Saturday, February 27, 2010

Balancing act

As a result of U.S. arms sales to China, the PRC government announced that it would sanction those American companies that participated. Like many others, I was curious to see how this would play out.

Turns out that two weeks ago (when I was sick), China announced that it was going to buy 20 passenger planes from Airbus, the major European aircraft manufacturer. Now on the surface this may seem like a snub to Boeing, but in all actuality it doesn't mean much.

According to Boeing, increase air travel in China will require Chinese airlines to take delivery of 3,800 additional passenger planes by 2028. Airbus is estimating that China will require 3,200 additional aircraft to meet the demand. (The difference between the two is that Boeing assumes Chinese airlines will use smaller aircraft like the 737, while Airbus is betting on larger aircraft equivalent to the 767.) Either way, Chinese airlines will need a lot of planes in the next 18 years.

Precisely because of this huge demand for aircraft, the Chinese airlines nor the Chinese government can play favorites. If the Chinese government were to completely expel Boeing from the Chinese market for passenger aircraft, it would have no choice but to deal with Airbus (which could raise its prices as a result of its major competitor being locked out). That would not be good for Chinese airlines. Not to mention that by hurting Boeing, it hurts the Chinese manufacturers Boeing subcontracts to for the production of aircraft parts.

So far it looks like the sanctions the Chinese government was talking about amount to very little. This could change in the future as Chinese aircraft manufacturers increase in capability and quality, but I expect that not to happen for at least another ten years. While on the surface it looks like China has a lot of weight, this is an example of how little it can do despite its rhetoric.

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