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Posted June 18, 2020

Byron King

By Byron King

As the West Unwinds, China Targets Boeing and Airbus

Never let a good crisis go to waste.

Youve probably heard this before. Its an old political saying here in the U.S.1

Now, translate it to Mandarin:

?????????????. 2

Translate it, because for all of Chinas problems, the country is using the ongoing global corona crisis to its national economic advantage.

Right now, China is gunning for a critical part of the Western economy thats reeling from economic contraction; namely, the multibillion dollar commercial airliner sector.

That is, as the Western economy unwinds, China is moving to capture large chunks of the airplane-building business from Boeing and Airbus.

China has a plan, so lets look at whats happening

If you follow the aerospace and airline industry, you know the present situation is tumultuous and that the future is uncertain.

The worlds two biggest airplane builders, Boeing and Airbus, are in dire straits. And across the world, no airline anywhere is doing well.

Youve likely seen statistics about how airline traffic is down over 90% from last year.3 And how airlines are parking jets, while builders like Boeing and Airbus are scaling back production, laying off workers and cutting back on purchases from suppliers.

To give you a feel for numbers, worldwide about 14,000 commercial airliners are parked at storage sites. Perhaps youve seen images like these Delta Airlines jets at Kansas City, MO.

Delta Airlines jets

Delta Airlines jets parked at Kansas City International Airport.

These arent just shiny airplanes, carefully parked in neat lines. These are dozens of expensive, idle assets costing money every day while generating no revenue.

Lets say that a typical, new commercial airliner like those in the photo above runs about $100 million. (Its worth noting that big, twin-aisle airliners like B-777, B-787, Airbus 350, etc. run in the range of $250 million and more.)

Do some easy math Take 14,000 aircraft at an average value of $100 million each. Thats $1.4 trillion of capital, just gathering dust and bird nests.

The current scenario is ruinous to the mostly-grounded airline industry. And its equally or more ruinous to companies that build airplanes and make parts; to the Boeing-Airbus duopoly.

Indeed, if you follow Boeing or Airbus, pictures of parked airplanes must make you cringe Who needs brand new jets when desert airfields are packed with perfectly serviceable, not-very-old airplanes?

But in China, state planners see opportunity. Lets look at things from the China angle

For over 20 years, China has skillfully played Boeing and Airbus against each other.

Begin with the fact that China is a vast market for airliners, considering the countrys large population and its go-go growth story.

Some forecasters estimate that China needs in the range of 20,000 or more airliners over the next 15 years to service its internal and foreign markets. Thats a lot of potential sales to Chinese airline companies

But Chinese airlines dont buy their own planes. That is, a Chinese government entity does the procurement.

For comparison, in the U.S. it would be as if the Federal Aviation Administration (FAA) decided what airplanes the U.S. airline companies should buy. Yes, it seems odd to a U.S. mindset, but thats how they roll in China. Buying airplanes involves big money, so the state is deeply involved.

As you can imagine, Chinas airplane-buying process is highly political. The government buying office grants an order for Boeing here, an order for Airbus there and these are big orders, worth billions of dollars.

Each aircraft order has a certain amount of leverage. Every order brings impactful levels of economics and high industrial visibility across a global supply chain.

So China has tied foreign aircraft purchases to both U.S. and European cooperation in other arenas. It might be trade, or even foreign policy matters. The bottom line is that if U.S. or European politicians want see orders for Boeing or Airbus, they must accommodate certain Chinese issues.

At the level of industry and technology, over many years China has taken advantage of the Boeing-Airbus airplane building duopoly and played both companies against each other for hard terms. And in addition to price discounts, Chinese orders typically require concessions like manufacturing offsets and transfer of intellectual property.

The airplane side-deal could be as simple as Boeing or Airbus setting up a factory in China to make nuts and bolts, wire bundles or other aircraft components. But over time, things have evolved to where Airbus has an entire aircraft assembly facility in China, while Boeing has an aircraft finishing facility there.

