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Analyzing the Boeing/COMAC Partnership in China

Boeing/COMAC

A corporate strategy article by Thunderbird students Jack Coulter, Rob Pangborn, Matt Richards, Todd Young and Scott Yuska

China’s aviation market is booming.  Aircraft manufacturers predict China will need 5,000 new airplanes by 2030, catapulting China into the world’s second largest market for commercial aircraft.  With the demand for aircrafts growing in China, The Boeing Company has started keeping the Chinese market in mind when designing new planes.  Features, such as seating arrangement, size, and fuel efficiency, are some of the items the Seattle-based aircraft company is evaluating.

The world’s largest aerospace company, Boeing is the largest provider of commercial jets to the airline industry.  It makes aircraft that seat from 50 to more than 500 passengers.  Models include the 737, 777, and the 787 Dreamliner.  Currently, Boeing holds almost 60 percent of the Chinese market, while Airbus, a European-based aircraft manufacturer, holds about 40 percent the Chinese market.

Boeing/COMAC

A corporate strategy article by Thunderbird students Jack Coulter, Rob Pangborn, Matt Richards, Todd Young and Scott Yuska

China’s aviation market is booming. Aircraft manufacturers predict China will need 5,000 new airplanes by 2030, catapulting China into the world’s second largest market for commercial aircraft. With the demand for aircrafts growing in China, The Boeing Company has started keeping the Chinese market in mind when designing new planes. Features, such as seating arrangement, size, and fuel efficiency, are some of the items the Seattle-based aircraft company is evaluating.

The world’s largest aerospace company, Boeing is the largest provider of commercial jets to the airline industry. It makes aircraft that seat from 50 to more than 500 passengers. Models include the 737, 777, and the 787 Dreamliner. Currently, Boeing holds almost 60 percent of the Chinese market, while Airbus, a European-based aircraft manufacturer, holds about 40 percent the Chinese market.

Both Boeing and Airbus are facing stiff competition from the Commercial Aircraft Corporation of China (COMAC), the first commercial-jet manufacturer in China.  Established in May 2008 by the Chinese State Council and headquartered in Shanghai, COMAC is determined to independently manufacture large Chinese passenger aircraft that will be sold not only to Chinese buyers but throughout the world.  In March 2012, Boeing created a research partnership in Shanghai with COMAC to look at ways to make planes more fuel-efficient and cut greenhouse-gas emissions.

PlaneIn September 2009, COMAC announced it would build the C919, a planned family of 168-190 seat airliners that will be the largest commercial airliner ever designed and built entirely in China by a Chinese company.  With the C919, China aims to satisfy some of its domestic demand and boost exports, initially in Asia then Europe.  COMAC expects to sell 2,509 C919s over 20 years with the first flight of the C919 expected to take place in 2014, and deliveries scheduled for 2016.  COMAC has already received orders for 175 C919 aircraft, namely from Chinese customers.

China’s plan to build its first big passenger plane promises to reshape the fast-growing aviation market.  The C919 forms part of China’s long-term goal to break Airbus & Boeing’s duopoly over the local aviation market, and is intended to compete against Airbus A320 and the Boeing 737.  A lot is at stake for Boeing in China.

The Market

The Chinese aviation market continues to grow as evidenced by the growth in airports from 139 to 175 between 2000 and 2010.  Hong Kong is the now the world’s top cargo airport, measured in tonnage.  Beijing Capital Airport, in 2010, was the second busiest passenger airport measure in passenger kilometers.

The Chinese government has issued policies and long-term growth plans for air traffic and infrastructure.  It is estimated that by 2015 there will be 230 commercial airports—up 55 since 2010.  The air market is not solely reliant on air infrastructure growth.  Tremendous growth in rail networks and roads will connect even more passengers to these new airports, increasing potential passenger volume even more.  With the increased China's airplane marketinfrastructure connectivity, rapid economic growth, market liberalization, and a rising middle class/income, there is much to expect in China’s air industry.

Boeing has estimated a 7.6% annual rate of growth in air demand, pushed by an expected annual 7.0% growth in China’s GDP.  As a result Boeing has estimated that China’s airlines by 2030 will need 5,000 new airplanes valued at $600 billion.

Today, Airbus is Boeing’s chief competitor in the Chinese market.  However, Boeing expects that to change over the next 10 years.  “I don’t know if it will take ten years or 20 years, but Airbus and Boeing will get a third competitor. He’s likely to come from China,” James McNerney, Boeing’s Chief Executive stated.

