Opinion: Why Boeing’s Troubles In China Run Deep
China Southern Airlines’ Boeing 737 MAX flight on Jan. 13 was the first commercial operation of the type in China since the MAX was grounded in March 2019 following the Lion Air and Ethiopian Airlines MAX crashes. Boeing had delivered 97 737 MAXs to Chinese carriers before March 2019, and 138 more MAXs built for them are sitting in the U.S.
Before the grounding and the COVID-19 pandemic, China was the single most important market for Boeing and Airbus jetliners. At the November 2018 Zhuhai Air Show, Boeing management said the company delivered 202 aircraft to China in 2017 and expected to exceed that in 2018. The company’s stated deliveries (excluding those through leasing companies) were 161 and 192 aircraft for the two years, respectively (and a total of 1,000+ for 2011-18). China thus accounted for around one-quarter of total deliveries for Boeing and as much as one-third of the 737 program.
But this delivery rate collapsed in 2019 and has stayed low ever since: Boeing delivered a total of only 71 aircraft to China in the last four years.
It would be easy to attribute this decline purely to the pandemic—but that would be wrong. China’s “zero-COVID” policy involved lockdowns and restraints on travel that endured longer than in any other region. But Chinese airlines did take delivery of new aircraft in 2018-22: 561 from Airbus and 90 jets from domestic manufacturer Comac (including the first C919).
Boeing’s share in the Chinese market has fallen from more than 50% in 2019 to about 10%, putting it in the No. 3 position behind Airbus and Comac. Without pre-2019 levels of access and demand from China, Boeing’s total addressable market is around one-fifth smaller for the 737 MAX and at least 10% smaller for widebodies.
Aside from the relative weakness of the 737 MAX compared to the Airbus A320 family (and especially the A321neo), an even bigger problem is trade relations. Boeing is one of very few U.S. companies that has had a large positive trade balance with China. If Beijing is trying to exert leverage or retaliate over U.S. trade policy moves, Boeing is the obvious line of attack. Given the further deterioration of Sino-U.S. relations recently, especially regarding Chinese access to U.S. semiconductor technology, it is hard to feel optimistic about Boeing’s return to its previous scale in China.
During the company’s second-quarter 2022 earnings call, Boeing management referred to how the company was “de-risking” its Chinese exposure, including through remarketing undelivered 737 MAX aircraft previously intended for Chinese airlines. If carried through, that should reduce the backlog of undelivered MAXs and generate much-needed cash. But a more important issue is securing new 737 MAX orders from Chinese carriers.
Here, the issue of Boeing’s trade balance becomes a further negative. If China does as it has with every other manufactured capital good, the country increasingly will favor locally produced goods. In this regard, Boeing’s 737 MAX completion center in Zhoushan does not cut it: Installation of seats, painting and handover work is low-value. Airbus’ A320-family final assembly line in Tianjin has at least five times the labor content per aircraft.
A further twist comes from the recent certification of Comac’s 150-seat C919 narrowbody, which is in production and should enter service with China Eastern Airlines in 2023.
Comac officials’ recent statements that 150 C919s could be built annually by 2025 does not seem credible. No new airliner program has managed such a ramp-up, let alone in the current tight supply chain environment. But Comac’s smaller ARJ21 achieved a record 33 deliveries in 2022, and we forecast it will reach 60 aircraft annually through the middle of the decade. It is realistic to think the more modern C919 could reach 100 deliveries annually in the second half of the decade. This suggests that imported 737 MAXs likely will take third place in a market that both Western manufacturers forecast at around 300 aircraft per year.
The implications for Boeing are that 737 production likely will peak at closer to 40 per month than the 50 per month of 2018. A (weak) No. 2 position would be near-structural versus Airbus.