Rolland Vincent

Much is being said and written on the topic of an international trade war, led by mounting tensions in the complex U.S.-China relationship.&nbsp;With China on the rise and many in the U.S. seeking a return to the good old days of American greatness, the rhetoric–turned-reality of mounting trade tariffs is a troubling development that is beginning to spook investors worldwide.
In April 2018, China’s Ministry of Commerce proposed tariffs of up to 25 percent on $50 billion worth of U.S. goods, focused on the agricultural, automotive, and aerospace sector. This was in response to a proposed 25 percent U.S. tariff on China-made semi-conductors, electric vehicles, solar panels, aircraft parts, and other products announced on April 3.&nbsp;In July 2018, both of these proposals became policy, with the U.S. Administration subsequently proposing to ratchet up tariffs by $200 billion or even more on a broad range of consumer goods.
In civil aircraft and aerospace markets, there has been much speculation about the potential impacts that such tariffs could have on export leaders like Boeing.&nbsp;So far at least, China’s 25 percent tariff on U.S. civil aircraft with an empty weight of 15,000-45,000 kilograms (33,000-99,000 pounds) is targeted below the Boeing model line, with the exception of the in-development but slow-selling 737 Max-7.&nbsp;Boeing’s new BBJ Max-7, with an operating empty weight (OEW) of 48,230 kg (106,330 pounds), is exempt from the 25% tariff, at least for the time being.&nbsp;Targeting aircraft up to but excluding Boeing’s family, China’s retaliatory tariff may have been meant as a (now failed) warning shot to the U.S. Administration to proceed no further.&nbsp;Squarely in China’s initial tariff crosshairs are Gulfstream’s large-cabin business jets, including the G500, G550, G600, G650, and G650ER.
From a market perspective, a key question to ponder is whether a 25 percent tariff puts a freeze on business jet sales. Answer: Not necessarily.&nbsp;Creative minds are already evaluating various scenarios to side-step current tariffs, whether through special-purpose companies, offshore registrations and operating bases, and other solutions.&nbsp;Buyers longing for a Gulfstream may simply defer their purchases until the tariff volleys subside, or opt for the super-midsize&nbsp;G280, an aircraft that provides advanced technology, high performance, and high value-for-the-dollar to meet most customer requirements.&nbsp;Some would-be Chinese buyers may be attracted to a financial or operating lease that could circumvent the tariff.&nbsp;Aircraft purchased by Chinese buyers before 2018 but not yet delivered—for example, from Minsheng Financial Leasing’s 2014 order for up to 60 Gulfstreams—may well be exempt from the tariff.&nbsp;All of these are questions that need to be investigated in the weeks and months ahead.&nbsp;As always, serious Chinese buyers certainly have other good options to consider, including buying a large-cabin Dassault Falcon or Bombardier Global, both of which are exempt from the U.S.-China tariffs.&nbsp;
China remains a very young market for business aviation, with a fleet profile that is heavily skewed toward new, large-cabin aircraft, especially from the leading brands.&nbsp;As this market matures, it will almost certainly evolve to begin to look more like other large country markets for business aviation.&nbsp;Case in point: we have already witnessed the emergence of a preowned aircraft market in China, which, along with heavy local investments in FBOs, maintenance facilities, new airports, and personnel training, bodes&nbsp;well for the industry’s future.&nbsp;With China’s economy continuing to expand at an impressive rate of 6.5 percent per year, the growth of its civil aviation markets—commercial airline, business and general aviation, and related services—is almost certain to continue in tandem.
So far, Gulfstream has captured the dragon’s share of the China business jet market.&nbsp;With more than 430 business jets based in the country (including Hong Kong and Macau), Gulfstream’s share of the China business jet fleet is a commanding 41 percent today, according to JetNet records.&nbsp;This is a little more than two times Gulfstream’s share of new business jet deliveries worldwide in the past five years, highlighting the appeal of the Gulfstream brand and the success of its sales, marketing, and customer service investments in China to date.&nbsp;
Can Gulfstream expect to maintain a 41 percent share of the China market going forward?&nbsp;Current trade tensions and China-imposed tariffs will likely slow down the current market expansion, which was just beginning to accelerate after a flat period for the last several years. Eager Chinese buyers may have to cast their nets more widely than they have in the past to evaluate other business aircraft and/or other leading brands. &nbsp;
The current round of back-and-forth trade volleys between the U.S. and China will continue for the time being.&nbsp;Not coincidentally, this is about the price of a shiny new, long-range business jet, whether built in Savannah, Montréal, or Mérignac.&nbsp;Trade wars may be hard-fought, but economic history suggests they are rarely decisively won.&nbsp;
In the small but global business aviation industry, China looms large as a vital market for aircraft sales, a growing center for aviation capital and talent development, and an emerging force in aircraft design, engineering, manufacturing, and aviation-related services.&nbsp;In what may be at least a $64 billion question, we might ask: Is China’s emergence the challenge of an unwelcome competitor, the opportunity of a mutually beneficial business relationship, or a little of both? &nbsp;

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