March 26, 2018

China-US Tariff & Trade Issues…

Effects On Boeing & China-US Travel: Minimal

The Wall Street Chicken-Littles Are Very Ill-Informed

With a supposed trade war coming with China, Boeing’s in line for some tough times.

At least that’s what we are told.

The financial-sector gurus are out in full force, many predicting dire outcomes for China-US aviation as a result of the imposition of tariffs on certain goods from China.

We’re pretty much assured, according to the implications of some of the reporting, that the US consumer and the US economy are going to take it in the keester, because China will retaliate.

Already we’ve seen dire stories coming from other sectors of the economy… supposedly.

One financial media source recounted in an editorial how one small manufacturer has had to lay off staff due to the increase in steel prices, even though they supposedly were using US-made metal.

The bottom line was that, because underpriced Chinese steel was going away, US sources no longer had that price-pressure. Meaning, they didn’t have the market imperative to respond to unfair import competition.

But that wasn’t the take in the article… which curiously recounted something that supposedly took place within days of the announcement – not the actual implementation – of the tariffs on cheap Chinese steel. But the story was positioned as sort of the harbinger of things to come.

China & Boeing: This Isn’t Econ 101. It’s Global Inter-Dependence 401. Unfortunately, there’s a lot more to this than what’s coming from many of the Wall Street shamans, some of whom probably couldn’t tell “China” from a gift-set of Melmac.

The fodder of choice, it seems, tends to be dire warnings of this economic conflict hammering Boeing, and in the process zapping the entire supply chain, sending US workers to the unemployment line.

The Chinese, according to some of the supposed experts, can just switch to Airbus and leave Boeing bone-dry in the exploding China aviation market. Any look at production rates at Airbus would embarrass the folks putting this stuff out.

Or – watch the newswires, this one’s coming – the warning that China could just rely on buying indigenous airliners such as the C-919, oblivious of the fact that this machine won’t be market-ready for at least three years.

Indeed, these prognostications have reportedly caused Boeing stock to drop by over 5%, regardless of the fact that most of these stories are not based on hard market analyses… just Econ 101 assumptions.

Industry Expertise Not Needed. One financial media source last week actually warned that China has an immediate replacement for their orders for Boeing airliners. See, there are over 900 airliners coming off lease in the future, the story confidently reported, and then told the readers that China could simply “swoop in” and take those units in the place of buying new Boeing products.

Sure. Just pick’em up right off the desert showroom. No need to consider age, condition, engine configuration, airframe and component time, pending maintenance bulletins and a.d’s, maintenance bridging, compatibility with existing fleets, etc. Nor the fact that historically, China has not bought used aircraft.

But, such considerations are not important – nor is industry knowledge – when the goal is to fill several column inches.

It’s this type of veneer reporting that causes runs on stock prices… and misleads the public.

It’s not “fake news” – that’s when somebody actually knows the facts and reports something dishonestly different. This, however is simply irresponsible and amateur opinions represented as expertise.

Some Facts Not In Evidence. What a lot of this reporting doesn’t understand is that Boeing aircraft are global in scope. Parts, components and technology of their products come from all over the planet. While China is not a major direct sub-contractor for, say, the 787, Boeing does have a finishing center in China, and components for its aircraft coming out of the factory in Renton are certainly sourced in China by sub-contractors.

Another point: China is in need of lift. BGI’s Airports:China™ forecasts illuminate the fact that the domestic Chinese airline system is nowhere near reaching its stride in regard to meeting current demand.

The China market is such that there is no true US-style hub-and-spoke system, which takes passengers from several points and aggregates them on other flights. While on paper, it appears that there are plenty of options for connections at some airports, a closer review shows that today, the vast majority of traffic is between cities.

Aggregation between Mianyang  and Kunming isn’t needed. Just capacity. The vast demand between large commercial centers is a long way from being met… which means that China cannot economically afford to cut Boeing off… they need the lift.

It’s Boeing Or Loss of Economic Growth. Underscoring this, last week – amid all the dire shallow-fact stories warning about Boeing’s “problem,” China Southern confirmed orders for 30 more 737s, and Xiamen Airlines did the same for an equal number of units.

It’s unfortunate that so many of the folks in the financial media are simply not versed in the dynamics of the Chinese air transportation system. They just assume that the orders for new jets can be turned off and on.

Point Made: The two airlines noted above need the lift that these Boeings will deliver… and they do not have easy alternatives. They could cancel the order, but that would self-inflict huge economic damage to a nation that needs this capacity – as soon as possible.

Conclusion: The last thing China can afford is choking off Boeing. Airbus can’t fill the gap – not to mention for several Chinese Boeing operators, that would mean introduction of an entirely new sub-fleet, which is not an easy thing to do.

China & US – Partners. It’s Not Two Separate Markets, Anymore. Plan on this: The emerging Kabuki Theater between the US and China is not one where China holds all or even most of the cards. They are a producer nation – with @18% of their exports coming to the US. That’s a chunk of business they cannot do without.

Plus, some of the tit-for-tat tariffs proposed by China don’t make much sense within the inter-connected global economy. One example is the Chinese threat to put a tariff on pork from the US.

Oops, two little problems… pork is a major food item in China, and the supplies from the US are critical to that supply. Not to split hairs, but it’s China importing pork from the US, because it’s a needed food staple. So, it’s Chinese consumers who get zapped at the dinner table.

The second leeetle problem is that much of the US pork industry is now owned by, yes, Chinese companies. So, they get the short end, too.

Okay, What About China-US Passenger Traffic? We’ve seen where political disagreements have resulted in dictums from the Chinese government that have decimated the strong tourist traffic between China and Korea. And China and Taiwan.

This certainly could be an option in regard to retaliation for the US tariff program.

But, it’s not likely. First, the current channels of capacity between China and the US are essentially choked due to a variety of factors – one being lack of nonstops from interior Chinese cities, and another being the non-existence of a true hub-and spoke system that could develop more nonstops.

BGI Airports:China™ forecasts indicate that outside of Beijing, Shanghai and Guangzhou, the rest of China is generating less than 10% of the demand that can be expected with increased capacity channels. Regardless of actions to blunt Chinese from visiting the US, the demand is such that it would not likely be noticed.

Furthermore, the China-US relationship has progressed well beyond the simple tourist-group stage, which is the case with Chinese traffic to places like Korea, Taiwan and Thailand.

Between business travel and the demand generated by the @400,000 Chinese students in the US, passenger movements between the two nations is much more solid and fundamental that just folks wanting to take a vacation. It’s far from being just discretionary travel.

Don’t Buy Into The Financial Chicken-Littles. Boeing Needs China. But China Needs Boeing. China respects strength. The US is finally addressing imbalances in the trade relationship – which the Chinese government will rail about, but which internally they understand.

So, regardless of all the me-too stories about Boeing being in line for huge damage due to the US tariff moves, the hard underlying fundamentals show that this is one area that China will be very reticent to mess with.

Regardless of what the “experts” on Wall Street are telling us.