2010 Speeches
W. James McNerney, Jr.

Jim McNerney

Chairman, President and Chief Executive Officer

The Boeing Company

"Nearly Four Decades in China: A CEO's Perspective"

The Chicago Council on Global Affairs

Chicago

May 26, 2010

Given our topic today, I think I should start by commending Secretary of State Hillary Clinton and Treasury Secretary Tim Geithner for the progress that their teams made this week at the Strategic and Economic Dialogue in Shanghai. I know some of you followed this closely. And I know Commerce Secretary Gary Locke also played a key role as part of that 200-person U.S. delegation.

It's vitally important that U.S. political leaders are engaged in support of U.S. trade relationships. Expanded engagement in international markets, combined with the recovery of our financial services markets, is critical to accelerating our overall economic recovery. We're reminded everyday how fragile the recovery is when we see what is happening in Europe right now.

What I think is remarkable is that this year's Strategic and Economic Dialogue was, in a way, unremarkable -- an established and accepted part of the way the United States and China work together on behalf of their respective citizens.

What a difference 38 years makes! I know most of us remember what's been called the "week that changed the world," when President Richard Nixon made his historic trip to China in 1972. Nixon said at the time that the United States and China had come together to "build a bridge" -- a bridge that would span thousands of miles of ocean ... and a nearly a quarter of a century of barely suppressed "hostilities."

Back then, the "bridge" that President Nixon spoke of consisted of nothing more than a piece of paper -- the Joint Communiqué signed by the leaders of the two countries. Today, the sea-and-sky bridge that connects our two countries carries a two-way traffic of goods and services that totals nearly 400 billion dollars a year -- or more than a billion dollars a day.

There was zero trade between our two countries between 1949 and 1972. By the year 2000, U.S. exports to China had grown to $16 billion, while U.S. imports from China totaled $100 billion. Since then, U.S. exports to China have doubled and redoubled -- rising by a factor of four (to $70 billion) -- while U.S. imports from China have tripled (to nearly $300 billion).

Obviously, as a nation we are running a large bilateral trade deficit with China. (I'll come back to that and comment on it further in a few minutes.) For now I just want to point out a powerful fact: China has passed Britain, Germany and other countries to become the largest buyer of U.S. exports outside North America . . . while the United States has passed Japan to become the largest buyer of China's exports.

Indeed, Chinese goods -- everything from apparel, to toys and games, furniture, cameras, computers, electrical machinery and equipment, footwear and bedding material -- are ubiquitous in U.S. stores such as Wal-Mart, Crate & Barrel, Home Depot and many other places.

By the same token, rising disposable incomes have energized Chinese consumers like never before: traveling, driving cars, and shopping for high-end goods. So if you spend much time traveling around China, as I have over the past two decades, you cannot miss the fast-growing presence in China of all things (or at least many things) American -- from movies and music to the exponential growth in number of retail outlets, such as Starbucks, KFC, Pizza Hut, McDonald's, and Wal-Mart. It now seems like there's a Starbucks on every corner in Shanghai -- and that's because there is -- just as there is in downtown Chicago. Wal-Mart now has no fewer than 146 stores, including 138 Supercenters, in 89 Chinese cities. And high-end Buicks from General Motors have become the symbol of success for the young professional set.

China's demand for imported goods is also being stoked by huge government spending on infrastructure -- in building highways, railroads, airports, hospitals and the like -- and still more by the recent real estate and construction boom. So U.S. manufacturers with growing exports to China include makers of pharmaceuticals, computers and electronics, and medical, railroad and construction equipment. IBM, Caterpillar, GE and Boeing all count China as one of their largest export markets. And for perspective, China is, indeed, Boeing's largest export market -- and not by a little, but by a lot.

In looking back, the case can be made that the whole story of what now goes by the name of 'globalization' began with that presidential visit to China in February 1972. In that sense, Boeing had the good fortune of being present at the moment of its creation. President Nixon and his entourage arrived in Beijing on a Boeing 707, truly the game-changing airplane of its time, and they were met on the tarmac by Premier Zhou Enlai and a small group of Chinese officials. China ordered ten Boeing 707 jetliners soon after the visit, setting in motion a tremendously productive relationship between a company (Boeing) and a country (China) -- a relationship that continues today and in many ways has become symbolic of the nearly four decades of cooperation between our two nations. Visits to our facilities over the years by some of the highest-ranking Chinese leaders -- from Vice Premier Deng Xiaoping to Presidents Jiang Zemin and Hu Jintao -- have underscored our centrality to both commercial and country-to-country relationships with China.

