Boeing has a lot to lose in China as Trump and Xi fire the first salvos of their trade conflict

PUBLISHED : Friday, 22 June, 2018, 11:07am
UPDATED : Friday, 22 June, 2018, 11:07am

In the perennial battle between Boeing and Airbus, China has for years tried to keep orders on an even keel between the duopoly. Now, thanks to US President Donald Trump, the American planemaker is at risk of losing its meagre lead in the world’s second-biggest aviation market.

With the rising prospect of an all-out trade war after the Trump administration announced tariffs on US$50 billion of goods imported from China, President Xi Jinping is under pressure to retaliate. A clue to his tactics may be revealed during French Prime Minister Edouard Philippe’s visit to Beijing this weekend, where he’ll try to seal a deal for more than 180 Airbus A320 jets.

The US$18 billion order, if confirmed, would send a strong signal to the US that China has effective options to hit hard where it hurts. The Asian power is likely to favour Airbus planes for future orders, according to Jin Wei, an aviation researcher at China Center for Information Industry Development, a state-backed think tank in Beijing.

“Awarding big plane orders to Airbus will be a wake-up call to the US that China has alternatives and does not fear clashing with US on trade,” Jin said.

Such a strategy may also help China drive deeper divisions within the Group of Seven nations, whose leaders in Europe and Canada are struggling to adapt to challenges from an unpredictable Trump on issues ranging from security to exports. Germany’s foreign minister last week called on European nations to unite and fill the void left by the US pullback from global agreements.

For Philippe, an Airbus contract would finish off business his boss Emmanuel Macron left behind from his January visit to China. Talks over Airbus planes are ongoing, according to an aide to the French prime minister who asked not to be named, citing government policy. The aide declined to say whether a contract will be signed next week.

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Guillaume Faury, Airbus’s head of commercial aircraft, is scheduled to be part of the business delegation Philippe is taking on his four-day trip, which culminates in Beijing on Monday with a customary deal-signing ceremony and a meeting with Xi.

A representative for Airbus said the Toulouse-based company is always in talks with customers about their fleet requirements and doesn’t comment on diplomatic matters. Boeing declined to comment.

To be sure, China isn’t likely to dump Boeing altogether for Airbus. Nor is the Airbus order a given, considering Sino-French relations haven’t hit all the right notes. Though Macron has shown more inclination to connect with China than his predecessors and has pledged to visit once a year, he said in Canada this month that the Asian country couldn’t yet join the G7 because it doesn’t share the club’s values.

Yet, Trump’s policies may give China enough reasons to tilt the balance in favour of Airbus, said Corrine Png, chief executive officer and founder of Crucial Perspective, a Singapore-based research firm focused on transport.

“We expect Airbus’s market share in China to increase going forward,” she said.

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Back in April, as trade tensions heated up, China fired a warning shot with the threat of a 25 per cent levy on aircraft categories that included the largest Gulfstream luxury jets and older and smaller 737 models nearing the end of their production run. But the measure stopped shy of penalising the 737 Max 8, Boeing’s bestselling new model.

China is a key battleground for Chicago-based Boeing and Airbus as the country is slated to surpass the US as the world’s biggest aviation market by as early as 2022. Boeing predicts China will need more than 7,200 new aircraft worth over US$1 trillion in the 20 years through 2036.

Unlike other markets where individual airlines decide on plane orders, a central government agency -- China Aviation Supplies Holding -- is responsible for purchases before allocation to different state carriers and leasing companies. That means political considerations have a lot more weight on decisions.

“If you think like a bureaucrat, who would you want to deal with? Trump or Europe?” said Mohshin Aziz, an analyst at Maybank Investment Bank in Kuala Lumpur. “Right now the answer is quite obvious.”

A trade war may end up hurting companies on both sides, said Lin Zhijie, an aviation columnist at China’s Chinese carriers will be at a disadvantage if they have only one supplier, according to him. “They will increasingly see a lack of choice while purchasing aircraft,” he said.

If Boeing is shut out of the market, Chinese carriers would lose leverage to command discounts from Airbus. And the airlines have little leeway to shift orders between the planemakers since the models with the highest demand, like Airbus’s A320neo narrow-body jets, are sold out through the early 2020s.

“There are no good options for customers with Airbus and Boeing currently oversold,” Douglas Harned and Christian Laughlin, analysts with Sanford C. Bernstein & Co., said in a report to clients Thursday.

The US has announced a 25 per cent tariff on US$34 billion in goods from China ranging from whiskey to aircraft tyre retreads starting July 6, with further duties on another US$16 billion in imports under consideration.

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In response, China said it would levy tariffs of the “same scale and intensity” on goods from the US. This week, Trump ordered identification of US$200 billion in Chinese goods for additional tariffs of 10 per cent, with another US$200 billion after that, if Beijing retaliates.

Trump’s tariffs provide little benefit to US aerospace manufacturers because such imports are almost negligible. By targeting aircraft and parts, the US administration risks upsetting a trade imbalance weighted 17 to 1 in America’s favour as a result of Boeing’s booming aircraft sales, according to Richard Aboulafia, a consultant with Teal Group.

While there is a possibility that the US and China will reach an agreement over trade, the dispute can also get “worse and worse,” said Nicholas Smith, a strategist at CLSA in Tokyo.

“The whole thing is pretty volatile,” Smith said. “They could explode or they could fizzle out.”