Will Boeing Become a Chinese Target?

Company execs worry that more than $3 billion worth of jet orders could be at stake if U.S.-China relations deteriorate further

Boeing's quarter-century effort to cultivate trade ties with China is under threat once again. The jetmaker's executives are fretting that more than 70 new commercial jet orders from China could be in jeopardy if tensions between Washington and Beijing escalate rather than cool down after the recent spy-plane mishap, BusinessWeek has learned.

The rising U.S.-Sino tensions come at a delicate time for the Seattle-based airplane giant, as it tries to complete the first significant sale with the Chinese in more than three years. The total order, which has not been disclosed publicly, is valued at more than $3 billion. It could represent from 6% to 10% of potential total sales for this year, depending on its actual size. Though other factors, such as overall worldwide orders, will determine the actual magnitude of the China order, it's a sizable number in the low-volume, high-cost commercial airplane business.

Boeing officials are concerned that the Civil Aviation Administration of China (CAAC), which approves purchases on behalf of the country's 33 carriers, could nix the deal. For now, a CAAC official in Beijing denies any retaliation is in the works: "As our Trade Minister said, trade will not be hurt." But adds Boeing Deputy Vice-President Bruce Dennis: "We're very concerned and are watching the situation closely."


  For more than two decades, Boeing has cultivated a close business relationship with the Chinese. It was one of the first U.S. companies to establish trade ties after President Nixon's historic visit in 1972. Since then, it has spent hundreds of millions to help the Chinese develop its commercial aviation industry. In return, Boeing controls nearly 70% of China's plane market -- the world's fastest growing -- delivering 396 jetliners to China over 28 years.

The company is a clear target of Chinese retaliation in the event of sour relations. After all, it has happened before: In 1996, Boeing lost a $1.8 billion order to European rival Airbus Industrie when the U.S. and China nearly came to blows in the Taiwan Strait.

Boeing CEO Philip M. Condit says he's confident that the current tensions between Washington and Beijing won't fundamentally change trading relationships. But he adds: "We are a high-visibility player, and that always puts us on the front lines."


  The booming China market is critical to the futures of both Boeing and Airbus. Boeing reckons China could purchase 280 jets in the next five years, a crucial counter to slowing sales elsewhere. And Airbus predicts that China's airline fleet will grow the fastest of any country -- more than tripling over the next 20 years to 1,600 aircraft, from about 490 today.

Already, China's 33 airlines need new airplanes to replace aging jets as well as to accommodate sharp growth in airline traffic. Boeing and Airbus both predict air travel inside China will grow at a sizzling 8% a year over the next 20 years. China's desire to buy the big jets comes as airplane orders elsewhere around the world are expected to fall behind last year's pace.

Both jetmakers are hoping China can pick up some of the slack. "We have a significant numbers of airplanes in the final approval process," Boeing's Dennis says. "There is a somewhat of a logjam [of orders] building for both manufacturers. The Chinese really need some airplanes. They have been under-ordering." So far, Boeing has announced about 100 orders worldwide in the first three months of this year. Airbus has booked about 117.


  But the recent diplomatic clash between Washington and Beijing illustrates the delicate challenges of doing business in China. With such a big market for airplanes, Boeing finds itself caught between the harsh political realities and the strong commercial desires of the world's most populated country.

Boeing knows this squeeze well. As a price for selling airplanes in China, Chinese leaders have long pressured the company to influence U.S. government policymakers and politicians. During a U.N. dinner in New York for then Chinese President Jiang Zemin, one of China's top ambassadors chided Boeing's CEO at the time, Frank Shrontz, for not lobbying hard enough against Taiwan supporters at the Washington state capitol in Olympia.

It didn't matter that Boeing's lobbying effort had defeated two bills in the Washington State legislature that would have recognized Taiwan's status as an independent nation. The Chinese also expected Boeing to play a central role in securing a permanent most-favored nation status for China, which it did along with several other large U.S. companies. China leaned on Boeing to lobby in the U.S. for China's entry into the World Trade Organization.


  Beijing has also demanded that Boeing subcontract work to Chinese companies in exchange for new airplane orders. That has been a controversial issue for the 26,000-member International Machinists Union. The Machinists fear they'll lose their jobs to foreign workers. But in factories scattered from Xian to Shanghai, the Chinese are fabricating Boeing 737 tail sections, 757 cargo doors, and an assortment of other aircraft component parts.

Though it's always difficult to know when politics influences a business decision in China, analysts are watching developments in the U.S.-China relationship closely. "If we had an escalation in tensions, then we would have to reconsider our order assumptions from China," says Chris Mecray, an aerospace analyst for Deutsche Banc Alex Brown. "But I don't think we're there yet."

Boeing executives well know the economic stakes if the political turbulence grows stronger. One former senior Boeing execs puts the situation in striking terms: "We're toast." Such are the dangers for U.S.-based multinationals that depend so heavily on the Chinese market.

By Stanley Holmes in Seattle

Edited by Douglas Harbrecht

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