US Isolationism Takes Flight to Ground Bombardier

The USA, keen to enact an “aggressive defence of US trade remedies laws”, attacks Canadian aerospace firm Bombardier – landing a direct blow to both of its closest allies.

The Economist warned that “disengaging will not cut America off from the world so much as leave it vulnerable to the turmoil and strife that the new nationalism engenders.”1 Bombardier has become both a casualty and live demonstration of this rising trend.

Boeing Co., seeing an opportunity to exploit this rhetoric, has successfully petitioned the US government to impose punitive tariffs on Bombardier Inc., a small Canadian airplane and train manufacturer driving innovation in the aerospace industry. Delta Air Lines placed an order of at least 75 of its C Series aircraft, valued at $5.6bn (excluding any potential discounts)2. The development costs for the C series, $5bn, exceeded the initial budget by more than double, forcing equity injections by the Canadian government; this order had assuaged the concerns around the company’s future, given their falling revenues and production delays. Arguing that Bombardier had been given illegal and ‘unfair’ state aid, Boeing successfully convinced the US Department of Commerce that they’d ‘dumped’ the jet at below cost prices. The government intends to levy a 300% import tax on Bombardier, effectively tripling the cost of the C Series jet (the US International Trade Commission, USITC, will rule on the matter early next year).3

This is a strawman argument; state subsidies have been a key part of airline manufacturing for decades. Moreover, Boeing did not even bid for the contract. The smallest plane that Boeing produces is the 737, which is considerably bigger and not even a direct like-for-like comparison: “neither Boeing nor any other U.S. manufacturer makes any 100-110 seat aircraft that competes with the CS100”4.

The impact of this decision (and isolationism more broadly) extends beyond the firm’s home market. Bombardier has a global supply chain, sourcing its wings from its production facility based in the UK. Bombardier employs ~4,500 people in Northern Ireland, 1,000 of which build the wings for the C Series – all of whom now have their jobs at risk.

The entire situation resembles a strange sort of novella: the USA, keen to enact an “aggressive defence of US trade remedies laws”, lands a direct blow to both of its closest allies. Canada, a staunch proponent against isolationism, risks having an innovative upstart driven out of business (displacing tens of thousands of workers). The UK, ironically also isolationist vis-à-vis the European Union and heavily reliant on the USA as a key trade partner in a post-Brexit world, is embarrassingly undermined by Trump’s decision.

Boeing and the US government are essentially trying to trip Bombardier at the first hurdle as they try to establish a foothold in the broader jet airliner market. Bombardier Aerospace has previously focused on propeller planes, and winning Delta’s bid for the jets solidifies their entry into the US. Boeing is motivated by wishing to avoid another Airbus scenario; Airbus entered the aerospace engineering industry in the 1970s as a nonentity and, with support from the French government, has now grown into Boeing’s largest competitor, generating €66.5bn in 20165. Boeing is keen to avoid Bombardier from disrupting the jet airliner market and doing the same.

Given the capital expenditure that would be required to expand its supply chain operations into the USA to avoid the tariff, management couldn’t pursue this option, as it would drive them to insolvency. Opportunely, Airbus purchased a majority stake in the programme, offering its manufacturing and marketing expertise as part of the joint venture – and, crucially, access to their Alabama production facility6. This would arguably allow them to circumvent the tariff as it would be assembled in the US.

In an effort to establish greater stability and longevity to the company (and ultimately recoup their development costs), Bombardier has also successfully diversified its customer base by looking for customers outside of the USA. They’ve recently acquired contracts from two airline carriers: an unnamed European customer, and EgyptAir7.

To further protect itself against rising protectionism in the short and medium term, management has two options. The obvious low-hanging fruit would be to continue looking for customers outside of the USA. Each incremental order for the C series, combined with Airbus’ backing, generates more revenue and instils greater confidence in its ability to deliver on their orders. Another option is to rely on the Canadian and UK governments to lobby the US government on their behalf. Both have already threatened to halt orders of Boeing aircraft8.

While the matter seems to be settled for now, the USITC has still not rendered their verdict on the Delta order. Would it be worth the firm building facilities in the US market for future production – thus protecting themselves against the risk of more jingoistic trade policies (as well as other macroeconomic forces)? How far will the US government take this trade aggression – and, by extension, is Bombardier now ‘safe’ from further repercussions?