Risks

While Boeing is already the dominant player in the Chinese commercial jet market, they obviously want to continue to expand as the market itself grows.  In March 2012, Boeing announced a partnership with COMAC with a goal to develop fuel-efficient technologies.  The partnership was part of broader effort by Boeing to cement its leading sales position in the lucrative Chinese market.   However, COMAC’s status as a state-owned and sponsored enterprise creates an inherent risk for Boeing going forward in China.  As a research collaborator with COMAC, Boeing risks losing key fuel efficiency intellectual property that could neutralize some of the competitive advantages of its own aircraft.  Additionally, Boeing’s partnership with COMAC will strengthen a competitor by helping jump start their advanced technology research in this critical area.  China is clearly looking to build up their domestic airline industry by acquiring knowledge from competitors.

What if Boeing and COMAC run into difficulties with their relationship?  This proposition could lead to Boeing being on the outside looking in to the Chinese market.  If Boeing does not work well with COMAC they could find themselves in a similar position that of Google two years ago.  Boeing’s biggest risk may be neglecting the partnership with COMAC because they could stand to lose the second largest airplane market in the world.

Rewards

Boeing’s partnership provides the firm a chance to maintain strong ties with China’s government in a nation where relationship (Guanxi) is paramount.  Since the airlines are controlled by the government, Boeing has an opportunity to maintain good favor with the government, potentially staying ahead of regulations, legal changes, and other trends that could affect this huge growth market.  The tie up with COMAC is ultimately a defense movie that should keep Boeing from being locked out of the Asia-Pacific market.  This collaboration between Boeing and COMAC is part of broader efforts by Boeing to cement its sales position in the vital Chinese market.  Yet the relationship does little to benefit Boeing.  In the short-term, Boeing maintains favor with the Chinese government and positively positions itself for future Chinese airline orders.  The relationship should also allow Boeing to keep close tabs on the growing competitive threat from COMAC’s C919.  In the mid-term, Boeing should benefit by having to consistently outpace COMAC in innovation.  The stiff potential competition from COMAC should force Boeing to continue to maintain its leadership position in airline innovation.  In the long term, the partnership may position Boeing to manufacture airlines in China just Airbus has done with the A320.  Today, Airbus assembles A320 aircraft in a joint venture with the Chinese consortium of Tianjin Free Trade Zone and China Aviation Industry Corporation.  As of March 2012, Airbus had delivered 80 A320 jetliners assembled in Tianjin – proving that large commercial aircraft can be successfully manufactured in China.  If Boeing ever decides to follow Airbus and being building planes in China, the partnership with COMAC could pave the way for successful manufacturing operations.

What should Boeing Do?

While there are compelling reasons to form a partnership with COMAC, Boeing in this instance has significant risk and potential for harm.  The lack of strong intellectual property protections in China increases the risk for Boeing.  Boeing’s obvious tradeoff is sharing technology for solidifying its market presence in China.  Because of the nature of the relationship, COMAC’s interests as a state owned and sponsored enterprise are most definitely blurred.  This connection with the Chinese state provides COMAC a position of strength in the partnership, enabling them to demand unequal technology transfer in exchange for greater access to the rapidly expanding market.  The key currency being exchanged in this partnership is the technology itself.  Boeing must walk a very fine line between sharing adequate amounts of technological intellectual property to keep COMAC happy while not compromising its position as the dominant player in airline innovation.  If Boeing fails to strike the right balance between these two competing factors, they risk creating a clone of themselves or being shut out of the Chinese market all together.  Nevertheless, Boeing will undoubtedly retain considerable share and influence over the Chinese market no matter what happens with COMAC.

If the COMAC partnership is to be beneficial, Boeing must build secure defenses to ensure propriety and competitive advantages are not leaked or lost.  Rather than focusing on the cost advantages and market access to China, Boeing’s focus should be on the continued development and innovation of its products.  Strategic partnerships should be based around the mutual learning and creation of new technologies rather than enabling future competitor’s access to intellectual property.

  1. Boeing.com Web. http://www.boeing.com/commercial/cmo/china.html . April 1, 2012.
  2. Bureau, Frankfurt. Boeing Expects Growing Competition from China.  Web. http://www.marketwatch.com/story/boeing-expects-growing-competition-from… . April 15, 2012
  3. Odell, Mark. Boeing and Airbus Call Time on Duopoly.  Web. http://www.ft.com/intl/cms/s/0/55a1fcf0-9b39-11e0-a254-00144feabdc0.html#axzz1s984p7fS. April 9, 2012.
  4. Wang, Jasmine.  Boeing Partners with China Challenger COMAC on Energy Research.  Web.  http://www.bloomberg.com/news/2012-03-06/boeing-partners-with-china-challenger-comac-on-energy-research.html.  April 6, 2012.
  5. Hinton, Christopher.  Boeing secures $19 billion jet order from China.  Web. http://articles.marketwatch.com/2011-01-19/industries/30709024_1_boeing-china-airbus-boeing-commercial-airplane.  April 8, 2012.