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Boeing vs. COMAC: Trade War on the Horizon

Sheri Stroop

IMAN625 Spring 2013

University of Maryland University College


Table of Contents Abstract .......................................................................................................................................... 3

Boeing vs. COMAC: Trade War on the Horizon ....................................................................... 4

The Boeing Company ................................................................................................................... 4

The Major Trade Challenge Facing Boeing ............................................................................... 5

Government and NGO Roles ....................................................................................................... 7

Recommendations ......................................................................................................................... 8

Conclusion ................................................................................................................................... 10

References .................................................................................................................................... 11


Abstract

Boeing faces a potential trade challenge from China’s COMAC in the coming decades.

China has been funneling industry information through Boeing’s manufacturing facilities in

China to its own aircraft manufacture, COMAC, with the intent of shutting Boeing out of the

Chinese aircraft market. COMAC is poised to roll-out its first batch of C919 mid-size aircraft to

market beginning in 2014, in direct competition with Boeing. Because China’s demand for

commercial aircraft is set to expand at a rate of 7.2% in the next 2 decades, Boeing will need to

revise its strategy if it is to remain a leader of the aircraft industry.


Boeing vs. COMAC: Trade War on the Horizon

The Boeing Company (Boeing) has a long history of designing, manufacturing and selling

its commercial passenger airliners in the global market. Up until this point, Boeing’s only real

competition has been Airbus, a European based aircraft manufacturer. However, Commercial

Aircraft Corporation of China (COMAC) has its sights set on building commercial aircraft and

taking on this duopoly, aspiring to be the third major player in the industry (COMAC, 2013).

Boeing’s is facing a potential trade challenge from COMAC, should COMAC succeed in its

aircraft endeavors: With the full backing of the Chinese government, COMAC could come into

the world market with a significantly lower cost aircraft at Boeing’s expense (MacPherson,

2009).

The Boeing Company

A visit to any airport in the world would show Boeing’s standing as one of the world’s

most prominent aircraft manufacturers. Airlines proudly announce via ticketing kiosks,

their websites and even the ticket itself the type of aircraft in which passengers will fly.

According to Boeing’s website, the company services customers in 150 countries and provides

employment for over 170,000 workers worldwide in 70 countries. Additionally, Boeing’s 13,000

operational jets comprise an estimated 75% of the total jet population (Boeing, 2013)1. Boeing is

the largest manufacturer of commercial aircraft in the industry and often holds the largest market

share in what is estimated to be a $100 billion industry (Reuters, 2013). 2

Boeing currently manufactures six different types of commercial aircraft, ranging in size

from the BBJ/VIP luxury liner, which is custom made, to order to the highly demanded 737 with

1 This number includes McDonnell-Douglas aircraft, also owned by Boeing.

2 Boeing grossed $49.1 billion in 2012 (Boeing, 2013).


a seating capacity for 100 passengers, to the 787 Dreamliner with seating capacity for 500

passengers and a flight range of 9300 nautical miles.3 The company sold a total of 1338

commercial aircraft to airlines in 11 countries in 2012; the majority purchased by Lion Air and

United Airlines (Boeing, 2013).4 Overall, Boeing is often the top manufacturer in the industry

worldwide.5 Taking into account only the most recent statistics for the company, one might

conclude that Boeing has nothing to fear from new entrants into the market. In the short-term,

perhaps that conclusion would be correct. However, the exponential growth of China’s economy

and demand for aircraft cannot be ignored.

The Major Trade Challenge Facing Boeing

With the world’s fastest growing economy, 6

China is quickly becoming a country to be

reckoned with in the global marketplace (MacPherson, 2009). China often uses unconventional,

and what developed countries would define as illegal, means of beginning most of their

industries. In addition, the Chinese have a long history of not playing by the rules when it comes

to international trade, and China’s entrance into the aircraft manufacturing market is no

exception.

As a result of an ever-expanding consumer base, China’s demand for aircraft is growing,

and the Chinese government has made it clear that expansion of domestic aircraft production is a

requirement to meet this demand (MacPherson, 2009). China entices Boeing and companies like

it to begin manufacturing operations with the low labor cost of labor in its country.7 While

companies may gain additional revenue through partnerships with China in the short term,

3 The Dreamliner is currently not in circulation due to an FAA safety investigation.

4 Lion Air of Indonesia purchased 201; United Airlines of U.S. purchased 100.

5 Boeing often switches market position with Airbus for the top spot.

6 According to MacPherson, China’s GDP has been expanding at a rate of 10% annually since 1990.


history shows they often pay in the long run. The Chinese have been extracting knowledge of

aircraft assembly and components through Boeing’s Tianjin manufacturing plant, with the intent

of building its own airline industry through COMAC (Bédier, Vancauwenberghe, & van Sintern,

2008). Although using the knowledge gained from foreign companies in China violates World

Trade Organization (WTO) rules, China’s low regard for intellectual property rights seems to

trump the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Since

China is a member of the WTO, this is cause for concern to any and all countries that set up

operations in China. However, with China’s deep pockets and impossible to ignore economy,

many companies see this as a cost of doing business and continue to invest capital there.

Skeptics would say that it could be years, if ever, before COMAC will be considered a

major competitor to Boeing, let alone a threat, because the aircraft manufacturing industry has

high barriers to entry (Bitzinger, 2013). However, many others in the international community

would beg to differ. As large as China’s market for commercial jet is, Boeing only sold 45 of

200 aircraft purchased in China in 2012 (Boeing, 2013). With COMAC promising for its first

C919 aircraft to come off the assembly line in 2014, China could very well become a major

contender in the marketplace (ChinaDaily, 2013). COMAC has already secured 380 orders for

its new C919 aircraft from 15 different customers (COMAC, 2013). Air China flights to the U.S.

are set to expand this year (Yuwei, 2013). While that means a business opportunity for Boeing in

the near term,8 with the Chinese government pushing its airlines to buy their aircraft from

Chinese manufacturers, that business could quickly dry up. China’s leadership has set its sights

on what it sees to be a lucrative industry and will pursue that industry to the fullest extent.

7 Manufacturing costs can be as much as 25% lower in China and other developing countries than in developed

countries (Bédier, Vancauwenberghe, & van Sintern, 2013). 8 Air China uses Boeing 777s for international flights (Yuwei, 2013).


COMAC’s website states that “it is determined to independently build large Chinese passenger

aircraft“[emphasis added], and according to an article in FinancialExecutive, the Chinese have

told Boeing that in the next five years “midrange-aircraft…will be entirely manufactured in

China, under a Chinese mark or name using technology that they took…from Boeing” (Navarro,

2013).

Government and NGO Roles

Though China’s rapid expansion and increase in market activity may give it the look of a

free society, the Chinese government continues to play a strong role in all industry in China.

China requires American companies that manufacture in China, such as Boeing, to take on a

majority Chinese business partner, essentially surrendering control of their business operations in

country. It is through this partner that China is able to funnel information about how the

American company does business, and eventually, shut out the American business entirely

(Navarro, 2013). According to COMAC’s website, the Chinese government sees the

introduction of the C919 aircraft to the market as an example of its national strengths and a

demonstration of the “superiority of the socialist system” (2013). The emphasis by the

government on the need for success of the C919 project should be seen as a warning to Boeing:

China is willing to pursue all means necessary to succeed in the commercial aircraft industry, if

for no other reason, to protect its honor.

The government of the United States plays a lesser, albeit important role in the aircraft

manufacturing industry, should a trade dispute arise. Although the WTO is the governing body

for international trade disputes, the U.S has its own trade related agencies that get involved in the

case of intellectual property theft, completely by-passing the WTO dispute resolution process.

According to the Office of the U.S. Trade Representative (USTR), the USTR’s Office of


Intellectual Property and Innovation (IPN) is not just a protector of U.S. business inside the

United States, but it also protects U.S. foreign direct investment worldwide through Special 301

of the Trade Act of 1974 (USTR, 2013). Special 301 committees classify countries on the basis

of the risk they pose to intellectual property rights as priority foreign countries, priority watch list

and watch list, with those classified as priority foreign countries being at risk of potential trade

sanctions (International Trade Association, 2009). China is currently on the priority watch list

(International Intellectual Property Alliance, 2013).

NGOs also play a role in the commercial aircraft manufacturing industry. The National

Business Aviation Association and the General Aviation Manufacturer’s Association make it

their business to promote the importance of air travel to U.S. business through their “No Plane,

No Gain” campaign. These organizations influence policy makers in the United States and in

China to provide an aviation friendly environment, citing the use of aircraft in business to create

jobs and expand communities (NBAA, 2013). Other organizations, such as TechAmerica get

involved in the trade related aspects of the commercial aircraft industry, advocating for U.S.

companies overseas to overcome barriers to trade such as China’s indigenous innovation policies

(TechAmerica). These policies require foreign companies to turn over R&D and technology to

the Chinese government when setting up shop in China, providing China with a way to produce

Chinese products from what would normally be intellectually protected specifications.

Recommendations

The growth of the market for commercial aircraft in China could lead to a make or break

point in the industry sometime in the near future, and Boeing wants a piece of that pie. Boeing

sees its partnership with China as crucial to ensuring their “market leadership position for years

to come” (Boeing Frontiers, 2009). For Boeing, a failure or a shutout in the Chinese market is


simply not an option. However, there are avenues that Boeing can pursue to remain successful in

the commercial aircraft industry.

Boeing cannot ignore the coming competition in China. With the rapid pace of expansion

in China, it is feasible that China could overtake many industries as the global leader in the next

decade. Indeed, that is China’s stated ambition and goal for the future. Boeing needs to prepare

for a Chinese entrance into the aircraft market by setting itself apart from its competition. To

date, COMAC only has plans for regional to midsized aircraft – direct competitors for Boeing’s

737 model. Boeing needs to focus on selling its larger aircraft, such as the 777 model to Chinese

airlines that fly internationally. This would allow Boeing to continue to compete in the Chinese

market without being a threat to the Chinese aircraft industry. In this scenario, the downside is

that Boeing loses market share in the midsize aircraft category to China, but can feasibly remain

among the top players in the industry as a whole.