(797 words)

 

References

  1. The Economist, “The new nationalism,” (Nov. 19, 2016)
  2. “Delta Orders Up To 125 C-Series Bombardier Jets”. 2017. Ft.Com. https://www.ft.com/content/51456e4a-5733-3423-bccc-5d264a5a82bb.
  3. “US Blow To Bombardier Puts Jobs In Canada And UK At Risk”. 2017. Ft.Com. https://www.ft.com/content/2de9932c-a315-11e7-9e4f-7f5e6a7c98a2.
  4. Mayeda, More, and More Tomesco. 2017. “U.S. Slaps Duties On Bombardier’s C Series Jet In Win For Boeing”. Bloomberg.Com. https://www.bloomberg.com/news/articles/2017-09-26/u-s-imposes-duties-on-bombardier-jets-in-setback-for-c-series.
  5. Gordon Rayner, Laura Hughes, and Iain Withers. 2017. “Theresa May Threatens US With Trade War Over Bombardier Row”. The Telegraph. http://www.telegraph.co.uk/news/2017/09/27/theresa-may-threatens-us-withtrade-war-bombardier-row/.
  6. Tomesco, More, and More Johnsson. 2017. “Boeing Scorns Airbus, Bombardier Plan For Alabama Facility”. Bloomberg.Com. https://www.bloomberg.com/news/articles/2017-11-15/boeing-scorns-airbus-bombardier-plan-for-c-series-plant-in-u-s.
  7. “Bombardier Clinches C Series Order From Egyptair”. 2017. Ft.Com. https://www.ft.com/content/40cb252c-c940-11e7-aa33-c63fdc9b8c6c.
  8. “Trudeau And Trump Discuss Bombardier Row”. 2017. BBC News. http://www.bbc.com/news/uk-northern-ireland-41592474.

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18 thoughts on “US Isolationism Takes Flight to Ground Bombardier

  1. I think unilateralism is a more accurate term. Isolationism would be avoiding any entanglements whatsoever both diplomatically and economically. Unilateralism seeks the best terms of agreement for oneself, but does not preclude engagement with other parties. On the scale from acting solely in a nation’s own interest, and being a charity organization for other countries, where should a government fall? Any shift will be met with disdain because it’s a relative scale. In a global economy where these shifts can happen, companies simply need to be prepared or at least be aware of the possibility of “unfair” trade conditions.

  2. Ultimately, if Bombardier aims to be a big scale player of aeroplanes to international airlines, they have to supply the US market and, as you suggest, establishing some production facilities in the US could act as a hedge to political risk. However, I wonder if there’s another solution to this issue. Could airlines such as Delta work with Bombardier as a supplier to lobby the government and point to a loss of competitiveness for US airlines because of an inability to procure suitable small planes? Can big businesses sufficiently influence an isolationist President to protect their supply chains?

    Are there any other actions Bombardier and Airbus can take to overcome Boeing’s defensive actions?

  3. Very interesting article! And very clear point of view on a very complex topic !
    Your view on Bombardier supply chain as a whole is very interesting, and the paradox of the situation with the UK is all the more ironic indeed.

    However, the fact that Boeing has no product in the 100 seat range is notably an issue for Boeing. As no product existed in that range before the CSeries, airlines had to buy a bigger 737 even if it didn’t perfectly match their needs becauset the had no choice. With the CSeries, airlines can now buy a smaller and more affordable aircraft which will then hit Boieng sales as it has no product on that market.

    The next question I would have is: now that the final assembly can be done in Alabama in Airbus facilities to avoid tariff, what about sub-assemblies that are still done abroad? Will the tariff be also applied to them? Will Airbus find a loophole to avoid them?

  4. Under U.S. laws, this clearly falls under the ITCs definition of “dumping,” which in a few words can mean two things (i) imports that are sold in the United States at less than Fair Value or (ii) which benefit subsidies provided through foreign government programs. This case clearly validates both, per your article, and in addition, under the same definition, there is no reference to a “competitive” product under the filing complaint, but just that the petitioner is an “industry participant”.

    On another note, the “innovative upstart,” Bombardier had over $16 billion in revenue (USD). To be fair, the Company has been exploring divestitures for the past few years and is liquidity constrained. The Canadian government was making an investment from having one of it’s largest national employers file for insolvency should it not have made those investments. However, if the Canadian government allowed the Company’s aircraft subsidiary to file for bankruptcy, the subsidies by Canadian and Quebec would not have fallen under “dumping” statues. Now to address the underlying issue, the situation is completely messed up. This as an industry issue, as it is industry standard to under-project costs in order to win contracts. The Company did not properly project cash flows and needed help from the Canadian government, given their credit documents, they could not take a “rescue loan,” and were forced to take equity.

    Under all of these assumptions: Why didn’t the Canadian government try to find an equitable solution, instead of forcing the U.S. government’s hand? Anti-dumping laws were already getting more stringent several years ago. Should Canada get a pass on complying with U.S. International trade laws?

  5. Thanks for the interesting read. While I agree that it’s important to have a presence in the US, I would also point out that if you look at projected trends in the commercial aerospace market, majority of air traffic growth will be happening in developing markets like Asia and Latin America. Many of the airlines in those countries are ramping up their aircraft purchasing to serve the greater demand. Only concern with Bombardier is that their planes range on the smaller end so the routes they’d be able to service are limited.

