The Bombardier-Boeing Dispute and the Chinese Factor

By Danny Lam

Airbus has taken control of a new “partnership” of 50.01% Bombardier C-Series, 31% Beaudoin/Bombardier, and Quebec 19%. Jobs in Canada and Northern Ireland are safe and secured, and the May government can move forward. Airbus is contributing management, marketing, facilities in a plant in Alabama, and technology.

The Quebec government’s former 49.5% ownership stake in the C-Series program purchased for US$1billion, which has since been diluted to 38% has lost 50% by additional dilution to 19%.  Bombardier’s present share of 62% is now down to 31%, or down 37%.  The Quebec government by far, took the biggest hit to finance this deal.

Not only do Airbus not contribute cash to the deal, but Bombardier is obligated to fund early production and cash shortfalls up to CAD $700m for the first 3 years.Airbus also obtained warrants for 100 million shares in Bombardier and rights to buy out the limited partners.At inception, the partnership has no debt.

If we assume that the C-Series partnership is worth US$1 billion, then Airbus basically picked it up for US$500m, or not much more than the price of one A380 jet at list price (about US$440m).

But when one looks at the deal — one always need to argue what are the alternatives.

As it stands, with the 300% tariff on C-Series, any shipment (let alone orders) into the US market is out for the indefinite future until the matter is resolved.  Resolving it through the US domestic process, NAFTA or WTO arbitration can take years. Effectively barring the C-Series from the world’s largest market.    Meanwhile, anti-dumping and countervailing duties (AD/CVD) assessed have to be paid — nearly impossible at 300% for a cash strapped company.

The proposed deal enable this problem to be sidestepped by the Airbus manufacturing facility in Mobile, Alabama.

Bombardier, for all their talk about the China market, have sold exactly zero C-Series there despite an intensive marketing campaign. Since Spring 2017, Bombardier have been in talks to transfer technology and knowhow to PRC in exchange for cash and the promise of some sales.

Had the deal happened, it would have been a disaster for the global aviation industry as Chinese manufacturers absorb the knowhow, disburse the technology widely and flood into the market like they did in steel, aluminum, solar PV, etc.   

Bombardier was courting bankruptcy — and to them, helping the Chinese destroying the Boeing-Airbus oligopoly was an expedient solution.  Moreover, the “shell” of Bombardier, under present NAFTA rules, will enable Chinese made civilian airlines to be imported as “domestic NAFTA” content, bypassing US AD/CVD protection.

Boeing had few options given the threat that Bombardier’s behavior caused to their largest 2 markets:  USA and China. Selling technology and knowhow is not strictly speaking, illegal, so they complained about the one thing they can complain about:  Dumping.

What Boeing did not foresee is how Bombardier and the government of Quebec and Canada reacted:   by launching a massive political campaign against Boeing, pulling out all stops including explicit threats to not buy Boeing by the Liberal regime of Canada: Tightly tying Canadian trade with defense.

Threats made by the Prime MinisterForeign and Defense Ministers, and Canadian Ambassador MacNaughton to cut off trade (business) with Boeing is one thing, but then Canadian officials persuaded Prime Minister Theresa May to lobby President Trump and UK officials made similar threats against Boeing.

Bombardier had a plant in Northern Ireland, which has 10 MPs from the Democratic Unionist Party (DUP) in a coalition with Theresa May’s minority Conservatives. Withdraw of DUP support will cause the UK government to fall, necessitating new elections.

Intense lobbying of DUP MPs resulted in considerable pressure on the May government, causing her government to utter the same threats as Trudeau’s Liberals:  Michael Fallon, UK defense secretary, warned Boeing’s complaint on Bombardier “could jeopardize its chances of securing government contracts.”

But there is one more complication.

Theresa May’s government failed to cause the US to back down despite these threats made in concert with the Trudeau regime.  Her government was branded ineffective, her threats “fluffy words” by the GMB (union) representative Ross Murdoch. It also became an issue for anti-BREXIT forces.

Had the criticism of Theresa May continued with her government unable to convince the US or Boeing to pull back within 2 months, Bombardier’s precarious cash cushion will mean that large layoffs will be required in Northern Ireland and Montreal, Canada, just before Christmas.

Under these circumstances, DUP will almost certainly withdraw their support and the May government will fall.

