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Boeing May Be Glad It Missed The Plane To China

International Business: CHINA


Losing out on China's joint venture may save it loads of trouble

For months, Western aerospace companies have been falling over one another to become a partner in a Chinese project to build a 100-seat jet. In April, with U.S.-China relations tense, Chinese Premier Li Peng traveled to France and announced the winner: Beijing would sign a memorandum of understanding with a European consortium rather than Boeing Co., the leading U.S. contender. Politics, the Seattle giant says, cost it a lucrative deal.

But while Boeing expresses disappointment that it won't be part of the $2 billion consortium, industry analysts and sources close to Boeing say in reality it is relieved to have been passed over. With few customers for the plane in China or abroad, the deal would have drained money, technology, and management time for years. Boeing "won by losing," says Jim Eckes, managing director of Indoswiss Aviation Ltd., a Hong Kong-based aircraft leasing company.

Sour grapes, suspect Europeans from Aero International Regional (AIR), the Franco-Italian-British consortium that is negotiating to build the plane dubbed the Asia Express. Still, U.S. industry sources say the deal will be excruciatingly difficult. For starters, Beijing has not even resolved who will be the other Asian partner, which will be vital to financing the venture. China has been feuding for months with the Samsung-led South Korean group over where the planes will be assembled. Singapore has also tried to jump in. But with only a small amount of cash, its offer apparently did not impress Beijing.

Even before they hash out a final deal with China, the Europeans have some issues to sort out among themselves, such as exactly which companies are going to be involved. Two members of AIR--British Aerospace and Aerospatiale--are partners in Airbus Industrie, but Daimler Benz Aerospace, also an Airbus partner, covets a role too. So it's not clear whether the Chinese will do business with individual companies or with Airbus itself. "The situation is extremely fluid and vague," says an Airbus official. "Nothing has crystallized yet." The third member of AIR, Italy's Alenia, is not part of Airbus.

The prospects for the Asia Express itself are questionable. Ironically, most analysts question whether there will be much demand for the planes in China. That's because Chinese airlines, the presumed customers, prefer larger jets for their routes, says Eckes.

The only way to make the economics of the deal work is if China exports the plane, at least to Asian markets. But that would compete with a proposed Indonesian plane and existing Western models. Moreover, the market is brutally competitive, as evidenced by the collapse of Dutch manufacturer Fokker. China's track record making planes for export is not encouraging either. To meet the demands of the U.S. Federal Aviation Administration, the Chinese would need to improve vastly their production process, Boeing sources say.

BILLIONS PENDING. During his French trip, Li dealt a blow to Boeing when he announced that China would place an order for 13 Airbus planes, with an option to buy an additional 20 jumbos, worth potentially $1.5 billion. Boeing, with a 70% share of the Chinese commercial market, has $4 billion in orders pending in China, but they are on hold until Washington concludes its debate over China's most-favored-nation status and other issues. Boeing says contracts for over 100 jets are waiting to be signed.

Even with the Airbus orders, Boeing will enjoy dominance in the Chinese market. Last month, Vice-Premier Zhu Rongji assured Boeing Commercial Airplane Group President Ronald B. Woodard that the company will continue to have a "long and prosperous relationship in China." A likely time for some good news for Boeing is in June, when it has scheduled a board meeting in Beijing.

For now, Boeing has solid prospects for future sales, without the hassles of a difficult joint venture. If the Europeans founder with Asia Express, the Chinese could ask Boeing to dance again. The question then would be whether the U.S. giant could manage to decline gracefully.By Seanna Browder in Seattle, with Dave Lindorff in Hong KongReturn to top

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