Following the US decision to sell US$ billion in arms to Taiwan, Beijing decided to play hard ball. Not only did it unleash the usual bluster about damaged ties and communications channel, but it added a significant threat: According to Foreign Ministry spokesman Ma Zhaoxu, China will sanction the US firms involved in the sale, possibly including Boeing, which manufactures the Harpoon anti-ship missiles included in the Taiwan arms package. Following the announcement, speculation immediately turned to whether the sanctions would significantly damage Boeing’s position in China, where it enjoys over a % share of the Chinese civil aviation market. Beijing has talked itself into a corner on this one. By mentioning sanctions it has bound itself to enact something in order to save face with the millions of nationalist hardliners, and it seems likely that it will have to enact some sort of punishment on Boeing. But whatever it does will have to be largely symbolic, because China has few options but to continue ordering from Boeing for the medium term, and possibly the long term.
First, switching costs are high. Using its typical market-access-for-technology-transfer contract structure, China has forced Boeing to outsource certain component manufacturing in China and to invest in R&D here. While the components Chinese factories supply to Boeing are basic – doors, wing fairings and the like – China needs basic help with aircraft production if it is to produce an airplane that does not have to be forced down the throats of Chinese airlines, such as the recent ARJ-21, which depends mostly on technology from the 1980s. Indeed, there are pervasive industry rumors that Boeing doesn’t actually bother to use the components provided by its Chinese suppliers due to quality problems – one notes the curious omission of any mention of Chinese manufacturers in the 787 development team list. Nevertheless, the paltry US$ million in subcontracts Boeing dished out in China is small change that China needs, or thinks it needs – for outsourced work, certainly, but more importantly because it needs the technology. So, China sanctions Boeing, Boeing quietly degrades its technology cooperation.
At the same time, keeping the existing fleet of Boeing airplanes in flight drives a lot of revenue in Boeing’s direction, and the fleet of Chinese engineers and mechanics and pilots trained on Boeing technology can’t simply become Airbus experts tomorrow. There are significant cost advantages for Chinese airlines to standardize maintenance around a limited number of models. All those planes still have to stay in the air for the next – years or so of their product lifecycle.
So what? China can always turn to Airbus, right? Well, yes and no. For one thing, unlike Boeing, Airbus isn’t actually doing much component outsourcing for its new generation of aircraft, and definitely not be doing much in China. China may crow about the Airbus assembly plant in Tianjin, but there’s not a lot of technology transfer in assembly. So moving to Airbus doesn’t help with the technology transfer challenge. There is also a market problem. Standardization is nice, but when overdone it leads to overdependence. If China moves too far in Airbus’s direction, it loses price negotiation leverage. And Beijing cannot have forgotten that French leaders have also sold arms to Taiwan, met with the Dalai Lama and famously protested the Olympics. Recently, French Foreign Minister Bernard Kouchner demanded an explanation from China over Google’s hacking claims. Switching from Boeing to Airbus does not solve any diplomatic problems related to cross-strait relations.
Understanding this last point, the nationalists and the less informed Western journalists are getting excited about the domestic option. Some of them may have believed Beijing when it said that the ARJ- was produced with "% domestic intellectual property," but the plane is a derived McDonnell-Douglas design crammed with foreign avionics and running on foreign engines. The ARJ- is being pitched as a solution to China’s "high, short runways" in western provinces. Maybe so, maybe so, but the high-altitude, short runways of western China are not exactly centers of passenger demand, and even if they were, the ARJ- is a regional jet in a market swamped with competition from smaller, better players. So much for the ARJ-. What about the famous Comac C, which is everywhere being touted as China’s domestic jumbo-jet that will compete with A and the ? Again, the Chinese definition of "jumbo" is similar to the definition of "% domestic intellectual property." The C, when finished, will hold passengers max. The will carry over passengers. The A, a flying opera house, can carry up to . The C is not going to compete with these planes. Statements of support from Chinese airlines should be taken with a grain of salt; Chinese carriers are famous for refusing to buy domestic aircraft, even when produced by joint-ventures. No, China does not have much of a domestic option, nor does turning to Airbus solve any of its problems. Boeing should worry a little, yes, but shorting Boeing in China is unlikely to pay off any time soon.