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Boeing Delivers Its First 737 MAX Completed in China

By Adam Levine-Weinberg - Dec 17, 2018 at 9:50PM

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Boeing is trying to balance government concerns on both sides of the Pacific as it opens its new completion and delivery center in Zhoushan, China.

On Saturday, Boeing ( BA -1.92% ) delivered its first jet from its new 737 completion and delivery center in China: a 737 MAX 8 built for Air China. The new facility will eventually finish up to 100 737 MAX aircraft annually, all destined for carriers in China. (That capacity is still significantly lower than the number of 737s delivered to Chinese airlines in a typical year.)

Boeing's decision to open up shop in China has drawn plenty of criticism. However, considering that Airbus ( EADSY -2.31% ) does even more production work in China, opening this completion and delivery center was a good compromise by Boeing.

A rendering of a Boeing 737 MAX 8.

Boeing will complete up to 100 Boeing 737 MAXes annually at a new facility in China. Image source: Boeing.

You can't satisfy everyone

Boeing first decided to open a 737 completion and delivery center in China in late 2015. It was largely a way to keep Chinese leaders happy, as aircraft orders by Chinese airlines are at least nominally controlled by the government.

Airbus builds some A320-family aircraft at a factory in Tianjin, so it was already well ahead of Boeing in terms of having an industrial presence in China. If Boeing had refused to move any work to China, it would have risked losing a substantial amount of business to its archrival.

In late 2016, Boeing and its Chinese partner COMAC announced that they would locate the new completion and delivery center in Zhoushan, which is less than 100 miles from Shanghai. Predictably, then-candidate Donald Trump blasted Boeing for moving work overseas.

However, Boeing said at the time that it did not expect any layoffs in the U.S. in connection with opening the Zhoushan facility. (Indeed, at full capacity, the Zhoushan completion and delivery center will employ just 300 workers.) By contrast, a loss of market share in China could certainly have impacted Boeing's domestic workforce.

What the new center does

Boeing 737 fuselages on the assembly line in Renton.

Boeing builds all of its 737s in a single massive factory. Image source: Boeing.

It is important to note that Boeing is still building all of its 737-family aircraft at its factory in Renton, Washington. It has three side-by-side production lines there that can each churn out up to 21 737s per month. This high-volume facility represents a key competitive advantage for Boeing, whereas Airbus builds its A320-family planes at four factories on three continents. It's likely a big reason why Boeing is so much more profitable than its European rival.

After production, some 737s destined for Chinese customers will be flown to the new completion and delivery center in Zhoushan. Initially, the Zhoushan facility will specialize in fitting aircraft interiors for those planes. Eventually, the aircraft will also be painted there.

Rather than cannibalizing Boeing's production in the U.S., setting up a completion and delivery center in China will free up space at the 1.1 million-square-foot Renton plant to enable future production increases for the 737 family. (The Zhoushan delivery and completion center spans 666,000 square feet of space even though not a single jet is being built there.)

Navigating tricky waters

Rising trade tensions between the U.S. and China represent a key risk for Boeing, because China has become such an important aviation market. By moving some low-value, relatively labor-intensive work to China, Boeing may be able to stay in the Chinese government's good graces and reduce its costs without threatening the job security of its skilled workforce back home.

For now, Boeing's real trump card with respect to trade relations with China is that Airbus has a massive order backlog. As a result, Airbus couldn't come close to supplying enough aircraft to meet China's voracious demand for new airplanes.

However, in the event of a global recession, lots of delivery slots could open up as airlines look to shrink their fleets by deferring or canceling orders. If that happens, Boeing wouldn't want Chinese airlines to keep all of their Airbus orders and dump their Boeing deals. Thus, keeping China happy by moving a token amount of work there is likely to be a wise long-term decision for Boeing.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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