“America First” Leaves Bombardier Aerospace Scrambling for Help
Following a 300% tariff hike on the C-Series aircraft, Bombardier entered a joint venture by giving a majority stake in the program to Airbus for free. Their combined supply chain poses a threat to Boeing in the single-aisle market.
Recently, Bombardier found itself at the center of an international trade dispute as the U.S. Commerce Department imposed duties of 300% on the Canadian aerospace manufacturer’s C-Series program. Boeing does not offer aircraft in the competing size range and did not compete for the order[1], but proposed a tariff in a complaint which alleged that Bombardier “received illegal subsidies and dumped the planes at absurdly low prices” in its 2016 sale of 75 CS100 jets to Delta[2]. The announcement by Commerce Secretary Wilbur Ross stated that “subsidization of goods by foreign governments is something that the Trump Administration takes very seriously,” echoing President Trump’s “America First” policy[3]. The airplanes are uneconomical for Delta with the proposed tariff[4], and without access to the U.S. Market the financial stability of the C-Series program, which cost over $6B to develop[5], is at risk.
Uncertainty in future C-Series production has serious consequences for Bombardier’s supply chain. Since commercial aircraft have service lives averaging over 20 years[6], airlines require a stable supply of maintenance parts and support for decades after an airplane enters service. Without credible guarantees of stability, airlines are hesitant to place orders and existing customers may cancel backlogged orders[7]. Risk in the backlog makes it impossible to communicate accurate forecasts to suppliers, which is vital due to the long ramp up and multi-year lead times in aerospace manufacturing.
Since the ruling, Bombardier has scrambled to keep the C-Series program alive in light of these new American protectionist policies. The C-Series supply chain operates globally, but is especially important in Canada and Northern Ireland, where Bombardier employs 21,000 and 4,200 employees, respectively[8]. The Canadian and British governments have come to Bombardier’s defense, threatening valuable military contracts that Boeing was expected to win, but Boeing has not backed down[9]. In October, Bombardier announced that it will sell a majority stake and operational control of the C-series airplane program to Airbus at no cost—even adding a further guarantee of $700M by Bombardier to cover program shortfalls over the next two years[10].
The deal is costly but offers major benefits to Bombardier. In the short term, partnering with Airbus offers a credible promise of stability, and access to Airbus’ larger sales network to improve demand. Bombardier can leverage this increased volume and the scale of Airbus to renegotiate better pricing and terms with C-Series suppliers. Due to the high levels of uncertainty, Bombardier’s suppliers required substantially higher prices as compensation for the risk[11]. Supplier costs represent around 60% of the total cost of the assembled CS100, and industry experts estimate Bombardier could save up to 40% of recurring supplier costs by aligning supply chains with Airbus. Bombardier can also expect to leverage Airbus’ global service network, avoiding the need to build out a parallel chain to supply replacement parts[12].
In the medium term, Bombardier is considering opening a second final assembly line for the C-Series at Airbus’ new production facility in Mobile, AL[13]. Airbus COO Fabrice Bregier estimates building another assembly line would cost “a few hundred million dollars[14],” but assembling the planes in Alabama may allow the program to avoid the tariffs if the Commerce Department rulings are upheld by the U.S. International Trade Commission (ITC). The U.S. market represents approximately 30% of the 6,000 total orders expected over the next 20 years[15], or $144B at list prices[16], so the investment has significant potential upside.
Despite the benefits, this deal carries risks for Bombardier. Full regulatory approval is not expected until late 2018, and until then coordination between Bombardier and Airbus is limited[17]. Boeing continues to challenge the deal, insisting that tariffs should still apply and threatening litigation which could “drag on for years[18]”. From a more optimistic viewpoint, it is possible that the U.S. ITC would have blocked the tariffs even without the deal, and thus the Mobile final assembly line offers less benefit. In that case, Bombardier may have left value on the table by partnering with Airbus on such favorable terms, and may have had equal opportunities for cost reduction through supply chain partnerships with COMAC, the Commercial Aircraft Corporation of China[19]. Still, given the isolationist sentiment permeating Washington, this deal seems like a safe bet by Bombardier to ensure the viability of the C-Series program.
Questions:
Bombardier’s Quebec production line is unionized, but Airbus’ Mobile factory is not unionized and Alabama is a right-to-work state. What actions would you take as a union leader representing Bombardier’s Canadian employees? How would you respond as a senior executive representing Bombardier?
