Name: Boeing's China Problem
Uploaded: 2021-06-01T11:49:49.000Z
Duration: 12 min 55 s
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To, from, or through China, more than half a billion passengers fly each year.

By 2035, that number is expected to be 1.3 billion.

It is one of the fastest growing aviation markets in the world, is home to what is believed

to be the future busiest airport in the world, and is expected to soon surpass the US to

become the single largest aviation market in the world.

Last year, a new aircraft was delivered to a Chinese airline every 21 hours.

That's $35 billion worth of aircraft purchased in a single year.

All of this, however, represents a considerable problem for the world's largest aircraft

You see, the reason China is a problem for Boeing is also part of the reason why China

is already such an enormous market for them.

While the US is resoundingly Boeing's number one customer, at least partially propped up

by government defense contracts, China safely holds the number two spot.

Excluding North America, China, in fact, singlehandedly earns Boeing more money than every continent

Now, not only is China a fierce battle-ground between Boeing and Airbus, even if Boeing

has a slight overall edge in market share, but the company now also faces a trifecta

of issues potentially hindering its future dominance in this ultimately crucial aviation

The first of these issues has to do with Boeing brand new yet beleaguered airplane—the 737

Prior to the MAX's grounding, China was, by a wide margin, the largest operator of

Its airlines had a total of 97 MAX's while US' airlines, representing the second largest

This is an aircraft particularly well-suited to China's geography.

With a number of smaller, secondary or tertiary cities, China's airlines are increasingly

focused on developing non-stop flights bypassing the major hubs of Beijing, Shanghai, and Guangzhou,

or fights to lower demand cities outside of China.

This is especially true given the huge number of smaller airlines operating in China who

have established themselves by setting up hubs in some of the country's smaller cities

whose populations more recently started the transition into the country's middle and

upper classes than those of the country's tier one cities.

Of course, flying to or from these smaller cities means lower demand for seats, however,

the longer-range, smaller-capacity capability of the 737 MAX perfectly suits this mission.

That allowed Chinese airlines to set up, in an economical manner, flights like Jinan to

Singapore, Guangzhou to Lahore, Ürümqi to Bangkok, or Hangzhou to Hotan—all five or

The 737 MAX was an aircraft perfectly suited for China and Boeing knew it.

This suitability and focus was demonstrated by Boeing's decision to set-up an aircraft

While aircraft would continue to be primarily assembled in Renton, Washington, they would

be flown over to Zhoushan without the interiors completed.

In Zhoushan, their seats, overhead bins, and basically the entire rest of their interiors

would be installed by Chinese workers in this Chinese factory.

Having a ground presence in China would appease the government, and by extension airlines,

and the hope was that this would help convince them to buy Boeing jets considering that their

This was especially necessary considering that Airbus already had an even more extensive

final assembly line in the country for its competing a320 jets.

Given the MAX's suitability, though, Chinese airlines bought an enormous number of these

In addition to the 97 already delivered, Chinese airlines had almost 500 of them on order but

then, of course, the MAX crashed, and then it crashed again.

China's Civil Aviation Administration, eager to maintain the country's recent streak

of aviation safety, quickly grounded the MAX after its second crash making China the first

This was a rather shocking move as historically, every country's aviation regulator more

or less just followed the lead of the American FAA in these decisions.

It was thought that, if the FAA said it was safe, it was safe, an in this case, the FAA

initially asserted their confidence in Boeing's 737 MAX and chose not to ground it immediately.

Now in the aftermath of this, the grounding of the MAX has presented Beijing with three

First, especially in the case of the state-owned airlines and leasing companions, the Chinese

have a much stronger negotiating position than before with Boeing as the company works

Prices, which typically vary widely from airline to airline and deal to deal, could end up

Secondly, China's three largest airlines, which are all state-owned, are asking Boeing

for compensation for the grounding of their jets.

By extension, this is essentially the Chinese government, the very one that holds the keys

to the Chinese aviation market, asking Boeing for compensation and, if Boeing doesn't

comply in what is possibly largely a symbolic move, the Chinese government could decide

to reduce future Boeing orders, potentially in favor of Airbus.

While Boeing is seemingly setting itself up to offer compensation to airlines affected

by the MAX's grounding, whatever it gives to the Chinese airlines, however favorable

the company is with them, they will have to match this precedent for their compensation

with every other of the world's affected airlines.

What could end up the most formidable MAX challenge, though, is that the Chinese aviation

regulator has now established itself as a leader.

It was them who made that first decision to ground the jet that started the domino effect

of other national regulators grounding the MAX.

Considering China's regulator now successfully flexed their muscle in this space, the American

FAA, which has deep links to Boeing and has allowed Boeing to essentially self-certify

certain aspects of their new aircraft, has lost some prowess in its role as, in a sense,

Therefore, not only will China's regulator likely take a more independent route in re-certifying

the MAX once its issues are resolved, it will also possibly feel free to make its own independent

decisions on the airworthiness of future aircraft.

This is a precedent that should have Boeing concerned.

Now, a smaller but significant second issue for Boeing is the ongoing trade-war between

While Boeing has not yet encountered clear implications from this trade-war, some speculate

that the company could be used as a pawn.

You see, China's three largest airlines—China Southern, China Eastern, and Air China—are

all majority government owned and therefore their orders can be used as a sort of political

To date, these three airlines' fleets are slightly weighted towards Airbus planes, despite

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Boeing's China Problem

essentially

significant

enormous

opportunity