Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Will China Kill Boeing's Most Important Airplane?

By

787 delays make headlines, but a bigger problem may have just emerged.

PrintPRINT
How important is Boeing (BA) to the US economy? The company's $29 billion worth of foreign sales in 2009 singlehandedly comprised about 2% of America's total exports. And, even though unprecedented portions of Boeing's $33 billion supply chain are outsourced -- particularly for the beleaguered 787, a project which is three years behind schedule -- according to Boeing estimates, it is indirectly responsible for 1.2 million stateside jobs.

Parts for the 787 are manufactured in just about every corner of the globe:

The horizontal stabilizers come from Italy's Alenia Aeronautica.

Latécoère of France manufactures the passenger doors.

TAL Manufacturing Solutions of India is making the floor beams.

Boeing gets its titanium from the VSMPO-AVISMA Corporation, a Russian firm.

Even China is supplying components for the 787.

Chengdu Aircraft Industrial Group is the sole supplier of 787 rudders. Shenyang Aircraft Corporation is the sole supplier of 787 vertical stabilizer leading edges. Harbin Aircraft Manufacturing Corporation is the sole supplier of 787 wing-body fairing panels.

What's different about this than sourcing doors from France or floor beams from India?

Dick Nolan, the William Barclay Harding Professor of Business Administration at Harvard University, writes in the Harvard Business Review;
"To finance the development of the 787 and secure global orders, Boeing agreed not only to outsource an unprecedented amount of the plane's parts to partners in Europe, Japan, and China, but also to transfer to them unprecedented know-how. Before the 787, Boeing had retained almost total control of airplane design and provided suppliers precise engineering drawings for building parts (called 'build to print'). The only exception was jet engines, which have long been designed and manufactured by suppliers such as GE (GE), Rolls-Royce, and Pratt & Whitney (UTX).

"The 787 program departed from this practice. Boeing effectively gave Tier 1 suppliers a large part of its proprietary manual, 'How to Build a Commercial Airplane,' a book that its aeronautical engineers have been writing over the last 50 years or so. Instead of 'build to print,' Boeing provided suppliers with performance specifications for parts and components and collaboratively worked with them in the design and manufacturing of major components such as the wing, fuselage section, and wing box."

Yeah, okay. So? What does any of this have to do with China, specifically?

Bear with me, here -- it has less to do with the 787 and everything to do with the 737.

Nicole Piasecki, Boeing's vice president of business development, describes the 737 as Boeing's "bread and butter," which provides a constant revenue stream used to fund the development of aircraft such as the 787, and is often referred to as the "backbone of the air-travel industry."

"The 737 is a high-volume, high-profit machine," Richard Aboulafia, an analyst at Teal Group, an aerospace consulting firm in Fairfax, Virginia, confirms.

And Boeing is relying on foreign 737 aircraft sales for at least the next two decades, forecasting global demand of 21,160 narrowbody jets between now and 2030. The company also sees its growth overseas, not here.

"Today, the rest of the world dominates our forecast," Randy Tinseth, vice president of marketing for Boeing's commercial airplanes division, said recently. "The single-aisle market is huge."

The single-aisle market essentially is the Chinese market. Boeing needs China. China doesn't need Boeing. And here's why a threat to the 737 is a real threat to Boeing:

Comac believes 4,439 commercial jets, worth $480 billion, will be needed in China by 2029, constituting 14% of world demand. China's intra-country aircraft market is forecast to grow 7.9% year-over-year between now and 2029. 71% of the yet-to-be purchased planes are expected to be narrowbodies.

As it so happens, Shenyang and Chengdu, the 787 component manufacturers, also supply parts for the 737. So do Aviation Industrial Corp and the Xi'an Aircraft Company.

Now, remember what Dick Nolan said about Boeing giving away proprietary knowledge regarding previously carefully-guarded commercial aircraft-building knowledge?

China seems to have learned Boeing's secrets rather quickly, because the state-owned Commercial Aircraft Corporation of China, or Comac, unveiled the C919 at the Zhuhai air show on Wednesday. The C919, which is expected to enter service in 2016, is a (what else?) single-aisle plane some are calling a "737-killer," and Comac has already booked 100 orders from Air China, China Southern, Hainan Airlines, and GE Capital Aviation Service.

Chinese state media claims the C919 will be 20% less expensive than the 737 and its foreign competitors. And, considering that , the C919 looks to be a formidable threat. (Hey, a few years ago, would anyone have imagined that a Chinese company would be manufacturing the Apple (AAPL) iPhone?)

Plus, if current conditions hold, Chinese carriers that take delivery of the C919 will be exempt from the 23% duty levied on foreign-built aircraft.

Let's hope the Chinese will be kind enough to outsource some of the work to the US once they kill off the 737. Oh, wait -- we don't actually make anything here anymore.

Oh, well.


No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE