Further along, he says, “If the prime manufacturer, or systems integrator, cannot make his fortune by giving all his work away, who does benefit? The subcontractors, of course. They have a guaranteed profit margin if they write the contract properly. They have access to free technical advice if they encounter problems, because the systems integrator cannot allow them to fail.”19
Boeing can argue that sharing the financial risks with another company is very different. Risk sharing is really revenue sharing. Japan’s three heavies have become risk-sharing partners instead of suppliers. With this arrangement, Boeing negotiates a fixed percentage of the revenue with each partner. And the partners must each share a larger portion of the costs of developing the airplane.
Although it’s a beneficial arrangement for Boeing, there can be some downside. If and when an overseas partner determines that no other supplier can do the same work for Boeing as well or cost-effectively, that company is certain to insist on a larger share of the revenue. At that point, Boeing would find itself paying foreigners to do what it could have done itself, or what it might have paid domestic suppliers to do; however, the money would be flowing abroad instead of staying within the country.
“I see considerable risk in the business and the technical issues,” says a knowledgeable Boeing engineer. “For instance, I’ll be very interested to see how much leverage the suppliers have with their sixty-five percent equity in gaining favorable terms for future use of the technology.”20
Boeing didn’t need to acquire risk-sharing partners to build the 787. Boeing was aware that the financial markets would have funded development of the airplane, an admittedly more expensive option. But the option that Boeing selected is hardly the ideal way to reduce risks, especially long-term risks.
Boeing isn’t Wal-Mart, a globally integrated company that has amassed great economic power on its own terms. Its products, like those of numberless other companies with global networks, are commodities. A used-up tube of toothpaste or a worn bath towel is swiftly replaced. But Boeing operates in a different supplier-integrator environment. The company may get ten thousand calls per year from customers operating a product that will have cost $120 million or so and will require maintenance and technical analysis of component parts that are five or fifteen or twenty-five years old. An open question is whether a company with those responsibilities can fulfill them if it loses touch with the methods and procedures being used to make its product, especially an airplane that is built around an all-composite fuselage and wing.
IN 1992, Boeing’s share of the world market for airliners was 70 percent. But with American carriers starved for funds and canceling or postponing equipment orders worth many billions of dollars, Boeing had become heavily and increasingly dependent on sales to foreign airlines, especially those in East Asia, where economic growth and power were by then concentrated.
Japan and China, along with British Airways, had become Boeing’s two largest overseas customers. Air travel within and into China was growing exponentially—by nearly one-third in 1991 alone. Rapidly expanding regional airlines were sprouting up, and new airports were being built from scratch. “It is a mushrooming economy with a weak transportation infrastructure,” Condit said at the time. “It needs airplanes. The same is true of Indonesia with all those islands. It’s pretty exciting. Our guess is that the intra-Asian traffic growth will be greater than in the U.S. for the first time in the history of our forecasts.”21
China was giving Boeing’s leadership a lot to think about. In competing with Airbus—an aggressive but still small player—Boeing had advantages; it was the dominant supplier of commercial aircraft, and its role as a major defense contractor underlined its political importance in Washington. To buy Boeing might help to promote Chinese access to the huge American market that beckoned.
For both Boeing and Airbus, but especially for Boeing, political issues with China would always have to be reckoned with. In the 1990s, Boeing felt that its commercial presence in China was always at risk in Washington. The issue then was whether to keep extending most-favored-nation, or MFN, treatment to China in trade. Then as now, China was running a heavy trade surplus with the United States, but without MFN the surplus would have shrunk significantly. It was equally true that if China had chosen to buy the majority of its jet airliners from Airbus, the U.S.-China trade deficit would have been very much larger.
So it was that when Boeing executives were asked what they wanted most from Washington, the anxious and emphatic response was that continued, unconditional MFN for China comes first, second, and third on the wish list. Each year, certain members of Congress attacked MFN for China, citing its poor record on human rights as well as a predilection in Beijing for flogging weapons to some of the world’s least stable places.
