Current Event Post - Plane Makers Under Pressure to Cut Costs as Competition Looms

While consumers have considered Boeing and Airbus the only rivals in creating large innovative aircrafts, the market may have overlooked a rising dragon in the East,  China’s state owned Comac is creating a C919 and C929 that will rival the Boeing and Airbus airplanes (Cameron 2012). Comac’s C929 has been labeled a “game changer” in the industry providing a 10% reduction in cost compared to Boeing and Airbus ³(Cameron 2012). The plane will carry 165-180 passengers and will benefit from China’s growing need to replace retiring airplanes (Cameron 2012). An important point advantage China has over Boeing and Airbus is supply of low cost labor in the country. Although the article explains that this advantage is minimized when looking at the bigger picture because most of the parts are from the west it still will be a long term advantage over the United States and European labor unions that increase labor costs (Cameron 2012). Also, it does not take a country like China to build the know how to create these parts reducing the competitive advantage of Boeing and Airbus in the long run. Increased competition in the industry pushes downward pressures on prices decreasing margins giving China’s labor cost and important strategic advantage. Comac has had success and traction with their current C919 selling over 380 orders². The company is expecting to sell anywhere from 4,000- 20,000 airplanes over the next 20 years³.

            China’s state owned enterprises low labor costs creating increased competition in the global market place is important for every industry in the world. The country has a strategic competitive advantage in low labor costs that pushes downward pressure on price and increases competition globally. Also, it is important that we recognize there is a new Asian tiger in the aircraft market providing competition for the traditional Airbus and Boeing.

            Implications of China becoming competitive in the aircraft market means decreased margins for the top 2 aircraft companies. Downward pressure on prices will require that western companies tighten supply chain and reduce the cost of materials or add value that allows price competition to cease to exist. Managers should keep an eye out for state owned enterprises that provide increased competition through low labor costs.

  

¹Cameron, D. (2012, Nov 09). Plane makers under pressure to cut costs as competition looms. Wall Street Journal (Online). Retrieved from http://search.proquest.com/docview/1143674269?accountid=7108

²http://www.reuters.com/article/2012/11/13/us-china-airshow-idUSBRE8AC03B20121113

³http://www.globaltimes.cn/content/744184.shtml