Trade – Is Boeing Caught in the Middle?

US President Donald Trump is in a “trade war” with China in which Boeing appears to be caught in the middle. China currently has 222 orders in Boeing’s backlog. 1,855 Boeing aircraft are currently operated by Chinese airlines, and Boeing has been in negotiations for a potential 500 aircraft order with multiple Chinese carriers. All of that may be up in the air, given recent actions in the emerging trade war between the countries. The Latest Shots in the Trade War Rhetoric China’s reaction to Trump’s new tariffs include, earlier this month, expanding export controls on rare earth metals. Chairman Xi’s administration has added five additional metals to seven already subject to export controls this month, as Trump threatened higher tariffs on Chinese trade. Trump, in retaliation to that move, announced that the US is considering imposing export controls on Boeing aircraft parts destined for China. That policy appears not well thought out, however, and would be a disaster for Boeing. An Impending Disaster for Boeing? The result of Trump implementing export controls would likely first result in the end of negotiations for 500 new Boeing aircraft and force China to move its order to Airbus, which already has an assembly line in Tianjin and from whom there is no spare parts threat. Airbus is already the market leader in China, with more than 2,200 aircraft in service with Chinese carriers. Moving a 500 aircraft order would significantly change market share in the Chinese market, and cost well over $50 billion in revenue to Boeing. The second element would likely be the deferred delivery of the 222 Boeing aircraft on order, resulting in higher inventory costs at Boeing and no pre-delivery payments from Chinese customers. This happened last April for a short-term element, but could return if sanctions on parts occur. Boeing would need to absorb the carrying costs for another $20 billion plus worth of aircraft, after a reworking of its delivery skyline. The third element is the elimination of spare parts revenue from China. The long-term impact of Trump’s policy would be a grounding of western aircraft in China. Because Airbus and Embraer aircraft also have about 50% US content, they could also be impacted by export controls on spare parts that originate in the US. Short-term, this would cause a reduction in flying hours for aircraft operating in China, as without access to spares, they would need to be grounded once existing spare parts inventories are depleted. That may result in China resorting to reverse engineering spare parts and building them domestically, or to cannibalize parts from other aircraft as Russia is doing to maintain operations. But from a business standpoint, Boeing would rather have the spares revenues and normal operations rather than be in the center of a protracted trade war. While such a policy would hurt Chinese airlines economically, it would also likely result in those airlines refusing to purchase new aircraft from Boeing for decades to come. China is a major customer for Boeing aircraft, and an instantaneous drying up of that market would be a bitter pill for an already beleaguered Boeing to withstand. The full retaliation will last for decades The fourth element will likely be a resurgence on Chinese investment into COMAC, the commercial aircraft company of China, to accelerate the ramp-up of production for its C919 aircraft. While that aircraft currently utilizes multiple western built components, including engines, China is actively developing its own supply chain for replacements for western parts, to ensure that in a trade war China could be self sufficient. That program of reverse engineering is already well underway and a new Chinese-designed and built engine is well along in development. COMAC has been slow to ramp-up production for its C919, which has more than 1,000 orders from domestic airlines, and is now aiming to expand its market internationally, beginning in Southeast Asia and Africa. Malaysia’s AirAsia is considering COMAC airplanes, and would be a major coup for China. A ramp-up of production, forced by a lack of aircraft, may be just what is needed to turn what today if a future threat into a more immediate one. From Economic Competitors to Adversaries China and the United States were economic competitors, whom Trump has now turned into adversaries. If Trump imposes export controls on Boeing spares, nearly all of the outcomes would be substantial and negative for Boeing. The loss of new orders, the loss of existing orders, the loss of spares and services revenues, and a renewed urgency to ramp-up COMAC would haunt Boeing for decades to come. The fact of the matter is that rare-earth elements aren’t that rare, and North America has several regions in which they can be found. But what the United States doesn’t have are the mining facilities to get the ore out of the ground nor the smelting facilities to separate and refine those metals, each of which take time and regulatory efforts to develop. Clearly, China has more rare earth materials, just as Saudi Arabia has more oil. But that doesn’t mean that domestic production is impossible, just more costly. But isn’t the proper use of tariffs to intervene and change that imbalance? This is a logical place for tariffs If tariffs are meant to spur domestic economic development, rather than block our exports, shouldn’t we deter our intake of Chinese rare earths by putting a high tariff on them to develop a domestic supply chain? This could turn out to be another negotiating point used to solidify a position. In that case, Boeing may face only some short-term issues. But if economic sanctions on aircraft spares exports are put into place, Boeing stands to lose a $50 billion plus order, cancellations of about $25 billion in orders, loss of $100 billion in long-term aftermarket revenues, and a permanent market share shift of about 5%, given that China is among the world’s largest customers for commercial aircraft. The Bottom Line Boeing is the single largest exporter in the United States, and represents the largest portion of our balance of trade. But aircraft are for bringing people together, not keeping them apart. Threatening to shut down trade in aircraft spares is an act that would result in serious economic damage to Boeing and the US aerospace industry, and potentially be seen as a hostile action that goes too far for many of our allies and friends around the world.

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