Boeing in China: Creating Their Own Competitor?
A corporate strategy article by Thunderbird students Amanda Bhatia, David Freeman, David Wilson, Geoffrey Christanday, Jennifer Mousseau and Matthew Larson
As China’s economy develops, so do the prospective opportunities for foreign firms eager to sell their goods and services to these new Chinese customers. However, many multinational corporations have already tried and failed – and yet – what makes these MNC’s keep coming back?
On March 6, 2012, Boeing and COMAC (Commercial Aircraft Corp. of China) announced[i] to the world that they will be joining forces for the first time ever, in creating a “collaboration agreement to partner in areas that will enable commercial aviation industry growth in China and potentially around the world”. This partnership sounds well intentioned, but could make Boeing, and even Airbus (their current main competitor) nervous as to their future prospects in China and the future global market. Will Boeing's partnership with COMAC provide Boeing with an opportunity to meet strong aircraft demand forecasts in China in coming years, or instead mean the creation of their own competitor?
The Boeing-China Relationship Today
Boeing claims to have a “long history of cooperation for mutual benefit” with China, dating back nearly a hundred years, when Boeing hired their first engineer in 1916, China-born Wong Tsoo.[ii] Today, many of the current 787 Dreamliner parts are manufactured in China and delivered to the U.S. for assembly.[iii] In fact, every plane that Boeing produces has parts made in China. This makes for a strong argument for “cooperation for mutual benefit” indeed.
In addition to parts, Boeing has large investments in Boeing Tianjin Composite Co. Ltd and Boeing Shanghai Aviation Service Co. Ltd. – two companies that make interior parts & composites as well as provide service, maintenance and upgrades to commercial airplanes respectively. They also have four strategic partnering universities and six student aviation clubs at these & two other universities. Perhaps the proceeding activities provide some benefit to Boeing, but less compelling of an argument of “cooperation for mutual benefit” than previously.
However, Boeing’s mutual benefit claim begins to break down when they acknowledge the following[iv]:
Boeing also works with China in areas such as safety, aviation quality practices, business and executive training, and technical support. Since 1993, in cooperation with Chinese airlines, CAAC and industry, Boeing has provided enhanced professional training to almost 40,000 Chinese aviation professionals in pilot techniques, flight operations, maintenance engineering, regulatory, air traffic management, executive management, airline management and marketing, manufacturing, quality assurance, finance, and industrial engineering. Boeing considers this training an investment in the future of Chinese commercial aviation and provides it at no charge to China. (Emphasis added)
Regarding the “mutual benefit” of the Boeing-China relationship, one might be compelled to ask, “Who’s on the receiving end of all this?” and “China” is the answer. Additionally, “What does Boeing get in return?” and “Expiring Terms of Trade” would be the response. If this is truly the case, what is Boeing’s strategy in China?
To answer that, one must dig deeper into the current players in China’s aircraft market, namely Boeing and Airbus, who each currently share ~45% of the total market on current aircraft. Boeing’s forecasts[v] illustrate great potential as China’s carriers and others will spend $600 billion for 5,000 new commercial airplanes from Boeing, Airbus and other manufacturers over the next 20 years. In that small bit of detail comes the clear driver behind all aircraft manufacturers’ desires to get a piece of that $600 billion dollars. And since nearly all of China's airline industry is controlled by the Chinese government, foreign aircraft manufacturers will need to win the approval of the Chinese government, if they want a piece of this action.
The New Boeing-COMAC Relationship – A Leap of Faith
This need to win favor from the Chinese government may have been one of the main drivers for Boeing to enter into such a collaboration, and all those past investments which they’ve delivered “at no cost to China”. Yet, Boeing is not the only company doing so; back in 2008, Airbus opened its first non-European assembly line in Tianjin, China.[vi] Competition for the Chinese market is fierce. And Boeing obviously feels this pressure and believes that this new collaboration agreement with COMAC is the right strategic initiative needed to properly position themselves in the Chinese market.
The details of this agreement suggest that more than research of fuel use reduction and efficiencies will be conducted at this new jointly funded research center in Beijing, headquarters of COMAC. Boeing and COMAC will also hold annual leadership meetings and exchange market forecasts. As are common in these types of partnerships, both sides will have their own agenda – whether explicitly or implicitly stated. For Boeing, they are likely to gain understanding of the Chinese market and regulations which could give them an advantage over Airbus and other competitors who may fail to meet, less understand, future regulations which could protect COMAC aircraft sales over foreign aircraft. Even with the entry of China into the World Trade Organization, which requires more open trading policies including elimination of protectionist barriers for foreign competition, China could regulate the industry to meet certain carbon-emission standards. And with Boeing sharing this future fuel efficiency technology with COMAC, they could hedge this risk.[vii]
Collaborating with China’s COMAC – Partnership or Ploy?