  6. Interesting read, thanks Judy. The WTO legitimizes safeguards – emergency protection from imports – under certain conditions, especially in events where local industries have been hurt or face the threat of severe economic downturn due to surges in imports. In the case above, can Boeing justifiably demonstrate that its business, in the United States, has been hurt solely by “aircraft imports?” Further, safeguards ought to come with an expiry date (they can’t be imposed indefinitely). Can Boeing, and the broader airline industry, demonstrate that their businesses run the risk of severe economic downturn in this case indefinitely?

  7. Interesting read!

    I would argue that irrespective of size of the Bombardier’s planes and whether Boeing has any products of that range or not, that the United States is justified to restrict imports from Bombardier and Boeing has a valid plea (It will be interesting to see how this is decided next year). Think about it, a local incumbent (Boeing) has made significant investments to produce bigger fleet suitable for its market, based on some cost-size considerations. Then a foreign player operating in a much different cost environment (assuming labour and energy are cheaper in Canada vs the US), add government subsidy on top of that, is selling into the local market without controls. That is fundamentally unfair not only to Boeing, but also to Americans – If this continues, Boeing’s employees will lose their jobs to save Bombardier’s Canada workers.

    This is similar to the issue affecting the airline industry: government-subsidized Middle Eastern carriers crashing into open skies in other markets and causing downward pressure on fares. While competition is good, it has got to be fair!

  8. Very interesting read Judy, thank you!

    I think from a company standpoint, given their recent financial difficulties, it would not be realistic to assume Bombardier can actually expand its supply chain to USA. Also, given how US government sided with Boeing, I think there is a substiantial risk that they might make this potential expansion relatively difficult and even more expensive for Bombardier. Because I think Boeing’s stance in this issue is not only related to the fact that Bombardier received government support, I think there is a genuine (and rightfully so) concern about losing market share to Bombardier. I agree with Marc D in that Bombardier actually poses a great competition to manufacturers like Boeing and Airbus as it offers a product that the two dominant players don’t and hence it can address an untapped demand in the market.

    Going forward, I expect US government to remain its position in this matter as they don’t really have a strong incentive for not doing so. But it will be interesting to see if Bombardier will gain further demand in the US market despite its higher prices. If they do, I wonder if Boeing will respond by changing their classical offering and go into smaller planes segment.

  9. Globally, political shocks are a big reality of doing business. Companies need to strategically prepare and develop risk management systems to absorb such shocks. In this case, M&A with a competitor without similar restrictions was viewed as an optimal option. I believe an important lesson here for companies is the need for them to accept the new reality and prepare to adapt accordingly.

  10. The US has a long history of protecting industries that it sees as being potentially vital in a military situation. We’ve seen this extensively in shipping where there’s a longstanding requirement set forth by the Jones act that all transportation of US goods between US ports has to be done by US ships and we’re seeing it again here. While these regulations likely do help us keep industries that would be useful in wartime alive I think that we’re starting to really see the consequence they have in situations like the one outlined in this article. In my opinion it makes even less sense when we are enforcing these regulations against countries that have been our longstanding military allies.

  11. Thanks Judy, very interesting! Bombardier seems to be faced with some critical decisions. In addition to those you’ve outline, I might consider some other possible approaches/respones:

    -Pursue more strategic partnerships with U.S. airlines that may have more influence over he U.S. government, which could ultimately make the issue of isolationist policy less black and white; if the U.S. government takes actions against Bombardier, they would, in theory, be taking actions against Bombardier’s partner airlines (the more of which are based in the U.S., the more difficult those actions become). That being said, it seems that political arguments do not always look beyond first order considerations (i.e., simply the direct impact on Bombardier), and so I’m not sure how much this would ultimately change the behavior of the government.

    -I wonder how realistic it would be for Bombardier to enter the U.S. with a larger manufacturing footprint. I was surprised to see that Airbus has a facility in Alabama- I would be very curious to learn more about the political considerations and regulatory process for establishing that plant. Additionally, the start-up costs for such a plant would seem to be prohibitively expensive.

    -Finally, I wonder whether it is at all feasible for Bombardier to consider a partnership with Boeing or another U.S. OEM. Though it seems counterintuitive to partner with a competitor, I wonder if this angle with some sort of JV structure might allow Bombardier to circumvent some of the issues facing its supply chain while also keeping an eye on the competition in the U.S.

  12. Perhaps monopoly isn’t so bad, though. Sure, the word monopoly has been disparaged to the point that one might think the US Constitution contained an open declaration against it. But some of the world’s great monopolies have been very good to the world. Competition in business, although good for consumer pricing initially, causes companies to lose their margins and profits, thereby limiting what they can put back into their businesses. In the case of Boeing, hurting their profits might hurt their R&D efforts, especially R&D of projects that might benefit humanity greatly but with little odds for success. Boeing has been very good for the world. I’m not sure if it’s so bad for the US to protect their monopoly.

