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How China is playing Boeing against Airbus to build its own airplane industry

It's all going according to plan.
It's all going according to plan.
Pool/Getty Images

For the first time ever, Boeing is locating an aircraft production facility abroad — in China — as part of a bundled deal to sell 300 new planes to Chinese airlines and leasing companies. Companies moving production to China is an old story, of course, but Boeing isn't just new to the Chinese market — this is the first time it's ever built a factory abroad. That makes it a huge deal in the deeply politicized aviation industry, and many smell a link to the demise of the Export-Import Bank, since Boeing was the biggest beneficiary of its largesse.

But this is also a story about Chinese public policy, and it highlights at least one respect in which the country's state-dominated economic growth model (whatever its other flaws) works better than freer markets — the country can coherently pursue multi-pronged efforts to develop new domestic industries by leveraging the scale of its domestic consumer market. The Chinese want to develop a domestic airplane manufacturing industry. But building large airplanes is difficult. So they've been playing Boeing and its major competitor off each other to get both companies to help teach a Chinese company how to do it. Lenin famously said that "the capitalists will sell us the rope we use to hang them," and while neither company really wants to help create a new rival, neither is willing to cede control over the Chinese market to the other.

Boeing scored a huge sale to the Chinese government

In total, the planes Boeing has agreed to sell are worth about $38 billion — an enormous sum of money. That's spread across three separate airlines and an aircraft leasing company, but all three airlines are state-owned enterprises, and the leasing company is a subsidiary of a bank that's also state-owned.

The deal, in other words, is entirely controlled by the Chinese government, which, of course, wants a good deal on quality airplanes but also has a larger set of policy objectives.

Boeing is opening a Chinese factory to catch up to Airbus

In the United States, privately owned airlines choose to buy large aircraft from either Boeing or Airbus, Boeing's European rival, based on a relatively narrow set of business considerations. But while the Chinese government isn't indifferent to the quality of a plane purchasing deal qua deal, it also looks at other political factors.

In recent years the bulk of Chinese aircraft purchases have come from Airbus. Not coincidentally, Airbus has a production facility in Tianjin and is opening a second Chinese factory. Boeing is now opening its own Chinese factory in part to play catch-up — and the announcement is deliberately paired with the announcement of the new sales. The message from the Chinese government to both companies is clear: Your ability to make sales in China is going to be based in part on your willingness to locate factories in China.

China is trying to learn how to make airplanes

Labor unions representing Boeing's workforce are, naturally, concerned about the impact of the new facility on jobs for their members. But China's leaders are really after something much bigger than a factory full of jobs. They are trying to develop a domestic aviation industry. And to do that, they need workers and managers who know how to build airplanes.

That's why the Chinese government's state-owned aerospace company has launched a subsidiary called the Commercial Aviation Company of China (Comec) with a mandate to build first the C919, a narrow-body aircraft intended to compete with Boeing's 737 and Airbus's 320, and then with a longer-term ambition to build wide-body airplanes.

The plant Boeing is going to build in China will be used to put the finishing touches on 737s and will handle the delivery and servicing of the aircraft. It's also going to be a joint venture between Boeing and Comec. In other words, Boeing is going to be training Comec personnel in the skills they need to complete the C919 — an airplane that is designed to put Boeing out of business.

China is playing Airbus and Boeing off each other

How could Boeing be so careless about its own long-term business interests? Well, in part it's because Boeing's executives need to care about the company's short-term revenue and profits, and the quarterly earnings reports don't care about Comec's long-term vision.

But in part it's because Boeing believes that Comec is going to master this craft one way or the other. After all, remember that Airbus plant in Tianjin? It's also a joint venture with Comec. So from Boeing's perspective the die has already been cast, and it would be foolish to let Airbus gobble up the entire Chinese market for itself.

Meanwhile, Airbus is probably telling itself that helping the Chinese learn how to do final assembly for the A320 probably isn't that big of a deal because there are a lot of other steps in the aircraft value chain and a lot of bigger, more complicated planes out there. But that's why getting Boeing into the China game is important. Boeing's new Chinese plant is going to be doing basically the same things as Airbus's existing one. So if Airbus wants to regain the upper hand in competition for sales to the giant Chinese market, it will likely have to step up its future Chinese production.

Loss of Export-Import Bank subsidies plays an indirect role

Lurking in the background of this story is the Export-Import Bank, a longstanding scheme to provide discounted loans to American manufacturers that vanished early this summer after sustained attacks from Tea Party Republicans. As the American economy has shifted away from manufacturing over the decades, airplanes have become a very large share of American manufacturing exports, and Boeing became the single biggest recipient of Export-Import Bank loans. On an elite level, the main source of lobbying against the bank was Delta, an airline that didn't like the idea of the US government subsidizing airline purchases for its foreign competitors.*

The bank's disappearance will somewhat disadvantage Boeing in competition with Airbus for future contracts, because Europe retains its export financing subsidies. It also moderately reduces financial incentives for Boeing to keep its production in the United States.

But the main relevance is political. The aerospace industry is highly politicized, due to both the heavy government role in regulating the airline industry and the linkages between commercial aircraft production and military aircraft production. Boeing's main competitor, Airbus, is partly owned by European governments, and its Chinese frenemy Comec is owned by the Chinese government. Government ownership isn't really done in America, but the Export-Import Bank — along with defense contracts — was one of the US government's main tools for supporting and influencing Boeing. With it gone, Boeing is more cut loose and more inclined to cut deals that advance China's long-term industrial aspirations rather than America's.

* Correction: An earlier version of this article stated that Delta mostly flies Airbus planes. Delta does have a fleet of Airbus equipment inherited from its takeover of the former Northwest Airlines but a majority of its planes are made by Boeing.