Bombard(ier)ed by Tariffs: The Challenges of Protectionism in the Age of Trump

Bombardier’s efforts to meaningfully enter the U.S. market with its low-priced, high-tech C-Series recently stalled when the U.S. Department of Commerce recommended a 300% tariff on each imported jet. In this new age of American economic isolationism, can Bombardier break through?

Setting the Scene

This September’s ruling by the U.S. Department of Commerce, on the ethicality of Delta’s recent order of jets from Bombardier (a Canadian aerospace manufacturing competitor of U.S.-based Boeing), has highlighted the impact that the current environment of heightened protectionism is having on foreign companies with international supply chains attempting to sell into America.

Some background: Delta, historically a large Boeing customer, recently placed an order for 125 of Bombardier’s new C-Series 110-seat jets. In response, Boeing argued that Delta only placed said order because Bombardier priced the jets well below expected market value in an attempt to buy U.S. market share. The U.S. Commerce Department, “with the support of U.S. President Donald Trump,” took up Boeing’s complaint [1]. In its report, the Commerce Department recommended a 300% tariff be applied to the import of each Bombardier jet, reflecting Boeing’s assertion that its Canadian rival sold jets at “absurdly low prices to undercut Boeing and win its business” [2]. On the news, Bombardier’s stock plunged 16 percent “for its biggest intraday decline in two years” [3]. The slide was reflective of the numerous reasons why the prospect of a 300% import tariff is of huge concern to the company. With respect to this order specifically, Delta has indicated it will not bear the burden of the tariff and would likely not complete the order at the additional cost, increasing the likelihood of the sizable order – on Bombardier’s most costly project to date – being rescinded [4]. On a broader scale, the precedent set by this ruling makes it considerably harder for Bombardier to pitch other American airlines on importing aircraft built through international supply chains at competitive prices, which imperils its hopes of growing share in the consolidated, two-player U.S. market.

Bombardier Reacts

Directly following the shock, Bombardier’s management team enacted a number of strategic moves to constrain the impact of the ruling. A month after the decision, Bombardier agreed to sell 50.01% interest in the C-Series program to Boeing’s main competitor Airbus, a move that limits upside in a program that Bombardier invested $6 billion in but also grants the program a much better chance of survival by providing it with access to Airbus’ “improved economies of scale and better sales network” [5]. Most importantly, Airbus will be moving production of the C-Series from Montreal to Mobile, Alabama, with the hopes of avoiding the recommended import tariff by moving the final stage of the supply chain to the States. Such a move could also curry favor with the Trump Administration by giving it the ability to cite job creation numbers, a statistic the president frequently touts as a metric of political success. To further highlight the C-Series’ U.S. ties, Bombardier President Fred Cromer has publicly noted that compared to ”Boeing’s globally distributed supply chain for aircraft…more than half of a U.S.-assembled C-Series will come from U.S. sources” in the hopes that this will bolster the company’s argument to fight off the tariffs [6]. 

What Next?

While these strategies seem to be an effective way for Bombardier to de-risk the liability of the international nature of its supply chain and operations in the short-term, it is not clear whether there is merit in adopting significant mid- and long-term strategies to protect against the business risks of U.S. isolationism. The danger in currently creating any mid- or long-term strategies with respect to trade is that U.S. politics have proven over the past century to be both cyclical and reactive. Since the 1947 adoption of the 22nd Amendment limiting presidential terms, only one party has held the presidency for more than eight consecutive years (the Republican Party from 1980-92) [7]. Additionally, the current president’s approval rating sits at 37% – the lowest approval ratings a president has held in this point in his presidency. It thus stands fairly likely that the next election could usher in a president with starkly different views on economic isolationism [8]. Thus, Bombardier has to walk the fine line between maximizing current shareholder value (as they are currently doing through the Airbus stake and Mobile final assembly) and investing in long-term technology to create best-in-class products while avoiding long-term deals that could disadvantage the company in 10 years’ time if the country’s protectionist fever breaks.

The questions I leave my classmates with are:

  • 1. How should the U.S. Department of Commerce think about levying tariffs on U.S. imports if a significant amount of the supply chains involved in creating the product are domiciled in the US (as is the case with the C-Series)?
  • 2. How should firms plan long-term strategies to address the risks of present day U.S. protectionism when American political history proves that current attitudes may be reversed within 5-10 years time?

(792 words, without subsection titles or citations)

References

[1] David Reid, “Boeing versus Bombardier: Here’s what happens next,” CNBC, October 17, 2017, https://www.cnbc.com/2017/10/17/boeing-and-bombardier-next-steps-in-the-trade-battle.html, accessed November 2017.

