How to lose $1 trillion: Boeing’s struggle to capture China’s commercial jet market
Boeing is trapped between a groundswell of “America-first” manufacturing sentiment at home, and a fiercely competitive environment in China—its largest growth market for commercial jets. How the aerospace juggernaut handles this politically charged opportunity will determine the company’s growth prospects in the years to come.
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The aerospace and defense sector is the crown jewel of American trade, accounting for nearly 10 percent of total US exports. [1] Last year alone, Boeing commercial jet sales generated $65 billion in revenue and employed nearly 60,000 employees. [2] Though Boeing over time developed a global supply chain, until recently it manufactured all of its commercial jetliners on US soil. This changed, however, in 2015, when Boeing announced plans to open a facility in China to finish and deliver its single-aisle 737 jets, as part of a $38 billion 300-plane order from Chinese companies. [3] This decision prompted an immediate backlash from then-Republican presidential front-runner Donald Trump, who blasted the aerospace juggernaut for “taking a tremendous number of jobs away from the United States.” [4]
This criticism belies the fact that Boeing is pursuing a twenty-year $1 trillion commercial jet opportunity in China against the backdrop of a number of policy and competitive challenges. First, in summer 2015 Congress refused to reauthorize the US Export-Import Bank—an FDR-era program that helped American manufacturers export goods by subsidizing financing. At the time, Boeing was the largest beneficiary of this program, as one of the nation’s largest exporters. Second, Boeing felt significant competitive pressure from Airbus, which had opened a manufacturing facility in Tianjin, China in 2008, and already had plans to open a second factory. [5] Third, and most crucially, China’s State Council—its highest body of state administration—unveiled Made in China 2025, an initiative aimed at transforming ten strategic industries into global leaders. Aerospace was name a top priority. [6]
China is no stranger to succeeding in engineering-based innovation in advanced industries. In 2008, the Ministry of Railways launched a nationwide effort akin to the Apollo space program to build a new generation of high-speed trains. McKinsey estimates that China has accounted for 86 percent of global growth in the market since then. Success was largely driven by key technology transfers from overseas partners, joint ventures between government-sponsored enterprises and foreign firms, and the heavy use of advanced foreign suppliers. [7]
Indeed, China has already begun to replicate this playbook in the commercial aerospace industry. In 2008, the State Council created the Commercial Aircraft Corporation of China (Comac)—a State-owned aerospace manufacturer. [8] Merely nine years later, Comac responded to Boeing’s 737 with its very own C919—a single-aisle commercial jet. The C919 flew its maiden flight in May 2017, and is expected to commence delivery in 2020. [9] This was largely made possible by tapping into the experience of Airbus and Boeing’s key suppliers, including US-based General Electric and Honeywell. [10] However, Comac’s ambitions do not stop at single-aisle jetliners. Just two weeks after the C919’s maiden flight, Comac and Russia’s state-sponsored aerospace entity established their very own joint-venture aimed at developing a new twin-aisle airliner to compete with Boeing’s 787 Dreamliner. [11]
The backlash Boeing faced in 2015, upon announcement of its new factory in China, failed to credit the firm for responding to an increasingly tenuous competitive environment. In actuality, the crucial question to answer is whether opening one factory in China is enough. Interestingly, we can look to China’s miraculous development of its high-speed rail industry for strategic guidance for non-Chinese companies. In 1998, Canadian rail equipment manufacturer, Bombardier, was the last foreign company to tap into China’s railway market. However, it deftly co-founded Bombardier China—a joint venture between Bombardier and China’s China’s rail-related state-owned entity, CRRC. [12] Though this arrangement entailed technology sharing, and enabled CRRC to now account for 41 percent of the global market for high-speed train deliveries, it enabled Bombardier to tap into the Chinese market more effectively than any other western player. [13] If Boeing wants to achieve measurable and sustainable success in China, it should look to Bombardier’s strategy for guidance.
At this point, Boeing’s management team must determine whether its current China strategy is sufficient to capture the $1 trillion commercial jet opportunity. Between headwinds from US government policy and fierce competition from Airbus, Comac, and Russian aerospace entities, Boeing must decide whether it ought to forge deeper ties with Comac, or whether taking Bombardier’s approach would be a Pyrrhic victory. Moreover, if Boeing chooses to partner closely with Comac, it must consider the potential political blowback at home from unions and politicians alike.
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[1] Reuters, “China to spend over $1 trillion on planes over next 20 years: Boeing,” September 6, 2017, http://www.reuters.com/article/us-china-aviation-boeing/china-to-spend-over-1-trillion-on-planes-over-next-20-years-boeing-idUSKCN1BH0T2, accessed November 2017.
