1, many aircraft orders were cancelled, and some air carriers--includingUnited Airlines--are struggling for survival. 4.The Dogfight for Bombardier's niche. Background Bombardier is a Canadian-based company with operations throughout theworld. Bombardier is recognized in thethree major markets in which it competes as having strong technologicaladvantages, but it continues to rely on government assistance to maintainleadership positions. Outlook The alliance with John Deere may signal that Bombardier is moving awayfrom its traditional strategy of growth through acquisition into a newstrategy of growth through partnership. However, Bombardier is in a good position to take advantage of marketopportunities that emphasize quieter, more efficient aircraft. In early 2 3, Bombardier announced a business alliance with JohnDeere, a manufacturer of farm equipment. Boeing and Airbus--the twolargest aircraft manufacturers--did not serve this market during the 199 s,and Bombardier gained access through its acquisition of several companies,including LearJet. (2 3, February 7). However, the company's sharp dropin its stock price in 2 1 and its failure to recover in 2 2 indicatesthat the market is concerned about the company's earnings in those years,and that there is doubt regarding the company's ability to move forward incoming years. Thedrop in earnings is attributed to the oversupply of aircraft in the world,and the slowdown in orders received by Bombardier. By 2 1, the company had reorganized so that it now had four majorbusiness segments, and the financial performance of these segments hadshifted significantly. Whilethese tend to be larger aircraft, air carriers may well seek innovativeways of avoiding placing orders for new aircraft with so many available instorage ("Aircraft," 2 3). This ATV also has atowing capacity of 5 kilograms, which makes it a good farm implement.The towing capacity and the ability to transport two riders providesagribusiness with an economical alternative to other types of vehicles.ATVs have long been used in agriculture because of their ability to movepeople and equipment quickly and to areas that are difficult to reach withlarger, heavier equipment (Fone, 2 3). ATVs have traditionally been one-seat vehicles because ofthe problem of balancing the weight when there is only one rider.Bombardier has overcome this problem and has produced a vehicle that can besuccessful with either one or two people on board. Thesuccess of the aerospace group is due largely to the increased use of thehub and spoke process in the airline industry, and Bombardier's own successin this market segment. 549.Schlein, M. Having demonstrated success in Las Vegas, the company may be able toleverage that success into additional opportunities in other urban areas.However, the company is likely to face resistance to traditional railmarkets since the failure of its Acela product to meet delivery andperformance expectations in the market. Resources will not bepooled; there will be no joint headquarters and each company will continueto operate independently of the other. In the transportation segment, Bombardier has worked closely with theFederal Railroad Administration in developing the JetTrain, but the companymay have problems selling the JetTrain to potentially the largest customerin the United States, Amtrak. The following chart illustrates the company's high and low stockprices for the past ten years; these prices have been adjusted for stocksplits which occurred in 1995, 1998, and even as recently as 2 (Schlein,2 3, p. Mass Transit, pp. Such aircraft are less expensive to operate,ecologically friendly, and easier to fill than larger aircraft. This indicated that although the aerospace sector contributed thelargest percentage of revenue, its operating profits were lower than othersegments of the company. Farmers Weekly, p. 556.Stone, T. Bombardier's home market accounted for 12percent of sales during that year, with the rest of the world responsiblefor ten percent (Schlein, 1997, p. Suchacquisitions provided economies of scale, but also saddled companies withconsiderable debt. The vehicle will be designed as a utilityvehicle and will target the agricultural market (Osenga, 2 3). It has shifted from being a one-product companyselling snowmobiles to a company that participates in the largesttransportation products available today--aircraft and trains. The JetTrain is a turbine-poweredlocomotive designed for North American markets not already served byelectric trains, and uses an engine originally designed and used inaircraft. The United States now accounted formore than 53 percent of the company's revenues, with Canada contributingdown to eight percent and Europe down to 28 percent. This high-speed train was eventually pulled byAmtrak when it was discovered that more than half of the trains had smallcracks in their suspension systems ("All Aboard," 2 2). Design Engineering, p. These markets have opened up in recent years as Americans havesought ecologically-friendly alternatives to mass transit. While some analysts expect aslight recovery in 2 3, companies such as Boeing and Airbus are expectedto expand their presence in segments where they have not had strong marketshare, and this makes Bombardier particularly vulnerable. These figures indicate that thecompany has struggled to realize similar increases in profits fromsubstantial increases in sales, and may indicate that the company hasencountered management difficulties within the company, or externalchallenges, which may contribute to Bombardier's questionable recentperformance. By 2 2, the internationalmarkets had shifted significantly. Environmental/Ecological Factors At the same time, the air transport industry--that is, the aircarriers themselves--also underwent significant change. The company willneed to overcome Amtrak's perception of Bombardier products before it willbe able to market its JetTrain successfully. Bombardier, Inc. In addition, although the industryas a whole has been struggling, Boeing's size makes it a more likelysurvivor than Bombardier if a significant industry shakeout occurs. Embraer is a Brazilian aircraft manufacturer which competesdirectly against Bombardier in the smaller (1 seat and less) market.Embraer gained market share initially by offering aircraft for lower pricesthan Bombardier, then by using government subsidies to help win business.The government subsidies to Embraer were not unexpected since the companywas founded in 1969 by the Brazilian government to build military aircraft. In addition,lower costs can be realized when the aircraft are depreciated and whencompared to last-minute commercial ticketing. The company's long-term success will require that it lessen itsdependence on aerospace and successfully market other products, includingits transportation systems. As the huband spoke system became the industry standard, there was greater demand forsmaller aircraft. The company's success in the transportation industry, particularly itssuccess with the Las Vegas monorail, may signal a significant new market.Cities are increasingly seeking mass transit options that do not involveimpeding street traffic and which are quiet and low polluting. 