Amid a rising tide of protectionism, businesses must adapt their operations and public communications to a new politicalenvironment. Nowhere is this more evident than in aerospace, where manufacturers deal closely with governments as both regulators and customers. In the last six months, inter-company trade disputes, which were normal only a few years ago, threatened multiple major national defense contracts, drove Bombardier to seek strategic alternatives, and undermined American, British, and Canadian trade ties.
The global commercial aviation market has long been dominated by Boeing and Airbus. Among smaller commercial planes, that dominance eroded and a host of players compete led by Bombardier and Embraer. As those companies grew, they increased the size of the planes they produce, culminating in Bombardier’s C Series with ~100-150 passenger capacities. The C Series was $2bn over budget, requiring $1bn in Quebecois equity and Canadian, British, and Quebecois low-rate debt to keep the project afloat. In 2016, Delta placed the first large U.S. order at 75 planes and over $5bn, marking one of the first major wins for the C Series program.
Boeing, whose 737s are slightly larger than some C Series jets, filed claims with the U.S. International Trade Commission. Boeing argued that the C Series should be tariffed based on unfair government subsidies and initial pricing below fair value. Such trade claims were relatively common in the decades-long battle between Airbus and Boeing. Barely a year ago, the World Trade Organization held that Airbus’ A350 was dependent on EU subsidies, a significant boost to Boeing, to relatively little fanfare. Boeing’s C Series claim engendered a very different response. Discussing Canada’s potential purchase of Boeing F-18 jets to upgrade its air force, Canadian PM Justin Trudeau said he “won’t do business with a company that’s busy trying to sue us and put our aerospace workers out of business.” In the U.K., where Bombardier manufactures C Series wings, Sir Michael Fallon hinted that the dispute risked Boeing’s defense contracts. Finally, Quebec Premier Philippe Couillard declared, “Quebec is attacked, Quebec will resist.”
In a highly politicized environment, aircraft manufacturers and regulators have also internalized the new language of trade. Bombardier argued that Boeing, whose international sales are supported by U.S. Export-Import Bank loans, was hypocritical to attack Bombardier’s subsidies and make trade claims which threaten Bombardier’s American and British jobs. Boeing responded that its supply chain employs over 35,000 British and Canadian workers. When the ITC made its initial rulings to impose 300% tariffs on the C Series, making the planes cost-prohibitive in the U.S. market, Commerce Secretary Wilbur Ross said the government would do “everything in our power to stand up for American companies and their workers.”
Bombardier’s response struck at the core of the populist trade debate. It partnered with Airbus, giving the European giant just over 50% control of the program and CAD 50m in warrants and agreeing to fund the next $700m in program cash costs. Airbus will provide sales and supply chain support and will open a new C Series assembly line at its Alabama plant. While the U.S. found duties should be applied to imported parts, it’s unlikely that Boeing will press trade claims that may deny jobs from Alabaman workers. Bombardier used Boeing’s popular rhetoric against itself and pitted it against American workers, an uncomfortable position for a government supplier.
In a world where isolationism has become a regular political tool, corporate management needs to be ready for their supply chain to escalate into a toxic political debate. Bombardier survived, but Boeing must still mend relationships with Canada and Britain. To that end, Boeing recently launched a campaign to raise awareness of its impact on the Canadian economy. Going forward, aerospace companies will need to rethink whether aggressive pricing and government financial support are worth alienating export markets. They should also refrain from competitively-driven trade disputes which can cause political headaches that jeopardize lucrative defense contracts. Should Boeing press its claim against the C Series or partner with Bombardier competitor Embraer on a similar program? Should the U.S. government approach trade claims differently when they are simply a competitive tool? Two years ago, it would have been absurd for governments to threaten fundamental national security programs for the sake of commercial trade. Now, this is the new world order.
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