[2] “Boeing Overview,” Boeing, 2017, http://www.boeing.com/resources/boeingdotcom/company/general_info/pdf/boeing_overview.pdf, p. 5, accessed November 2017.
[3] Johnsson, Julie, “Boeing Lands $38 Billion Jet Order From Chinese Airlines,” Bloomberg, September 23, 2015, https://www.bloomberg.com/news/articles/2015-09-23/china-signs-deal-to-buy-300-boeing-aircraft-xinhua-reports, accessed November 2017.
[4] McLeod, Harriet, “Trump slams Boeing over plans for new China facility,” Reuters, September 23, 2015, http://www.reuters.com/article/us-usa-election-trump-boeing/trump-slams-boeing-over-plans-for-new-china-facility-idUSKCN0RN2BG20150923, accessed November 2017.
[5] Yglesias, Matthew, “How China is playing Boeing against Airbus to build its own airplane industry,” Vox, September 24, 2015, https://www.vox.com/2015/9/24/9389767/boeing-china-deal, accessed November 2017.
[6] Kennedy, Scott, “Made in China 2025,” Center for Strategic & International Studies, June 1, 2015, https://www.csis.org/analysis/made-china-2025, accessed November 2017.
[7] Woetzel Jonathan, et al, “Gauging the strength of Chinese innovation,” McKinsey Global Institute, October 2015, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/gauging-the-strength-of-chinese-innovation, accessed November 2017.
[8] “The Chinese Aerospace Industry: A Background Paper,” Royal Aeronautical Society, July 2013, https://www.aerosociety.com/Assets/Docs/Publications/DiscussionPapers/ChineseAerospaceIndustryDiscussionPaper.pdf, p. 7, accessed November 2017.
[9] Goh, Brenda, “China’s COMAC says C919 jet completed second test flight,” Reuters, September 28, 2017, https://www.reuters.com/article/us-china-aviation-comac/chinas-comac-says-c919-jet-completed-second-test-flight-idUSKCN1C30H3, accessed November 2017.
[10] “China’s New Plane Will Be Helped Aloft by U.S. Technology,” Bloomberg, May 4, 2017, https://www.bloomberg.com/news/articles/2017-05-04/china-s-first-jet-to-rival-boeing-is-helped-by-u-s-technology, accessed November 2017.
[11] “China and Russia are teaming up to take on Airbus and Boeing.,” CNNMoney, May 23, 2017, http://money.cnn.com/2017/05/23/news/companies/china-russia-airplane-partnership/index.html, accessed November 2017.
[12] Nan, Hao, “Bombardier to bridge cooperation in China,” China Daily, December 5, 2015, http://www.chinadaily.com.cn/cndy/2015-12/05/content_22633703.htm, accessed November 2017.
[13] Woetzel Jonathan, et al, “The China Effect on Global Innovation,” McKinsey Global Institute, October 2015, http://www.mckinseychina.com/wp-content/uploads/sites/4/2015/07/mckinsey-china-effect-on-global-innovation-2015.pdf, accessed November 2017.
The article poses an interesting question. Ultimately Boeing needs to understand that its position as a $150+ billion market cap firm and iconic American company gives it enough leverage to stand against Donald Trump’s nationalist threats. As Trump loses credibility with his voter base and even his own political party, his baseless threats are becoming less and less believable. Despite Trump’s heavy criticism of Ford Motor Company’s plans to expand two plants in Mexico, Ford chose to go ahead with their plans and will invest $2.5 billion in their construction as well as employ 3,800, which pales in comparison to the 700 jobs the Company committed to creating in Michigan, an action Trump praised on Twitter (1).
The article does not mention that Bombardier is not just a rail company but in fact it gets more of its revenues from aircraft sales than it does rail. In fact, Trump has favored Boeing in the decision to slap tariffs on Bombardier aircraft sales to airlines in the US, which effectively taxes aircraft purchases from Bombardier at 300% (Bombardier is partly owned by Airbus) (2).
The question whether Boeing should emulate Bombardier’s JV strategy is a good one and I believe Boeing is already doing this. They announced a $33 million JV with COMAC in October 2017 to complete their 737 plant in China. There hasn’t seem to be much backlash from this decision in the US thus far…
(1) http://money.cnn.com/2017/02/17/news/companies/ford-mexican-plants/index.html
(2) http://money.cnn.com/2017/10/06/news/companies/boeing-bombardier-trade-ruling-tariff/index.html
(3) https://www.reuters.com/article/us-boeing-china-plant/boeing-to-invest-33-million-in-jv-with-comac-for-china-plant-china-daily-idUSKCN1C13DA
The author touches on multiple hot topics which are currently debated. On the one hand we have thriving foreign markets, on the other hand the US has a president who fears the movement of jobs from North America to other countries and continents.