549). Despite this, there arealready many aircraft already in storage that are in acceptable operatingcondition; the downturn in passenger demand has forced this storage. 549). 69.Osenga, M. But Bombardier has focused on growth through acquisition, and that hasmade it difficult for the company to thrive as it seeks to integrate newacquisitions. Bombardier filled this niche and, as a new supplier,provided an attractive alternative to traditional aircraft manufacturerswho did not serve the market at all, or on only a limited basis ("TheDogfight," 2 1). Over the past five years, sales increased at an annual rate of19 percent while earnings increased at 16.5 percent annually during thesame period (Schlein, 2 3, p. By2 2, Canada's own contribution was also down significantly (Schlein,2 3): [pic] The following chart, which uses estimated values for calendar year2 2, illustrates the company's sales performance against its earnings pershare performance (all figures are in Canadian dollars throughout thisreport). Value Line Investment Survey, p. Bombardier Limitedmanufactured snow tractors and snowmobiles, while MLW-Worthingtonmanufactured locomotives. 549). Both motorized consumer products and financialservices posted operating profits that exceeded their contribution torevenue (Schlein, 1997, p. In 2 1, only theaerospace segment contributed more to profits than to revenues, indicatingthat this is now the most profitable business unit in the company. This chart shows that the company's profits have kept pace withits sales in recent years, and have even outpaced the increase in salesduring some of the past ten years (the chart is plotted on a logarithmicscale so that relative rates of change can be noted). Social Factors In 1997, Bombardier divided its operations into five groups:transportation (including mass transit production), motorized consumerproducts (including snowmobiles and personal watercraft), aerospace(including Canadair, Learjet and de Havilland), services and capital.During fiscal 1997, aerospace contributed 5 percent of revenues and 42percent of operating profit, motorized consumer products contributed 23percent of revenues and 35 percent of operating profit, and financialservices contributed seven percent of revenue and 12 percent of operatingprofit. Political Factors Bombardier's success in the aerospace market did not go unnoticed, andit did not take long for other companies to enter and compete againstBombardier. 556). While Bombardier was fending off market challenges in aerospacepresented by Embraer (discussed later), Boeing entered the smaller jetmarket, as well, with its Boeing Business Jet (BBJ). Corporate jets have been popularfor very wealthy individuals as well as for corporations who make themavailable to executives; such aircraft provide an alternative to commercialflights and provide more flexibility as far as schedules. Bombardier participates in the transportation market through bothlocomotives and rail cars. Nonetheless, Bombardier, which is already thedominant company in the small jet market, is well-positioned to takeadvantage of any upturn in this market because of its technologicalinnovation and its industry reputation. (2 3, March 28). Carriers wereincreasingly changing from long runs to a hub and spoke system, and wereinterested in acquiring short-range aircraft that could offer greaterpassenger yields. On the manufacturing side, there was considerableconsolidation as some major manufacturers went out of business while otherswere acquired by their competitors. In addition,concerns about air safety following the attacks of September 11, 2 1, haveincreased interest in high-speed rail alternatives for domestic travel("All Aboard," 2 2). Double the fun on a new Bombardier. Conclusion Bombardier has succeeded in transforming itself several times over thecourse of its history. This does not mean that Bombardier is likely to abandon itstradition of making strategic acquisitions, but suggests that the companymay be more selective in deciding which companies it should acquireoutright, and which would be better strategic partners. Introduction Bombardier initially made a name for itself in snowmobiles, but todayis one of the world's largest manufacturers of aircraft and rail cars. Value Line Investment Survey, p. In 2 1, the company acquired DaimlerChryslerRail Systems GmbH, a move that gave the company increased access to theEuropean rail market. In addition, Bombardier has itself been the recipient of favorablesubsidies from its own government. Quebec, Canada: Bombardier, Inc.Aircraft. This passenger locomotive is designed to run at 15 miles per hour,but Bombardier maintains that it is quieter, lighter and pollutes less thantraditional high-speed diesel engines. In the transportation market, Bombardier realized additionaltechnological success when it introduced the JetTrain locomotive in late2 2. Although Bombardier has strong products in the market currently and onthe horizon, it has again become overly dependent on a single market.Where once the company was highly dependent on its snowmobiles, and foundthat such dependence made it vulnerable to external factors, it is nowhighly dependent on the aerospace market and faces challenges now that themarket is both saturated with competitors and undergoing severe externalshocks. 36-5 . 549).

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