The strategy of Boeing on the Russian market

The strategy of Boeing on the Russian market
Constantly aggressive, but is it constantly efficient?

by Viatcheslav KALINKINE

The Boeing Company is successfully vying with European aircraft manufacturers on the Russian runways. The Aeroflot-Don airline company planned to acquire four Dutch Fokker-100 on a short-term lease contract. These aircraft particularly seduced the managers of this company by their great passenger comfort and their reduced fuel consumption. The plan, however, fell through because the planes were uncertified and so could not enter Russian air space. Consequently, Aeroflot-Don had to lease two Boeing 737-500 airliners, which consume more kerosene than Fokker-100 planes. Those who follow Russian provincial news often read about the landing of a second-hand Boeing commercial jetliner, which was acquired in Indonesia (Singapore, Mexico, Egypt, or elsewhere) by some local Russian airline company, on a regional airfield to the sounds of a government orchestra.

Boeing is implementing an aggressive marketing strategy in Russia because local air carriers need to replace their obsolete fleets. But Airbus, Boeing's main European rival, is actively trying to increase its market share as well, and the Russian aircraft industry also wants to supply the majority of the local market's planes. In this situation, Industry and Energy Minister Viktor Khristenko, a young and energetic technocrat and Kremlin veteran, is doing his best to balance the interests between Moscow, Toulouse and Seattle.

"Happy days" begun for Boeing in Russia immediately after the Soviet Union's disintegration. On the occasion of one of his first visits to the United States, Russia's unforgettable first president, Boris Yeltsin, toured Seattle, and this convinced everyone that Boeing would henceforth establish control over the Russian aircraft industry. However, Boeing managers, who were not interested in the country's obsolete local factory equipment, decided to tap Russia's gigantic intellectual potential instead. In 1992 Boeing opened a science and technology center in Moscow that employed over 350 previously jobless Russian scientists and engineers specializing in the field of civil aviation, information technology and space research. The center is still operating today, but at that time its inauguration appeared some-what surrealistic. Today, Boeing possesses research departments in 7 Russian towns. In 1998, the company opened a construction center employing more than 1,200 engineers in Moscow. Since then, the center has implemented over 250 projects while also designing aerospace components, including those for the International Space Station (ISS). Russian engineers now design up to 35% of all Boeing parts.

Russian titanium weighed heavily in the balance

Boeing’s major trophy is without a doubt the Russian titanium. The Russians are long since crazy about titanium: they produce 1,5 times more of this super-light and extremely durable metal than all other countries combined. Those colossal Soviet strategic submarines, which were almost as large as WWII battleships, featured two very thick, large-diameter, titanium hulls. The Russians, who were the first to build pompous titanium-coated monuments to the first space travelers, subsequently mastered the production of titanium spades and shovels. They are very popular because they are extremely light and mud does not stick to them. Today they are still for sale in local
stores, and cost only five euros (for that price you have to fit the handle yourself !) Turkey, Japan and other countries bought hundreds of thousands of these spades and shovels in the early 1990s in an effort to stockpile titanium.

All the Russian titanium is produced by one sole factory situated at Verkhnyaya Salda in the Oural region. That is precisely where Boeing decided to set up. The Russian government was most eager to sell this factory to the Americans from Seattle, but the formerly omnipotent local authorities intervened and thwarted the deal. Sverdlovsk Region Governor Eduard Rossel, (a connoisseur of Beaujolais wines), recalls: "When the Americans wanted to buy the Verkhnyaya Salda factory, I sent a confidential note to Yeltsin… - today we can talk about it - because I feared that Russia would lose the enterprise and subsequently be obliged to beg for titanium. Indeed, quite an outrageous prospect. Finally, we maintained control over the enterprise, and now the Russian State is present again."
Boeing subsequently managed to establish indirect control over the VSMPO-AVISMA Corporation, which operates the Verkhnyaya Salda enterprise and supplies 65% of the titanium used by Airbus (only 40% for Boeing).

A special economic zone created for the American aircraft company

Presently, Boeing is "preparing to land" from another point of view. Dr. Sergei Kravchenko, president of Boeing Russia/CIS, recently said that his company has asked the government to create a special economic zone (SEZ) at Verkhnyaya Salda. This is extremely interesting because there is no plan for a SEZ in this town for the moment. However, a Russian-U.S. joint venture, due to make titanium components, is being created. The extremely wide-ranging local opportunities go far beyond the aircraft industry. Boeing, which is involved in the joint venture, therefore apparently does not doubt that Russian authorities will establish a special economic zone because the company is extremely valuable as a business partner. The U.S. corporate giant soon plans to spend $18 billion on the purchase of local titanium products. Moreover, Boeing managers promise to relocate "considerably important" titanium-processing facilities to Verkhnyaya Salda. Boeing plans to machine all die-cast parts and other large components (which had previously been made in Russia but machined elsewhere) on Russian territory. The new joint venture will primarily produce the Boeing 787.

In all, Boeing has decided to spend about $27 billion on contracts with Russian enterprises over the next 30 years, with some $5 billion to be dedicated to high added value services (intellectual, engineering, and design). Boeing divisions are to buy $4 billion in services and materials for such projects as the International Space Station, Space Launch and Connection by Boeing, offering satellite-based high-speed Internet access to passengers and crews of airplanes and ships on Russian territory. Moreover, it is interesting to note that Boeing holds a contract signed with Sukhoi, to provide international certification, help promote the Russian Regional Jet (RRJ), the last hope of the national aircraft industry, and ensure its warranty and post-warranty maintenance. Apart from Boeing, the RRJ program involves French and Italian companies.

Competition between European and American aircraft companies becomes fiercer

It would appear that the Europeans are gaining ground on the market of new aircraft, marking points in the political sphere. The President Vladimir Putin, who has never visited Boeing in Seattle, prefers to visit European aircraft factories.

In May 2006, the board of Aeroflot, Russia's national air carrier, decided to buy 22 A350 passenger jetliners by 2014, worth an estimated $3 billion. Boeing, which had hoped that Aeroflot would sign a lucrative contract for its B787 Dreamliners, was apparently the more obvious choice. First of all, the B787 will be ready two years before the A350, and secondly, Boeing linked the signing of the B787 contract with another agreement for the sale of MD-11 cargo aircraft to Aeroflot. Boeing now wants to phase out DC-10 jets and replace them with MD-11s. It is therefore hardly surprising that the new president of Boeing, James McNerney, paid his first visit to Russia on April 10-11. At the same time, Airbus promised Moscow a $100 million discount if Aeroflot opted for the A350 aircraft. Business analysts have said that Russia's decision to choose the EU airliner was motivated by Washington's tough stance on Moscow's accession to the World Trade Organization (WTO). By depriving Boeing of this multibillion-dollar contract, Russian officials wanted to exert pressure on U.S. negotiators.