Boeing needs China to approve the 737 Max. But that won’t end its epic sales drought

November 27, 2020 World



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The Civil Aviation Administration of China (CAAC) has yet to say whether it will allow the 737 Max to fly into the country after the U.S. Federal Aviation Administration gave the green light to the plane to carry passengers earlier this week. While the U.S. government has been a major obstacle for Boeing to clear, it will need approval from other aviation regulators before airlines can fly the plane between international destinations.

The European Union Aviation Safety Agency, which oversees flights to Europe, said it plans to act in late December or early 2021.

But China’s approval is key. The country was the first to ground the 737 Max last year after two of the jets crashed, resulting in hundreds of lives. Last month the CAAC said it has its own criteria Boeing (BA) must meet before China is satisfied with the plane again, including assurances that the changes to its design are “safe and reliable”.
“As long as they meet the requirements, we are happy to see them resume their flights,” CAAC director Feng Zhenglin said at a press conference in Beijing last month. “But if not, we have to keep rigorous scrutiny to ensure safety.”

CAAC did not respond to a request for comment from CNN Business.

A vital market

China’s approval isn’t just about allowing the 737 Max to fly back into Chinese airspace. Boeing’s business in China has been severely damaged by years of fighting between Washington and Beijing over trade, technology and intellectual property rights, and getting back on track will be a huge challenge.

Before the trade war, China was a big market for Boeing. In 2015 and 2016, sales in China accounted for 13% and 11% of the company’s total revenue, respectively, according to its annual reports. In 2015, China was Boeing’s largest export market and was the third largest in 2016.
But the company hasn’t sold passenger planes to China in the past two years, Sherry Carbary, president of Boeing China, said late last year, according to the state-owned Shanghai Observer. In May, China Cargo ordered two freighters.

The company’s problems in China are “well beyond Boeing’s control,” said Richard Aboulafia, vice president of analytics at Teal Group Corporation, an aerospace space consulting firm.

“In China, Boeing is a prisoner of forces that go beyond the mere dynamics of the air market,” he added. “It would be impossible for Boeing not to be enveloped in this gigantic chaos, involving trade barriers, [intellectual property] disputes and tariffs. “

The US-China tensions have also manifested themselves in other ways. Beijing said last month that it will impose sanctions on American companies, including Lockheed Martin (LMT) and Boeing, which were involved in arms sales to Taiwan.
However, Boeing is optimistic about the Chinese market. Last week, the company released a positive outlook, saying it expected industry-wide new aircraft sales to total 8,600 in China over the next 20 years. This estimate, worth $ 1.4 trillion, is even higher than where it was before the Covid-19 pandemic, notably, China’s economic recovery this year has outpaced the rest of the world.

“Boeing remains obligated to grow its presence in the Chinese civil aviation market for economic and strategic reasons alone,” said Alex Capri, a researcher at the Hinrich Foundation and a senior fellow visiting the National University of Singapore. “If not, the company will have a cost [research and development] future revenue and opportunities to collaborate with strategic partners “.

Domestic competition

Boeing may face tougher competition as it tries to get back on track in China.

Its rivalry with Airbus deepened, especially after Boeing was hit by the 737 crisis. Last year, weeks after China grounded the Boeing 737 Max, Airbus announced a deal to sell 300 passenger planes to Chinese airlines.
The new Commercial Aircraft Corporation of China, or Comac, is also developing its own aircraft.
Comac C919: China faces Airbus and Boeing

Comac’s jets may be able to meet some demand in China over the next five to eight years, Aboulafia said, but analysts agree that the planes don’t have the characteristics of a global competitor.

“As for [Boeing] by losing market share to Comac, there is no certainty when that could happen, “Capri said, adding that China has been trying unsuccessfully to build cutting-edge jet engines and other technologies for decades.

Capri added that Boeing has also been able to build a solid strategy in China by isolating its operations in the country and keeping some of its most valuable intellectual property and other operations elsewhere. He pointed to a 737 factory in China’s Zhejiang province, where the company does low-value tasks like installing interiors.

“Competing in the Chinese market will always be a Faustian business,” Capri said. “But civilian aircraft are no different from the situation in the auto or semiconductor industry,” he said.

Correction: An earlier version of this story incorrectly attributed a quote to the president of Boeing China.

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