Daily Insight: Tuesday 14 May 2019: China’s Trump Card – Boeing

News An editor-in-chief from China dropped a hint that commercial aircraft may be impacted shortly as China reacts to tariffs imposed by Donald Trump in the on-going trade dispute. As China is the largest potential market for the troubled 737 MAX, selling to the Chinese may be critical to Boeing’s future cash flows and competitive position. Until now, China has been careful to play off Airbus and Boeing against each other, typically ordering equal number of planes from each. However, with tariffs on Chinese goods being imposed by President Trump, it is expected that China could retaliate with tariffs on US-built aircraft, which would likely cripple Boeing sales in that country. While we do not expect China to be able to meet its internal growth targets without Boeing airplanes, a delay could send a chilling message to Washington. Analysis China is developing its own 737/A320 class airplane, the COMAC C919. While that aircraft remains a few years away from volume production, this airplane, when introduced, will be mandated for use by Chinese airlines for domestic routes, with each airplane sold coming at the expense of Airbus or Boeing. The US and European governments have been interfering with Chinese attempts to purchase high-tech aviation technology, from Bombardier’s CSeries to key suppliers that are up for sale. The US and EU want to maintain technical superiority for as long as possible. COMAC, with slow development of its 919, is playing right along with Boeing and Airbus wishes. Insight Over the longer term, China will have a major impact on the aerospace market. The country is too big not to have its own commercial aircraft manufacturer, and has the capital and national interest to develop it. From a WTO standpoint, China may be the ideal case highlighting government support of a commercial business, but is unlikely to see that same type of attention that Bombardier and Embraer share or Boeing and Airbus receive from each other. Why? China would likely simply laugh at the organization and walk away, and get away with it. From a trade standpoint, commercial aircraft are the US largest export, and China’s largest import. Why wouldn’t this come front and center during a trade disagreement? But the implications for Boeing are quite important, as losing a market for potentially 1/4th to 1/3rd of the projected 737 MAX sales would be quite substantial and bring with it a major financial impact. The Chinese have an Ace that they haven’t yet played, but is in their hand and ready. While taking fewer than planned aircraft could shoot them in the foot and potentially market them more dependent on Airbus and the EU, aircraft are the perfect vehicle to strike back at the Trump administration and his trade policies. The remainder of May will be interesting as trade negotiations continue.

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