Pontifications: Boeing’s risk if Trump goes wild

By Scott Hamilton

Feb. 6, 2017, © Leeham Co.: Boeing officials must be downing antacids by the bushel about now.

President Donald Trump has the Mexican president pissed off. Trump’s spokesman says the immigration ban (or pause, or suspense, depending on the day it’s described) may be expanded to other “terrorist” nations.

Trump threatens a 45% tariff on Chinese imports and a 25% tariff on Mexican imports.

Why do Boeing officials probably have upset stomachs and flaming heartburn?

Because Boeing has more than 1,200 orders from countries that are in Trump’s crosshairs.

Nearly 770 of them are 737s. More than 300 are 777s. Nearly 170 of them are 787s.

And these are just the identified customers. There’s no telling how many of the 1,101 737s, 16 777s and 76 787s (at Dec. 31) were ordered by Trump’s target and potential target countries.

Iran, Iraq and more

LNC detailed the exposure Boeing has to Trump’s immigration “no-fly” list in our Jan. 30 post to Iran and Iraq.

Trump spokesman Sean Spicer said the immigration ban could be extended to other countries with terrorist activity.

I put together the list of Boeing customers in these countries. It’s not small.

There are 1,242 orders that are on the identified customer list. This is twenty-one percent of Boeing’s backlog. The Middle East alone accounts for 560 orders from all the countries.

China

I’ve identified 250 known orders placed by customers from China on Boeing’s website. Boeing also reports that customers in China ordered 280 aircraft, so there are at least 30 Unidentified customer orders. There is a general belief the number is considerably higher.

“China Inc.” is Boeing’s largest single customer; no aircraft orders are placed in China without government approval.

Trump’s threatening China with tariffs is playing with fire. Boeing stands a very good chance of becoming collateral damage.

Will he or won’t he?

Between the election and inauguration, I was occasionally asked if Trump would impose tariffs on China and Mexico, and if so, what would the effect be on Boeing.

I always replied, “I don’t know. Trump changes his position so often, I don’t know what he’ll do.”

In the three weeks since he became president, Trump is proving to do what he initially said on a variety of issues. Anything after his initial statements now appear to have been smokescreens.

So, the original question stands. Will he impose tariffs on Mexico and China? I still don’t know and I certainly hope not. The effect on Boeing could be disastrous.

CNN’s Jon Ostrower pointed out that 100% of the wiring for the 787 comes from the Mexican aerospace supply chain. Flight Global’s Steve Trimble reported that the entire US aerospace industry imports about $1.6bn in goods from Mexico. How much of this is for Boeing, only Boeing knows.

Retaliation to tariffs

But Mexico already indicated it could retaliate by imposing tariffs on US goods. Aeromexico had 60 737s and four 787s on direct order from Boeing at the end of last year. Might these be subjected to a tariff of identical proportion that Trump imposes on Mexican goods? The most commonly cited tariff is 25%.

Parenthetically, Trump’s branded line of clothes is made in Mexico.

Trump threatened to impose a 45% tariff on China’s goods. China accounts for 280 orders from Boeing that we know of. Could you imagine China slapping these airplanes with a 45% tariff? Or cancelling orders? Or rewarding Airbus with future orders?

The Chinese government doesn’t fool around with being threatened. American Airlines last week complained the government won’t grant it any slots for its authorized Los Angeles-Beijing service. Having been a Chinese watcher since 1988, I think this smacks of the government sending Trump a message.

(American asked Trump’s Department of Transportation to not renew Air China authority to Houston. We’ll see what happens.)

Parenthetically, Ivanka Trump’s clothing line is made in China.

Retaliation to expanded immigration, travel bans

If Trump is truly determined to ban travel and immigration from countries with terrorist activity, the list is long and broadly dispersed.

Top of the list, of course, is Saudi Arabia, which was the home to nearly all the hijackers on 9/11. Qatar often has been cited as funding terrorism. Egypt (which has no outstanding identified Boeing orders) was the location of one airliner bombing and perhaps a second targeted at Egyptair. Indonesia and Malaysia have been terrorist locations.

If Trump extended the immigration/travel ban to any of these and other countries, what might the fallout to Boeing be?

Call to action

Boarder security is indeed an important issue, but the fact is the US already has a strong and lengthy refugee vetting process.

The threats to impose tariffs ignore the potential consequences on US businesses. In Boeing’s case, the company is the USA’s largest exporter.

Boeing has a large lobbying arm in Washington (DC) and CEO Dennis Muilenburg already has had a couple of conversations with Trump.

