State investment in Bombardier further mockery of WTO

Nov. 24, 2015, (c) Leeham Co. With the $1bn investment by the Province of Quebec in the Bombardier CSeries program, another example of government funding emerges in commercial aviation development.

Setting aside whether the investment might be challenged before the World Trade Organization—and whether this makes good business sense for Quebec—the move makes a mockery of the entire concept of avoiding government support.

It will well be remembered that more than a decade ago, Boeing challenged the government support Airbus received. Airbus filed a counter-complaint. Both sides were found to have violated WTO rules.

Even before that, Embraer and Bombardier filed complained about illegal subsidies relating to export credit financing. Both were found to be in violation.

(LNC acknowledges the complaints to the WTO are actually filed by the respective governments, but for all practical considerations, it’s the companies that are the drivers.)

China is open about the government support for the AVIC and COMAC ARJ21 and C919, with intentions to fund a wide-body C929 in the next decade.

Russia supplies state funding for development of the Irkut MC-21.

Bombardier received government aide from Northern Ireland and Canada for its CSeries before the latest funding scheme.

Neither Boeing nor Airbus has challenged China’s government funding of its commercial aerospace industry to the WTO. Airbus officials said neither they, nor did they expect Boeing, would file complaints about China. The reasons were obvious: Airbus and Boeing have too much at stake in China to risk pissing off the government.

An official of Embraer dodged the question whether he expected Brazil to file a complaint with the WTO over the latest BBD-government funding scheme. The funding isn’t expected to close until the first quarter, so no action would be likely until well after it is closed.

It wouldn’t matter.

Even though the WTO found Canada and Brazil in violation of the export financing support to BBD and EMB, neither country ever imposed penalties.

The WTO findings in the Airbus and Boeing complaints remain under appeal. No penalties can be imposed before decisions whether the appeals will be upheld or rejected.

Airbus and Boeing could also file complaints with the WTO over the Quebec funding. The CS300 is a direct competitor to the Airbus A319neo and the Boeing 737-7. It’s unlikely either will file a complaint, though.

Governments get involved in commercial aerospace development. It’s in their national interests to do so.

Quebec’s investment in BBD only proves the case once more.

22 Comments on “State investment in Bombardier further mockery of WTO

  1. The real irony of course , is that Canadair and DHC were originally sold in private ownership to end the taxpayer support/financial lifeline. Same went for Shorts in Northern Ireland.

  2. The real, real irony is that Europe and Unites States are subsidizing the ME3 plus Turkish +++ as the main beneficiaries of the abnormally low cost of manufacture of all the frames they buy. Once bought they can blitz the opposition with frequency and a new product that traditional flag carriers could only dream of or purchase in paltry numbers.

    As 2 examples the B787 and A380 programmes suggest a $50bn+ subsidy to airlines the world over

  3. I notice neither Scott or Bjorn put their name to this… just wondering who the author is?

    If a state is acquiring shares for their investment, then its not exactly the same as an (unfeasibly) low-interest loan which is only paid back per frame sold, even though both are essentially two forms of launch aid.

    If CSeries is a success, Quebec can get their return out of the holding company in either dividend or by selling the shares back to BBD for a profit. If CSeries is not a success, then BBD is dead anyway.

    • Good question about the author. The article is written in the Aboulafia style.

      • Oh come on, you guys.

        Before you click “read more,” if you look at the tags (in blue) you can see I wrote the damn thing.

        I flew back to SEA from SNA this morning. I have never such the heavy police presence at an airport in the space of 50 yards that I saw at SNA today: four K-9s, a dozen members of the sheriff’s department, all in “combat”-style uniforms (the greens, not your street-police uniforms). This is not your normal police presence at airports.

        Hamilton

        • Scott,

          Perhaps that is a sign of times to come. On the other hand, I flew into IAD on Saturday and my my wife, who was picking me up, had to circle around the loop many times because one of my bags was delayed. When I finally got to our car she pointed out an unoccupied car that she had seen sitting along the curb right in front of door 7 of the main terminal for at least 15 minutes while she was circling. The car was just a regular car, nothing official about it, and it was still there when we left the curbside. I wonder what happened to the days when the airport cops wouldn’t even give you enough stand still time to get your bags out of the trunk.

          • Scott:

            Often people ask the question that has been answered and often its been answered repeatedly. Sine (sp intended) of the times.

        • I knew you’d posted it Scott – it didn’t seem to be in your writing style so I was wondering it was penned by a guest writer who might not have had an admit account on the website.

  4. How much more is going to be needed? I guess a lot, maybe $10 billion. The people of Northern Ireland may have skills in composites, but are also troublesome and expensive to employ.They were chosen for their subsides more than efficiency (actually the same is true of most sites) I suspect one of the many reasons Airbus walked away was that they couldn’t see how to get the production costs down to a reasonable level. Also I can’t see how bombardier didn’t know they didn’t have anything like enough money for this project. Perhaps the plan was to get it started and then blackmail governments into coughing up the rest.

  5. the move makes a mockery of the entire concept of avoiding government support.

    I personally am very much in favour of the general concept of government support. Without it, neither Airbus nor Boeing would be where they are today.
    What I’m not in favour of is
    a) government support without something in return (ideally: money or a share in the company in question, or both)
    b) government support for companies that are already doing exceedingly well

    Case is point – the city of Hamburg invested more than €1bn in a local company called Beiersdorf in 2003 to protect it from being taken over (and potentially scaled down/closed) by Procter & Gamble. Once that threat was gone and Beiersdorf in a much healthier position, the city sold off its stake again, making a good few million in profit in the process. Beiersdorf now has a market capitalisation of ~€22bn and employs more than 3,000 people in Hamburg alone.
    I would call that an extremely wise investment for all parties involved.

