With nationalist moods sweeping elections across the world, companies must prepare to compete by tailoring their supply chains to protectionist realities. By the nature of its international business model, Boeing finds itself highly exposed to these political winds. The commercial aircraft industry is dominated by a few key players, each of which constitutes a large portion of its home country’s aerospace industry. As companies tend to buy aircraft in bulk, competition is fierce for a small number of long-term contracts. Governments often enact policies to give domestic companies the competitive advantages needed to win contracts. However, Boeing’s management is learning that lobbying the U.S. government for such aid to compete with foreign competitors can be a double-edged sword with negative implications for its supply chain.
Boeing has accused its Canadian competitor, Bombardier, of selling abnormally low-priced versions of its aircraft in the U.S. to strike deals with Delta Airlines. These low prices were said to be enabled through Canadian government subsidies. The International Trade Administration ruled in Boeing’s favor in October, recommending an effective 300% tariff in response to Bombardier’s actions . However, this confrontational strategy may have backfired, as the governments of both Canada and the U.K. have threatened publicly to forego purchases of Boeing defense aircraft, including the F/A-18 Super Hornet.
The loss of potential contracts over trade disputes could deal a blow to Boeing’s struggling defense aerospace business, which also recently lost the bid for the U.S. Air Force’s new long range bomber. The F/A-18 assembly line based in St. Louis has been on life support for several years, producing at a meager rate of two aircraft per month. As contracts of domestic buyers dwindle and the backlog of orders dries up, the production line could be forced to shut down permanently due to costly overhead burdens. Furthermore, without a fresh supply of orders on the horizon, the ordering of hundreds of millions of dollars of long-lead time material to support the production line becomes riskier . These realities could force Boeing out of the defense aerospace industry altogether.
In response, Boeing has aggressively pursued foreign contracts for its defense aircraft, even bending to nationalist impulses by offering to build a new assembly line for F/A-18 aircraft in India. This move is in support of Prime Minister Modi’s “Make in India” program, which aims to develop a domestic defense industry. In international defense deals, it is rare for an aerospace company to set up a production line in a foreign country . While certain parts of the aircraft would still be sourced from the U.S., fears have grown among workers at the St. Louis facility that a new, more efficient Indian assembly facility may eventually come to serve all foreign demand for F/A-18 aircraft. This dynamic could have negative implications for worker morale. Boeing has already outsourced production functions for other aircraft in its inventory to India, which would provide economies of scale and a trained labor source . The proposal to produce F/A-18 aircraft in India would surely explore new regulatory frontiers with respect to the export of classified defense technology. The burdens of complying with these regulations could complicate timelines and supply chain logistics in any such implementation.
An assessment of Boeing’s management in the protectionist environment shows mixed results. While Boeing may be justified in its suit against Bombardier, the plan to resolve the issue in such an overt and confrontational way is ill-conceived. A subtler approach might involve lobbying the U.S. government for subsidies of its own, so that it may compete with Bombardier on an even footing. Such an approach would avoid harsh, punitive tariffs and thus be less likely to provoke the Canadian government. Some may consider it politically risky for Boeing to propose building an Indian production facility for the F/A-18, an icon of American airpower. However, this a shrewd move by Boeing management. The U.S. government’s lukewarm interest in the future of the F/A-18 program gives Boeing the cover to offer state-of-the-art defense technology to India in a package tailored to support Modi’s infrastructure initiative. As the primary customers, U.S. government representatives would only be able to blame themselves for not buying more F/A-18 aircraft if they sought to turn the outsourcing decision into a political debate. Meanwhile, Boeing is serving U.S. policymakers’ agenda of developing closer ties with India in efforts to contain Chinese ambitions.
As Boeing moves forward, questions arise. Should the U.S. allow a company in its aerospace defense industry to develop a defense infrastructure for a foreign country? What level of trust should exist between nations before such interaction takes place?
- “Boeing v. Bombardier: Tariff Is Now 300%.” CNNMoney, Cable News Network, money.cnn.com/2017/10/06/news/companies/boeing-bombardier-trade-ruling-tariff/index.html.
- “The Navy Could Throw Boeing’s Fighter Jet Business a Life Preserver.” Fortune.com, Fortune, http://fortune.com/2016/03/03/boeing-navy-super-hornet.
- Gallagher, J. (2016, Dec 11). Boeing wants to build super hornets in India. Should St. Louis worry? TCA Regional News Retrieved from http://search.proquest.com.ezp-prod1.hul.harvard.edu/docview/1847615106?accountid=11311.
- Chowdhury, Anirban. 2017. “Boeing Doubles Outsourcing From India To $500 Million In A Year – Times Of India”. The Times Of India. https://timesofindia.indiatimes.com/business/india-business/Boeing-doubles-outsourcing-from-India-to-500-million-in-a-year/articleshow/51019768.cms.