But this isn’t enough. Boeing’s workforce needs to start contacting their Congress Members to express alarm at the reckless threats proffered by Trump.

  • A two-page research note issued Friday by Morgan Stanley also expressed concerns about the Trump effect on Boeing. “We believe that tensions internationally, in particular with China and the Middle East, have the potential to be the biggest risk to [Boeing] given the backlog exposure and expected long-term growth,” wrote Morgan Stanley, which rates Boeing Overweight (Buy). These two regions represent 15% of Boeing’s backlog overall and 55% of Boeing’s wide-body backlog, the investment bank writes. Twenty-five percent of the 20 year growth comes from these regions.
  • The Seattle-PI has a good look at other risks to Boeing with Trump’s “America First” policies.
  • Aviation Week has this editorial on Trump’s tariff threats.

 

43 Comments on “Pontifications: Boeing’s risk if Trump goes wild

  1. Note to Readers: I initially closed Comments because I needed to post this comment first. I don’t want a repeat of the tone and direction of the comments to last week’s Pontifications on Trump actions and the potential impact to Boeing. Please confine your comments to thoughtful ideas and debate. If this goes too far afield again, I will close comments.

    Hamilton

  2. Even if he were to slap these tariffs, could not Congress, if it so chose to go against him, override such tariffs?
    In other words, how much can he implement without any fear of Congress overriding him?

    I don’t think there is much doubt that Boeing will suffer in some way if he were to carry through on many of the “threats” he has made.

    I just wonder if Boeing has any chance here, no matter what action they take vis-a-vis the President. It just might be that he (and many in the Republican party) doesn’t really care what happens to a company which is so closely associated with the Democratic Party (I mean by having such a large presence in Washington State AND Illinois). Maybe this is another reason for them expanding in South Carolina. A bit of spreading the eggs to other baskets. Ok, they also have a presence in Missouri, so maybe I am not even close on this one.

    Would/could the USA try to force Airbus not to deliver to any of these countries if Boeing were to be “barred” through the implementation of these policies by the President? I am referring to the Iran deal which I understand is also an issue for Airbus if the USA launches sanctions.

    • Ofcouse they will, Iran had to be funnel fed plane’s from the great Satan

    • Aero Ninja: Hopefully this is within comment bounds.

      Despite the past policy by Republicans of open trade, you assume any of the Republicans in Congress have the guts or the integrity to actually stand up for what they purport to be their bedrock principles. Reality is they want their jobs and don’t know which way to jump that allows them.

      Its a pretty funny dynamic, Democrats won’t want to save them of course from themselves.

      The USA can stop Airbus deliveries as there is a US content on the Airbus aircraft that puts them well over the limit.

  3. A major conundrum for sure.

    With apologies to Winnie Churchill and Ike and Good ole Ben Franklin plus a bit of miss- phrasing comes to mind.

    Beware the Commercial Industrial complex- and- rarely have so few screwed over so many.

    Add a twist of Ben Franklin

    Those who choose money over security and freedom may wind up with neither.

    And of course we now have miss- stated flashbacks and comparisons to the thrilling days of yesteryear and the now twisted meme ” America First ”
    I’m buying stock in Popcorn and suitable drinks- which combined with a few inches of snow in Redmond should make for an interresting Day.

  4. How would Airbus be affected by all this?

    I’m thinking about many of those components and systems that make up an Airbus aircraft, are made in the US.

    Some engine options on Airbus aircraft are manufactured in the US (P&W and GE), while others are manufactured in the EU (CFM, RR). Tariffs might affect engine choices as well.

    • US can stop transfer per the law due to content.

      There is far more than engines involved, lots of Airbus systems are US sources.

      They have manufactured satellites with no US content to they can’t get controlled by the US as to who they can sell to, impossible on an Airbus.

  5. “I’m buying stock in Popcorn and suitable drinks- which combined with a few inches of snow in Redmond should make for an interresting Day”

    Thanks for the tip. Only US stocks I presume..

    Intersting developments. Most countries have their own Trumps today, but this seems the first one who made it to the top. I think everyone is waiting for the real world to steer Pres.Trump. In case of aerospace, it’s risky to play us first with your biggest export market.

      • That was a hoot! One of the funniest things I have watched in a long time.

  6. Boeings patriotic America first card has bounced back and bitten them on the bum.
    For now the game is damage limitation, finding ways for Trump to back out of unfeasible idea’s,like the wall, without too much loss of face.
    As far as defence is concerned Boeing are going to walk all over him, Trump is going to learn that there’s so much more to negotiating than rucking over building contractors and property spivs.

