China Cracks the Aircraft Market

2008 has been quite a year for the country’s aviation industry. Over the past six months, China has created a giant new aircraft company to make jumbo jetliners in competition with Boeing (BA) and Airbus; it has merged the country’s two largest aircraft makers into one company; it successfully tested its first domestic commercial jetliner; and it announced orders for the new aircraft from a unit of General Electric (GE).

In May, China formed China Commercial Aircraft Co. (CCAC) to make jumbo jetliners, capitalizing the new company with registered capital of 19 billion yuan ($2.7 billion). The state-owned Assets Supervision and Administration Commission alone invested 6 billion yuan, becoming the largest shareholder. Shareholders of the new company also include China Aviation Industry Corporation I (AVIC I) and China Aviation Industry Corporation II (AVIC II), two of China’s main state-owned aircraft makers.

In June, China announced the merger of AVIC I and AVIC II into a new company, Aviation Industry Corporation of China (AVIC). The new company, which formally started operations on Nov 8, has 10 major business segments, covering general-purpose aircraft, helicopters, transport aircraft and engines. AVIC has dozens of subsidiaries involved in its various business lines, 21 of which are listed. In 2007, AVIC I reported revenues of over 100 billion yuan ($14.7 billion), while AVIC II’s sales were approximately 10 billion yuan ($1.5 billion). In a recent announcement, an official of the company said that AVIC is targeting revenues of one trillion yuan ($146 billion) by 2017.

In November, China announced that it had successfully tested its first entirely domestic-made jet aircraft. The ARJ21, which stands for Advanced Regional Jet for the 21st Century, is designed to carry between 70 to 80 passengers on short-haul flights.

Also in November, CCAC announced the sale of five ARJ21 planes to General Electric for delivery in 2013. The aircraft leasing arm of General Electric also signed an option to buy an additional 20 planes, in a deal that could be worth $735 million. GE supplies engines for the aircraft and plans to lease the aircraft to China’s domestic carriers for use within China.

Although China appears to be making rapid progress in manufacturing this very complicated, sophisticated product, Silicon Hutong’s David Wolf provides an excellent historical summary of China’s quest to produce jetliners and describes how the events of this year actually represent the culmination of 35 years of effort, beginning in the 1970s.

However long it has taken, China’s emergence as a potential competitor to Boeing and Airbus in the manufacture and sale of jet aircraft illustrates once again how the combination of an open-door policy and a large market enables China to attract the best technology from around the world. With air traffic in China expected to grow 8.9 percent per year, Western companies simply don’t want to miss out on the next big aviation growth market. We have seen how the same scenario has played out in autos and other industries and has enabled China to close its technology gap with the rest of the world. With the China market growing so quickly, the pace at which technology is being transferred is also quickening.

About one-half of the equipment on the ARJ21 is made by U.S. companies. In addition to the engines that are made by GE, for example, Parker Hannifin Corp. makes the fuel, hydraulics and flight control systems for the planes, and Rockwell Collins Inc. provides radios, navigation equipment and other avionics systems. Summing up the motivations of U.S. companies helping China to enter this market, even if it ultimately leads to future competition for their own companies, Clayton Jones, CEO of Rockwell Collins (COL), said,

We understand that they may want to develop an indigenous industry, but we want to stay a part of it as long as we can. If I don’t move in there, somebody else will.

In the wake of the financial crisis, China is also now looking at another way to get advanced technology from the West for its aviation industry, this time through acquisitions. At the Zhuhai air show in early November, AVIC announced that it plans to acquire a foreign general aviation aircraft maker to shore up its technology capabilities. Citing Tan Weidong, president of AVIC’s general aviation unit, China Daily reported that the deal is expected to be closed by the end of the year. The name of the acquisition target was not disclosed.

By providing access to its large and growing market, and now using its cash, China can gain access to whatever technology is required to make any product in the world. Now more than ever, Western manufacturers need to establish or beef up their China operations if they also want to participate in the continued growth of the China market.

Disclosure: Author holds a long position in BA

Comments

[fatcat:]

If their planes are anything like the rest of the junk they make,I'm not flyin em...

2008 Dec 05 05:44 AM

[Kryssy:]

One would be well advised not to be dismissive of China and their efforts. They are well capable of producing high quality - I've seen examples of it. However, they are very accomodating and it all depends on how much you are prepared to spend, i.e. you pay little you get just as much.

