How to Sell an Airplane in China

As president of Boeing International, Shephard Hill oversees foreign business for the aircraft maker. During the past four years, Chicago-based Boeing has inked the biggest deals in the 96-year-old company’s history with customers outside the U.S. Eighty percent of Boeing’s outstanding commercial aircraft orders are from non-U.S. purchasers, and half the company’s revenue comes from overseas sales.

Shep talks with Bloomberg Businessweek about the politics of selling jetliners in China and Brazil (edited interview).

You have 50 percent market share in China.

It’s 55 percent, but who’s counting?

How were you able to do that?

We believe in a company-to-country relationship. First thing we have to have in China are partners. We have to collaborate with industry there. And then, tied to that—and this is where it gets a little more complicated—is a country-to-country relationship. It goes up and down. They can be mad at us about Taiwan. If you have a company-to-country relationship you can kind of take the edge off of it. So if there is a problem in Taiwan, they don’t stop buying all our planes. But they will clearly send us a message that they are not pleased.

How do they send the message?

As happened on the last [U.S.] arms sale [to Taiwan], there were Apache helicopters that we built that were part of that sale. The ambassador called me at home. If this had been five or six years ago, it would have been a very strident: “What the United States has done is not acceptable. You’re meddling in domestic Chinese politics, and you, the U.S. companies, will be held accountable.”

The last time—about two years ago—it was, “Shep, how are ya?” We had these pleasantries. And then at the end, it was, “We are displeased; we think this is meddling in Chinese domestic politics. We want you to convey that accordingly, and that will factor into our ongoing decisions.” Never a threat against a sale, per se, or anything like that. But just making us, as well as other U.S. companies, aware that this was not something that they approved of, and this, the market that we all enjoy playing in, could be affected by that.

Do you know how many other executives were called?

I don’t know. A lot.

Did it end up impacting business?

Business, to a large extent, continued on. Because there’s mutual benefit in the business. Boeing is the largest procurer of Chinese aviation products. Every plane we have has some Chinese content in it.

So how did you respond to the call?

At the end of that call I said, “You know, of course, that we’re not in a position to say, ‘No we’re not going to support our government.’” We have to always be very straightforward with the Chinese.

How do you get a contract in China?

You create a deal on a contract, and that has to go to the government for approval. And in China the government looks at: How many planes can we buy in a year? What can our airspace accommodate? They manage very strictly how far things can grow. So our relationship has to be both with the airlines, on product, price. But then with the government. That’s where the partnerships come in.

Partnerships?

It has to be in the context of mutual benefit. We understand what China wants. They want to diversify their economy. They want to grow the skills base of their students. They have highlighted aviation as one of the national priorities of the country. And as a result, we have facilities in China where we partner with both government and semi-government companies. But we are always mindful when we say very directly to the Chinese: “We will collaborate with you. We know you are a very important market and partner, but we also know that one day you want to compete with us.” As a result of that, there are certain areas of our technology and our expertise that won’t be part of those collaborations.

What intellectual-property theft issues have you had?

I can’t say. That’s always an area that we are mindful of. That’s an area that we bring to the Chinese government directly. If Premier Wen was sitting right here with you, he would tell you he knows that’s an area that China needs to continue to focus on.

Have there been any improvements?

The acknowledgement that it is an issue. And their willingness, when cases are brought to them, to investigate it, to go into it. … What’s interesting is that actually as they evolve, they are now developing IP that they are interested in protecting. And they see the connection [between] those two things.

You’ve been lobbying since at least 2009 to sell 36 F-18 fighter jets to Brazil, which would transform that country’s air force and is worth at least $4 billion to Boeing. You’re competing with France and Sweden. How has Secretary of State Hillary Clinton been involved?

She had written a letter back in 2009 to the foreign minister. Brazil is a perfect example of where the country-to-country relationship has to get tight for [Brazilian President Dilma Rousseff] to go and buy F-18s. Before they buy the next fighter, they want to know: Do we have a close relationship with the United States? Are you willing to give us the technology that we need? And her imprimatur on that, her personal engagement there, is very, very important.

More so than in other countries?

Yes. Because Brazil, as you know, always wants to be nonaligned to some extent. Because they wanted to be treated by the United States as an equal. Not that, we’re throwing you technology as a favor.

What does Boeing need to do to stay competitive?

Coming out of the delay of three years, [it’s] that you probably need to do more in-house. And you certainly need to know how to do everything in-house. Even the stuff you ask other people to do. So the challenge will be that we don’t lose ingredients to the success of the sales that came through this global supply chain. India buying all of those 787s also played into us building a maintenance air overhaul building in India. That was part of the Air India deal.

That would not have been the case 10 years ago?

They would have been satisfied with just providing raw materials.

In the past four years, we’ve seen Americans lose many jobs while corporate profits have risen. And the jobs companies have added have been not in the U.S., but in emerging markets.

In our particular case that’s just wrong. These planes are all made in the United States. While we have a global supply chain, the fact of the matter is that we’re adding thousands of engineers to build these planes. Over 80 percent of our backlog is international. That’s adding jobs in the United States. Does China industry, does Japan industry, does U.K. industry participate in that? Absolutely. Are we helping employ people in those countries? Absolutely. Have we outsourced jobs that we had in Seattle or Puget Sound to go do that? Absolutely not.

You see this growing middle class around the world. What does this mean for Boeing?

Whether you’re looking at the National Intelligence Council or Goldman Sachs, by 2026 or 2030 there will be more people who are not poor than are poor. Poor to them is a dollar a day. So there is huge movement toward people being urbanized in China and India, and with that, people’s ability to have more resources, which will also put demand on natural resources. But it will also create a huge bow wave of people that want to travel. And if you look even at the economy going up and down right now, what has been sustained throughout is passenger travel. Because more and more people have the ability to buy a ticket. These low-cost airlines have popped up. The Lion Air thing. Imagine that, a Lion Air, in Indonesia.