    • Long term yes, short term the China is at risk (figuratively and literally)

  7. China uses trade as a football, but if they are looking carefully enough could they spare Boeing as Washington is not typically a Republican state?

    • I think China thinks in broad terms and talk loudly and use the big stick.

      • Pork does not get the attention aircraft do.

        Aircraft bellies are worth a whole lot more than Sow Bellies.

        What is being missed is that Taiwan is considered a core issue with China. That would be the same as allowing Florida to succeed. (Texas I think we should let go)

        In other words, its a war issue.

        I don’t know how they rate the South China Sea.

        Stupidly China has put a huge amount of prestige into that and its unsupportable militarily.

        Between nationalism and the investment it could be the same as Taiwwan.

  8. The article makes a good point. Interestingly, US software companies have even more exposure to tariff wars. Giants such as Microsoft, Google, Apple and Oracle may equally be worried. Software companies depend on talent to join them to foster innovation. A large proportion of this talent are non-native Americans.
    The other point is that in a subtle way, the previous president made great strides in restoring the reputation of the US which would have had a positive effect for exports.

  9. I never believed the Iran order would be filled. If for no other reason than Iran cannot stop acting out, and we had a POTUS with an extremely lenient attitude towards them for eight years, that was unlikely to be duplicated by any successor.

    As for China, they have a lot more to lose than we do and if they want to continue their one sided trade policies in order to prop up their hollow economy and the communist party, they can choose to do so. They would be making a mistake.

    It is also a mistake to view trade in the vacuum of the aerospace sector. Sure, it’s important. It’s so important we allowed virtually all other manufacturing to in the United States to be destroyed. As this piece points out, aerospace jobs are important as well. Too important.
    This is why it’s also a mistake to view Boeing’s trade with China in terms of sales and jobs, when it should be viewed in terms of overall trade, geopolitics, and economic and security strategy.

    With China’s constant sabre rattling, aggressiveness both political and military, and attempts to seize territory, it’s all destined to go poorly for the trade angle anyway, and China should never be depended on for aerospace sales or jobs at any rate.

    Boeing spent a lot of effort, very publicly, sucking up to Xi Jinping. This is very beneficial, only as long as Xi Jinping is China’s leader. He has successfully so far, purged his opposition. But if Xi Jinping is removed for any reason, which always ultimately happens in China, he successor will take a dim view of Boeing. Automatically, Boeing will be on the outs for such open courting of Xi Jinping. It’s a well know political/cultural aspect of doing business in China, called “Guanxi”. https://www.youtube.com/watch?v=f67UW6rqX6g&t=324s

    • You seem to not know how China functions.

      There is a steady turn over at the top.

      If that was stopped, it would be a coup, lot of power centers involved

      He will be gone in a few years as that is the progression baring a couple

      The system is setup now to avoid a Meo or Peng.

    • Agree totally with most of your points. As I’ve stated before here, we’re one P8A downing in the South China Sea from a regional war with China. (Nobody’s real fault–just a clash of empires.) Trump can offset the China loss with an opening order for 2,000 HarpoonERs. And, as a bonus, how about a subsidiary Raytheon- licensed line (in Spokane) for at least 2,000 Tomahawks? And a ramped up BA 18 line in St. Louis–we’re going to need attrition jets and spare parts.

  10. We are already seeing US checks and balances come into play.

    For example, President Trump has not reversed the deals with Iran Air. I’m sure he wants to, but retrospective law is frowned on. Having said that Iran does need to be careful

    We will see, but President Trump does not have a free ride. He will be challenged – he won’t like it – but it will happen!

    • With Republican control of the presidency, house, and senate, they should be able to enact their spending agenda. But if they get distracted…, live by chaos, die by chaos.

      • Iran Air goes the way they are told.

        If its gets testy, then they can simply say no Boeings.

        What happens after that is unknown.

  11. Trade strategy focusing on Asia. A year ago.
    http://www.voanews.com/a/obama-greater-us-focus-on-asia-pays-off-will-continue/3198443.html

    In Europe I increasingly see articles on new economic opportunities as a result of Brexit & Trump policy.

    If e.g. Airbus delivers less to US airlines because of import tariffs, they’ll focus on their Asian markets more, who’ll buy less Boeing aircraft because of import restrictions and welcome Airbus with open arms. Tianjin will deliver the first NEO in September.

  12. Scott:

    Boeing workforce is going to be no where as effective as they might have been.

    You assume a normal progression of things, as this is certainly not, its not going to make a dent.

