17 February 2017 · 3 min read

Court room dramas

Embraer & Brazil vs. Bombardier & Canada – round 2

Embraer and the Brazilian Government vs. Bombardier and the Canadian Government looks set to be the next aerospace courtroom drama. This follows hot on the heels of the aerospace giants Airbus and Boeing slogging it out in the courts over government’s providing financial support for new aircraft programmes, known commonly as ‘Launchaid’ (see Andy’s December blog). 2017 will see the aerospace minnow’s take to the stand in a replay of their previous drama, as Embraer has again complained to the World Trade Organisation about Canada’s support of Bombardier.

Last week the Canadian government announced US$282m in repayable but interest free funding for Bombardier’s C-series aircraft and Global 7000 jet, with the money coming from Canada’s Strategic Aerospace and Defence Initiative (SADI).  This announcement triggered the Brazilian government, whose own aircraft manufacturer Embraer is a direct competitor of Bombardier, to claim Bombardier has received government support to the tune of $2.5bn over the past decade. It is alleged this has come through research incentives and reductions in local taxes, as well as injections of capital.

This government support is what, according to Brazilians, helped Bombardier get an order for 75 CSeries jets, worth an estimated US$5.6bn, from Delta Airlines, beating the competition from Embraer’s E-Jets. Brazil believes Bombardier offered a discount to below break-even price in order to close the deal – something it couldn’t have done without the alleged subsidies. Both parties now have sixty days to reach a settlement, after which the WTO will set up a dispute panel with the final decision likely to take more than a year.

Government’s subsidies have been an intrinsic part of the aerospace industry over a number of decades because commercial aircraft sales generate high levels of trade and jobs, and therefore economic growth. With so few players in the industry, and no more than one aircraft manufacturer in any one country, it seems ludicrous to suggest that governments will remove their support and therefore the status quo or the established Boeing and Airbus duopoly, with a few smaller manufacturers such as Embraer and Bombardier fighting over the spoils.

However, we easily forget that only four decades ago the market was much more fractured and centred on the West, with three US manufacturers, three Europeans, no Russian or Asian players. These trade disputes, which are over long standing issues and are notoriously lengthy to resolve, risk distracting attention from subtle evolutions of the competitive environment. If the WTO chooses to crack down on government support, then the status quo in the west will suddenly look vulnerable. The Chinese C919 aircraft manufactured by the state owned COMAC is due to enter service at the end of 2018, and the Chinese government is more than willing to financially support its flagship aircraft, even if it is technically and commercially uncompetitive. In addition we have the added dynamic of President Trump promising to ‘make America great again’, thus leaving us in no doubt that Boeing’s governmental support will continue.

We in the west are walking a tightrope between upholding scrupulous business practice and doing what is best for our own economic and business interests. We should be wary of becoming too comfortable squabbling over whether the current competitive environment is fair, because that affords new entrants an opportunity.

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