Governement intervention in Airbus and Boeing
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Airbus and Boeing are competitors in the aircraft industry as both of the companies are aircraft manufacturers. Boeing was actually founded in 1916 in Seattle earlier than Airbus and got huge support from US government. It was a dominant player in the global manufacturing industry in the 1960’s together with McDonnell Douglas. Meanwhile Airbus was founded in 1970s by four countries which are France, Germany, Spain and United Kingdom. These countries have supported Airbus from its establishment until now by providing fund through soft loan and subsidies. These soft loans and subsidies help Airbus in the research and development activities as well as the production of commercial aircrafts which will be sold to the airline companies around the world. It is found that these supports are very helpful to Airbus in competing with Boeing as it succeed in becoming the world’s number two commercial aircraft manufacturer. Besides that, by 1992, Airbus had captured roughly one-third of the global commercial aircraft market.
This shows that the soft loan and subsidies from EU and the founding countries help Airbus in competing with Boeing for the position of world’s leading commercial aircraft manufacturer. Even though the support was really helping Airbus in strengthening its position in the market, it is also create an issue of unfair government intervention. Boeing the competitor of Airbus and the U.S. government have long complained about the massive subsidies and soft loans that were responsible for Airbus birth and its success. This issue is worsened when Airbus surpassed Boeing in becoming the world’s leading aircraft manufacturer. In 2005, the U.S. Trade Representative brought its case to the WTO because of approval of $3.7 billion subsidies and soft loan from EU to Airbus.
The case alleged the financial aid is qualified as subsidies under WTO’s Agreement on Subsidies and Countervailing Measures (ASCM). Under ASCM, subsidies to specific firms or industries from a government or other public bodies are prohibited. Thus U.S. would like to stop EU from giving out support to Airbus in terms of subsidies and soft loan. But the EU argues that United States government was also giving its support to Boeing as U.S. indirectly subsidizing Boeing through massive defense contracts paid via tax dollars. This shows that both companies, Airbus and Boeing, have been received support from the governments in order to compete in the market. Question 1:
Where do you stand? Do you think EU subsidies and soft loans to Airbus are fair? Why or why not? What advantages does Airbus gain from free financial support from EU governments? Are complaints about EU subsidies fair in light of Europe’s history of democratic socialism? In my humble opinion, I would stand on the Airbus side and would like to stress that the EU subsidies and soft loans to Airbus are fair. It is because, there is nothing wrong for EU as an economic and political union of European countries itself was built to help the firm established within the zone of EU. According to Airbus website on 18th May 2011, entitled “WTO final ruling: Decisive victory for Europe” stated that “The World Trade Organization (WTO) report released today constitutes the final blow to the Boeing-sponsored myth that government support to Airbus somehow caused harm to Boeing.
The WTO has now confirmed definitively that government loans are a legal instrument and that none of the government loans made to Airbus over the past 40 years were prohibited. It also reaffirms that, contrary to Boeing’s repeated assertions, the subsidies did not cause any material injury to Boeing.”1 Based on the statement above, it clearly shows that the subsidies given to Airbus is permissible and thus, should not be claimed by Boeing. Furthermore, according to Kayleigh and Tobias (n.d.) EU action in giving out big portion of subsidies seems legal in order to aim at industrial competitiveness, growth and job creation.
Since the American aircraft industry once held a significant market power from the 60s onwards, European manufacturers had to react resulting in the Airbus Consortium and appropriate launch aid. In fact, Boeing also have their indirect support from the US government support as stated in the case study, which is through massive defense contracts paid via tax dollars and other support from Pentagon and NASA. Plus, Boeing also will be given billions of soft loans provided by Japanese firms only if the aircraft is commercially successful. Apart from that, the money injection to Airbus will worth nothing if Airbus itself has a weak management in terms of expertise and technical know-how skills in providing the good aircraft. As for Boeing they should believe that they could stand on their own feet because of the good quality of their aircraft and technical know-how expertise could considered as sellable.
Definitely, Airbus could gain substantial advantages from the free financial support from the EU governments which are; first, Airbus will save their cost on production since EU fully supported the R&D activities for the development of valuable new technologies. Thus, indirectly, it would increase the knowledge on the aircraft industry. Second, because of the free financial support provided by EU, Airbus could gain profit much sooner compared to the other firms without any subsidies provided. Thirdly, it would boost up the market share of Airbus and also outsell the Boeing as what had been happened in the 2000s and it is supported by the study of Kayleigh and Tobias (n. d.) on the impact of Airbus’ subsidies, it increased market share of Airbus and has led to lower prices to consumers and Boeing’s monopolistic position has been challenged.
