Boeing's China Problem - YouTube

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To, from, or through China, more than half a billion passengers fly each year.

By 2035, that number is expected to be 1.3 billion.

It is one of the fastest growing aviation markets in the world, is home to what is believed

to be the future busiest airport in the world, and is expected to soon surpass the US to

become the single largest aviation market in the world.

Last year, a new aircraft was delivered to a Chinese airline every 21 hours.

That’s $35 billion worth of aircraft purchased in a single year.

All of this, however, represents a considerable problem for the world’s largest aircraft

manufacturer—Boeing.

You see, the reason China is a problem for Boeing is also part of the reason why China

is already such an enormous market for them.

While the US is resoundingly Boeing’s number one customer, at least partially propped up

by government defense contracts, China safely holds the number two spot.

Excluding North America, China, in fact, singlehandedly earns Boeing more money than every continent

in the world.

Now, not only is China a fierce battle-ground between Boeing and Airbus, even if Boeing

has a slight overall edge in market share, but the company now also faces a trifecta

of issues potentially hindering its future dominance in this ultimately crucial aviation

market.

The first of these issues has to do with Boeing brand new yet beleaguered airplane—the 737

MAX.

Prior to the MAX’s grounding, China was, by a wide margin, the largest operator of

this airplane.

Its airlines had a total of 97 MAX’s while US’ airlines, representing the second largest

customer group, only had a total of 72.

This is an aircraft particularly well-suited to China’s geography.

With a number of smaller, secondary or tertiary cities, China’s airlines are increasingly

focused on developing non-stop flights bypassing the major hubs of Beijing, Shanghai, and Guangzhou,

or fights to lower demand cities outside of China.

This is especially true given the huge number of smaller airlines operating in China who

have established themselves by setting up hubs in some of the country’s smaller cities

whose populations more recently started the transition into the country’s middle and

upper classes than those of the country’s tier one cities.

Of course, flying to or from these smaller cities means lower demand for seats, however,

the longer-range, smaller-capacity capability of the 737 MAX perfectly suits this mission.

That allowed Chinese airlines to set up, in an economical manner, flights like Jinan to

Singapore, Guangzhou to Lahore, Ürümqi to Bangkok, or Hangzhou to Hotan—all five or

six hours flights with minimal demand.

The 737 MAX was an aircraft perfectly suited for China and Boeing knew it.

This suitability and focus was demonstrated by Boeing’s decision to set-up an aircraft

completion center in Zhoushan, China.

While aircraft would continue to be primarily assembled in Renton, Washington, they would

be flown over to Zhoushan without the interiors completed.

In Zhoushan, their seats, overhead bins, and basically the entire rest of their interiors

would be installed by Chinese workers in this Chinese factory.

Having a ground presence in China would appease the government, and by extension airlines,

and the hope was that this would help convince them to buy Boeing jets considering that their

purchase provided Chinese jobs.

This was especially necessary considering that Airbus already had an even more extensive

final assembly line in the country for its competing a320 jets.

Given the MAX’s suitability, though, Chinese airlines bought an enormous number of these

planes.

In addition to the 97 already delivered, Chinese airlines had almost 500 of them on order but

then, of course, the MAX crashed, and then it crashed again.

China’s Civil Aviation Administration, eager to maintain the country’s recent streak

of aviation safety, quickly grounded the MAX after its second crash making China the first

country to do so.

This was a rather shocking move as historically, every country’s aviation regulator more

or less just followed the lead of the American FAA in these decisions.

It was thought that, if the FAA said it was safe, it was safe, an in this case, the FAA

initially asserted their confidence in Boeing’s 737 MAX and chose not to ground it immediately.

Now in the aftermath of this, the grounding of the MAX has presented Beijing with three

gifts.

First, especially in the case of the state-owned airlines and leasing companions, the Chinese

have a much stronger negotiating position than before with Boeing as the company works

to regain the momentum it had before.

Prices, which typically vary widely from airline to airline and deal to deal, could end up

lower.

Secondly, China’s three largest airlines, which are all state-owned, are asking Boeing

for compensation for the grounding of their jets.

By extension, this is essentially the Chinese government, the very one that holds the keys

to the Chinese aviation market, asking Boeing for compensation and, if Boeing doesn’t

comply in what is possibly largely a symbolic move, the Chinese government could decide

to reduce future Boeing orders, potentially in favor of Airbus.

While Boeing is seemingly setting itself up to offer compensation to airlines affected

by the MAX’s grounding, whatever it gives to the Chinese airlines, however favorable

the company is with them, they will have to match this precedent for their compensation

with every other of the world’s affected airlines.

What could end up the most formidable MAX challenge, though, is that the Chinese aviation

regulator has now established itself as a leader.

It was them who made that first decision to ground the jet that started the domino effect

of other national regulators grounding the MAX.

Considering China’s regulator now successfully flexed their muscle in this space, the American

FAA, which has deep links to Boeing and has allowed Boeing to essentially self-certify

certain aspects of their new aircraft, has lost some prowess in its role as, in a sense,

“the world’s aviation regulator.”

Therefore, not only will China’s regulator likely take a more independent route in re-certifying

the MAX once its issues are resolved, it will also possibly feel free to make its own independent

decisions on the airworthiness of future aircraft.

This is a precedent that should have Boeing concerned.

Now, a smaller but significant second issue for Boeing is the ongoing trade-war between

the US and China.