An experience of a former Boeing representative in Beijing, Thomas Lane, left a strong impression on the company. Sometime in 1991, Lane found himself in the unusual position of being invited to a dinner given by Prime Minister Li Peng and seated on his host’s right. In an after-dinner talk, Li Peng observed that China was ready to buy a lot of Boeing airplanes, but wouldn’t do so if there was trouble about MFN. Richard Albrecht, who was then Boeing’s president, said, “When the Chinese tell us to go tell our government not to interfere [with MFN], we mention weapons sales and human rights, and each of them says, ‘That’s not my area of responsibility.’”22
The Chinese were hardly subtle in their use of aircraft deals as leverage in the campaign for MFN renewal. Late in 1992, United Airlines, Boeing’s biggest customer, announced it was postponing delivery of 122 Boeing airliners worth $3.6 billion; the list included 777’s, Boeing’s new airplane, for which United was a launch customer. On April 7, 1993, United, a typically hard-pressed and overcommitted U.S. carrier, disclosed that it was deferring delivery of another 49 Boeing aircraft worth $2.7 billion and also including 777’s; by then, Boeing had committed several billion dollars to the 777 program. But on April 9, just two days after the second blow from United, China placed an order worth $800 million for 20 Boeing airplanes, all narrow-bodies. And from Beijing there also came a strong hint of a follow-on order for a similar number of the pricier wide-bodies, both 767’s, and, yes, the 777’s on which the company thought its future might depend.
Boeing began selling airplanes in China in 1972, in the midst of the Cultural Revolution and six years before Washington and Beijing opened formal diplomatic relations. After acquiring a dominant position, Boeing began to be perceived by its hosts, along with other Western companies operating in China, as taking the market there for granted, ignoring those of its own people who knew better, and, in general, showing little sensitivity to the business culture in which it was operating.
A long and well-documented article in the Seattle Times in June 2005 described the ins and outs of the Boeing-China relationship over a period of several years; Boeing, it concluded, “may be pulling itself out of its decade-long downturn in China.” Still, regaining its dominant role in China, the article said, “may require corporate leadership that is more nimble, humble and ethnically diverse.”23 Boeing has since begun to get that kind of leadership.
From its early days as a small player, Airbus had the Asian market in its sights. Building on a small foothold, its share increased steadily. And while sales by Airbus to Chinese airlines have continued to lag behind Boeing’s, each of China’s chief long-distance carriers—Air China, China Eastern, and China Southern—are now buying aircraft from both suppliers. Boeing remains well ahead in sales to Air China, the flagship carrier, which is based in Beijing, although China Eastern, centered in Shanghai, is purchasing more planes from Airbus. China Southern, which is operated from Guangzhou and is the country’s largest airline, is now acquiring roughly equal numbers of Boeing and Airbus aircraft, although Boeing still holds a sizable lead in their fleet.
Each side can report good news. Two-thirds of the aircraft delivered to China in 2004 were from Airbus. But in sales of airli
ners with a hundred seats or more, Boeing had roughly 70 percent of the Chinese market at the end of 2005, Airbus 30 percent. The stakes are seen as immense. In the next twenty years, Chinese airlines are expected to triple their fleets, adding twenty-three hundred aircraft worth nearly $200 billion.24 As in the past, China is seen by Boeing and Airbus as the growth market.
Still, there are China watchers within the industry who show some skepticism born of experience. “It’s always next year with China,” they like to say. The country’s massive rural labor force lacks mobility, and, many would argue, needs it. Sales of aircraft in the Chinese market have never been an accurate reflection of demand, still less of potential demand. The market was what the government said it was. An airline might sometimes have to take airplanes it didn’t want or forgo those it did want. (Air traffic control as recently as the early 1990s was chaotic. It lacked positive radar control, except on three routes. An airliner’s departure time would be noted and keyed to an announcement that in X number of minutes another flight would depart.)