Following President Nixon's landmark visit -- with the so-called "Open Door" now solidly in place -- China began moving from a centrally planned system that was largely closed to the outside world ... to a still-centrally planned but self-styled market-oriented economy. In doing so, China quickly embraced participation in the global marketplace. Toward the end of the 1970s, China initiated major economic reforms -- freeing farmers to sell surplus crops on the open market and encouraging foreign companies to make direct investments in special economic zones along the coast. These reforms set the stage for the prolonged economic boom which has continued unabated from that time to this.

China is now the third-largest economy in the world after the United States and Japan.

On a somewhat more personal note, when Nixon visited China, I was a year out of college and working in Europe. Like everyone else, I was taken with the idea that this vast and ancient land was prepared to open her door to the outside world. Later on, I joined GE -- in part because GE was a company with very much of a global view.

Jack Welch -- GE's leader for the 19 years I was there -- sent me over to Hong Kong in the early 1990s to head up GE's Asia operations. Jack didn't give me a blueprint or lots of instructions. Instead he gave me one of his leadership lessons. He told me, "Asia's the biggest opportunity we've got, and we're not doing much. Go figure it out." The lesson was, if you give good people a lot of rope, you'll get good ideas in return, instead of getting a public hanging.

At that time there was a lot of talk about the fact that China had passed the one billion mark in population. It became a popular cliché to say if you could figure out a way to sell just one of anything to everyone in China, you'd get rich in a hurry. Problem was, China at that time was still very poor. These were the days when bicycles were the predominant luxury. It's hard to sell much of anything to people who are only making a few dollars a day.

Therein, I think, is one of the most important changes in China that I have witnessed over the last 20 years -- the rapid growth in personal incomes. A growing middle class in China is dramatically reshaping the country's domestic economy and having a major global economic impact, too.

China's growing prosperity is compelling when you look at a few noteworthy statistics (and you pretty much have to go there every six months just to keep up with the pace of change!):

  • One survey indicates that automobile ownership in China has doubled in the last five years, with approximately 50 million people now owning their own cars.The Chinese are adding 12,000 cars per day. And, in fact, here's the clincher: Chinese consumers last year bought more cars than U.S. consumers did! Think about that; the Chinese auto market is now bigger than ours.
  • Public transportation in large cities has become incredibly fast and efficient. For example, if you want to get to the middle of Shanghai from Pudong International Airport (almost exactly the same distance as between here and O'Hare), you can make your way through 45 or more minutes of traffic ... or you can hop the world's fastest train and get there in eight minutes. That's about 280 miles [450 kilometers] an hour. Imagine a Blue Line trip to O'Hare like that!
  • As recently as 1986, only 7 million people in China had phones of any kind. Today more than 350 million people own mobile phones. (You'll note that there are more mobile phones in China than there are people living in the United States!)
  • And China's online population is the biggest in the world at more than 425 million people, or a third of the population.
  • Narrowing things in the direction of Boeing's interests: Under China's civil aviation plan, by 2020 the number of airports serving more than 30 million passengers a year will increase to 13 from the current three. These are huge, O'Hare-sized airports. (In 2009, the U.S. had 18 airports of that size.) And between 2008 and 2020, China will be adding 97 new airports in major metropolitan cities, which will open the airways particularly for domestic travelers and bring its total number of airports to 244.
  • The Chinese people are becoming significant spenders on global travel, too. Already, today, in Paris, the greatest number of tourists by ethnic origin are Chinese -- and they spend more per capita than anybody else. And an estimated 180 million plan to travel in the relatively near term. Many of them want to visit the United States, but it is much more difficult for them to obtain a U.S. visa than it is for them to visit European Union nations, as an example.