The article makes a case for moving the final assembly to China and/or to look into the possibility to form a joint venture with local companies, despite the pressure from the US president.
Although I agree to the tenor of the post, i.e., that China is an incredibly interesting market for aerospace, I would caution Boeing’s management against moving the assembly to China. A credible fear of many western companies is the “transfer” of knowledge and technology. In order to access the market, the Chinese government forces foreign companies to lift its secrets [1]. Is a better access to this market really worth unveiling all of Boeing’s secrets in manufacturing?
[1] Wang, Yue. Forbes. October 23, 2017. https://www.forbes.com/sites/ywang/2017/10/23/china-first-foreign-tech-terms-must-be-wary-under-xi-jinpings-rule/#26b1129f44c3 (accessed 11 27, 2017).
In my view, there is no doubt Boeing should aggressively pursue the JV – and as Bismah said, there is already traction on that front. Without pursuing such a venture, I have major concerns about Boeing’s ability to penetrate the Chinese market at all. I could not help but draw connections between this post and another post by Josh regarding Lotte, a South Korean conglomerate who recently had suffered significant repercussions from Chinese nationalist policies. In that post, Josh alluded to other successful JVs that have allowed companies to establish effective operations in China. If Boeing truly has aspirations to penetrate the Chinese market, I would be hard pressed to find a better solution. And, I would also argue that Boeing’s success in penetrating the Chinese market can benefit their domestic US operations – which could be a selling point against the recent nationalistic rhetoric prevalent in the US system.
Thanks Bismah & Tim,
You rightly pointed out that the structure of Boeing’s current plans for final assembly in China is through a JV with Comac, but I think the true test is whether they forge a deeper partnership that includes tech transfers. What characterizes the Bombardier/Comac JV is the extent to which Bombardier actually shared its core technology.
Great point
Compelling thoughts. I’d like to play devil’s advocate to an extent by connecting this to another writer’s article about Iran Air. I wonder if Boeing risks future exports to other countries if they do too much to prop up the Chinese aerospace industry. Iran is desperate for commercial aircraft, and once COMAC matures into a direct competitor they may be willing to make a deal. Iran is already coordinating with COMAC [1], which lends me to believe that they are hoping to get a technology partnership or C919 export deal approved. Boeing is accustomed to having only one competitor. There may be a lot of risk in the long-term by pursuing a Bombardier-style JV, which could accelerate COMAC’s rise to competitor status.
[1] “Mr. Tian Min meets with Iranian aerospace colleagues in Teheran,” COMAC, March 14, 2016, http://english.comac.cc/news/latest/201603/18/t20160318_3606400.shtml, accessed November 2017.
Very insightful and balanced read! Given the fierce competition with its rival Airbus, Boeing’s movement to open its first completion and delivery factory is inevitable path to expand supply chain in China, the fastest growing market for aviation industry. It can help Boeing improve its margin on 737 by reducing hefty manufacturing cost and designating Chinese plant as a hub for international delivery of finished 737 planes to various countries, including China. However, as we learned from Bombardier, Boeing should be prepared itself to defend its market leading position in world aviation industry by continuing its excellency in innovation in order to prevent itself from possible future threat from Comac.
I think Boeing is the United States’ largest exporter and is playing a dangerous game while ramping up production in markets where new competitors could spring up almost overnight. When you build manufacturing capabilities in a country, you naturally transfer proprietary knowledge and capacities to its engineers and workforce. I see why the Chinese government would want expanded Boeing facilities. Given the political risks stemming from the current balance of American/Chinese trade, and the risks of losing your competitive edge, to what extent is it worth it to ramp-up manufacturing in China? Could Boeing instead stop at one factory, having marked what may have been a political checkbox? From the Bombardier story that has been all over the news recently, it seems that Boeing has profited from its perception of being an American manufacturer. Given the firm’s recent layoffs stateside, to what extent they would be able to or even should pursue an expanded Chinese manufacturing strategy?
Drew makes a good point above- when you manufacture abroad, competitive knowledge goes abroad as well. This is why government contractors dealing with security payloads such as SpaceX are not allowed to manufacture outside the US. However, I think Boeing and Airbus have much more power than we give them credit for. Though I do not want to underestimate Chinese and Russian development capabilities, the commercial jet market is a firm duopoly and the sheer size of investments needed to break into the market give them some time to think about their strategy. Because scale matters, I think both Boeing and Comac would both benefit by partnering, although Boeing would certainly take a reputational hit at home.