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Video Boeing's China Problem

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00:00   |   Sep 10, 2019 at 07:00

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Boeing's China Problem
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  • This video was made possible by Skillshare.
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  • To, from, or through China, more than half a billion passengers fly each year.
  • By 2035, that number is expected to be 1.3 billion.
  • It is one of the fastest growing aviation markets in the world, is home to what is believed
  • to be the future busiest airport in the world, and is expected to soon surpass the US to
  • become the single largest aviation market in the world.
  • Last year, a new aircraft was delivered to a Chinese airline every 21 hours.
  • That’s $35 billion worth of aircraft purchased in a single year.
  • All of this, however, represents a considerable problem for the world’s largest aircraft
  • manufacturer—Boeing.
  • You see, the reason China is a problem for Boeing is also part of the reason why China
  • is already such an enormous market for them.
  • While the US is resoundingly Boeing’s number one customer, at least partially propped up
  • by government defense contracts, China safely holds the number two spot.
  • Excluding North America, China, in fact, singlehandedly earns Boeing more money than every continent
  • in the world.
  • Now, not only is China a fierce battle-ground between Boeing and Airbus, even if Boeing
  • has a slight overall edge in market share, but the company now also faces a trifecta
  • of issues potentially hindering its future dominance in this ultimately crucial aviation
  • market.
  • The first of these issues has to do with Boeing brand new yet beleaguered airplane—the 737
  • MAX.
  • Prior to the MAX’s grounding, China was, by a wide margin, the largest operator of
  • this airplane.
  • Its airlines had a total of 97 MAX’s while US’ airlines, representing the second largest
  • customer group, only had a total of 72.
  • This is an aircraft particularly well-suited to China’s geography.
  • With a number of smaller, secondary or tertiary cities, China’s airlines are increasingly
  • focused on developing non-stop flights bypassing the major hubs of Beijing, Shanghai, and Guangzhou,
  • or fights to lower demand cities outside of China.
  • This is especially true given the huge number of smaller airlines operating in China who
  • have established themselves by setting up hubs in some of the country’s smaller cities
  • whose populations more recently started the transition into the country’s middle and
  • upper classes than those of the country’s tier one cities.
  • Of course, flying to or from these smaller cities means lower demand for seats, however,
  • the longer-range, smaller-capacity capability of the 737 MAX perfectly suits this mission.
  • That allowed Chinese airlines to set up, in an economical manner, flights like Jinan to
  • Singapore, Guangzhou to Lahore, Ürümqi to Bangkok, or Hangzhou to Hotan—all five or
  • six hours flights with minimal demand.
  • The 737 MAX was an aircraft perfectly suited for China and Boeing knew it.
  • This suitability and focus was demonstrated by Boeing’s decision to set-up an aircraft
  • completion center in Zhoushan, China.
  • While aircraft would continue to be primarily assembled in Renton, Washington, they would
  • be flown over to Zhoushan without the interiors completed.
  • In Zhoushan, their seats, overhead bins, and basically the entire rest of their interiors
  • would be installed by Chinese workers in this Chinese factory.
  • Having a ground presence in China would appease the government, and by extension airlines,
  • and the hope was that this would help convince them to buy Boeing jets considering that their
  • purchase provided Chinese jobs.
  • This was especially necessary considering that Airbus already had an even more extensive
  • final assembly line in the country for its competing a320 jets.
  • Given the MAX’s suitability, though, Chinese airlines bought an enormous number of these
  • planes.
  • In addition to the 97 already delivered, Chinese airlines had almost 500 of them on order but
  • then, of course, the MAX crashed, and then it crashed again.
  • China’s Civil Aviation Administration, eager to maintain the country’s recent streak
  • of aviation safety, quickly grounded the MAX after its second crash making China the first
  • country to do so.
  • This was a rather shocking move as historically, every country’s aviation regulator more
  • or less just followed the lead of the American FAA in these decisions.
  • It was thought that, if the FAA said it was safe, it was safe, an in this case, the FAA
  • initially asserted their confidence in Boeing’s 737 MAX and chose not to ground it immediately.
  • Now in the aftermath of this, the grounding of the MAX has presented Beijing with three
  • gifts.
  • First, especially in the case of the state-owned airlines and leasing companions, the Chinese
  • have a much stronger negotiating position than before with Boeing as the company works
  • to regain the momentum it had before.
  • Prices, which typically vary widely from airline to airline and deal to deal, could end up
  • lower.
  • Secondly, China’s three largest airlines, which are all state-owned, are asking Boeing
  • for compensation for the grounding of their jets.
  • By extension, this is essentially the Chinese government, the very one that holds the keys
  • to the Chinese aviation market, asking Boeing for compensation and, if Boeing doesn’t
  • comply in what is possibly largely a symbolic move, the Chinese government could decide
  • to reduce future Boeing orders, potentially in favor of Airbus.
  • While Boeing is seemingly setting itself up to offer compensation to airlines affected
  • by the MAX’s grounding, whatever it gives to the Chinese airlines, however favorable
  • the company is with them, they will have to match this precedent for their compensation
  • with every other of the world’s affected airlines.
  • What could end up the most formidable MAX challenge, though, is that the Chinese aviation
  • regulator has now established itself as a leader.
  • It was them who made that first decision to ground the jet that started the domino effect
  • of other national regulators grounding the MAX.
  • Considering China’s regulator now successfully flexed their muscle in this space, the American
  • FAA, which has deep links to Boeing and has allowed Boeing to essentially self-certify
  • certain aspects of their new aircraft, has lost some prowess in its role as, in a sense,
  • “the world’s aviation regulator.”
  • Therefore, not only will China’s regulator likely take a more independent route in re-certifying
  • the MAX once its issues are resolved, it will also possibly feel free to make its own independent
  • decisions on the airworthiness of future aircraft.
  • This is a precedent that should have Boeing concerned.
  • Now, a smaller but significant second issue for Boeing is the ongoing trade-war between
  • the US and China.
  • While Boeing has not yet encountered clear implications from this trade-war, some speculate
  • that the company could be used as a pawn.
  • You see, China’s three largest airlines—China Southern, China Eastern, and Air China—are
