January 10, 2018 1:01 am JST

Boeing losing bearings after stumble in trade row

Aviation giant erred in trying to capitalize on US protectionism

SOICHI INAI, Nikkei staff writer

The acquisition of Bombardier's C Series business gives Airbus an edge over Boeing in narrow-body aircraft. © Reuters

NEW YORK -- Boeing's effort to protect its home turf from encroachment by Canada's Bombardier by appealing to a protectionist U.S. government has backfired badly, leaving one of the world's top aircraft makers with an empowered rival and an unclear path forward.

Driven into Airbus' arms

Airbus announced in mid-October that it would acquire Bombardier's spun-off C Series operations. The European manufacturer would hold a 50.01% stake, with Bombardier retaining about 31% and the government of Quebec, the Canadian province where Bombardier is based, owning around 19%. Airbus will appoint four members of the new company's seven-member board.

"This is a win-win for everybody!" declared Airbus CEO Tom Enders.

Bombardier CEO Alain Bellemare also seemed pleased by the deal, calling Airbus "the perfect partner for us, Quebec and Canada."

The sale was prompted by a petition Boeing filed with the U.S. Commerce Department. The Chicago-based manufacturer accused Bombardier of selling C Series planes to American carrier Delta Air Lines at an unfairly low price, endangering jobs at Boeing. Boeing has criticized the "unfair" subsidies received by the Canadian company and asserted that "global trade only works if everyone plays by the same rules of the road."

The Commerce Department issued preliminary decisions in late September and early October to slap tariffs amounting to roughly 300% on 100- to 150-seat civil aircraft made in Canada -- a category that includes C Series jets. Bombardier sought to avoid these duties by selling the business to Airbus, which operates a plant in Alabama and plans to assemble C Series planes there.

By going after Bombardier, Boeing ended up handing a gift to Airbus, its biggest rival.

Making enemies

This was not the end of Boeing's woes. Canada on Dec. 12 canceled a roughly $5 billion order for 18 F/A-18 fighter jets from the company, opting to buy used planes from Australia instead.

Ottawa has been infuriated by what it considers the shoddy treatment of Bombardier, one of the country's few big homegrown manufacturers. Canadian Foreign Affairs Minister Chrystia Freeland has blasted Washington and Boeing, asserting that the punitive tariff on the C Series is "clearly aimed at eliminating" the jetliners from the U.S. market.

"Boeing is fortunate to have an outstanding 100 years of partnership with Canada, which had culminated in our $4 billion annual economic impact in Canada," the American manufacturer said Dec. 8, before the cancellation was officially announced.

Boeing says it works with 560 suppliers in Canada and supports some 17,500 jobs in the country. Though it dangled the prospect of adding another 2,000 jobs by expanding its Canadian operations, whether this had any impact is unclear.

Bad business

Delta, meanwhile, has made its dissatisfaction with the tariff ruling known. The C Series purchase will move ahead, CEO Ed Bastian told a news conference. The airline does not believe the tariff is just: More than 50% of parts and materials in C Series jets are American-made, and the jets have created many jobs in the U.S., Bastian said. Boeing, moreover, does not produce an aircraft in the same class as the C Series, and so it is difficult to see how the manufacturer is harmed by C Series imports, he said.

This anger could hurt Boeing's chances at receiving major orders in the future. Delta announced on Dec. 14 that it had ordered 100 Airbus A321neo jetliners. The aircraft seat around 200, putting them in the same class as Boeing's 737 Max 10, which Delta was reportedly also considering. The airline's resentment toward Boeing may have pushed Delta in the direction of the A321neo.

Going by the aircraft's list price, the Airbus order could be worth some $12.7 billion, and carries the option to purchase another 100 jets. And this is only one of the contracts Boeing could lose out on: Delta has made it known that it looks to replace much of its fleet with more modern aircraft.

Boeing announced Dec. 21 that it was in talks toward a potential combination with Brazil's Embraer, a specialist in small aircraft and regional jets seating 100 or fewer. As Boeing sees it, a tie-up could let the manufacturers square off against the Bombardier-Airbus alliance. But negotiations will not be easy. Brazil's government holds a "golden share" in Embraer, giving it veto power on matters such as the transfer of Embraer stock, and has expressed reservations about a business combination that would have Boeing take ownership of Embraer.

Out of character

Boeing was not always the poster child of American protectionism. In decades past, in fact, the aircraft maker was a noted leader in globalized procurement and production. Boeing began using Japanese parts in the 1950s and '60s, and ramped up procurement from Japan in the 1980s. Japanese makers produce 35% of Boeing's 787 long-haul jetliner, including its carbon fiber composite primary wing, which is made by Mitsubishi Heavy Industries.

When trade frictions in the 1980s sparked concerns that American aircraft technology could leak to Japan, Boeing spoke out against a trend toward protectionism in the U.S. Philip Condit, an executive vice president who would later become Boeing's CEO, noted in 1989 that, historically, important technologies have inevitably spread. Countries such as Japan intent on entering high-technology fields could not be kept from doing so, he said.

Boeing's latest bid to use U.S. protectionism to its advantage is a cautionary tale. In a globalized world where networks of mutual reliance are a fact of business, a country's attempts to protect its own economic interests tend to be met with equal measures from trading partners. Companies that fail to come down on one side of the protectionist-globalist divide are liable to languish in the middle.

Mitsubishi Heavy Industries, Ltd.

Japan

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