ADVERTISEMENT

Boeing may get slammed if Trump sets off a full-blown trade war with China (BA)

Boeing is America's biggest exporter and China is its most important customer with $1.1 trillion in potential sales over the next 20 years.

  • Stuck in the middle of this
  • China accounts for 20% of Boeing's order book.
  • This could result in lost future business and even canceled orders for Boeing.
ADVERTISEMENT

There's a US-China trade war brewing and Boeing is stuck in the middle of it.

One day after the Trump administration proposed tariffs on more than 1,300 products exported to the US from China — including aviation-related items — the Chinese government announced retaliatory tariffs on more than 100 products from the US.

This includes a 25% tariff on aircraft weighing between 33,000 pounds and 99,000 pounds. In other words, it's a 25% tax on Boeing's best selling plane, the 737

ADVERTISEMENT

"Going after China for aerospace is like living in a crystal palace throwing pebbles and expecting the other guy to not throw rocks," Richard Aboulafia, Teal Group aviation industry analyst, told Business Insider.

China is arguably Boeing's most important market. According to Morningstar, the Middle Kingdom accounted 25% of Boeing's 2017 deliveries and a whopping 20% of its 5,800-plane order book.

Over the next 20 years, Boeing expects Chinese demand for airliners to top 7,200 aircraft with a value of $1.1 trillion.

In a statement, the airplane maker expressed its concern that the tariffs proposed by both nations would harm not only Boeing but also the global aerospace industry.

US

ADVERTISEMENT

Visits to the US by heads of state often include an order for Boeing airplanes.

As a result, "Boeing faces a massive risk of being used as a political pawn by the Chinese," Vinay Bhaskara, a senior business analyst for the trade publication Airways, told us.

For Boeing, the nuclear option in the short run would be for China to cancel its existing orders, which includes a monster 300 aircraft deal announced last November worth an eye-watering $38 billion.

This, along with the countless other orders placed by Chinese customers represent one-fifth of Boeing business. The loss of these orders could prove to be devastating not only for Boeing but the ancillary businesses such as parts manufacturers that support the production of aircraft.

ADVERTISEMENT

According to Bhaskara, China is counting on its prominence in the market as leverage in Washington D.C.

However, both Aboulafia and Bhaskara said it is highly unlikely that China would go this route for several reasons. For starters, no other OEM has the capacity to pick up the slack.

Airbus currently boasts a 7,000 plane backlog that would take it the better part of a decade to work through. So there's no way for it to simply absorb all of China's demand for new aircraft.

This dearth of production capacity would become a de facto cap on the growth of China's aviation industry, Bhaskara said.

Bhaskara said this is something the Trump administration is banking on as a counter to China's market power.

ADVERTISEMENT

Another factor in Boeing's favor is China's woefully underdeveloped domestic aviation industry. According to Aboulafia, China's domestic commercial airplane program is decades behind the likes of Airbus and Boeing. As a result, COMAC, China's state-owned jet maker, has to depend on technology transfers from Western manufacturers to make up for lost ground. This trade dispute would only slow that process down.

But unlikely doesn't mean impossible.

If China were to cancel its Boeing orders, it could turn to the second-hand market for planes. With leasing a popular option for even the world's wealthiest airlines, there are always hundreds of second-hand planes available. As Airbus and Boeing deliver new A320neo and 737MAX aircraft to customers, there will be older planes coming out of service that will be ripe for China's picking.

And with the increasingly prominent role China is playing in the financing of airliners around the world, it would have first dibs of many these off-lease aircraft, Aboulafia pointed out.

"We're dealing with a different China here," Aboulafia said. "It's a little more authoritarian than it was a couple of years ago. And a little more interventionist in the economy, so it could order its airlines to buy used planes instead."

ADVERTISEMENT

So what's the most likely outcome from all of this?

Both analysts believe this trade dispute will likely result in the loss of orders for Boeing.

"I'd be surprised if we don't see a significant shift towards Airbus in orders this year," Aboulafia told us.

"A few months ago, Airbus signed an agreement with China to ramp up production rates at its Tianjin plant almost in anticipation of this," he added.

However, this shift shouldn't be permanent. After all, the world's political landscape is forever shifting. The same goes for the world commercial aviation.

FOLLOW BUSINESS INSIDER AFRICA

Unblock notifications in browser settings.
ADVERTISEMENT

Recommended articles

Sony’s creators convention redefines the creative landscape for content creators

Sony’s creators convention redefines the creative landscape for content creators

Egypt, Nigeria, and South Africa ranked as Africa's most polluted countries in new report

Egypt, Nigeria, and South Africa ranked as Africa's most polluted countries in new report

10 African countries with the lowest life expectancy according to the World Bank

10 African countries with the lowest life expectancy according to the World Bank

Kenyan women are more obese than their men - here’s why

Kenyan women are more obese than their men - here’s why

Africa’s richest man Dangote stands between Europe and $17 billion in revenue

Africa’s richest man Dangote stands between Europe and $17 billion in revenue

After months of exchanging blows, Kenya and Uganda takes steps towards resolution

After months of exchanging blows, Kenya and Uganda takes steps towards resolution

Africa's first black billionaire could join $2.9 billion Vivendi bid for MultiChoice

Africa's first black billionaire could join $2.9 billion Vivendi bid for MultiChoice

10 most dangerous African countries in 2024

10 most dangerous African countries in 2024

Russia’s nuclear influence expands further north of Africa

Russia’s nuclear influence expands further north of Africa

ADVERTISEMENT