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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

  • manufacturerBoeing.

  • 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 airplanethe 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 Hotanall 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 airlinesChina Southern, China Eastern, and Air Chinaare

  • 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

  • skiesthe 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 thisthe 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 orderswhy 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 divisionpossibly 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 intriguedmost 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

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  • Presentation seems like a simple thing, but there are actually so many nuances to it that

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B1 US boeing aircraft china chinese airbus max

Boeing's China Problem

  • 1 1
    joey joey posted on 2021/06/01
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