[2] Jon Ostrower, “Boeing v. Bombardier: Tariff is now 300%,” CNN Money, October 6, 2017, http://money.cnn.com/2017/10/06/news/companies/boeing-bombardier-trade-ruling-tariff/index.html?iid=EL, accessed November 2017.

[3] Frederic Tomesco and Andrew Mayeda, “Bombardier Dives on Blow to $6 Billion Bet-the-Company Jetliner,” Bloomberg, September 27, 2017, https://www.bloomberg.com/news/articles/2017-09-27/bombardier-s-6-billion-jet-takes-hit-as-boeing-wins-u-s-duties, accessed November 2017.

[4] Ibid.

[5] Allison Lampert and Tim Hepher, “Boeing says Bombardier CSeries jets may face hefty duties despite Airbus deal,” Reuters, October 16, 2017, https://www.reuters.com/article/us-bombardier-airbus-cseries/boeing-says-bombardier-cseries-jets-may-face-hefty-duties-despite-airbus-deal-idUSKBN1CL328, accessed November 2017.

[6] Stephen Trimble, “Tariffs won’t apply to US-assembled CSeries – Cromer,” Flight Global, November 12, 2017, https://www.flightglobal.com/news/articles/dubai-tariffs-wont-apply-to-us-assembled-cseries-443162, accessed November 2017.

[7] Raymond Smith, “Is it that hard for a party to hold the White House for three terms?”, The Hill, April 15, 2015, http://thehill.com/blogs/pundits-blog/presidential-campaign/238812-is-it-that-hard-for-a-party-to-hold-the-white-house, accessed November 2017.

[8] Jennifer Hansler, “Trump’s approval rating hits historic low, Washington Post-ABC poll says,” CNN, November 6, 2017, http://www.cnn.com/2017/11/05/politics/wapo-abc-poll-nov-5/index.html, accessed November 2017.

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9 thoughts on “Bombard(ier)ed by Tariffs: The Challenges of Protectionism in the Age of Trump

  1. Thanks for sharing!
    The dilemma Bombardier is facing is complex indeed. If they are very serious about wanting to break into the U.S. aerospace market as a long term strategy, I wonder if it would make sense for them to invest in their own US-based manufacturing capabilities. This would of course not solve their current issues, but as long as their expected long-term share in the US market is sizeable enough to warrant their own standalone manufacturing facilities it would hedge them against future changes in US protectionist policies.

  2. Great write-up! It seems to me that Bombardier already has the hard part over with: the selling of 50.01% of their company to Airbus in order to gain share to the Mobile assembly plant. I’m not expert in free trade agreements, but my feeling is that Bombardier would not do such a drastic move unless it guaranteed the removal of the 300% tariff threatened against them.

    My comment to your second question is very similar to Hortense’s above. If Bombardier is serious about competing with Boeing, it might be in the company’s best interest to invest in an American based manufacturing plant regardless of who is President. Just as we saw in the Fuyao glass case, the economics of their decision of whether to build a new plant in China or America naturally worked in favor of the Moraine, Ohio plant. When asked about whether or not the new streak of isolationist policies in the United States has any effect on their company’s plan going forward, she basically answered that it didn’t matter any more. They had already built the Moraine, Ohio plant so any tariffs placed on future imports would not affect them. They essentially touched “home base” and were safe. In my opinion, Bombardier would be short-sighted if they banked on current American political attitudes to reverse in 5-10 years when they could just as easily change back in 15-20.

  3. Thank you for sharing this write up.

    Your question about the role of tariffs is a good one and leads me to ask the question, “what will replace this revenue stream”? A potential answer is higher corporate tax revenue generated through increase domestic production and broader consumer taxes arising through greater domestic economic activity. However, given the administration’s agenda for tax reform intends to lower the corporate tax rate, the expected uptick in tax revenue associated with reshoring may be mitigated. Moreover, the investment in educating a fairly docile domestic manufacturing sector on advance manufacturing techniques is fairly significant. How does government partner with corporate to ensure that reshoring is a feasible strategy that allows US corporations to remain competitive in the global economy?

    This dovetails into the observation that reshoring must be assess over the short and long term, particularly given the high capital investment associated. Given Bombardier is a aerospace manufacturer and falls within the broader investment category of defense, a sector that has performed particularly well under the Trump administration, I would suggest the organization look to develop deep relationships with Washington. Either bidding for government contracts or lobbying for grants and funding to further innovation, would be the best strategy to succeed both in the short and long term as federal funding on defense spending has traditionally been hard to cut.