  • all majority government owned and therefore their orders can be used as a sort of political
  • tool.
  • To date, these three airlines’ fleets are slightly weighted towards Airbus planes, despite
  • the country’s airlines as a whole on average having a slight preference towards Boeing,
  • but they still do operate a significant number of Boeing planes.
  • While Boeing is not, of course, a state-owned company, they are the US’ largest exporter
  • and a major American employer and therefore the US government and Department of Commerce
  • works hard to prop them up.
  • As the largest international market for Boeing, China has the keys to either help or hurt
  • America’s economy through how many planes it decides to order.
  • In the height of the US-China trade war, in March, 2019, Chinese President Xi Jinping
  • announced a massive $35 billion order of 300 Airbus aircraft by China’s state-owned aircraft
  • leasing company.
  • While you can never know for sure, this certainly was viewed as a move at least partially intended
  • to send a message to the US.
  • Meanwhile, since the beginning of the trade-war, there has been a noticeable lack of significant
  • Boeing aircraft orders by Chinese airlines.
  • These, however, are most all fairly short-term threats.
  • The trade-war will pass, the 737 MAX will take the skies again, but what is perhaps
  • Boeing’s largest problem is still to come.
  • Their largest threat is that China is building their very own plane.
  • It’s being built by the Commercial Aircraft Corporation of China or COMAC.
  • Now, to recap, in the commercial jet aircraft manufacturing space, there’s of course Boeing
  • and Airbus, then there’s Embraer, which is in a joint venture with Boeing, and Bombardier,
  • who’s flagship C-series program was bought by Airbus.
  • Therefore, Boeing and Airbus control an enormous majority of the industry.
  • Aside from that, the only major unaligned aircraft series is the Bombardier CRJ regional
  • jet who’s manufacturing rights are in the process of being bought by Mitsubishi.
  • There’s then the Russian United Aircraft Corporation producing a small number of Ilyushin,
  • Tupolev, and Sukhoi jets and an even smaller number of commercial jets produced the the
  • Ukrainian Antonov company.
  • These Russian and Ukrainian aircraft tend to mostly be bought and operated by Russian
  • and Ukrainian airlines, so, in terms of global aircraft competition against Boeing and Airbus
  • there really is none.
  • It is the textbook duopoly.
  • COMAC, however, could break that.
  • It may surprise some to hear that there are already COMAC aircraft flying in China’s
  • skies—the ARJ21.
  • This small, 78 passenger jet was COMAC’s first significant foray into commercial aircraft
  • manufacturing and it has been, to put it bluntly, a disaster.
  • When it was first announced in 2002, the aircraft was supposed to take the skies in 2005.
  • In reality, though, the first prototype wasn’t completed until 2007, the first test-flight
  • didn’t happen until 2008, and then after delay upon delay upon delay, the first commercial
  • flight didn’t happen until 2016.
  • Since then, the issues have not let up.
  • The aircraft was plagued with reliability and capability issues and, to date, only fourteen
  • are in commercial service.
  • Now, it would be quite reasonable to question why this aircraft could threaten Boeing especially
  • considering that Boeing doesn’t even develop an aircraft in a similar size to the ARJ21.
  • The answer is that it doesn’t.
  • The aircraft that should make Boeing nervous is this—the Comac C919.
  • Worth noting is that Boeing is actually in a joint venture with COMAC for its final-delivery
  • plant in Zhoushan, but that certainly doesn’t stop the companies from competing.
  • Just by looking at this plane you can tell it’s built to compete directly with Airbus’
  • a320 and Boeing’s 737.
  • It’s designed to carry pretty much the exact same number of passengers and it even uses
  • the same engines at the a320neo and 737 MAX, but let’s be clear, the c919 is not the
  • a320 or 737.
  • It’s a brand new aircraft by a brand-new aircraft manufacturer and it’s abnormal
  • for even Airbus or Boeing’s new aircraft introductions to go smoothly.
  • Designing aircraft is difficult.
  • The c919 is still in its testing phase so its true performance and reliability statistics
  • are not yet verifiably known, however, in all honesty, the success of this plane has
  • less to do with its actual capability than probably any other plane in the world.
  • The success of this plane has to do with whether the Chinese government decides it will be
  • successful.
  • Of China’s eight largest airlines, just one, Hainan Airlines, is not government owned.
  • China’s government holds the keys to hundreds or thousands of aircraft orders—why would
  • it order from anyone but itself?
  • Unsurprisingly, quite a few of the C919’s orders to date have come from Chinese state-owned
  • airlines and aircraft leasing companies.
  • Its only non-Chinese order came from GE’s aircraft leasing division—possibly as a
  • vote of confidence considering the C919 uses GE engines.
  • The real test on whether the C919 is actually a good plane will come once it enters commercial
  • service, its reliability and capability is exhibited to the world, and foreign airlines
  • consider whether they want to order it.
  • With China’s expertise in low-cost, high-tech manufacturing, it could possibly prove a low-cost
  • alternative to the a320 or 737 which has had some airlines intrigued—most visibly Ryanair
  • who’s CEO said he would be seriously interested in the aircraft if a 200 seat variant was
  • developed.
  • China also has increasing geopolitical power, especially in pockets of Africa which also
  • have fast developing aviation markets, and this could translate to a number of politically
  • aligned countries choosing to buy and operate COMAC planes.
  • Overall, the real challenge to Boeing is the opportunity.
  • If they miss the opportunity to become a dominant player in the world’s future largest aviation
  • market, they could have trouble maintaining their position as the world’s largest aircraft
  • manufacturer.
  • Being number one means that staying number one is the expectation, not the goal, and
  • so the Chinese market, while it is an opportunity, is also a requirement.
  • Now, in a similar vein, anyone who’s been number one in anything knows that staying
  • there requires continuous improvement.
  • That means that no matter if you’re at the beginning of your career or if you’re already
  • at the top, you know that you should be constantly improving yourself.
  • Part of the way that I make sure I’m always doing that is by using Skillshare.
  • Their courses are a great way to quickly and simply learn new skills.
  • For example, for anyone that has to do presentations, whether it be at school or work, I’d highly
  • recommend the Skillshare original called, “Presentation Essentials: How to Share Ideas
  • That Inspire Action.”
  • Presentation seems like a simple thing, but there are actually so many nuances to it that
  • can really make the difference between an ineffective and effective presentation.
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Animation by Josh Sherrington
Sound by Graham Haerther (http://www.Haerther.net)
Thumbnail by Simon Buckmaster