Another way of saying it comes from a recent note in the trade magazine Aviation Week & Space Technology: Blinded by their head-to-head rivalry, obsessed with market share and their orderbooks, (Boeing and Airbus) just took too many long-term risks for short-term wins.4

According to Aviation Week, the West will come out of the virus crisis and the associated economic crash financially bled dry, industrially bruised and politically in shambles.

In this looming new era of brutal austerity, look for even more of a buyers squeeze by China on Boeing and Airbus. China will tie more and more of its purchases to price discounts, industrial transfers and offsets.

All of this while China is building a passenger jet thats quite similar to the B-737 and/or Airbus 320; its called the C-919, in development for a decade.

C-919

China rolls out C-919, competitor to Boeing & Airbus. South China Morning Post.5

Ultimately, Chinas goal is to replace most if not all foreign airplane purchases with home-built products like C-919. And this means supply chains within China too, down to the last nut, bolt, computer chip and even the composition of the paint.

Indeed, this is all part of a comprehensive, state-sponsored national goal under a program called Made in China 2025.6

Its the Chinese plan

Right now, new airplane orders from anyone, anywhere are at a near-standstill for Boeing and Airbus. Cancellations and requests for delay or deferral are rolling in for already-ordered planes.

Per Aviation Week, the overall market for Boeing and Airbus airplanes is sliding downhill. It may wind up half as large in a year or two, a dramatic decline.

Its tough for Boeing and Airbus and will only get worse. They and their suppliers are scaled to build airplanes at a certain rate; at last years rate, in a manner of speaking. This was to supply markets that simply vanished and dont exist anymore.

Looking ahead, theres not much near- or medium-term hope. The demand side of the airline business the need for new airplanes from Boeing and Airbus will be anemic for several years. Across the world, most airlines are discussing some semblance of recovery in the time frame 2022 to 2025.

For Boeing and Airbus, the prospect of building fewer airplanes at slower rates introduces all manner of expensive inefficiencies.

All this while China is patiently waiting in the wings with its new aviation products.

When it comes to future aircraft buys, expect China to continue playing hardball, running its old plays and squeezing Boeing against Airbus in terms of pricing and industrial offsets.

But now, China has a new option. China can compete head-to-head against the existing duopoly with its new C-919, and with future versions or derivatives.

Chinas idea is to displace Boeing and Airbus from their positions as a global duopoly, and then to sell Chinese equipment across China and out into the world.

China is playing a long game here and taking advantage of the current global economic mess.

Looking ahead, countries that retain aerospace jobs will be those with nimble business managers and smart government policymakers who can juggle competing issues. Things like efficient manufacturing, maintaining supply chains, tax and investment strategy, labor relations, targeted stimulus tools and robust research and development.

The U.S. aerospace sector is at risk, make no mistake about that. Boeing has long been up against Airbus. And now Boeing is in the crosshairs of Chinas effort to become a global aerospace leader.

Meanwhile, the aerospace industry highlights much of the failed side of what the U.S. has been up to over the past couple of generations. Boeing spent much of its profit over the past decade buying back shares and paying out dividends. Politics and financialization dominated over product development and protecting the long-term company interests.

In March, I wrote that Its time to get back to basics. And the most basic point is that real economies make real things

The people who run China know this China is a country that makes real things. And the goal is to build real airliners to out-compete Boeing and Airbus.

The challenge Boeing and Airbus and for the U.S. in general will be to make it through the current economic and social mess and retain an advanced economy on the other side.

On that note, I rest my case.

Thats all for now Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King

Managing Editor, Whiskey & Gunpowder

WhiskeyAndGunpowderFeedback@StPaulResearch.com

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1 I recall first hearing that quip in 2009 from Rahm Emmanuel, then an adviser to former President Barack Obama. He was talking about how the incoming Obama administration could take political advantage of the 2008 economic crash.

2 Bing Translate; y?ng yu?n b yo rng y g h?o de w?i j? lng fi.

3 Preliminary Air Traffic Data, United States Department of Transportation

4 Why Air Transports Return To Normal Will Be Anything But, Aviation Week Network

5 China Rolls Out Indigenous C919 Jet in a Bid to Compete With Boeing, Airbus, South China Morning Post

6 Made in China 2025, Wikipedia

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