President-elect Donald Trump’s recent spat with Boeing has been in the news since Trump tweeted his disapproval with the new Air Force One’s price tag. Trump and CEO Dennis Muilenberg had a phone conversation dealing with this issue after Trump’s tweets.
Earlier this month, Donald Trump tweeted the following message:
“Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!”
The actual cost of the new airplanes has not been set. But the Air Force has a budget of $2.9 billion for the program through 2021. So far, Boeing’s existing contract with the government is for $170 million. This amount is for planning the construction of the new planes.
Last Tuesday, Trump told reporters that he believed the cost of the new planes was too high. Here is what he had to say:
“I think it’s ridiculous,” he said. “I think Boeing is doing a little bit of a number. We want Boeing to make a lot of money, but not that much money.”
On Wednesday, the President-elect softened a bit. He discussed the possibility of continuing with the order if Boeing will lower the price.
This is what Trump said:
“But you know, that’s what I’m here for. I’m going to negotiate prices. Planes are too expensive. We’re going to get the prices down. If we don’t get the prices down, we’re not going to order them, we’ll stay with what we have.”
While the Air Force One conflict is getting most of the headlines, there’s a deeper issue between Boeing and the President-elect.
What’s The Real Issue For Boeing?
According to CNN Money, the real issue for Boeing is China. Boeing’s main concern is Trump’s influence on the United States’ relationship with China. During the campaign, Trump had some harsh words for China.
Now that he is the President-elect, some of his actions have antagonized China. He recently stated that the United States does not need to be beholden to the “One China” policy. The statements were made after he accepted a phone call from Taiwan’s president on December 2nd.
In an interview with Fox News, he is quoted as saying:
“I fully understand the ‘one China’ policy, but I don’t know why we have to be bound by a ‘one China’ policy unless we make a deal with China having to do with other things, including trade.”
His statements are indicative of the President-elect’s willingness to disregard four decades of policy toward China. This is what Boeing is truly worried about.
China is the most important growth market for the aircraft manufacturer. It manufactures a majority of China’s airplanes. As a matter of fact, 25% of the 500 Boeing 737 jets that Boeing manufactured in 2015 were created for Chinese airlines.
The Potential Consequences For Boeing
Trump has repeatedly threatened to impose a hefty tariff on Chinese imports. His proposed tariff could go as high as 45% on Chinese imports. There are some who fear that Trump’s attitude towards China could result in a trade war.
If this happened, Boeing would be a primary target for China. It could shift its orders to Airbus. This would cause Boeing’s output to plummet. The company would see a loss of jobs and a huge loss of market share. This could result in a domino effect: after getting China’s business, Airbus could significantly drop its prices and take other deals away from Boeing.
It’s no wonder that Boeing is worried about the actions of the President-elect. If Trump continues with his aggressive stance towards China, Boeing could lose big.
Compared to the risks associated with Trump’s approach to China, the price of two Air Force One jets is small. Boeing is in a precarious situation. They still need to ensure that they have a positive relationship with the incoming administration.
Not only do they depend on the Chinese for their business, they also depend on the U.S. military. In addition to being the premier aerospace manufacturer, they are also a major defense contractor. Last year, it made $26 million in sales from the U.S. government. This accounted for 27% of its annual revenue.
Boeing is in a tight spot. The company’s fate seems to be in the hands of the new administration.
Source: CNN Money