How would you ensure that Delta (and other U.S. carriers) maintain confidence in the program between now and the time the production line in Mobile is up and running (assume 3 years)?
(Word Count: 799)
References:
[1] https://www.flightglobal.com/news/articles/cseries-prices-threaten-737-max-7-viability-boein-437624
[2] https://www.reuters.com/article/us-boeing-bombardier-commerce/u-s-backs-300-percent-in-duties-on-bombardier-after-boeing-complaint-idUSKBN1CB29X
[3] https://www.commerce.gov/news/press-releases/2017/09/us-department-commerce-issues-affirmative-preliminary-countervailing-1
[4] https://www.reuters.com/article/us-delta-air-bombardier-tariffs/delta-refuses-to-pay-tariffs-on-bombardier-cseries-jets-idUSKBN1CG20F
[5] https://www.bloomberg.com/news/articles/2017-10-17/airbus-tie-up-with-bombardier-is-challenge-for-china-s-ambitions
[6] http://www.boeing.com/assets/pdf/commercial/aircraft_economic_life_whitepaper.pdf
[7] https://airwaysmag.com/industry/aircraft-order-cancellations-and-deferrals-cause-for-concern/
[8] https://www.nytimes.com/2017/10/10/world/europe/donald-trump-bombardier-northern-ireland.html
[9] http://fortune.com/2017/09/28/boeing-bombardier-theresa-may-jobs/
[10] Analysis: Airbus Acquires 50% of Bombardier CSeries, Vinay Bhaskara, Airways Magazine, October 16, 2017.
[11] Transformative Transaction: Airbus’ decision to take control of the Bombardier C Series bodes deep consequences across the civil aerospace industry, Flateau Toulouse, Jens et al., Aviation Week and Space Technology, October 30 – November 12, 2017
[12] https://www.economist.com/news/business/21730466-american-aerospace-giants-campaign-tariffs-against-c-series-aircraft-has
[13] https://www.washingtonpost.com/news/business/wp/2017/10/16/canadian-firm-could-dodge-300-percent-tariff-by-building-jets-in-alabama/?utm_term=.8c38ed322dd7
[14] https://www.bloomberg.com/news/articles/2017-10-20/airbus-puts-price-tag-on-made-in-usa-label-for-c-series-jet
[15] https://www.bloomberg.com/news/articles/2017-10-20/airbus-puts-price-tag-on-made-in-usa-label-for-c-series-jet
[16] http://commercialaircraft.bombardier.com/en/media/list-prices—commercial-aircraft—bombardier.html
[17] http://www.4-traders.com/BOMBARDIER-INC-1409153/news/Bombardier-Union-representing-2-000-Quebec-workers-has-mixed-feelings-about-CSeries-Airbus-deal-25303840/
[18] https://www.ft.com/content/d888b3e2-b357-11e7-a398-73d59db9e399
[19] http://www.bombardier.com/en/media/newsList/details.33466-comac-and-bombardier-sign-definitive-agreement-to-establish-commonality-opportunities-between-c919-and-cseries-aircraft.bombardiercom.html
Great article! Very interesting to see the steps a company will take when such a high tariff eliminates their ability to do business in a country. I think it’d be really tough to maintain confidence in the Bombardier program, but looking at the Delta reaction it seems that they plan on both maintaining their order for the Bombardier jets and insisting that they will not pay the ridiculous 300% tariff. It seems like Delta is trying to see what type of market power it has as the most valuable airline company in the world and a significant employer of American workers and buyer of American manufacturing.
Given that Boeing and Airbus have very comparable airplane offerings, a partnership between Bombardier and Airbus should frighten Boeing as that would be a more complete product offering in the American market. One of the key reasons Delta is contracting Bombardier for these shipments is because they don’t believe another company makes a similar plane, and if a Bombardier-Airbus partnership can deliver superior value to Delta through this program it may tip the scales towards Airbus when Delta makes its next large purchase of new aircraft. While the pushing of the tariffs made sense for Boeing in the immediate term, it may create long-term partnerships that will eventually threaten its position if the next US administration has a different view on protectionist policies.
Great article Rob! From an American perspective, it was interesting to see how “America first” policies can actually hurt American business more than helping it. My initial reaction would have been that the tariff would be great for Boeing. Based on your article though, it seems as though partnerships between other international competitors can provide competitive advantages that overcome the tariffs. This concerns me in other industries as well. For example, isolationist policies aimed at promoting domestic goods and reducing imports could hurt relationships with many American trade partners. This would allow countries such as China to form powerful trade agreements (a new TPP) that China takes the lead on, while the US sits on the sidelines, resulting in less favorable economic conditions for the US.