    I would group Québec’s investment in Bombardier in very much the same category. Local government buying a share in an important local company in order to help it through difficult times.
    If you or me or any investor on Wall Street can go and buy a stake in BBD I don’t see why the state of Québec shouldn’t be able to do this.
    As for Québec potentially influencing BBD’s business decisions – sure, that could happen. But that could also happen with non-public activist investors. And personally, I don’t really care that much about the nature of an investor that forces a company to follow a wrong path.
    One thing I will say for Québec, though, is that they should have a genuine interest in BBD surviving, which is probably more than what could be said about many other investors.
    As any investment, this is of course a gamble, so whether there’s going to be a happy ending is anyone’s guess.

    If CSeries is a success, Quebec can get their return out of the holding company in either dividend or by selling the shares back to BBD for a profit. If CSeries is not a success, then BBD is dead anyway.
    Indeed.

    • I do agree. This is turning out to be a cultural disagreement between what we Americans see as “just” and the rest of the world’s concept, idea of what government is and what it’s role is in our lives. I am a big fan of Boeing. I follow Boeing news every day. I hope for new orders and want to see the 737max program catch up… I visit Scott’s site every day since it is so accurate and candid. At the same time, I have come to the conclusion, after many years of the WTO complaints put forth by both Airbus and Boeing, that both are receiving aid from governments at both local and at a state level. The US will face this more and more in all sectors of the economy and will just have to eventually except that this is how the majority of the world views the role of government.

      • Its murkier than this though.

        The Boeing 787’s composite design rules were backboned by the govt funded effort for the JSF (X-32).

        • It’s even murkier than that; MHI and FHI of Japan advanced their composite tech via the government of Japan’s funding for the development of the F-2 (re-winged F-16). And then there’s the Italian government’s extensive subsidies to Alenia. But I wouldn’t advise anyone to hold their breath waiting for Airbus to take Japan and Italy to the WTO over illegal subsidies.

          It’s also important to keep in mind that most of the world’s capital markets are underdeveloped relative to the US so the government’s role as lender is far more prominent and perhaps more justifiable.

          But I fully expect the forthcoming Canadian fighter competition to be decided, in part, by the bidder that can demonstrate the best industrial tie-up with Bombardier.

        • The picture gets murkier when one considers other sources of money for the supply chain. Billions (to the tune of tens of billions) are being spent in Europe to find out how to go more electric with the airplane now that bleed air is sizing the engine. I feel sorry for some of the American companies since I know of at least four European companies and two Japanese companies getting millions upon millions each for R&D. And NASA offers like 2 million split among all.

          Boeing and Airbus grab the headline, but the underlying government support for suppliers is just the same.

  6. On the contrary, the Quebec investment has been structured to avoid charges of illegal government support.

    Investissement Québec, the business investment arm of the government (crown corporation) is paying 1.0 B$ for a 49.5% stake in a C Series joint venture. That doesn’t mean it will be getting that share of eventual profits, though.

    The transaction is structured in a similar way as if Airbus, for example, had made the investment.

    It’s not a bailout. It’s a capital infusion. There is no grant aspect to this investment.

  7. Could Airbus and Boeing afford their predatory pricing without the fat margins they get through military subsidies er. sales? What about Embrear? How much of the KC 390 wing tech and avionics development went into the Embrear E2? The govt assistance to BBD is very modest compared to what the other 3 receive which is why they dare not file a WTO complaint.

    • Mark, the Embraer E2 is essentially a re-engineering of the existing E jet. No new wing and avionics required ( other than a FBW upgrade)
      https://leehamnews.com/2014/10/20/e-jet-the-project-that-shaped-embraer/
      Embraer thought it could use a lot of existing airliner technology to develop its new KC-390, it didnt turn out that way, but of course that isnt a problem carrying it over to military use. It certainly didnt happen the other way round, from military to airliner .

  8. @anfromme

    “I would group Québec’s investment in Bombardier in very much the same category. Local government buying a share in an important local company in order to help it through difficult times.”

    When the announcement was made the Québec Economy minister said that the time of government subsidies was over and that he considered this cash infusion as an investment. Of course the government could loose money if the C Series does not succeed, but it is also true that the government could actually make money with this deal if the C Series turns out to be a success. And I think that’s the way it should be.

    But now the question is the following. If the Canadian government decides to help Bombardier, what shape of form will it take? I have asked myself that question ever since Québec made its own announcement a couple of weeks ago. Since Bombardier now appears to have enough cash to operate comfortably for the foreseeable future I thought the federal money would have to be used to fund a new programme. But what programme do you think I had in mind? You guessed right: the CS500. Today I watched the Investors Day conference in New York and if I interpreted well what Alain Bellemare was trying to say, the federal aid might very well be specifically for this new model. AB was not that specific, but that is what I understood he ment. And that is what I wanted to hear anyway…

    As for the WTO rules for government support, we have to keep in mind that the initial government contributions from Ireland, Canada and Québec were following the WTO rules for an investment of around 3 billion dollars. But since the C Series is already costing almost twice as much as it was supposed to at the time, I have good reasons to think that the amounts that were initially allocated are now at nearly half of their allowed maximum. In other words there should be room for additional government support without exceeding what the WTO considers as acceptable.

  9. Beyond all this ideological and national war, the most important thing is that people, as Americans, can have a means of transportation! And for Thanksgiving! Happy Thanksgiving American Friends (aviation enthusiasts to watch the link below)!
    http://www.nytimes.com/interactive/2015/11/24/upshot/thanksgiving-flight-patterns.html?action=click&pgtype=Homepage&version=Moth-Visible&moduleDetail=inside-nyt-region-0&module=inside-nyt-region&region=inside-nyt-region&WT.nav=inside-nyt-region&_r=0

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