Boeing's China Problem | Wendover Productions

The first of these issues has to do with Boeing's brand new yet beleaguered airplane, the 737 Max.

Prior to the Max's grounding, China was, by a wide margin, the largest operator of this airplane.

Its airlines had a total of 97 Maxes, while US airlines, representing the second-largest customer group, only had a total of 72.

This is an aircraft particularly well-suited to China's geography.

With a number of smaller, secondary, or tertiary cities, China's airlines are increasingly focused on developing non-stop flights bypassing the major hubs of Beijing, Shanghai, and Guangzhou, or flights to lower demand cities outside of China.

This is especially true given the huge number of smaller airlines operating in China who have established themselves by setting up hubs in some of the country's smaller cities, whose populations more recently started to transition into the country's middle and upper classes than those of the country's tier one cities.

Of course, flying to or from these smaller cities means lower demand for seats.

However, the longer range, smaller capacity capability of the 737 Max perfectly suits this mission.

That allowed Chinese airlines to set up, in an economical manner, flights like Jinan to Singapore, Guangzhou to Lahore, Urumqi to Bangkok, or Hangzhou to Hotan, all five or six-hour flights with minimal demand.

The 737 Max was an aircraft perfectly suited for China, and Boeing knew it.

This suitability and focus was demonstrated by Boeing's decision to set up an aircraft completion center in Zhoushan, China.

While aircraft would continue to be primarily assembled in Renton, Washington, they will be flown over to Zhoushan without the interiors completed.

In Zhoushan, their seats, overhead bins, and basically the entire rest of their interiors would be installed by Chinese workers in this Chinese factory.

Having a ground presence in China would appease the government, and by extension, airlines, and the hope was that this would help convince them to buy Boeing jets, considering that their purchase provided Chinese jobs.

This was especially necessary, considering that Airbus already had an even more extensive final assembly line in the country for its competing A320 jets.

Given the Max's suitability, though, Chinese airlines bought an enormous number of these planes.

In addition to the 97 already delivered, Chinese airlines had almost 500 of them on order.

But then, of course, the Max crashed, and then it crashed again.

China's Civil Aviation Administration, eager to maintain the country's recent streak of aviation safety, quickly grounded the Max after its second crash, making China the first country to do so.

This was a rather shocking move, as historically, every country's aviation regulator more or less just followed the lead of the American FAA in these decisions.

It was thought that if the FAA said it was safe, it was safe, and in this case, the FAA initially asserted their confidence in Boeing's 737 Max and chose not to ground it immediately.

Now, in the aftermath of this, the grounding of the Max has presented Beijing with three gifts.

First, especially in the case of the state-owned airlines and leasing companies, the Chinese have a much stronger negotiating position than before with Boeing as the company works to regain the momentum it had before.

Prices, which typically vary widely from airline to airline and deal to deal, could end up lower.

Secondly, China's three largest airlines, which are all state-owned, are asking Boeing for compensation for the grounding of their jets.