Airplane salesmen, whether from Boeing or Airbus, liked to say, “There is just one buyer of aircraft in China. Never mind whose logo is on the tail.” That comment has become a little clearer than the actual truth as, gradually, the interplay of suppliers, airlines, and central political authority loosens. Boeing and Airbus try to acquire nonbinding commitments from an official body, CASC (an acronym for the government agency that manages China’s aviation industry), which in turn reports to the State Council. It still does, and the State Council must still approve CASC’s recommendations of aircraft purchases. The carriers, too, try to maneuver their preferences through or around CASC. But more often than in the past CASC’s recommendations are approved, with the government then allocating the aircraft to various airlines. However, the carriers are no longer required to take delivery, in which case the airplanes in question may not be built at all.
The relaxation of official control reminds some China watchers of another saying, “The mountains are high, the emperor is far.” According to a senior industry executive with long experience in China, “It all comes down now to politics and price. It used to be just about politics. Now it is about politics and economics. Not so long ago, the leadership took these decisions [on aircraft procurement] without any attention being paid to the economic analyses that were always provided. Not anymore. Now the people at the top who make these decisions do read the analysis, partly because the numbers have gotten so high. Their decisions have to show some appreciation for the money involved, as well as making sense politically.”25 Put differently, the big Chinese airlines now have more to say about aircraft selection and procurement, while continuing to need the central government’s approval.
As before, gaining official approval depends heavily on external politics. Any rumor, however vague or tenuous, that points toward a new arms package earmarked for Taiwan can harm Boeing’s prospects if the supposed source is American. Or (less likely) if it’s European, Airbus will be the loser.
On this point, contacts between China and France are instructive. Their relations are normally close. Both countries see themselves as centers of civilization, and both have highly centralized administrations. The year 2005 was called “the year of France” in China, while 2004 was “the year of China” in France.
In January 2004, China’s president, Hu Jintao, made a state visit to France during which he went to Toulouse and was shown a cabin mock-up of Airbus’s A380. His host, French president Jacques Chirac, made some comments about Taiwan designed to please Hu, and in doing so he went well beyond what his staff had expected him to say. In turn, Hu noted a purchase by China Southern of some A320 family aircraft a few days earlier.
The meeting probably led to an order by the Chinese six months later for twenty A330’s, Airbus’s midsize aircraft. The purchase agreement was signed by France’s prime minister, Jean-Pierre Raffarin, and the Chinese vice premier, Zeng Peiyan. The authorities in Beijing divided the new aircraft between China Eastern and China Southern.
In October, four months later, Chirac returned the visit. China was widely expected to announce the purchase of several A380’s while he was there. But that didn’t happen, very probably because France’s government had been unable, or hadn’t tried, to lift an arms embargo imposed in 1989 as punishment for the Chinese leadership’s crushing of the democracy movement at Tiananmen Square. “Of course, these two issues are connected,” an official with Air China told the Wall Street Journal. “China always places political concerns first when making big orders for aircraft.”26 In January 2005, three months after Chirac’s visit, China did make the long-awaited purchase of five A380’s.
Long-distance air travel had become a more immediate concern for the Chinese, largely because they would be hosting the Summer Olympics in July 2008 and appeared to feel a need for more airplanes, today and tomorrow. Airbus and Boeing did what they could to make the most of the moment. Airbus pushed to expand sales of its entire family, from the A320 at the low end to the superjumbo A380 at the high end. Boeing competed hard against the A320 with its 737, but its larger effort, some of it visible, some much less so, was directed toward selling sixty of its new airplane, the 787, to China in a single package, or “block deal.”
Given its long range, midsize, and highly tempting performance guaranties, the 787 seemed an ideal fit for the Chinese market. But for Boeing, the path to agreement held some traps, the first of which was Japan’s heavy involvement with the airplane. Its content would be 35 percent Japanese, and the launch customer was All Nippon Airways. Also, Boeing stood accused of having taken the Chinese market for granted, whereas Airbus had taken nothing for granted. And of course, Airbus was planning to compete against the 787 with a new and similar airplane, the A350. Granted, the A350 wouldn’t be available until two years or so after the Summer Olympics, but Chinese decision makers had to worry that despite Boeing’s assurances, its new airplane might not be ready in time either. Indeed, the first deliveries of the 787 had been scheduled for the summer of 2008, at just about the time the Olympics would begin.
Boeing’s strenuous efforts to sell the package to China were waged in Washington as well as in Beijing. The U.S. presidential campaign was under way, and Boeing was trying to conclude the 787 deal with China before the election. Predictably, both candidates had echoed Boeing’s claims to the high ground in its duel with Airbus over subsidies for new airplane development.
The White House went further, according to a senior Boeing executive, who said that in October 2004, President George W. Bush contacted President Hu Jintao and requested that a purchase by China of 787’s be approved for announcement prior to the U.S. elections. That didn’t happen, but two weeks later, at a meeting in Chile of leaders of Asia-Pacific states, Bush and Hu did discuss the 787 package. In late January 2005, the package was approved. Six Chinese airlines would receive 787’s.
China’s leadership likes to announce large acquisitions of Boeing airliners during high-level American visits in order to ease, if temporarily, Washington’s unhappiness with China’s huge trade surplus. During Bush’s visit to Beijing in November 2005, China signed an agreement to buy seventy Boeing 737’s and announced that an order for another eighty would follow.
JAPAN IS a market unlike any other, partly because it is one of the few countries in which planes and trains compete. Two highly efficient travel modes apparently generate so much intercity traffic that both prosper. Yet despite the high-volume rail travel, Japan has carriers that fly jumbo airliners, notably Boeing 747’s, on flights between neighboring cities that last no more than an hour and are normally filled. The world’s three most heavily traveled routes, according to a JAL official, are, first, Tokyo-Haneda-Sapporo; second, Tokyo-Haneda-Fukuoka; third, Haneda-Osaka. (Japanese travel buffs point out that Air France canceled its Paris-Brussels service when France’s high-speed rail service began connecting these two cities and their airports.)
Japan’s singularity af
flicts Airbus. The company competes strongly in China, but not in Japan, where politics and habit conspire in Boeing’s favor. In a large sense, Boeing is seen as family, having been a presence in Japan for more than a half century. Airbus didn’t become a presence there until May 2001. Also, Boeing has the advantage of being American. Thanks to America’s more sympathetic treatment of Japan in the nineteenth century, and to the long and productive business relationships that lasted well into the twentieth century, the Japanese put aside the bitterness created by their defeat in World War II more rapidly than had been expected.
In 2003, Airbus competed against Boeing for the sale of single-aisle aircraft to All Nippon Airways. Although ANA’s selection of Boeing 737’s over Airbus’s A320’s was predictable, Airbus complained that political pressure had steered the decision away from ANA’s preference for the A320’s. This move by Airbus angered various interested parties in Japan, not least ANA’s management, and further weakened Airbus’s position. Its CEO, Noel Forgeard, felt obliged to visit Japan and issue an apology to Yoji Ohashi, president and CEO of ANA.27
Not long afterward, ANA decided to replace its entire fleet of Airbus airplanes—A320’s and A321’s—with Boeing aircraft. “We haven’t helped ourselves by the way we have dealt with the Japanese,” said Christian Scherer, a highly regarded senior vice president of Airbus. “We learned marketing from the U.S., but this Anglo-Saxon marketing model doesn’t work in Japan. It does work for Boeing.”28 He was alluding to Boeing’s special relationship.
Although Airbus has tried to learn from its mistakes in Japan, it feels that Boeing continues to benefit from official intervention on its behalf. The alleged pressure from on high is cited as most often indirect. “We have discovered that MHI [Mitsubishi Heavy Industries] has on occasion pressured JAL [to buy from Boeing] when its airplane was competing against us,” an Airbus vice president says flatly. His term “its airplane” reflected MHI’s strong involvement with Boeing aircraft, along with the heavy subsidies it receives from the Japanese government.
Boeing Versus Airbus Page 21