I. Company Ov Overview BOEING Boein Boeing g is the the world world’s ’s larg larges estt aeros aerospa pace ce comp compan any y and and lead leadin ing g manuf manufac actu ture rerr of commercial airplanes and defense, space and security systems. It supports airlines and U.S. & allied government customers in more than 90 countries. Headquartered out of Chicago Boeing employs more than 160,000 people across the United States and in 70 countries Products include commercial and military aircraft, satellites, weapons, electronic and defense systems, launch systems, advanced information and communication.
AIRBUS Headquartered in Toulouse, Airbus is owned by EADS, a global leader in aerospace, defence and related services. This group – which is comprised of Astrium, Cassidian and Euro copter, in addition to Airbus – has a presence on every continent, and employs a total workforce of more than 119,000. Airbus itself is a truly global enterprise of some 52,000 employees, with fully-owned subsidiaries in the United States, China, Japan and in the Middle East, spare parts canters in Hamburg, Frankfurt, Washington, Beijing and Singapore, training centers in Toulouse, Miami, Hamburg and Beijing and more than 150 field service offices around the world. Airbus also relies on industrial co-operation and partnerships with major companies all ove over the worl orld, and a net network of some 1,500 500 suppliers in 30 countr ntries.
Page | 1
In the decade between 2000 and 2010 Airbus received 6,657 orders, while Boeing received 6,457. Airbus had higher deliveries between 2003 and 2009, but fell slightly short of Boeing's deliveries, delivering 4,320 aircraft compared to Boeing's 4,412.
II.
Dispute 1. How did the battle begin?
In the 80’s and 90’s, Airbus was obtaining subsidies from the European governments. And, the US Government supported Boeing and McDonnell Douglas. But the subsidiary created many controversies so in 1992, EU and US governments met and signed the bilateral EU-US agreement. This agreement was signed with the hope of ending the long-standing disputes between Airbus and Boeing. The agreement limited direct government subsidies. It states that commercial airplane companies can receive repayable government loans for up to one-third of the development cost for a new airplane and that such subsidies had to be repaid with interest within 17 years. The agreement also limited indirect subsidies such as government supported military research programs to 3% of total revenues. The main objective of this agreement was to create more transparency in an industry that has a past of being unclear. •
•
•
After the 1992 Agreement, both parties somewhat still violated the rule and the battle reached its highest peak when the United States, in May 2005, filed a case against the European Union for providing allegedly illegal subsidies to Airbus. Twenty-four hours later the European Union filed a complaint against the United States protesting support for Boeing. In March 2010, the WTO ruled that European governments unfairly financed Airbus. The WTO delayed its ruling on the European Union's complaint against US state aid for Boeing. In September 2010, a preliminary report of the WTO found unfair Boeing payments broke WTO rules and should be withdrawn. In May 2011, World Trade Organization judges agreed that government loans to help Airbus develop the world's largest jetliner, the A380, had not broken a ban on export subsidies, which is the most severe category of market-distorting aid. - However U.S. officials said the WTO backed complaints that Europe's aircraft giant had received $18 billion of softer subsidies that still unfairly hit Boeing and its workers. So, WTO gave the European Union six months to withdraw the subsidies or eliminate their effects. - Both sides claimed victory after the WTO issued its latest report in what has become the world's largest trade dispute, affecting over 100,000 aerospace industry jobs.
Page | 2
The battle between them is still going on fiercely after the WTO litigation, as we can see in the marketplace like the Paris Air Show video that you’ve just watched. We will give some more facts on their backgrounds and on how and what Boeing and Airbus have done so far to compete each other.
