A joint venture deal between GE and a Chinese military-jet maker will strike at the very heart of the existing Boeing/Airbus duopoly in control of most of the world’s large commercial jet market.

The Wall Street Journal reports China Squeezes Foreigners for Share of Global Riches

Foreign companies have been teaming up with Chinese ones for years to gain access to the giant Chinese market. Now some of the world’s biggest companies are taking a risky but potentially rewarding second step—folding pieces of their world-wide operations into partnerships with Chinese companies to do business around the globe.

General Electric Co. is finalizing plans for a 50-50 joint venture with a Chinese military-jet maker to produce avionics, the electronic brains of aircraft. The deal with Aviation Industry Corp. of China would give GE access to a Chinese government project aimed at challenging Boeing Co. and Airbus in the civilian-aircraft market.

General Motors Co. established a joint venture this year with SAIC Motor Corp., its longtime partner in China, to produce and sell their no-frills Wuling-brand microvans in India, and eventually in Southeast Asia and other emerging markets as well.

The two deals show China Inc.’s growing international ambitions, as well as its increasing leverage over foreign partners. To make the GE deal happen, GE Chief Executive Jeffrey Immelt made an extraordinary concession, agreeing to fold into the venture all of GE’s existing world-wide business in nonmilitary avionics. GM, in its deal, contributed technology, its manufacturing facilities in India and use of its Chevrolet brand name in that market.

End of the Duopoly

Please consider Competition between Airbus and Boeing

Competition between Airbus and Boeing (sometimes referred to as the “Airliner Wars”) is a result of the two companies’ domination of the large jet airliner market since the 1990s, which is itself a consequence of numerous corporate failures and mergers within the global aerospace industry over the years. Airbus began its life as a consortium, whereas Boeing took over its former arch-rival, McDonnell Douglas, in 1997. Other manufacturers, such as Lockheed and Convair in the USA and Dornier and Fokker in Europe, have pulled out of the civil aviation market after disappointing sales figures and economic problems. The collapse of the Eastern Bloc and its trade organisation Comecon around 1990 has put the former Soviet aircraft industry in a disadvantaged position, although Antonov, Ilyushin, Sukhoi, Tupolev and Yakovlev develop new aircraft and gain a small market share. All this has left Boeing and Airbus in a near-duopoly in the global market for large commercial jets comprising narrow-body aircraft, wide-body aircraft and jumbo jets. However, Embraer has gained market share with their narrow-body aircraft in the Embraer E-jets series. There is also a similar competition in regional jet manufacturing between Bombardier Aerospace and Embraer.

In the decade between 2000 and 2009 Airbus received 6,452 orders, while Boeing received 5,927. Airbus had higher deliveries between 2003 and 2009, but fell slightly short of Boeing’s deliveries, delivering 3,810 aircraft compared to Boeing’s 3,950. The competition is intense, and each company regularly accuses the other of receiving unfair state aid from their respective governments.

There is a lot more information in the above link. Inquiring minds will give it a closer look.

Short and Long-Term Risks

The obvious long-term risk is China ends up with GE’s technology then later dumps GE as a partner. Short-term, this deal will cost Boeing and Airbus jobs in the US and Europe respectively, starting as soon as production begins.

Moreover, this will put huge wages pressures on Boeing and Airbus. Think Aviation Industry Corp. of China is going to pay US union wages and benefits to its workers? The hollowing out of US manufacturing marches on.

Already Boeing and Airbus are continually griping about who is getting more government subsidies. Expect both companies to quickly start bitching about Chinese government subsidies.

Finally, look for large commercial jet prices to drop. That’s what competition does, and that’s the good side of this deal. Regardless of how you see it, we can safely add this news item to the list of deflationary pressures.

Mike “Mish” Shedlock
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