Now, Boeing doesn't sell any of the consumer products I've mentioned. But, of course, we are interested in travel, and we do keep an eye on consumer sentiment as it relates to buying airline tickets -- as that is what ultimately drives demand for new airplanes. For more than a decade, air traffic within China ... and between China and the rest of the world ... has been growing at a compound annual rate of about 12 to 15 percent -- even through the global economic downturn. That is a blisteringly fast pace -- one we can expect will continue for some time.

Over the past decade, China has bought more airplanes than any country in the world (except the U.S.). It has a total of 1,560 commercial airplanes (almost 53 percent of them Boeing airplanes), and the average age of these planes is just six and a half years -- meaning that China also has one of the youngest fleets in the region.

Notwithstanding those impressive stats, just think of the 97 new airports I mentioned earlier, and consider how far China has to go before it begins to approach the levels of air travel saturation we have in the United States: To draw even with the U.S. in frequency and convenience of air service, China would need ten times as many airplanes as it now has.

There are some reasons that China may never achieve the same level of air service that we are accustomed to in our country. But it will surely come a lot closer than it is today. To us it is axiomatic that the desire to fly goes up with a rising level of income. That is why we have forecast that China (including Hong Kong and Macau) will triple its fleet over the next 20 years to 4,600-plus airplanes -- representing a growth rate six times that of the North American fleet that we anticipate over the same time period..

Let me put that into perspective: The current value of Boeing airplanes now in the China fleet is around twenty billion dollars. The total market potential over the next 20 years is 20 times that amount -- or four hundred billion dollars. And we hope to provide a majority of those airplanes.

I'd like to make just a few more comments on Boeing's work in China and the impact of our deep roots there. For any of you who may be planning your first trip to China (and for those of you who may travel there with regularity), it's often overlooked that China is a world leader in aviation safety, which isn't the image we've had over the years. The fact that China has maintained an excellent safety record during the past decade of unprecedented growth in its air-transportation system is an impressive achievement when you grow that fast. It's also something Boeing is proud to have actively partnered with China and its airlines to attain.

Not only have we supplied more than half of the airplanes in China's fleet, but we have also helped China stand up its aviation infrastructure. We have trained pilots, mechanics, air traffic controllers, help design air-traffic-control systems and other things. We have worked with China in the establishment of airports and airplane service centers that maintain, modify and upgrade existing aircraft, and provide various other kinds of technical support. And we have shared best practices in leadership, integration and lean operations to make the whole system as safe, and as efficient and as successful as possible.

Last but not least, we have helped nurture China's capabilities in the design and manufacture of an increasing number of parts and assemblies for all of our airplanes -- the Boeing 737, 747, 767, 777 ... and our newest and most innovative airplane, the 787 Dreamliner.

In large part because of our efforts, the U.S. is now the biggest import market for Chinese aerospace suppliers. Since the 1980s, Boeing has purchased more than one point five billion in aviation hardware and services from China, and we are prepared to purchase roughly twice that amount over the near term.

That leads to a view shared by many in our industry that within the next 10 to 20 years, the Chinese aerospace industry -- which today is customer and supplier to both Boeing and Airbus -- will also become a strong competitor to both of us. All the necessary ingredients are there: financial wherewithal, technological proficiency, a large domestic market, a productive workforce, and a pipeline of talent trained in science and technology.

Rather than retreat from this challenge or attempt to delay the inevitable, we have opted to accept the reality of both partnering and competing with China. In the near term, the Chinese market I've described for you today is simply too large and too important not to cooperate for mutual benefit. More joint activity, such as our aviation services facility in Shanghai that Secretary of State Clinton visited this past weekend, are a potential outcome of this strategy.

Longer term, as China's capabilities continue to strengthen, and head-to-head competition for new airplane orders sets in, we will compete and win the way we have for decades -- through the game-changing innovation of our products and services, fueled by advancing technologies and the creativity and ingenuity of our people. All of which we focus on providing our customers a substantial competitive advantage over their competitors.

Ultimately, we believe that China's airlines -- like airlines everywhere -- will want to buy products and services that provide their customers the best experience and their business with the best value -- and we intend to be their supplier of choice. In other words, we're playing offense, not defense.

