A Financial Times article reports that China has decided to build a State owned company to compete with Boeing (NYSE:BA) and Airbus. An esteemed colleague, Douglas A. McIntyre of 247wallst.com doesn’t seem to take this news too seriously. Perhaps the news doesn’t warrant an immediate panicky reaction, but some of us do take this seriously.
We all know how difficult it is to build large commercial aircraft. The Russians have tried to compete without much success. The European Union has heavily subsidized the Airbus consortium and some claim continues to do so. It is not unusual to conclude that China will not find it profitable to compete with Boeing and Airbus. Guess what, we don't think China is thinking of profits at all. China is sitting on top of a trillion Dollar surplus and has finally figured out how to spend it constructively, thus helping its people while simultaneously preparing the Chinese economy for the next fifty years.
Frankly we saw this coming. As graphically depicted in a previous article, Boeing's outsourcing activities have transferred frame and fin construction technology to China. On a totally different article, this time about the Embraer sales to China, we commented on a Faisal Laljee article from 08/31/2006 as follows:
ERJ may have made a crucial miscalculation on the HNA deal. The deal calls for about half the manufacturing (and were guessing this includes profits) to be done in China by a Chinese subcontractor! In essence ERJ may be creating willy-nilly its own new competitor. Don’t expect the Chinese to honor a tech confidentiality clause. Recent history has shown that Chinese companies always circumvent these clauses. For a short term gain, this acute shortsighted approach could be very costly in the long run.
Willy-nilly Boeing has helped create its own competitor. We don't expect the Chinese to start producing 300 seat aircraft at first, but we do foresee 80 to 120 seating models to roll of the production line within the next few years. Of course Airbus couldn't be outmaneuvered by Boeing and is contributing as well by building an assembly plant for the A320 in Tianjin. So goes the assembly know-how.
Taking its queue from Boeing, major parts will initially be outsourced to Italian, French and American companies, amongst others, and eventually China will produce the entire aircraft at home. All China has to do is subsidize Chinese airline purchases and they have a built in market for their new industry. A trillion Dollars can go a long way.
Disclosure: This is the opinion of several CrossProfit analysts and is not the consensus at CrossProfit.com.