As a follow-up to our prior Supply Chain Matters posting reflecting on high tech executives meeting with the leaders of China and India last week, came the announcement from Boeing of a significant order for new commercial aircraft along with the pending opening of a Boeing manufacturing facility within China itself.
Boeing indicated that it would sell 300 of its new model 737 jets to China. Of far more concern, this deal includes a plan calling for Boeing to team-up with state-controlled Commercial Aircraft Corp. (Comac) in building and operating a single aisle aircraft completion center in China. This announcement came as President Xi Jinping of China visited Boeing’s facilities near Seattle.
While Boeing indicates that the timing of the completion center has not been finalized, Boeing’s labor unions and certain politicians were quick to weigh-in on this announcement. While Boeing stresses that it will not reduce employment on the 737 program in the state of Washington, the current global hub of 737 manufacturing, the announcement did not garner favor with the likes of U.S. Presidential candidate Donald Trump, State Representative June Robinson and the head of Boeing’s labor union representing aerospace workers.
Readers might recall that in 2011, Boeing reached a labor contract settlement with the labor union representing the company’s production workers at production facilities in the state of Washington. Among other tenets in the ratified agreement, Boeing agreed to source the production of its new 737 MAX aircraft, the newest version, within the union facilities in Renton Washington. The union pressed for such a tenet because Boeing had already had plans to ramp-up model 787 aircraft production at the Charleston South Carolina final assembly facility.
In its reporting, The Wall Street Journal indicates that last month, Boeing increased its forecast for commercial aircraft demand emanating from China to 6330 new aircraft over the next 20 years, 70 percent of which are noted as market growth vs, replacement of older aircraft. That figure represents an average annual volume of upwards of 300 aircraft on an annual basis and that is the friction associated with the announcement of Boeing’s first foreign-based final assembly manufacturing site.
Added to these concerns is that state-owned Comac has been developing the C919 to compete with the 737 and the Airbus A320. That aircraft has thus far garnered orders for 500 jets. Airbus operates an assembly plant in Tianjin to produce aircraft destined for China and Asia based carriers.
Boeing indicates that the new facility will paint the fuselage and install seats and in-flight entertainment systems, but yet one wonders whether China’s leaders will accept such lighter areas of manufacturing as a legitimate presence. One might speculate that value-added composition will be an area for ongoing negotiations related to the China based facility. While in-country value-add is often a tenet of large aircraft deals, coexistence with a declared competitor along with general concerns for intellectual property protection and information security compound a decision related to China in the current environment.
Similar to the themes of the high tech sector, Boeing needs access to China’s growing commercial aircraft market, and in order to gain such access, the company must add a China based production presence to its global supply chain flows, regardless of the expected fallout.