Lastly, based on the arguments above and the revelation of Europe’s history of democratic socialism since 1940’s, it is unfair to complain about the EU subsidies. It is because, the democratic socialism is a broad political movement propagating the ideals of socialism within the context of a democratic system2 and for the socialists, they believe that economic inequality is bad for society and the government is responsible to intervene for reducing it. 3 Thus, it is unfair to complain about the EU subsidies since the government intervention is the must for them in preserving their political and economic stability. Question 2:
Do you believe U.S. military contracts with Boeing amount to subsidies? Have these types of payments provided Boeing with unfair advantages? Justify your answer. In order to answer the question, first of foremost we have to know the meaning and examples of subsidies. The subsidies mean a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidies are usually given to remove some type of burden and are often considered to be in the interest of the public. The examples of subsidies are welfare payments, housing loan, students’ loan and others. In fact, there are other companies which got subsidies like Intel received $3.8 billion, IBM got more than $1 billion and Microsoft has pulled in $95 million.
Historically, competition between Airbus and Boeing has been happened in the large jet airliner market since the 1990s. This resulted from a series of mergers within the global aerospace industry, with Airbus beginning as a European consortium while the American Boeing absorbed its former arch-rival, McDonnell Douglas in a 1997 merger. Other manufacturers, such as Lockheed Martin and Convair in the United States and British Aerospace, Dornier and Fokker in Europe, were no longer in a position to compete effectively and withdrew from this market. To answer the question, we do believe that U.S. military contracts with Boeing amount to subsidies and these types of payments provided Boeing with unfair advantages. It is because the company totally used its link with U.S. government and is not relying on the credibility in managing aircraft industry.
The company got massive defense contracts paid via tax dollars. In fact, the company enjoys tax break, infrastructure support and other incentives totaling billions of dollars. For example, Boeing received more than $5 billion of subsidies from the U.S. government in the development of the 787 Dreamliner. In addition, more than $23 billion is given to the company as indirect government subsidies by means of R&D funding and other indirect support from the Pentagon and NASA. The European countries also complain Boeing had received launch aid from Japan particularly for the large part like wing. The boss of Airbus, Tom Enders, describes the 787 as the most heavily subsidised civil aircraft in history. All of these lead to unfair advantages for other players in aircraft manufacturing industry. Thus, they will struggle to survive and compete with Boeing.
The new aircraft companies from Russia and China are heavily affected by these situations. However, the Agreement on Subsidies and Countervailing Measures (Subsidies Agreement) strengthens discipline on trade distorting subsidies that other governments use to give their firms an unfair competitive advantage. All countries that become members of the WTO automatically will be subject to the Subsidies Agreement. In the agreement, the subsidies to specific firms and industry from a government or other public bodies are prohibited. Question 3:
Assuming that Airbus cannot compete without subsidies and loans, is it likely that EU will discontinue its financial support of Airbus? Is it in the EU’s interest to continue supporting Airbus? Justify your answer.
It is believed that EU will not discontinue its financial support of Airbus if they know Airbus cannot compete without subsidies and loans from them. Besides, it is in the EU’s interest to continue supporting Airbus. There are many reasons why EU is likely to continue its financial support. First of all, EU will indirectly incur a huge loss in term of effort and cash if they are not doing their best to ensure that Airbus can survive in the aircraft manufacturing industry. EU has supported Airbus since year 1970 and billions of cash has been contributed to make Airbus at what it is now. So, if EU decides to stop supporting Airbus then there is possibility that Airbus will not survive. The fact that Airbus will not survive means is not only affecting the company but it portrays that all EU’s material contribution since the Airbus establishment is just a wastage.
Second, Airbus is currently a stock-held company jointly owned by the British, Germans, French and Spanish. This means that indirectly Airbus is owned by part of EU’s country. EU as a whole really concern on supporting the efforts of every single country in its union, so it is unlikely for them to let the Airbus without financial aid if they know that it will affect the ability of that company to survive and compete. Besides, EU governments believe that the existence of Airbus is benefiting them in many ways so that create interest for them to support Airbus. First, Airbus R&D activities has allow for the development of valuable new technologies for EU. Besides, around 53000 jobs have been created by Airbus that involved the skilled and semiskilled represent almost 100 nationalities and mostly are European. Third, a massive amount of capital has been injected into Europe resulted from Airbus’s value-chain activities.