If the May government fell, elections will have to be held right around the new year, when UK will be deep in the midst of preparation for the coming conflict with North Korea.   More than likely, the Korean conflict and UK’s participation in it will become an election issue.  There is every possibility that Labor’s Jeremy Corbyn would win, and his cabinet will either refuse or pull UK participation in the war.

If the US lost UK support for the Korean conflict, they would have lost not only the single largest military contributor to the alliance with about 10% of the deployable force to the Korean peninsula, but also the diplomatic support that UK traditionally provides to nudge along any reluctant allies to join the coalition.    That would be a disaster for the US exercising a military option.

Not fatal, but very undesirable.

UK and Canada going to extreme lengths (including threatening embargos on Boeing) can be understandable if there are large number of jobs at stake in politically sensitive jurisdictions for the ruling party. When it was revealed on October 9, 2017 in the authoritative Aviation Week that was in fact, not the case, but the cause was actually Bombardier’s efforts at busting the Airbus-Boeing oligopoly with the PRC, which will threaten the aviation and defense industry – the top exporter who employ millions in high paying jobs in EU, America and most OECD nations, politicians abruptly changed tact.

President Trump confronted Prime Minister Trudeau about Bombardier and the Canadian Liberal party’s Chinese Trojan horse strategy when they met on October 11 at the White House. Prime Minister Theresa May abruptly stopped her government promoting Bombardier’s cause once she was briefed.  The anti-Boeing / ITC campaign by UK and Canada ceased after Oct 11.

By Sunday, Oct. 15, it was revealed that Bombardier was seeking to sell off divisions. On Monday, the sale of the C-Series “partnership” to Airbus was announced.

It is highly unusual for such rapid fire abrupt turns or changes in foreign policy by major OECD nations within a span of a week unless vital interests are involved. As it turned out, Bombardier’s selfish, mindless pursuit of the Beaudoin family interests resulted in the Canadian Liberal regime going “all in” mobilizing all of Canada’s economic and diplomatic muscle, including enlisting the aid of close allies like UK, to compel the US to back down on a trade dispute.

The Trudeau regime made it look like it is about Canadian and UK jobs, when in fact, they were supporting a strategy that would have accelerated the progress of the mercantilist PRC’s aerospace industry by decades.    

Robert Spingarn (Credit Swiss) described the Bombardier strategy as a joint venture with the PRC where;

“Canada would contribute a share of the program, allowing China to access first rate aerospace technology.    China would contribute capital and likely place a major order for the aircraft.”

The only problem is that technologies, once transferred, are “out the door.”

Chinese companies have a longstanding habit to distribute the technology acquired to other Chinese companies, and before too long, rather than one national champion, there are tens, then hundreds of provincial and local champions until the margins in the industry collapse.

Such a turn of events would be disastrous for the US and EU.

Insofar as the “upside” promised by PRC negotiators, it is an open question whether the promised “major order” will actually materialize or be cancelled when the domestic Chinese planes are available at deep discounts. More than once, major orders can be promised and never done.

McDonnell Douglas invested in facilities to manufacture the twin engine MD-80 147 passenger plane in exchange for promised orders for US$1 billion in 1992.  The failure of that deal to bring benefits was a contributing factor in the merger of McDonnell Douglas with Boeing in 1996.  What the deal did do was to transfer technologies that formed the basis of the COMAC C919.

The historical experience with PRC entities that promised big orders in exchange for technology suggest that Bombardier’s pipe dreams will merely repeat the McDonnell Douglas story.Bombardier’s controlling family was prepared to risk this and use Canada’s national prestige and leverage to push aside US concerns and tariff barriers.

The Canadian Liberal regime is likewise, tone deaf to these concerns and rushing to conclude a “free trade” deal with PRC in expectation of big orders for Canadian companies like Bombardier.

Canadian officials was stunned and surprised that despite maximum pressure applied, that included explicit threats to cease buying from the USA (not just Boeing), lobbying of State houses and Governors that included a phone call from Prime Minister Trudeau placed to Missouri Governor Eric Greitens threatening jobs in his state, the US Trump Administration and Boeing did not budge.