Music by http://epidemicsound.com
Select footage courtesy the AP Archive
China Eastern 737 Takeoff Video Courtesy PDX Aviation

References:
[1] https://data.worldbank.org/indicator/IS.AIR.PSGR?locations=CN
[2] https://www.iata.org/pressroom/pr/Documents/TopTenPaxMarkets_graph.pdf
[3] https://www.scmp.com/news/world/russia-central-asia/article/3024610/you-can-buy-russias-putin-pitches-su-57-stealth-jets
[4] https://skift.com/2019/01/08/boeing-edges-airbus-to-stay-worlds-biggest-commercial-aircraft-manufacturer/
[5] https://s2.q4cdn.com/661678649/files/doc_financials/annual/2019/Boeing-2018AR-Final.pdf
[6] https://www.cnbc.com/2019/02/04/boeing-stock-all-time-high-on-china-demand-production-acceleration.html
[7] https://graphics.reuters.com/ETHIOPIA-AIRPLANE/010091341G7/index.html
[8] https://www.routesonline.com/news/29/breaking-news/283437/what-routes-does-the-boeing-737-max-8-fly/
[9] https://www.airbus.com/newsroom/news/en/2018/09/airbus--china-assembly-facility-marks-10-years-of-quality-manufa.html
[10] https://www.wsj.com/articles/boeing-and-its-737-max-jets-have-a-china-problem-11554904340
[11] https://www.nytimes.com/2019/03/13/business/china-boeing.html
[12] https://www.apnews.com/88d5235d2107400680d8b0870d30d218
[13] https://www.marketplace.org/2019/02/11/ceo-americas-biggest-exporter-manufacturing-america-doing-business/
[14] https://www.bloomberg.com/news/articles/2019-03-25/airbus-is-said-to-seal-long-awaited-aircraft-order-from-china
[15] https://www.mhi.com/news/story/190625.html
[16] https://ukranews.com/en/news/612803-antonov-planning-to-resume-production-of-an-148-an-158-and-an-178-planes-in-2019
[17] https://www.telegraph.co.uk/travel/news/china-comac-919-new-plane-ryanair/

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