2. SWOT Analysis The main differences European government supported Airbus while Boeing was backed by US Boeing use Just in Time, and Airbus use manufactory •
Strengths
It is the largest aircraft manufacturer globally, it has given the most of the orders for aircraft manufacturing and it delivers aircraft to large no. of developed and developing countries. Its rank as defense contractor with different countries is second. Mostly defense fighter aircrafts also manufactured by Boeing. The designs of Boeing’s aircrafts are efficient. There is no fault in its designs. Its production system is also very efficient that’s why most airlines and countries order Boeing to manufacture their aircrafts. The engineers working in Boeing are also efficient, skilled and competent. They are also the reason for Boeing’s success because without competent workforce no organization can survive. It also has the Strength of product diversification, it not only manufactures commercial aircraft but also manufacture aerospace and defense aircrafts. There is a big difference in commercial and defense aircraft from every aspect. Another reason of its largest manufacturer is that it offers competitive price which is not so high that’s why developing countries also order to Boeing. It has strong customer base national and international both. And it has the good reputation regarding quality of the products that’s why its products are reliable. •
Weaknesses
The corporate governance of Boeing is not good that’s why the employees are not happy with its internal policies and procedures which is one of its weakness because when
Page | 3
employees are not satisfied; their performance would also be affected which also affect the productivity of the workers as well as the productivity of the company as a whole. Cost of developing an aircraft is very high which put burden on the company. It relies on suppliers and component manufacturer so that they can be the reason of loss by delay or end the supply which can also affect the reputation of the Boeing as well. •
Opportunities
The rapid advancement in technology will bring advancement in aircraft as well. Through the advanced technology light wait aircrafts can be created. And the defense aircrafts of longer range can also be made through technological advancement. Through the expansion of market it can increase its sale and capture more market share. As the demand for aircrafts is increasing world wide so it would be great opportunity for Boeing to expand its market. In Asia the customers for defense as well as commercial aircraft is increasing rapidly so Boeing has the great chance to capture Asian market before competitors reach there to capture that market. Through the innovation in products it can attract more customers and can increase its sales as well. •
Threats
Its main competitor is Airbus which is offering the discount in its products because it is subsidized by European common market. So it can take away its competitors by offering low prices. The competition of Boeing and Airbus is head to head so Boeing has to be alert. It should offer something different to counter attack the discount offered by Airbus. In most areas the focus is on refurnish the old aircraft rather than buy new ones which can decrease the demand as well as sales of the aircraft
3. Subsidies Subsidies historically were given to Boeing and Airbus to help them lower cost of developing new commercial jet aircraft. In Boeing’s case, subsidies came in the form of tax credit for R&D spending or Pentagon money that was used to develop military
Page | 4
technology, which then was transferred to civil aviation projects. In the case of Airbus, subsidies took the form of government loans at below-market interest rates. •
BOEING ATTACKS
In July 2004, Harry Stonecipher, CEO of Boeing at the time accused Airbus of abusing the 1992 bilateral EU-US agreement in regards to large civil aircraft support from governments. Boeing claims that Airbus has violated the agreement in a number of ways. 1. The Europeans haven't repaid the loans or the interest that has accrued on those loans. They have manipulated the accounting that takes advantage of the loopholes and allows them to avoid repayments. 2. They have failed to issue annual progress reports that spell out clearly where and when government money was received and paid back. •
AIRBUS BITES BACK
They point back to Boeing, charging the U.S. company has never fully complied with the other key provision of the agreement, which limits the indirect subsidies Boeing receives from defense and other government research agencies, for instance. In retaliation Airbus argued that the military contracts awarded to Boeing (the second largest U.S. defense contractor) were in effect a form of a subsidy. They claimed that the significant U.S. government support of technology development provided significant support to Boeing, as well as the large tax breaks offered to Boeing were also in violation of the 1992 agreement.
4. Outsourcing between Boeing and Airbus: Boeing and Airbus are still looking for the right balance in outsourcing, or at least for the right way to run the massively outsourced production organizations on which they base their latest airliner programs. Airbus had touted site divestitures as a means of limiting financial involvement in new programs but has not yet sold five of the seven sites that have been for sale since last year as part of its Power’s restructuring plan. Meanwhile, Boeing is endeavoring to regain control of its supply chain. The success of outsourcing in car manufacturing may have inspired both aerospace giants Page | 5
Because many of the world’s airlines are wholly or partially government owned, aircraft procurement decisions are often taken according to political and commercial criteria. Boeing and Airbus seek to exploit this by subcontracting production of aircraft components or assemblies to manufacturers in countries of strategic importance in order to gain a competitive advantage. What Airbus and Boeing have in common here is their willingness to transfer part of their risks to partners, and they are doing so to a much greater extent than before While Boeing and Airbus are both developing heir new line of airplane, their development efforts are kind of different from before. In the past, they were doing almost all the design and engineering in house. These days, they are increasingly outsourcing not only components but also design and engineering tasks to their international partners.