The opportunity for Boeing in China is but one frame in the mosaic of overall business potential for U.S. companies in Chinese markets, and, reciprocally, for Chinese companies in U.S. markets. I believe the United States and China are already interdependent and growing more so every day. Now, clearly there are a host of challenges that I won't detail here, which business leaders and government leaders are working to resolve in order to ensure the continued strength and mutual benefit of our bilateral relationship.

I expect that the U.S.-China relationship will always be complex, but that global interdependence in business will help keep both nations motivated to work out their differences constructively.

My observation is that even when the two nations face strong disagreement and the rhetoric does occasionally flare, our mutual interdependence tends to bring it back down to a more pragmatic discussion about how to work through the respective issues for the long term.

Case in point: Despite ongoing debates on a number of issues, the two nations have worked very closely and effectively to navigate through the global financial crisis. And that is because we both had to.

Now, I'm under no illusion that some of these complex issues have easy solutions. Each of our countries faces a unique set of economic, business and political challenges which will color our views of things and drive different priorities and expectations.

What I believe we must strive for on both the business and political fronts is balance in the outcomes, supported by a spirit of constructive engagement and dialogue.

For its part, China is managing tremendous growth but also tremendous change. It is working to convert its initial low-cost advantage to a new foundation of competitiveness through technology and its application and a scaling-up of its industries to compete globally. And, all the while, it must manage the inherent tension between free-market dynamics and a political structure that wants to ensure the engagement of as many people as possible in the new economy to avoid a potential backlash.

I mentioned earlier the 5-to-1 trade imbalance that exists between our two countries, which I see as one of the more pressing challenges to our bilateral relationship. However, as development progresses in China and per-capita incomes continue to rise, China's domestic consumption will increase quickly. And when you consider the sheer numbers of potential new middle-class consumers involved, those increases will go a long way toward closing the trade gap with the U.S. and, in due course, make China less dependent upon exports for its future growth.

Meanwhile, on our side, we are confronted with high unemployment, growing deficits, massive debt levels, and reduced competitiveness in the face of emerging global competitors. As a nation, we really do need to do a better job of living within our means. We need to borrow less, save more, produce more, become more efficient and competitive, and bring our exports back into line with our imports. Opening up and expanding new markets is paramount, even if means -- as is the case with Boeing in China -- accelerating competition as you do it.

Allow me to make one last point. Ensuring a level global playing field for trade between our two nations is vital to both of our interests. I believe Secretary of State Clinton made that point very clearly this week in China. A soon-to-be-published World Trade Organization ruling against Europe's Airbus over the legality of government start-up funding (in this case known as launch aid) for large commercial aircraft programs, will set an important precedent for the global aerospace industry. China is one of several nations -- including Brazil, Canada, Russia, and Japan -- that is gearing up to compete in the large-airplane market mainly served by Boeing and Airbus today. Media reports have made it clear that the WTO will rule strongly against the kind of non-commercial launch aid funding that powered the rise of Airbus within our industry.

I'm confident that China (and that other nations with aspirations to enter the commercial-airplane business) will be mindful of that precedent. A rules-based global trading system builds trust across all parties and provides substantial economic benefits to all nations -- based on their competitiveness, not based on anything else.

Let me close now with a couple of thoughts.

The rise of China over the last several decades is truly a marvel. Some fear this rise, but I would argue that China can no more displace America than America can hold back China. Or as Secretary of State Clinton said recently: "Few global problems can be solved by the U.S. or China alone, and few can be solved without the U.S. and China together." The important concept here is maintaining dialogue between the two nations ... as well as between industry and the respective governments ... not only to address issues of concern but also to expand existing partnerships and create new ones.

Ultimately, I believe that China will continue to be both a major market and a major partner to us, supporting thousands of U.S. jobs and contributing significantly to the U.S. balance of trade. In fact, our interdependence with China is key to the United States achieving President Obama's goal of doubling America's exports over the next five years -- an increase projected to support two million American jobs at a time when we really need them.

I know I don't have to tell this crowd how much relationships matter, presence matters, and respect matters. The more we work with our counterparts in Chinese business and government, the more we will develop mutual understanding and influence.

In doing all that, we will keep the historic "bridge" that I mentioned at the beginning of my remarks in good repair.

Thank you. Now, I'll be happy to take your questions.