China’s Boeing Threat Has More Bite Than Bark
(Bloomberg Opinion) -- The trade war may finally start to bite for Boeing Co.
The aerospace giant is the only non-consumer, non-tech U.S. company that gets more than $5 billion of revenue from China, and as such, it was initially assumed to be among companies that would be most affected by trade tensions. So far, however, the impact from tariff crossfire has been rather limited. That may have been a reflection of China’s need for Boeing orders in the short term to support local airlines and an inclination to maintain a balance between the U.S. planemaker and its European counterpart, Airbus SE. An eagerness to ensure Boeing’s ongoing participation at an assembly center outside of Shanghai that’s co-owned by Commercial Aircraft Corp. of China (known as Comac) and an important part of the country’s strategy to build a homegrown aviation industry could have been another factor.
But now, with Boeing on the defensive, China’s calculation of its political interests may be shifting. China was the first country to ground the company’s 737 Max jet after the plane’s second fatal crash in just five months, and now it’s reportedly considering excluding the aircraft from a proposal to ramp up purchases of American goods.
China may now see an opening to establish itself as more of a leader in the aerospace industry, having already embarrassed the Federal Aviation Administration by leading a global charge to ground the Max that left the U.S. regulator isolated in its defense of the plane’s airworthiness and nearly the last of its brethren to temporarily ban the jet from commercial flight. China may be wont to relinquish its newfound role as a champion of safety, particularly as Comac prepares to drive a wedge in the Boeing-Airbus duopoly with the roll-out of its C919 in 2021. China says the plane — which can fit up to 168 passengers, similar to the Max 8 plane implicated in the crashes — has more than 800 orders worldwide. But one of the primary lingering concerns about the plane is that China has less of a proven safety track record than its Western counterparts. Anything the country can do to burnish its image on this front is in the interest of not only Comac’s backlog, but also the confidence of the local population.
There’s likely a fair amount of posturing going on here, as is the case with most aspects of the ongoing trade negotiations between the U.S. and China. China’s decision to include aircraft purchases in its efforts to narrow the trade gap with the U.S. may have been more a reflection of the big ticket price for planes than anything else. The Max has a list price of more than $100 million before accounting for customary discounts; China has a $300 billion-plus annual goods trade surplus with the U.S. Economists were already skeptical of the feasibility of China’s reported pledge to reduce that surplus to zero by 2024, given the U.S.’s heavy reliance on imports from the country, but it’s especially impossible if airplanes aren’t part of the equation.
Regardless, this always struck me as more of a short-term fix. Sure, China could load up on Boeing jet orders now, but ultimately the country will be reducing its dependence on Boeing and Airbus once Comac starts delivering its new C919 jet. Point being, there was always an obvious limit to China’s willingness to prop up Boeing. Chinese Airlines have a total of 104 unfulfilled orders for the Max — not an insignificant percentage out of a global outstanding order book of 4,636 planes, but also not that big or disastrous of a hit when you stop to think about it. As my colleague David Fickling has pointed out before, the slender order books are at odds with predictions for an explosion in demand as China’s middle class expands and are likely a reflection of Chinese carriers’ desire to back the C919.
The more immediate risk for Boeing is not that some arguably fictitious orders tentatively promised in trade talks won’t materialize, it’s that China walks away from some of its existing orders. Again, this isn’t a huge part of the backlog, but an aggressive move by China may inspire others to follow suit.
The common thinking is that Airbus has its own hefty backlog and can’t easily ramp up production to replace Max orders. But it sure seems like it’s going to try to chip away where it can. French President Emmanuel Macron has reportedly held discussions with Ethiopia’s prime minister about shifting more of the country’s business toward Airbus jets. He will also discuss a major order with Chinese President Xi Jinping later this month. Recall that Xiamen Airlines was reportedly mulling a break from a longstanding allegiance to Boeing in favor of Airbus, and that China and Airbus have had on-again/off-again talks about a separate $18 billion jet order.
The true financial fallout for Boeing from the Max debacle remains a question mark. But its rivals are wasting no time.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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