Bombardier Canada versus Brazil at the WTO 9-703-022 1. Analysis of the aero industry Aircraft industry is deeply related to the government sector. As case says, both companies Bombardier and Embraer S. A, were the originally in government sector. Since this industry generally have a historical relationship with the military, each state has tendency to protect it. Also there is another reason that aircraft industry has huge impact in local economics in the point of the expenditure, employee and cooperate tax.
Commercially aircraft industry create the business hierarchy under the assemble manufacturer, since aircraft consist of so many parts require high tech solution. Therefore not only manufacturers, but also R&D engineering companies, consulting firm and design venders, who play a significant role to support it and the government must encourage its industry. On the contrary in the military point of view, new company establishment in that industry often causes regional frictions.
Of course long-term investment such as R&D and periodical gap between industrialization and commercialization in this industry also request a government long-term support. On the other hand, negative factor to subsidize that kind of firm by government is democratic opposition by the media or citizens in that country. Those consensus well works as brake in most cases, while democratic opened countries can not control it and pay attention to it compare with the countries such as Singapore and China.
This is one of the obvious cases that political form affects the business. Beyond the control of private firm Like aerospace industry, aircraft industry often requires a performance beyond the control of a private firm from not only the economic scale point of view, but political point of view. If the competitor adopts the government collaboration in its sales promotion, the private firm can not keep its dominancy without the similar collaboration with the government. So as the history has proven, the firm in the industry always involves the government.
One thing that I want to emphasize is the change of the way of involvement. Until the firm gets the competitiveness position, it needs subsidiary in R&D and finance for company operation. However, after getting the position, the firm relies on the government in its sales promotion, that is, along with the company growth, the private firm has changed its strategic resource that the government subsidy is utilized. Finally, once the more than 2 countries governments subsidize the firms in their countries, that would be an international dispute.
WTO function To join WTO is an international status for smooth trade. Even though WTO judge fairly to solve the dispute, it does not well function to provide entire solution. The most critical point is that WTO can do nothing to impose their ruling to the disputed countries even if those countries never agree or accept it. Only thing is that under ruling the country has a right to make a sanction to another on one-on-one level. However the contemporary international organizations have a common problem. WTO only replies on each country’s political decision in the end.
WTO should have more effective function to force their ruling to the country, such as administrative litigation. 4. Segment analysis Aircraft industry has only small suppliers while the customers are all over the world. As above mentioned the industry requires large complex cooperate alliances in its hierarchy, only few countries having high tech industry basis are able to establish the industry. Among them regional jet was nitch market, but only 2 major aircraft manufacturer enter this market and other hesitate to compete.
Therefore, 2 companies clearly identified in the hostile competition. If other competitor 2-3 firms would participate this industry, 2 companies along with 2 countries might not be dispute. They are targeting dominant strategy that they try to commoditize their product as industrial standard to occupy major share to let the other quit or squeeze its market. Especially this industry is still expanding along with the demand of regional jet at smaller or medium size airports and in shorter flight.
If the company continue its effort to minimize the cost even with the government subsidiary, the clients would be happy and the companies have more competition. Incentive for consecutive company restructuring. As above mentioned, key issue is how to continue company’s consecutive trial for restructuring and operation cost reduction. Those kinds of incentives such as subsidization, export tax exemption, export finance might cause the recession of such effort. In this sense democracy may function to enhance the effort by providing opposition.
As additional point, I think support to R&D and exemption or reduction of cooperate tax is more effective than export finance is to avoid dispute. Recommendation to Bombardier. Considering bilateral dispute, I recommend Bombardier to work to Canadian government to step the negotiation out of WTO to reach mutual agreement. WTO ruling is now meaningless and without bilateral agreement, dispute would be repeated and expanded. Particularly, Sanction under WTO ruling is mainly duties in the country.
It might damage to their own citizens because they are forced to bear highly cost. Another suggestion is to split the manufacturing site to other countries, which welcome their manufacturing to get more supportive countries. Supportive countries consider them as a partner as Canadian and Brazilian governments do. They might get not only similar incentive , but also enhance competitive assembling. Furthermore, other countries also seriously consider how to solve the dispute with them. That would enable these manufacturers to be more attractive world wide brand in clean image.