Regardless of this partnership’s potential of bolstering Boeings position in China, it may also help COMAC further develop its C919, the nation’s first large passenger jet and a competitor for Boeing’s 737. Even though COMAC suggests that the C919’s maiden flight won’t take place until 2014 and ready for commercial use in 2016, Boeing must realize that this collaboration will have its dangers.
One major problem for foreign companies in China has been difficulty protecting their patents and other intellectual property from theft by partners, employees & even outside corporate espionage. Despite this well documented history of compromised IP with companies such as Apple, Ford Motor, and Lockheed Martin – multinational corporations continue to try to penetrate the Chinese market with their goods and services. With this tepid past, Boeing should ask itself, “Is this collaboration a partnership or ploy?”
A Boeing spokesman said the company is always focused on protecting its intellectual property, but that “our goal for the [center] is to create new intellectual property together—and that will be jointly owned."[viii] And yet COMAC’s chairman, Jin Zhuang Long, said this past February at the Singapore Airshow that COMAC’s near-term objective was to ultimately account for a third of China’s market. He also went on to say, “COMAC will not pose any threat to Boeing or Airbus over a long period of time since we only have two types of aircrafts so far: namely the ARJ21 and C919”.[ix] Much can be gleaned from your competitor’s words – and two words in particular may be of interest to Boeing, “so far”. Jin’s attempt to reassure competitors like Boeing or Airbus that “COMAC will not pose any threat” seems to diminish with these two words, and the fact that COMAC’s near-term objective is to capture a third of the current market share. In addition, COMAC has made it clear that they want to be able to build everything within China, eventually including engines. This is a clear indication that they do not intend on growing partnerships, but in fact, learning from them and taking that for their own success.
Even at the end of the March 6, 2012 press release, Boeing acknowledges that “COMAC is determined to independently build large Chinese passenger aircraft that will soon be soaring through the blue skies.”
Should Boeing be worried? You decide.
Caution to Boeing – Turbulence Ahead
Will Boeing's partnership with COMAC mean the creation of their own competitor, or will this end up providing Boeing with an opportunity to meet strong aircraft demand forecasts in China in coming years? Only time will tell. But in the meantime, here are some suggestions for Boeing.
First, Boeing needs to be particularly cautious about the COMAC-Boeing organizational & supply structure, intellectual property ownership, and shared information. Cooperation has its limits. A strategic alliance is more than just the legal agreement, and information will inevitably be shared much more freely when you are working directly with your competitor. Boeing must take measures to manage what information gets traded, because “successful companies inform employees at all levels about what skills and technologies are off-limits to the partner and monitor what the partner requests and receives.”[x]
Secondly, Boeing should know that the key to any partnership or collaborative effort is not to simply “get along”, but to emerge from the experience more competitive than when it entered. Keep in mind, COMAC finds something attractive about you, Boeing. Know what that is and keep them wanting – or your utility is finished, and COMAC (and the Chinese government) will hastily dispense of your services.
And lastly, don’t lose sight of the mutual goal; both companies stand to gain from this venture, fuel reduction and efficiencies are tantamount to the future of affordable air travel. But Boeing needs to keep learning, adapting and maneuvering the relationship such that it doesn't compromise their own competitive positioning in the market, or even worse, create their next competitor.
[i] Boeing.com. News Releases/Statements. accessed July 2012. http://boeing.mediaroom.com/index.php?s=43&item=2156
[ii] “Backgrounder: Boeing in China.” Boeing China Communications. July 2006.
[iii] David Kesmodel. Boeing Examines Supply Chain for Weak Links. Wall Street Journal. 30 Dec 2011. http://online.wsj.com/article/SB10001424052970204058404577111091095438300.html
[iv] “Backgrounder: Boeing in China.” Boeing China Communications. July 2006.
[vi] Nicola Clark. EADS to Build U.S. Assembly Line for Airbus A320. New York Times. 2 Jul 2012. http://www.nytimes.com/2012/07/03/business/global/eads-to-build-airbus-assembly-line-in-mobile-ala.html
[vii] Bloomberg.com, Boeing Partners With China Challenger Comac on Energy Research, 6 Mar 2012. http://www.bloomberg.com/news/2012-03-06/boeing-partners-with-china-challenger-comac-on-energy-research.html
[viii] David Kesmodel. Boeing Forms Alliance With Chinese Jet Maker. Wall Street Journal. 6 Mar 2012. http://online.wsj.com/article/SB10001424052970203370604577265630346576056.html
[ix] CNBC.com. COMAC Poses No Threat to Boeing, Airbus: President. 14 Feb 2012. http://www.cnbc.com/id/46376782/COMAC_Poses_No_Threat_to_Boeing_Airbus_President
[x] HBR, “Collaborate with Your Competitors – and Win”. 1989