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  • U.S. Trade Ruling Against Bombardier Has Much Broader Industry Supply Chain Implications

    This week, a significant development occurred in the commercial aircraft sector, one that will likely have geo-political and trade policy reprisal implications that could likely impact aerospace and other industry supply chains down the road.

    Specifically, The United States Commerce Department ruled in favor of a direct compliant from Boeing alleging that Bombardier’s $5.5 billion sale of 75 regional C-Series jets to Delta Airlines had benefited from unfair subsidies provided by the governments of Canada and the United Kingdom. As a result, U.S. trade officials indicated they plan to institute a whopping 220 percent tariff to the cost of new C-Series aircraft sold to U.S. customers. A final decision on such a duty is not expected until next year but the likely repercussions are somewhat obvious.Swiss Maiden CS100

    Supply Chain Matters has featured multiple prior commentaries regarding the C-Series beginning in 2010. The C-Series is a 100-150 single-aisle passenger aircraft that was the cornerstone of the company’s plan to compete head-on with the duopoly of Boeing and Airbus for advanced, lightweight commercial aircraft that can deliver compelling fuel efficiencies for airlines, specifically for regional airline routes. We often viewed the program as one of bold innovation coming from an industry challenger. The development program encountered a rocky product development cycle, including sole use of Pratt and Whitney’s innovative geared-turbofan engines, all of which delayed the aircraft’s market availability for over three years. Upwards of $5 billion have been invested in bringing this aircraft to market. Now that the aircraft has entered operational service, reviews from airline customers have been generally quite positive in terms of operational efficiency and passenger amenities. The reality however was that delays caused Bombardier to burn excessive cash, which required additional financial infusions to sustain the company. The Delta deal alone, by some accounts, represents upwards of 20 percent of total current sales of the C-Series aircraft.

    Boeing alleges that the Canadian company sold 75 C-Series planes to U.S.-based Delta Air Lines at “absurdly low prices,” while benefiting from unfair subsidies from the Canadian, Quebec and British governments. However, both Airbus and Boeing elected not to develop a direct competing aircraft to the C-Series, but instead concentrated on aggressive marketing and sale of new lines of single-aisle, more fuel efficient aircraft that carry higher numbers of passengers with higher list prices. With the Delta Airlines order, Bombardier has gained some traction within the U.S. market and we can only surmise that Boeing is not pleased.

    Aerospace industry teams know all too well the strategic role that the industry has for economic growth and employment not only for manufacturers themselves but on large-scale, globally based supply chains.  Government subsidies, either direct or indirect, are known industry realities principally because of the vast economic influence of the industry, including being a major impetus of global trade flows. The question debated is often the degree of such subsidies. Current multi-year backlogs of customer orders sustain the magnitude of such impacts. While Canadian and UK government subsidies to Bombardier are evident, Airbus and Boeing have their own trojan horses. In November of 2016, a World Trade Organization (WTO) panel ruled that upwards of nearly $6 billion of prior tax incentives provided to Boeing for its newly planned 777X program improperly excluded foreign competition. Two months earlier, the WTO had found that the EU had failed to unwind billions of dollars in unlawful subsidies to Airbus.

    The broader implication of this week’s development are the geo-political dimensions related to trade policies. Both The Wall Street Journal and the Financial Times have pointed out that aerospace industry participants know all too-well that cutting list prices to boost sales is common business practice. Early next year, the US International Trade Commission must determine whether Boeing suffered direct implications because of the Delta deal. That could be troublesome since Boeing has no directly competing aircraft in the regional airline market. The U.S. sanction ruling will likely proceed to a subsequent ruling from the WTO, and industry consensus seems to lean toward the U.S. sanction ruling likely not coming to pass.

    For the broader multi-industry supply chain management community, noteworthy trade implications are at-stake.

    We have highlighted in a prior commentary that major shifts in trade policies are at-stake with ongoing talks involving the Trans-Pacific Partnership (TPP) and the North American Free-Trade Agreement (NAFTA). One key tenet to TPP is broader access among members to individual government procurement programs. Both China and the EU are actively positioning to become de-facto leaders of more liberal and modernized trade policies among major Asian nations.  Earlier this year, the United States elected to pull-out of its prior commitment to TPP.

    With this week’s ruling, both Canada and U.K. are now threatening to spark a trade war, including a threat to not consider Boeing in pending defense equipment acquisitions. Like most all of today’s aerospace manufacturers, Bombardier’s C-Series supply chain is global in scope and includes upwards of 4000 direct employees in Northern Ireland, and an additional 9000 supply chain related employees across the UK. Prime Minister Theresa May’s Conservative government recently struck a deal with an influential Northern Island political party to gain a working majority in the UK Parliament because of the snap Brexit referendum election held in June. Thus, a potential spillover of political dimensions relates to ongoing Brexit with EU nations.

    The NAFTA re-negotiation talks are also underway, and one of the 100 declared objectives of the United States is to eliminate what is termed Chapter 19, a defined process to arbitrate trade disputes among NAFTA nations without resorting to local court rulings. Already, Canadian media is pointing out why the Bombardier ruling demonstrates why Chapter 19 matters in NAFTA. Noted was that Chapter 19 was the proverbial line-in-the-sand for Canada in the original 1988 NAFTA agreement.

    Both Canada and Mexico have previously reacted to perceptions that the U.S. would try to enforce domestic market protectionist policies in a revised NAFTA and this week’s punitive tariff ruling adds to that perception, not only for the North America regional agreement but other ongoing bi-lateral and international trade agreements as-well.

    The takeaway of our long narrative is that the Trump Administration along with Boeing’s efforts to publish Bombardier have much broader global trade and industry supply chain implications that could well lead to even broader protectionist policies.

    Bob Ferrari

    © Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

    1 Comment

    1. Hello Everyone,

      We have a late-breaking update to the above blog related to Boeing’s challenge to Bombardier’s sale of C-Series aircraft in the United States.

      The CEO of JetBlue Airways is urging the US International Trade Commission to reject Boeing’s call for tariffs to be imposed on Bombardier’s C-Series. In a September 24 letter to the Commission, a statement reads in-part:

      If the petitions prevail, JetBlue will lose access to a competitive and innovative platform that could bring significant benefits to the American flying public.”

      The letter to the commission indicates that the C-Series is the only aircraft offering a five-abreast interior which has won praise from commentators and other airlines.

      JetBlue itself has been conducting a fleet review which includes review of its current smaller Embraer 190 aircraft fleet. The bulk of the airline’s fleet consists of Airbus A320 aircraft.

      The JetBlue statement adds more credence to arguments of an open U.S. market for smaller aircraft manufacturers to compete within.

      Bob Ferrari

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