Last but not least, European countries benefited from enormous tax revenues generated by Airbus. However, the decision made by EU to continue the financial support will not be the same as before. This is because EU must also comply with the rules and guidelines given by World Trade Organization (WTO). The previous case brought up by Boeing has become the concern of WTO and as the result EU was found as not compliance to WTO ruling regarding the interest rate being charged on loan given to Airbus. WTO found that the interest rates charged on some of the loans provided by the UK, France, Spain and Germany amounted to subsidy becuase they were not competitive with market rates. Due to that, WTO gave the EU six months of time to comply.
According to the EU trade spokesman, John Clancy, he stated in December 2011 that the EU will take initiative to reform the financial aid package in order to ensure that this new comprehensive package of actions will achieve full compliance with WTO recommendations and ruling for the Airbus case. He also added that the new package of financial aid will address all the illegal subsidies issue and all forms of adverse effect on all models of aircraft covered by WTO rulings. All these reasons are the justifications why it is believed that EU will not discontinue its financial support to Airbus if they know it will give impact on the ability of Airbus to survive and compete. This decision is found as not only will benefit the Airbus alone but lots of advantages are shared by EU if Airbus continued to be profitable. Question 4:
In the event the WTO rules against Airbus and tells it to stop accepting subsidies and soft loans, how should Airbus management respond? What new approaches can management pursue to maintain Airbus’s lead in the global commercial aircraft industry? If the WTO rules are concluded against Airbus and tells it to stop accepting subsidies and soft loans, they should find other strategies to sustain their current position. Instead of depending on the soft loans and the subsidies, they may pursue new strategies to maintain Airbus’s lead in the global commercial aircraft such as: I. Cost leadership strategies
II. Differentiation strategies
III. Technology and Innovation strategies
IV. Low price strategies
Cost leadership strategies
Cost leadership strategy aims at producing products keeping the customer in view and manufacturing products at low cost per unit. So that, customer could afford that particular product. Airbus could position itself as offering a low cost product as a standard price. Costs are reduced at every element of the value chain. Airbus can exploit the benefits of a bigger margin than the competitors. Airbus also can produces services at low price coupled with a brand and marketing skills to use premium pricing policy. It could offer a services that was different from that offered by rivals. This allows companies to make prices less sensitive and focus on value that generates a comparatively higher price and a better margin. Differentiation Strategies
The differentiation strategy suggests that products and services should be unique with different and innovative designs and those products should be targeted towards the customer who are intending to buy low priced products and services. Differentiation strategy seeks to provide products or services completely different from those of its competitors by adding features valued by consumers. The main objective of using this is to either maintain the market share or increase market share relative to its competitors. A clear example of this is aircraft manufacturer Airbus’s wider fuselages, cockpits designed for use in more than one aircraft and electrical rather than mechanical flight controls. Technology and Innovation Strategies
Production innovation takes a main place in the innovation strategy important for the survival of the existent in the cruel aerospace environment. many surveys show the importance of Research and Development for innovation. Indeed the surveys proved that investment in this function of the business would affect profit marginal in a positive way. To safeguard this technology leadership position and to ensure its global competitiveness, Airbus need to takes pride in its ability to continually innovate, providing the world’s most efficient aircraft flying today, and preparing for the air transportation industry’s needs of tomorrow. Design plays a important role in Airbus innovation. Indeed Design is involved in producing products that are unique in design and architecture as the fuselages and the cockpits. Also the current position of Airbus in the market is largely due to the introduction of advanced technologies that would better meet the needs of competition and customer expectations. Low price strategy
The next generic strategy is the low price strategy. This strategy pursues a lower price than pertains in the market whilst trying to maintain similar value of product or service as those offered by competitor alike. There is the potential of price war among competitors and in the long run consumers are likely to lose as the firms might not be able to sustain the lower-price-good-value strategy. Notwithstanding the price war and low margins, there are some suggested ways in which a low-priced strategy can bring about a firms competitive advantage. The market segment must be low-price sensitive, and also the SBU has a cost advantage over its competitors. However, in practice, the lower price strategy usually brought about by lowering operational cost alone does not give the firm the competitive advantage if the firm is not able to sustain it in the long-term as there are now more firms entering the market because of low or no entry barriers like small capital requirements and also how efficient the staff might be. Conclusion
In conclusion, government intervention creates advantages and disadvantages to some people. Government intervention does not always mean a bad thing. This is because sometimes there are situations or conditions that need government intervention in order to preserve other well-being and interest. This can be seen as government intervention is often motivated by protectionism. Thus it shows that governments intervene in the trade and investment with the objective of giving protection. Even though this action gives some disadvantages to some other people, it should be done if the advantages received by others are more than the disadvantages. It is also cannot be done if it is bring a great harm to others while protecting some. So every government should establish policies that are fair to everyone and not bias to some people only. In the end, this fair policies will bring a more prosper economy and improve country’s well-being.