I agree with DM and Matt that this situation seems to be a lose-lose for Boeing, and makes me wonder if we can think of how the US government should treat unfair trade agreements. First, if the planes are being dumped into the US and supported by illegal subsidies, I think Boeing needs to prove they have been adversely impacted by the import of a plane they do not also sell. An interesting read linked below highlights this as a unique situation being brought to the US International Trade Commission — this plane has not been imported yet, and it is hard to assess import impact with zero imports. If they can show impact, how can we address the subsidy (because in my view that is the opposite of free trade), without a tariff? Bringing jobs back to the US and “America First” seem a secondary priority to the bipartisan US ITC, a group of seasoned trade lawyers appointed by Bush and Obama, who are trying to ensure fair trade practices (free of dumping, subsidies, copyright infringement, etc.) If I was Delta, I would be nervous I was not going to ever receive planes as cheap as I had hoped.
https://www.reuters.com/article/us-boeing-bombardier-commission-analysis/little-known-u-s-trade-commission-faces-test-in-boeing-bombardier-case-idUSKCN1C236J
Thanks for a great read, Rob! It’s certainly interesting to learn about the this in terms of the competitive dynamics at play, as well as the potential cost pressures on suppliers from the Bombardier / Airbus partnership.
It’s also interesting to think of the potential impact of this on Delta and their strategy if the tariff remains. You mentioned that, despite their complaint, Boeing does not have a plane of the same size. As a result, I wonder whether Delta has access to an alternative 100-seat plane that is economical. If not, this tariff could have ripple effects on how Delta operates, as it would have to operate presumably larger and more expensive planes. This could impact its strategy, such as which markets it serves or which routes it could take.
While this certainly has a significant impact on the supply chains of Airbus / Bombardier, I would be curious to hear your thoughts around the potential impact of this sourcing challenge for Delta on its operations.
Thank you for the interesting essay! I think it will be challenging for Bombardier to maintain confidence in the program, but there are a few steps they can take. First, Bombardier should try to enlist the airline industry as an ally in combatting these tariffs. Increasing the costs of airplanes hurts Delta and other carriers’ bottom lines. The airline industry may have the lobbying clout to help reverse this ruling. Second, Bombardier should try to utilize the Airbus partnership to keep the program running. For example, the two companies could offer discounts to airlines that order both the Bombardier C-Series and Airbus aircraft. By providing these sorts of incentives, Bombardier can keep the C-Series alive while they work to start up US-based production.
Rob,
This is an excellent article on a fairly subtle issue and highly complex supply chain. Thanks for digging in.
To your second question, regarding the action space and best move by the union leader at Bombardier, I find that there are likely to be two equilibria. The first of these is one that is analogous to the deal of convenience that Bombardier struck with Airbus. In much the same way as Bombardier realized they were in a risky scenario with limited insight into how things were going to shake out, and “blinked” as a result; I would expect there to be a strong argument on the part of the union to also “blink,” and yield to the prevailing labor rates and conditions necessary to ensure the continued production of the CSeries, and in turn the continued employment of the unionized workforce. There is widespread arguments on both sides of the political aisle around how necessary unions actually are to protect the rights of workers. [1] Indeed, some have argued that it is a paradox that unions actually “go on strike” if the mere threat of a strike, by backward induction, should be enough to bring everyone to the negotiation table and a resolution before the strike itself. The inversion of this is that if the company has no profit to go around (“going bankrupt” instead of “going on strike”), it’s not clear why the union would not be willing to come to the negotiation willing to concede on many points.
Additionally, I think the concerns about America First policy having far reaching consequences across the continent and the globe are overblown. I think the value proposition of international trade is widely understood to be positive for the vast majority of market participants (in both labor and financial markets). As such, I would expect a political consensus under a median voter theory of public choice to agree to continue to allow for the proliferation of trade over time.
[1] Derek Thompson, “Are Unions Necessary,” The Atlantic, June 2012, https://www.theatlantic.com/business/archive/2012/06/are-unions-necessary/258356/, accessed November 2017.
[1] David Lee and Alexandre Mas, “Long Run Impacts of Unions on Firms,” Institute for Research on Labor and Employment, January 2009, http://irle.berkeley.edu/files/2009/Long-Run-Impacts-of-Unions-on-Firms.pdf, accessed November 2009.