America upset Sino-US Boeing contract with a small chip

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Last updated at: (Beijing Time) Thursday, December 04, 2003

America upset Sino-US Boeing contract with a small chip

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It won't be long before Boeing delivers its two B-737 planes to China as stipulated in the contract between China and Boeing. But just at this time the US State Department notified Boeing that QRS11, a chip to be installed in the planes, must not be exported to China. This notification immediately made Boeing very nervous because the chip, small as a coin though it is, would probably delay the transaction. More importantly, the contract, signed half a month ago for a big deal of 30 planes worth US$1.7 billion to be sold to China, faces tests. Even Europe's Airbus gets the jitters as this chip, QRS11, is also in their planes. According to America's Exports Restriction Act, Airbus will have to take the chip off their planes if they are to be exported to China. Analysts pointed out that this notice from the US State Department meant a hard blow to both Boeing and the Airbus companies, because they would seriously affect their export of planes to China. A CEO of a European firm said that it was too bad and that they disagreed with such export restriction. He also made it clear that on this issue they are on the same boat with Boeing.

Americans fussed about the chip

The chip, (called QRS11 for short), was successfully developed by America10 years ago. It weighs less than 60 grams and is mainly used on gyroscopes. It is quite common in planes. Gyroscopes with QRS11 can ensure the plane flight in the right direction and help the crew identify nearby flying objects. So it is widely applied to civil and commercial planes worldwide. At present, altogether more than 1,000 civil and commercial planes in the world are equipped with this chip. It is not expensive, each costing about US$1,000 or about US$2,000 for the best one.

QRS11 with high performance can also be used in military planes, missiles, and satellite ground stations. It is plugged in an anti-armor missile made by America's Raytheonco. With this chip in their missiles, the US Department of Defense asked the State Department to include it into its list of banned exports to China.

The United States has imposed various restrictions on exports to China. There are several rules governing the exports, such as the Arms Export Control Act and Export Administration Regulations. It is clearly stated in their National Defense Authorization Act for 1999 fiscal year that any export item involving missile technologies is subject to presidential approval first to confirm the export causes no potential damage to the US space launching industry or no substantial improvement in China's missile and space launching capability. These rules are divided mainly into two parts: The first deals mainly with civil projects, focusing on the exports transferable from civil to military use. The second concerns mainly the export of military products. The US military maintain that ORS11 is related to these two parts of regulations, so export to China must be put under strict control.

Enterprises warn the government

US business circles hold different views about this. They pointed out that 80 percent of the globe's chips are for civilian purpose, it is unthinkable that QRS11 would pose military threat when it is used only in China! The US aviation questioned their government: the product had already been put on sales in the market for 10 years, why this problem hadn't earlier come to the mind of the US government? An official with the US Department of Commerce points out that America's Export Administration Act is harming the country's own interests. First, it causes billions of losses to American businesses. If China retaliates this time, then Boeing will suffer heavy losses. Second, it may affect America��s production of military supplies. A report of the weekly, Defense News, said that some enterprises, seeing the chip become an obstacle to exportation, privately expressed their unwillingness of having their technologies used in the making of weapons as they don't want to lose the overseas civil market.

In view of this, the US State Department, Department of Defense, and Department of Commerce had to immediately hold consultations, so as to quickly find an appropriate solution to this issue and avoid affecting Boeing's export to China. In the early November, ranking officials from Boeing, Airbus, and US Aviation Industry Association wrote to US Secretary of State Colin Powell, calling for a prompt settlement of the problem to ensure the global interests of the US and European aviation industry. The US Aviation Association even required that ORS11 be deleted from the banned exports list as soon as possible. Some enterprises even threatened that if things go on like this, American electronic manufacturers would refuse to supply the US military sector with materials or would simply move their facilities and R&D departments out of the United States.

Warnings from Chinese buyers

About half a month ago, Boeing won the order from China for 30 B-737 planes worth US$1.7 billion. The delivery of these planes is scheduled for the (2005-2006) period and the buyers are five Chinese airliners. This big deal is very important to both Boeing and the US government. This is because, on the one hand, Boeing, as America's largest industrial exporter, weighs the heaviest in the balance of America's foreign trade. On the other hand, China is a huge potential market, so Boeing does not want to lose this market. Boeing predicts that China will need 2,400 new planes valued at US$197 billion in the next 20 years.

The Defense News also reported that what Boeing is worrying about is happening. Some Chinese purchasers have warned they would consider receding from the contract if Boeing fails to deliver two planes in the near term.

Analysts note that the US government will have to take this situation into account. On November 27, our reporter interviewed the Import and Export Company under the China International Aviation Group (Air China) that placed order for Boeing planes half a month ago. According to Zhou Lixin, deputy general manager of the company, restriction on gyroscopes imposed by the United States is nothing new. After 1988, the US government stipulated that American companies are not allowed to sell spare parts like gyroscopes in their export package to China and these products can only be kept in Hong Kong where China can get them when it does need them. Of course, gyroscopes installed in planes will not be detached. It further specified that the gyroscopes bought by China can only be used by China and re-selling is banned. It is estimated that the United States would not spoil the whole order simply because of a component part.

A source from China pointed out that it is utterly absurd to assume that China spends tens of millions of US dollars on a plane just for a few chips. This has once again showed that the US administration system concerning exports to China must be changed. Recently, there were endless complaints from some Americans about America's enormous trade deficit with China. Now the "chip incident" gives them a well-grounded answer--They should ask the US government what's all this about. If exportation of Boeing planes to China is hindered simply because of a small chip, unbalanced Sino-US trade will be further expanded.

(This article from Global Times was written by the newspaper's correspondents Ding Gang and Li Hongwei and translated by PD Online staff member Lijia)

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