    We are living with alternative facts [edited]

    When the President of the US insults one of, if not our staunchest allies through thick and thing (Korea, Vietnam, Iraq , Afghanistan etc) and hangs up on him, things are not close to normal..

    I doubt Trump has a clue that Boeing is in other states than Washing State, they voted against him, time for payback.

    [edited]

  13. I fear that the greatest impact may well be on US second-tier producers: European (or Canadian or Japanese for that matter) primary manufacturers and assemblers are not going to risk – if they can avoid it – sales being banned because perhaps 5-10% of the content of their product is US produced. Germany in particular has done well selling military equipment (it does produce the best tank in the world) of late that have the advantage that no US ban can block them.

    • Much of what president Bannon/Trump say and now, do, is meant to play to their base of (generally ill informed) voters. Big tarrifs will nave no winners and many losers. Hopefully, Boeing and other large and mid size companies (and other entities) will put enough pressure on them to limit some of the damage.

    • David:

      Off topic maybe, but interesting one.

      The M1 has operated successfully in the very worst conditions possible.

      Agreed its a fuel hog but they have taken steps to address that with aux power source.

      Failures are rate, field replacement is quick as it was intended to be changed out as a pack.

      Probably the biggest issue is they have not upgraded the engine as there is far newer tech that could assist the fuel use (or replace it with a CI engine which would have been my first choice from the start)

      The output is mitigated by a TUSK package and it is very quiet relatively speaking.

      What is amazing is the once case of where they had one stuck and point blank they tried to Silver Bullet it. Wouldn’t penetrate.

      Eventually they pulled it out, repaired it.

  14. I agree that there is a lot of risk to Boeing from a potential tariff war. But it’s also worth recognizing that the most frequently floated tariff-like idea is this 20% across the board border tax.

    At least in some proposed versions of that law, Boeing would get enormous refundable tax credits because it exports a lot more value than it imports. If something like this is ultimately enacted — for other reasons, I hope it isn’t — the tax benefit could actually outweigh the potential loss of orders from certain customers. Just pointing out that there is upside as well as downside risk.

    • No one has managed to explain the tax thing to me yet, but surely Boeing will be a victim of retaliatory taxes?

      • That’s the rub. Retaliation, as a large percentage of Boeing is sold overseas, the company would be devastated.

        They are struggling with a downturn, it could get vastly worse.

        • I am not an expert on the tax plan, but here’s the basic gist as I understand it:

          Under the proposed system, the cost of imports is no longer deductible as an expense for tax purposes. On the other hand, the revenue from exports is no longer counted as revenue for tax purposes. CapEx is also deductible immediately as opposed to being depreciated over a number of years. Here’s how it would help Boeing (using made-up numbers):

          Suppose Boeing has $100 billion of revenue and $90 billion of costs today and has a 30% effective tax rate. It would report a $10b pre-tax profit and pay $3 billion in tax.

          If $60 billion of its costs are incurred in the U.S. and half of its revenue comes from exports, Boeing would now only report $50 billion in taxable revenue. (The $50 billion from exports would not be counted for tax purposes.) On the other hand, it would only be able to deduct the $60 billion in U.S. costs: not the $30 billion in costs related to imports. As a result, it would now report a $10 billion pre-tax loss for tax purposes. So instead of having a $3 billion tax bill, it now gets a refund of perhaps $2 billion (assuming the tax rate goes to 20%). While for tax purposes it reports a $10 billion loss, its underlying profitability hasn’t changed — it’s still making $10 billion before the impact of taxes. So its total after-tax profit goes from $7 billion to $12 billion.

          Many economists think the tax plan, if implemented, would lead to a stronger dollar. In the long run, this would force Boeing to lower prices for overseas customers or risk losing that business. But the net effect should still be neutral-to-positive, especially in the near-term.

          Retaliation is certainly a concern, but maybe not as much as some people think. My understanding is that WTO rules allow a border tax system, so while other countries could also completely rewrite their tax codes, they wouldn’t be allowed to just slap a retaliatory tariff on the U.S. IMO, China is the only major country that is likely to ignore the rules and react with punitive measures if the U.S. implements a border tax. (Perhaps Mexico would, too, if it gets singled out by Trump, but it’s not a very big market for Boeing.) In addition to a tariff, the Chinese gov’t could just favor Airbus in future airplane deals.

          Now obviously, getting in a spat with China would be really bad from Boeing’s perspective. On the other hand, what alternative does China have to buying Boeing planes over the next 3-4 years? Airbus could certainly find some more delivery slots for China, but probably not enough to take over the whole Boeing order book or anything close to it. The main risk is losing share longer-term in China.