    1. To consider in light of Malcom’s comments on monopolies above — but what if lack of competition actually *slows* innovation (Boeing would know it always has the best product, regardless of R&D investment or advancements made), further limiting the impact these companies can have on humanity? Of course there are other factors that drive innovation (for Boeing, demands of its government contracts, for example) but competition is an important one, and I don’t think protecting the monopoly would necessarily have the benefits you describe above.

  13. It’s interesting that Boeing is pursuing this strategy at home, while it faces similar obstacles abroad. On one hand, it is interesting to see many commenters supporting US’s trade restrictions, but I wonder if the consensus shifts when people understand the reciprocal pressure that China places on Boeing. (1) In the last few years, Boeing has had to open up its first non-US manufacturing facility, and it may be induced to engage in technology transfers with China’s state-owned airplane maker. At the core of this situation, China is keen to acquire advanced technology and the United States is keen to protect its jobs — these two fundamental orientations define each of their protectionist policies towards foreign airplane makers.

    (1) https://digital.hbs.edu/platform-rctom/submission/how-to-lose-1-trillion-boeings-struggle-to-capture-chinas-commercial-jet-market/?section=7751&sort=rand

  14. Thank you for the thoughts. What is conspicuously missing from your assessment of Bombardier is that Canada offered over $3 billion in loans, equity infusions, grants, and tax credits to Bombardier. Bombardier was on the verge of bankruptcy two years ago before federal and provincial governments buried the company in bailout money. (https://www.forbes.com/sites/lorenthompson/2017/09/21/why-washington-is-certain-to-find-canadas-bombardier-guilty-of-trade-abuses-next-week/#1a0e3b6412d6). These subsidies allow Bombardier to sell its aircraft at artificially low prices.

    This is not a case of American isolationism. This is a case of steep anti-subsidy duties protecting against Canada’s violations of the World Trade Organization standards.

    The US is not the only country who sees this as unfair. At Brazil’s request, the World Trade Organization is now investigating Bombardier for violating WTO rules (https://www.bloomberg.com/news/articles/2017-09-29/wto-to-probe-canadian-jet-subsidies-in-new-blow-to-bombardier). I commend the US and Brazil for enforcing a level playing field in trade and preventing Bombardier and Canada from engaging in predatory practices.

  15. Interesting situation to deal with! Judy, even though Boeing did not bid for the contract, the danger of another Airbus case that you mention is a more than sufficient reason for Boeing to ostracize Bombardier. In theory I agree with Messi that in the moment you have subsidies, you are not in the pure free-trade camp anymore, so if a government is involved on one side, it is fair that the other side government will be involved as well. However, as Judy mentioned, state subsidies are key in this industry, so this situation is trickier than others. For this reason, it is important that the Canadian and UK governments try to find an agreement with the US government, given also the fact that these counties are close allies with similar political views (except for Canada). Without a clear definition of intent from these governments, it is impossible to solve this issue.
    If I were managing Bombardier, I would try to expand Bombardier outside of US, hoping that the government lobbying efforts are successful in the meantime. Strategies like M&A and supply chain expansion are not realistic, since the company is not able to support capital intensive initiatives. I would also avoid the collaboration with Airbus, since it might lead to a weaker control of your operations and possibly a future acquisition from Airbus.
    In conclusion, Bombardier has the interest to enter the US market more strongly if it wants to become a major player in the industry, but it needs to have lower risk before doing it. It is a good strategy to temporarily expand outside US and encourage governments to get involved during this time. Such a tricky issue can’t be solved without governments being involved. Governments have great interests at stake in this issue as well, so Bombardier has good leverage to convince them to get involved.

  16. Thank you for the interesting read, Judy. I do think, however, that this is not entirely an example of isolationism from America — as pointed out by Sergio as well. The point about where should governments and policies fall on the spectrum of being entirely nationalistic (selfish) to being charity organizations for other nations, really resonated with me. In this case, I think the US is doing the former, but with good reason and isn’t really isolating the other nations but just doing more for themselves.

  17. Thanks for this post Judy! Your last two questions stuck out to me in particular as I was hoping to understand, is the isolationism policies a matter of this U.S. government administration or does one have the ability to wait production out until a more favorable administration rolls back policies? I would assume with Lobbying efforts by Boeing (a major player in U.S. aerospace) that there ability to reverse policy in the future will be difficult to do, but I do think there is an opportunity for Bombardier to expand outside U.S., as it has, and wait on Alabama production. I do understand that this doesn’t curb the 4500 employees it will need to manage in this arena; however, I think to remain viable, Bombardier simply needs to be patient and strategic.

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