President Trump did not negotiate on this issue not only because of the threat to Boeing. He was particularly upset at the disruption the Trudeau regime’s campaign caused to the UK and other allies he counted on.    President Trump made clear that Canada’s behavior have damaged vital interests:   the programs to eliminate the existential threat from North Korea to North America.

It is in this context that President Trump referred to discussing with PM Trudeau the need for “mutual defense” and “mutual offense” before their White House meeting October 11.

Disrupting the US led alliance at this crucial moment for whatever reason – whether gross negligence or intentional is beside the point – the Trudeau regime have crossed a line that no close ally should even approach.

PM Trudeau left the meeting with President Trump without the courtesy of a joint press conference or statement, or even a photo opportunity.Trudeau looked decidedly unhappy and ashen during his solo press conference afterwards. He evaded a question of what President Trump meant by “mutual offense” and “mutual defense” that alluded to Canada’s failure to meet NATO obligations or defend Canada against DPRK missile attack, and; Canada’s lack of capacity and willingness to participate in the coming North Korean campaign.

Canada’s courting of communist China and dismissal of DPRK threats was another major problem for the US.

What did happen is that the balance of the Trudeau trip to Mexico was rather subdued, with no effort to press Mexico to join Canada in condemning “unfair” Bombardier tariffs. Behind the scenes, officials from Canada, US, UK, France, and Germany worked hard to do what needed to be done to preserve jobs and to prevent a rupture of the alliance.

The deal was announced and longstanding Beaudoin family demands to retain controlling shareholder overcome.

Although talks by Bombardier and Airbus allegedly began in August, Bombardier has been continuously talking with just about anyone willing to save them including demanding US$1 billion from Ottawa. As late as Sunday, Oct 15, the option by the Beaudoin family to retain control of the C-Series partnership while selling off other parts of the business was still on the table.

That option disappeared when the Airbus option was pushed hard and imposed on the Beaudoin family – who finally gave up control.  All regulatory hurdles including anti-trust, etc. was brushed aside to enable the rapid fire announcement on Monday with the CEO of Bombardier and Airbus.

And so it was, a major threat – instability in UK – to the US and allies top priority to eliminate the DPRK threat was removed.  The multinational effort to prevent the Bombardier crisis from spinning out of control have a price.

The damage done to the Trudeau Liberal regime, and Canada in general with their closest allies, are done.  

No more will allies like US and UK not give second thoughts to permitting Canadian subversion of their political system. It is a sad day when the representations of senior Canadian officials and leaders is no longer automatically taken at face value.

Canadians can redeem themselves in the eyes of their closest allies by redoubling their efforts to strengthen the alliance, making this sad incident an abbreviation rather than the norm.

Canada owes it to the alliance partners that rushed in, so to speak, to save their bacon. They are truly Canada’s friends in need.

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2 responses to “The Bombardier-Boeing Dispute and the Chinese Factor”

  1. Max says:

    Ahhh, poor Boeing. They try and put Bombardier out of business in a market they don’t even compete again and get all sad when they join with Airbus so they can survive. Boeing, the company who screwed everyone in WA by moving to get yet more tax breaks, the company who lost a WTO ruling. Maybe they should build a plane that competes.

    Any you’re upset that the Canadian gov’t isn’t standing by Boeing when they’re trying to wipe out our aviation industry?? Are you delusional?

    • AO1 says:

      You did read the bit about the Beaudoin family about to sell all of Bombardier’s crown jewels to China for less than a song, more commonly known as a Chinese Promise.

      Once China has the know-how and tech transfer, how long do you think your Canadian (and UK) jobs would last.

      Boeing did the only course of action available to try and deal with this Chinese threat … they couldn’t give a sh*t about Canada aircraft, they are rightly scared of Chinese aircraft made with Canadian know how. So they raised a stink, as expected Canadian & UK politicians started screaming and then ‘egg of face’ oops.

      Want to know how the Chinese work, ask France who sold the plans for fast trains for ~$800m and now make the 2nd fastest train … China makes the fastest but not in the French/Chinese factory but a pure Chinese factory. And are now about to go on a Global sales drive causing French and German high speed rail companies to consolidate in the hope of competing.

      Yeah, you can gloat about ‘poor’ boeing, but your Canadian bosses were about to stab all Bombardier works in the back for … greed. Who would be ‘poor’ then being unemployed?

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