While Boeing has not yet encountered clear implications from this trade-war, some speculate

that the company could be used as a pawn.

You see, China’s three largest airlines—China Southern, China Eastern, and Air China—are

all majority government owned and therefore their orders can be used as a sort of political

tool.

To date, these three airlines’ fleets are slightly weighted towards Airbus planes, despite

the country’s airlines as a whole on average having a slight preference towards Boeing,

but they still do operate a significant number of Boeing planes.

While Boeing is not, of course, a state-owned company, they are the US’ largest exporter

and a major American employer and therefore the US government and Department of Commerce

works hard to prop them up.

As the largest international market for Boeing, China has the keys to either help or hurt

America’s economy through how many planes it decides to order.

In the height of the US-China trade war, in March, 2019, Chinese President Xi Jinping

announced a massive $35 billion order of 300 Airbus aircraft by China’s state-owned aircraft

leasing company.

While you can never know for sure, this certainly was viewed as a move at least partially intended

to send a message to the US.

Meanwhile, since the beginning of the trade-war, there has been a noticeable lack of significant

Boeing aircraft orders by Chinese airlines.

These, however, are most all fairly short-term threats.

The trade-war will pass, the 737 MAX will take the skies again, but what is perhaps

Boeing’s largest problem is still to come.

Their largest threat is that China is building their very own plane.

It’s being built by the Commercial Aircraft Corporation of China or COMAC.

Now, to recap, in the commercial jet aircraft manufacturing space, there’s of course Boeing

and Airbus, then there’s Embraer, which is in a joint venture with Boeing, and Bombardier,

who’s flagship C-series program was bought by Airbus.

Therefore, Boeing and Airbus control an enormous majority of the industry.

Aside from that, the only major unaligned aircraft series is the Bombardier CRJ regional

jet who’s manufacturing rights are in the process of being bought by Mitsubishi.

There’s then the Russian United Aircraft Corporation producing a small number of Ilyushin,

Tupolev, and Sukhoi jets and an even smaller number of commercial jets produced the the

Ukrainian Antonov company.

These Russian and Ukrainian aircraft tend to mostly be bought and operated by Russian

and Ukrainian airlines, so, in terms of global aircraft competition against Boeing and Airbus

there really is none.

It is the textbook duopoly.

COMAC, however, could break that.

It may surprise some to hear that there are already COMAC aircraft flying in China’s

skies—the ARJ21.

This small, 78 passenger jet was COMAC’s first significant foray into commercial aircraft

manufacturing and it has been, to put it bluntly, a disaster.

When it was first announced in 2002, the aircraft was supposed to take the skies in 2005.

In reality, though, the first prototype wasn’t completed until 2007, the first test-flight

didn’t happen until 2008, and then after delay upon delay upon delay, the first commercial

flight didn’t happen until 2016.

Since then, the issues have not let up.

The aircraft was plagued with reliability and capability issues and, to date, only fourteen

are in commercial service.

Now, it would be quite reasonable to question why this aircraft could threaten Boeing especially

considering that Boeing doesn’t even develop an aircraft in a similar size to the ARJ21.

The answer is that it doesn’t.

The aircraft that should make Boeing nervous is this—the Comac C919.

Worth noting is that Boeing is actually in a joint venture with COMAC for its final-delivery

plant in Zhoushan, but that certainly doesn’t stop the companies from competing.

Just by looking at this plane you can tell it’s built to compete directly with Airbus’

a320 and Boeing’s 737.

It’s designed to carry pretty much the exact same number of passengers and it even uses

the same engines at the a320neo and 737 MAX, but let’s be clear, the c919 is not the

a320 or 737.

It’s a brand new aircraft by a brand-new aircraft manufacturer and it’s abnormal

for even Airbus or Boeing’s new aircraft introductions to go smoothly.

Designing aircraft is difficult.

The c919 is still in its testing phase so its true performance and reliability statistics

are not yet verifiably known, however, in all honesty, the success of this plane has

less to do with its actual capability than probably any other plane in the world.

The success of this plane has to do with whether the Chinese government decides it will be

successful.

Of China’s eight largest airlines, just one, Hainan Airlines, is not government owned.

China’s government holds the keys to hundreds or thousands of aircraft orders—why would

it order from anyone but itself?

Unsurprisingly, quite a few of the C919’s orders to date have come from Chinese state-owned

airlines and aircraft leasing companies.

Its only non-Chinese order came from GE’s aircraft leasing division—possibly as a

vote of confidence considering the C919 uses GE engines.

The real test on whether the C919 is actually a good plane will come once it enters commercial

service, its reliability and capability is exhibited to the world, and foreign airlines

consider whether they want to order it.

With China’s expertise in low-cost, high-tech manufacturing, it could possibly prove a low-cost

alternative to the a320 or 737 which has had some airlines intrigued—most visibly Ryanair

who’s CEO said he would be seriously interested in the aircraft if a 200 seat variant was

developed.

China also has increasing geopolitical power, especially in pockets of Africa which also

have fast developing aviation markets, and this could translate to a number of politically

aligned countries choosing to buy and operate COMAC planes.

Overall, the real challenge to Boeing is the opportunity.

If they miss the opportunity to become a dominant player in the world’s future largest aviation

market, they could have trouble maintaining their position as the world’s largest aircraft

manufacturer.

Being number one means that staying number one is the expectation, not the goal, and

so the Chinese market, while it is an opportunity, is also a requirement.

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there requires continuous improvement.

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