  4. Great insights! I think the U.S. Department of Commerce should levy tariffs on a sliding scale. So for example, if 100% of the supply chain is outsourced, the tariff is X, if 60% of the supply chain is outsourced, than the tariff should be 60% of X. The metric it can use to calculate the percentage number is number of jobs created in the US vs out of the US.

    For long term strategies, I think Bombardier in its financial analysis needs to start implementing in their models the risk of certain tariffs. This requires the build out of a strong government affairs organization, which unfortunately shareholders hold this company accountable to do. Secondly, they need to invest in lobbyists to make sure they are challenging laws and regulations that they do not agree with. This competency has needed to be built out in organizations like Uber and Facebook who undergo heavy government criticism and potential regulation.

  5. I largely agree with the comments that were stated above, and it seems like there is a consistent question regarding not fully understanding why an aerospace manufacturer like Bombardier would choose to manufacture its jets in Canada rather than the United States. As we learned in the Fuyao case, there are more often than not many overriding factors regarding cost inputs, service assurance, and quality that trump governmental regulation when firms consider moving manufacturing to the same region as the final destination to which the product will be delivered to the buyer. Of course, a government affairs group is necessary for any large multi-national organization to cement its ties with governments worldwide, but the long-term strategy of the organization should not hinge on the short-term political whims of the time.

  6. Interesting post! I think several of the comments above (and the author as well) have pointed out the challenge of making long term decisions given a volatile US political environment. I agree with the suggestions that Bombardier should strongly consider a US-based manufacturing plant. While it will likely reduce their margins to do so (given presumably higher labor costs, etc.), it assures them a position in a leading market. It is difficult to envision simply opting out of the US market. Given Boeing and Airbus’ global dominance, it seems to me that conceding a top marketplace may even put others at risk, given the global nature of the airline business. Bombardier could think of the incremental costs of operating a plant in the US as a loss-leader of sorts, or put differently, as an insurance policy against political volatility. Given an unpredictable future, perhaps the best strategy is to be as resilient to the volatility as possible and to pay a cost to achieve that resilience.

  7. Exciting post, thank you for the insights! Bombardier is facing the same challenge as Airbus did some years ago before deciding to open its first US plant in Mobile, Alabama, in 2015. One of the key reasons behind Airbus’ decision was to minimize political risks in future deals, as Alan McCartor -Chairman of Airbus Americas- said: “It’s been night and day how we’re received on Capitol Hill” [1] pointing out that Airbus had gained some allies in Congress. That shows how hard has traditionally been for international aerospace manufacturers to deal with the US political protectionism, regardless of the party in power. However, what it is more alarming for international manufacturers and really emphasizes the current US protectionism is the fact that Bombardier, as opposed to Airbus, does not offer the same products as Boeing does. Bombardier C-series aircraft’s capacity ranges between 100-120 while Boeing’s smaller airplane has 130-160 seats, targeting different segments of the market. Given the more hostile environment for Bombardier, one can understand its decision to partner with Airbus. To address your second question, I do believe that Bombardier is still assessing the possibility to open a US plant in the long run, but they will never do that before testing the industry and having a relevant market share and solid customer relationships with US airlines.

    [1] https://www.nytimes.com/2017/05/03/magazine/a-look-inside-airbuss-epic-assembly-line.html

  8. Extremely insightful and thought-provoking article. I have two thoughts.

    First, I wanted to highlight the fact that commercial aircraft manufacturing is a relatively low-unit-volume business. Unlike auto manufacturers which can operate multiple plants globally and reach economy of scale in each one of them, commercial aircraft manufacturing for a given model is often located in once place, except a handful of high-volume models (e.g. Airbus A320). As such, I think it would be unrealistic to expect Bombardier to establish a US based final assembly line just to serve US customers. Given the political headwind and the likelihood of a change in direction in 5-10 years, what Bombardier chose is probably the best and only solution.

    Secondly, I think part of the rationale for the Department of Commerce to levy a tariff might be that a greater percentage of the value of a Boeing aircraft is created in the US, compared to a Bombardier. However, the side effect of this decision is that with the US market secured, Boeing can no longer justify plans to develop a direct competitor to the Bombardier C series, which is smaller than the Boeing 737. While this decision may benefit Boeing in the US market in the short term, it could potentially make Boeing less competitive in the global market in the medium to long run.

  9. I agree with a number of comments above however, just to play devil’s advocate, what if the political climate in the US does not change? Based on trends around the world, we may be headed towards an era characterized by isolationism. In this case, it would make sense for companies such as Bombardier to think about potential long-term solutions that would enable them to grow despite trade barriers.

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