Sector News
US Public Procurement Should Support Boeing Better, Europe Acts Illegally re Airbus

Many politicians, firms and individuals in Europe feel that we are more open in terms of trade than most parts of the world. The current crisis in the UK steel industry is largely blamed on Europe’s failure to stop China “dumping” surplus steel on the market. The perception is that EU procurement regulations push public sector contracting authorities into running competitive processes, rather than just supporting “local” industry and suppliers. “Local” can mean anything from “in Europe” to “in my town” of course depending on the perspective of the particular politician or official.

So it is interesting occasionally to get a perspective form another part of the world. Forbes website provides that this month with a thought-provoking article from Loren Thomson, writing about the announcement from Boeing that it is going to cut 4,000 jobs from its US workforce. He argues that the US government has failed on several counts to support Boeing in terms of winning US contracts, and here are some of the charges he lays at the government’s door.

“Failing to punish illegal behavior by foreign competitors. The World Trade Organization ruled six years ago that European governments had engaged in a multi-decade scheme of illegal trade subsidies (euphemistically referred to as “launch aid”) aimed at giving Airbus an unfair edge in the marketplace. U.S. industry has lost tens of thousands of jobs as a result”.

Without the illegal subsidies from European governments and the EU, he questions whether Airbus would or could exist at all, but now it is challenging Boeing’s previous dominance.

“Failing to sustain an export credit agency like those in other countries. Extremist ideologues in the U.S. Congress have sought to kill off the U.S. Export-Import Bank, which would make America the only major trading nation without such an agency. Airbus customers are able to tap multiple export credit agencies in financing their purchases”.

Thomson claims that the export credit operations in the US actually make a profit, and that commercial lenders are wary of countries such as Ethiopia and Pakistan, so Boeing loses out when Airbus can offer this support, unlike the US.

“Failing to think through the economic impact of defense purchases.  Boeing is expected to lose hundreds of millions of dollars developing the Air Force’s next-generation aerial-refueling tanker. One reason why is that it was forced to bid against Airbus, a subsidized foreign competitor, for the right to build the tanker”.

Boeing actually won the tender, and the Air Force will “get a great price” as Thomson acknowledges, but this will be “draining funds out of the nation’s sole surviving producer of commercial transports…” Thomson feels that instead, the Air Force should just have accepted a single-source bid – “Boeing had already offered to lease military derivatives of its 767 jetliner for the tanker role at the lowest rates available to the company’s commercial customers”.

But that last comment does expose the weakness in Thomson’s case. If the Air Force “got a great price”, is that not what government buying is all about? Surely it is not the place of the public sector buyer to subsidize certain firms or industries because they might then benefit the country in other ways (such as through increased employment)? That is the same argument that leads some to suggest more business going to small, local or minority owned firms, almost disregarding whether they actually offer value for money or not.

On the other hand, it is easy to have more sympathy with Thomson in terms of his arguments around state aid. Incidentally, that is a hot issue in the UK and Europe currently in the light of the steel industry problems. There is an argument that Chinese steel imports should be hit by bigger tariffs because the industry in that country is subsidised unfairly by the government.

The other point that Thomson does not explore is that without Airbus, Boeing would virtually have a global monopoly over large parts of the aero industry. Would that be good news for anybody – except the Boeing shareholders and senior managers? (And we might just note that Boeing’s CEO made $13.2 million last year, so this competition from Airbus certainly does not seem to be putting him on the bread-line.)

As procurement people, we should always want to see vigorous competition, and indeed should be proactive when we can be to drive markets towards that goal. Global monopolies are rarely positive for public or private sector buyers! So on balance, we suspect having Airbus around to challenge Boeing is healthy from a global, macro, taking everything into account standpoint.