2008 Dec 05 08:44 AM

[john s. gordon:]

aircraft structures made of melamine & lead paint?
> jack

2008 Dec 05 08:48 AM

[tipalia:]

U.S.A the greed and scandals capital of the world want to tell the rest of the world how to do business? Give me a brake chauvinists of this corrupted country called United States of America.

2008 Dec 05 09:20 AM

[Thunderlight:]

On Dec 05 05:44 AM fatcat wrote:

> If their planes are anything like the rest of the junk they make,I'm
> not flyin em...

They are not targeted at you, China has a huge domestic demand for commercial airplanes, and the demand will only raise in coming years as people continue to make more money. In fact, China is already spending billions of dollars importing planes from Beoing and Airbus. Successfully producing domestic commercial planes will have profound economic impact, even if no foreigners fly on them.

2008 Dec 05 09:29 AM

[john s. gordon:]

i've done some commercial air travel in china, mostly on ilyushin equipment. it's time to replace the ilyushins.
> jack

2008 Dec 05 10:23 AM

[User 313654:]

America has to wake up. Capital system is a failed system when not regulated.

2008 Dec 05 12:34 PM

[CLH:]

China is rolling. Japanese products were junk for years but no longer. China will progress at twice the speed of Japan.

PS FXI is rolling today while you talk talk talk.

China is using capitalism while the US and Europe are socialists headed down.

2008 Dec 05 02:57 PM

[huangthomas:]

< China cracks the jet aircraft market?> Not yet. The first order of seven 80-seaters to GE to be leased back to local Chinese airline for domestic commercial flight. The jets use GE engine and GE are obliged to buy couple more. The safety features have not clear US Air Safety Standard yet. The jets are potential competitors of EMBROER of Brazil and Bombardier of Canada.

China has 500 doctorate engineers studying in Great Britain right now. Boeing and Airbut are watching closely.

China has huge domestic market for jet planes to move 1.3 billion people arround.

2008 Dec 05 04:47 PM

[notsosmart:]

good article for the boeing machinist union.the next strike may be your last.

2008 Dec 05 09:22 PM

[PeteK:]

Boeing unions are walking the same path as UAW. They still
don't get it. They did it for fun and game. As a share holder,
don't like that a bit.

2008 Dec 06 04:38 AM

[mysaug:]

sounds like this will lead to more WTO violations by china. China wil require company to purchase only Chinese made parts , forcing A/c parts makers to build plants in china instead of exporting. Completey illegal under WTO rules, will see if new administration puts up with it. Cheap labor means nothing if the parts you need is covered by patents and patented technology. These US companies should tell the Chinese we will sell you what you want, but it will not be made in China . no way China can say no without violating IP as these are all patented products.

2008 Dec 06 12:33 PM

[mysaug:]

forgot to add, author is wrong. under WTO china can not predicate market access to local content mandates. Should be interesting times ahead.

2008 Dec 06 12:52 PM

[MrBuzz:]

The capitalist system has not failed. There is still too much government intervention. Having any government trying to find ways to save a company is like using the the Postal Service instead of FedEx. Same goes with future of health care...you want the post office type people giving you your health care? BO plans to do that.

China makes junk for us to buy because we contract with them to make stuff as cheap as possible. If we design and monitor better the products we wish to sell and as accept the cost will be more. Then China can make good stuff too. Japan went through this. Look at them today.

The Chinese and the PRC has been good partner so far. Our companies and theirs have had good working relationship. We need to build on that. Not tear it down.

2008 Dec 06 01:42 PM

[mysaug:]

China can not be trusted, the CEO of GE said that in a way a few yrs ago when asked why building a medical product company in India and not China. He said China does not understand the concept of win-win.

2008 Dec 07 10:54 AM

[PeteK:]

BA will be ruined just the same way as GM etc.
They never LEARN. period.

2008 Dec 07 02:52 PM

[bosun.j:]

In the next 20 years China will need more aircraft than are now owned by all the worlds airlines combined just to serve it's domestic market!

To all you rah rah rah sis boom bah we're number one types I can only tell you Gong Dai Wah!




On Dec 05 09:29 AM Thunderlight wrote:

> On Dec 05 05:44 AM fatcat wrote:

2008 Dec 10 11:43 AM