Alternatively, Boeing could pursue a regulatory approach to maintain its position as a

market leader. Boeing could petition the U.S. government for relief from the theft of its

technology through Section 301. This could potentially result in trade sanctions against China

with demands for a cease and desist from the use of Boeing technology in Chinese aircraft.

However, there are more downsides in this scenario than up, as this would certainly not make the

Chinese government want to continue its partnership with Boeing, and China could cut Boeing

out of the picture altogether until its aircraft program is complete by relying completely on

Airbus (Boeing’s largest competitor) for aircraft.

Another option for Boeing would be for it to focus selling mid to large size aircraft to

other emerging markets that are less of a threat to the company, but still rapidly expanding their

demand for aircraft. One such country would be India. India’s aerospace program is much


further behind China’s, yet this emerging market has been expanding at a rate of 4.5% of GDP

over the last year, with a potential to climb back to 6-8% by 2015 (Enjoji, 2013). In addition,

India’s demand for aircraft is larger than that of China, with projected growth of 9.8% vs.

China’s 7.2% in the next 20 years (Keller, 2011). India has 11 active commercial airlines for

Boeing to woo, none of which purchased aircraft from Boeing in 2012. Boeing would be on

more equal footing in India, competing against Airbus and Embraer, but not with a nationally

supported aircraft manufacturer dead-set on closing out all the competition (as will soon be the

case in China).

Conclusion

According to Avionics Intelligence, the world market for commercial aircraft is set to

double in the next two decades (Keller, 2013). This could lead to a significant shift in market

share in the industry. Long-established companies like Boeing should focus on continuing to

grow their market base to include rapidly expanding emerging markets, such as China, India and

Chile.9 While China is poised to become the next major contender in the industry, Boeing has

opportunities to partner with China to remain successful. In addition, China’s success in the

aircraft industry is not yet a foregone conclusion. Boeing can maintain its position as a leader in

the industry through partnerships and customers in new emerging markets, as well as by focusing

on marketing its larger line of aircraft to China to diffuse the potential conflict with COMAC’s

aircraft.

9 Chile is expected to add more than 160 aircraft to its fleet in next two decades (Vogelaar, 2012).


References

About Us. Boeing. Retrieved from http://www.boeing.com.

AviationNews. Retrieved from http://www.aviationnews.eu.

Bédier, C., Vancauwenberghe, M. and van Sintern, W. (2008). The growing role of emerging

markets in aerospace. McKinsey Quarterly, (2), 114-115. Retrieved from Ebsco

Publishing.

Bitzinger, R. (January 18, 2013). China and commercial aircraft production: Harder than it looks.

China Brief, v13, issue 2. Retrieved from http://www.jamestown.org.

Boeing 767. Retrieved from http://www.arabiansupplychain.com.

Boeing Frontiers (2009). Retrieved from http://www.boeing.com.

C919 Program. Commercial Aircraft Corporation of China. Retrieved from

http://www.english.comac.cc.

China’s first jumbo jet to debut in 2014. ChinaDaily. (March 4, 2013). Retrieved from:

http://www.chinadaily.com.cn

Commercial Aircraft Corporation of China, Ltd. Retrieved from: http://english.comac.cc.

Enjoji, K and Harjani, A. (April 2, 2013). India’s Chidambaram sees 8% growth by 2015.

Retrieved from: http://www.cnbc.com.

Hepher, T. and Scott, A. (2013). Airbus regains top spot from Boeing in first quarter. Reuters.

Retrieved from http://uk.reuters.com.

IIPA details significant copyright piracy and market access barriers in key markets; requests

designation of Ukraine as a priority foreign country. International Intellectual Property

Alliance. (February 7, 2013). Retrieved from: http://www.iipa.com.

International Policy & Advocacy. TechAmerica. Retrieved from http://www.techamerica.org.


Keller, J. (September 20, 2011). Worldwide commercial aircraft fleet to double over next two

decades, with demand for 27,800 new aircraft. Avionics Intelligence. Retrieved from:

http://www.avionics-intelligence.com.

MacPherson, A. (2009). The emergence of a new international competitor in the commercial

aircraft sector: The China syndrome. Futures, 41, pp.482-489. Retrieved from

http://www.elsevier.com.

Navarro, P. (January 2013). China 2013 the reshoring to America. FinancialExecutive, pp33-35.

Retrieved from: http://www.financialexecutives.org.

No plane no gain message resonates, even in China. National Business Aviation Association.

(March 1, 2013). Retrieved from http://www.nbaa.org.

Office of the United States Trade Representative. (2013). Retrieved from http://www.ustr.gov.

Special 301. International Trade Association. (2009). Retrieved from http://www.trade.gov.

Trade related aspects of intellectual property rights. (2013). World Trade Organization.

Retrieved from http://www.wto.org.

Vogelaar, R. (March 29, 2012). Chile sees demand for more than 160 aircraft in next 20 years.

Yuwei, Z. (April 1, 2013). Air China expands service across US. ChinaDaily USA. Retrieved

from http://www.usa.chinadaily.com.cn.

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