          On the other hand, I don’t see much chance of tariff retaliation from places like the UAE. They’re not competing with American companies anyway. Of course, Trump could undermine Boeing there in other ways (i.e. continuing with policies that appear to discriminate against Muslims).

  15. Forgotten how much of the 787 is manufactured overseas, but the paper war this proposal will generate will be mind boggling and probably mouth watering to the legal fraternity.

  16. Overall, Mexico has been a pretty-good neighbor. Yeah, their people come here and take American Jobs, but that’s not the fault of the Mexican Government – that’s the fault of American Big Business who encourage the American Government to tacitly sanction such illegal immigration so that American wages can be suppressed.

    Likewise, if we worries about so many jobs being sent to China, then why not roll-back the Offshore Corporate Tax Exemptions and quit authorizing “Tax Holidays” that allow Corporations to move their profits back to America Tax Free? That’s not so hard to understand.

    Meanwhile, Boeing and a lot of other American companies can do their best to insure that China realizes that they are no threat to China and that they also want a Free-Trade Environment. And, of course, try to talk some sense into Trump.

    By the way, do you know why Xi Jinping hasn’t talked to Donald Trump, yet? It’s because Xi Jinping can’t be bothered to pick up the phone just to talk nonsense. See…so China is doing it’s part, too – just don’t talk to the Trumpster until he cools down.

  17. Guess mypost a half hour ago got lost- so I’ll try again.

    RE the puditry by most posters/news anchors/ print media/TV/twitterverse/ and ther like as to ‘ taxes’/tariffs/ effects.

    Unless one has spent a few years as a tax pro/policy wond/ international trade issues/ dumpingm issues/ countervailing duties issues and/or in the related govt bcrats and 3 letter agencies- ALL comments are speculation, bereft of facts and data/ and without a doubt heavily biased. Put them into the SWAG category.

    Suggest jmost simply relax- grab a brew- while watching the moving lips of mostly the illerattti.

    FWIW- I make NO claims to being an expert on the related issues- but I
    have in the past ( as a retiree ) spent many many hours on research data analysis. and some commo with either experts or knowledgeable govt types on related issues as part of a proposed filing under WTO/Countervailing Duties/ Tariffs against Airbus re Boeing and govt subsidies ( related to GATT 92 ). Matter of fact the formal filing / petition was to be hand carried to WA DC the first week in September 2001 . . .

    About 3 years later- Boeing made a similar complaint/filing via dept of commerce.

    And none of the above even started on the possible tax realted issues

    Relax and watch the blinking lights – I’ve gota wholesale quantity of Orv Redenbacker premium popcorn- and several iches of snow. And a jug of Gallo red. 🙂

    • Unless one has spent a few years as a tax pro /policy wond, etc-this is why people are worried -quite apart from being just wrong the immigration ban just wasn’t thought through at all.

  18. Now isn’t that disturbing, voting for someone who you don’t expect to keep their campaign promises.

    Problem is, there are many more out there who did vote for him expecting those promises to be kept.

  19. I think companies like Boeing are pragmatic. They put aside “old” value & believes and adjust to new reality, make the best of it to make more dollars.

    “U.S. companies including major exporters General Electric and Boeing launched a coalition on Thursday to back a House Republican plan to tax all imports, saying the proposal would “support American jobs and American-made products.”

    http://www.cnbc.com/2017/02/03/ge-boeing-oracle-form-coalition-to-support-republican-border-tax.html

    • See my comment above. The Republican tax proposal, as I understand it, would potentially give Boeing a ~$5 billion (maybe even more) tax windfall.

  20. I am inclined to think that the implications to Boeing and wider trade in general will not necessarily be so massive in the short term. The world must keep turning and there will be a lobby in many countries that allows for key purchases to be facilitated. The damage to the USA will be felt longer term as the decisions of today and based upon the current trading environment filter through into future orders. If you feel that you are in any way at risk of suffering the wrath of the current administration there is an easy substitute in Toulouse. re the restriction of technology for Airbus I don’t see how this works. In whose interests is it to stop supplying Airbus from governmental or commercial perspectives?

  21. National security is more important than the interests of the Boeing profit and loss statement.

  22. Mexico wall paid for by Mexican government was a promise in the campaign
    Now it has changed and Trump says he will put a tariff on mexican goods imported … final result will be US citizens/companies (Boeing) pay for the wall each time they buy Mexican stuff.
    So keep cool this is not the last time Trump change his mind

  23. Comments are closed. The nature and tone once again went in a direction that is not allowed.