In order to do so, they are changing the product architecture and try to have the role of system integrators. Boeing has already outsourced more than 90 percent of the parts for its 787 Dreamliner and it's now outsourcing design and engineering as well. This might make sense in short term when financial issues are important but might not be a nice option for the future. For example, Boeing outsourced an unprecedented 70 percent of the content of the 787 to other manufacturers, most of them based in other nations. In contrast, 50 percent of the Boeing 777 was outsourced, 30 percent of the 767 and only 5 percent of the 707. Boeing has offered longstanding relationships with Japanese suppliers including Mitsubishi Heavy Industries and Kawasaki Heavy Industries by which these companies have had increasing involvement on successive Boeing jet programs, a process which has helped Boeing achieve almost total dominance of the Japanese market for commercial jets. Outsourcing was extended on the 787 to the extent that Boeing’s own involvement was reduced to little more than project management, design, assembly and test operation, outsourcing most of the actual manufacturing all around the world. Boeing has since stated that it "outsourced too much" and that future airplane projects will depend far more on Boeing's own engineering and production personnel.
Page | 6
European-based Airbus has decided to increase the outsourcing of parts China. Airbus will buy $60 million worth of components from Chinese companies in 2007 and $120 million by 2010. for example, in 2009 Airbus opened an assembly plant in China for production of its A320 series airliners. With the increase in its outsourcing efforts in the country, the aerospace giant hopes to further integrate the Chinese market in its supply chain and increase sales. The Battle between Boeing and Airbus in China •
In 1992, Boeing’s share of the world market for airliners was 70 percent. In competing with Airbus, Boeing had advantages; it was the dominant supplier of commercial aircraft, and its role as a major defense contractor underlined its political importance in Washington.
•
Two-thirds of the aircraft delivered to China in 2004 were from Airbus. But in sales of airliners with a hundred seats or more, Boeing had roughly 70 percent of the Chinese market at the end of 2005.
Both Airbus and Boeing still have to prove the new model can work effectively in aerospace, as it has eventually worked in the automotive industry.
5. 6. Effect of currency on competition Boeing's production costs are mostly in United States dollars, while Airbus' production costs are mostly in euros. When the dollar appreciates against the euro the cost of producing a Boeing aircraft rises relative to the cost of producing an Airbus aircraft, and conversely when the dollar falls relative to the euro it is an advantage for Boeing. There are also possible currency risks and benefits involved in the way aircraft are sold. Boeing typically prices its aircraft only in dollars, while Airbus, although pricing most aircraft sales in dollars, has been known to be more flexible and has priced some aircraft sales in Asia and the Middle East in multiple currencies. Airbus is squeezed financially by a weak dollar because planes are sold in dollars and enter the EADS accounts in euros -- a currency in which it also has a high proportion of its production costs. Depending on currency fluctuations between the acceptance of the order and the delivery of the aircraft this can result in an extra profit or extra expense - assuming Airbus has not purchased insurance against such fluctuations.
Page | 7
III.
Conclusion
The disputes that have arisen periodically in the aircraft industry between Boeing and Airbus have only lead to adverse effects on both these companies. The long drawn out and complicated litigation, with accusation and counter-accusations being field in the WTO, have lead to an unnecessary waste of resources that have harmed the company’s profits and performance. For example, one of the reasons why the shares of the Boeing Company took a downward turn after its merger with McDonnell Douglas was the dispute it had to settle with the EU before the merger could come through. It is in the best interests of everyone concerned to bring an end to these disputes. The company that loses litigation has measures such as fines imposed upon them by other members of the WTO, which raise their costs substantially. This impacts not only the company itself, but also airlines that buy their planes, manufacturers of components, and ultimate the traveller as well. It is in everyone’s interest to avoid disputes as far as possible, and the only way in which this can be achieved is to reduce the number of subsidies granted in direct or indirect ways, and finally wipe them out entirely. This would increase the levels of competition between Airbus and Boeing, which would ultimately benefit the taxpayers, since subsidies are paid out through the taxpayers’ money. While the argument in favour of subsidies is that the industry is often unable to remain viable on it own, instead of support from the government, other measures may be sought out. For example, in the production of the newest model, the 7E7, Boeing has shared the risk with the manufacturers who have contracts on the various parts of the airplane. By seeking alternatives, government subsidies could perhaps not lead to costly trade wars in which each company tries to outdo each other in terms of the subsidies received. It has been seen through the example of Airbus and Boeing that the level of competition in a duopoly are very high, and often lead to unfair trade practices which violate of existing norms and agreements. Government usually ever since Airbus outdid Boeing for the first time in 2003. The question of subsidies has been an especially contentious one since then, since Boeing claims that Airbus is now healthy enough to survive on its own without government support. It levies these accusations at Airbus while being granted enormous subsidies on it latest project, the 7E7. If the situation continued in this manner, the international civil aircraft industry would never be free from disputes.
Page | 8
