China has taken another step forward in its mission to build its own commercial airplanes, but industry experts remain skeptical of Beijing's long-term objective of becoming less dependent on Boeing (BA) and Airbus (EADSY.PK) - made machines.
China's first domestically-developed regional ARJ21-700 jet successfully made a trial flight of 1,300 kilometers in July. It took the jet about two hours to fly from Shanghai to Xi'an, the capital of northwestern China's Shaanxi Province, according to the China Economic Review.
The ARJ-21 is short for "Advanced Regional Jet for the 21st Century". The plane is also the first regional jet that China has fully developed on its own. The first ARJ-21 jets are expected to be delivered to Chinese clients late next year. The ARJ21 regional jet is able to carry 70 to 110 passengers and shaping up as China's equivalent of the A300 from Airbus.
In the 1980s, McDonnell Douglas, which is part of Boeing, made about 30 MD-82 and a couple of MD-90 in China. Some critics claim the ARJ21 is a copy of similar models from Bombardier and Embraer built at the old MD plant in China.
The ARJ21 program is important to Beijing because helps China learn to develop a commercial aircraft to Western standards, to coordinate with many subcontractors, to establish an international marketing operation, and—crucially—to prove that it can support aircraft in service. Parts for the plane are made by 19 foreign manufacturers, including General Electric (GE), Honeywell (HON) and Parker Hannifin (PH).
China is moving forward in full-sized commercial aircraft as well. Aviation Industry Corp. of China (AVIC) announced in February it wanted "new blood" from overseas to help it compete. Local media quoted a Chinese aviation official describing the project as an "inspiration to the nation" similar to the country's manned space program. After a highly publicized global search for foreign managers to help it modernize, China's main military jet maker has hired six executives — all of them Chinese, according to a recent AP report.
The Chinese government created AVIC last November by merging its two biggest military aircraft companies.
China's entry into a market long dominated by Western players has stoked an outpouring of nationalist claims and raised concerns about aviation safety and trade protectionism. Boeing is a leading American exporter and has many friends in Washington.
It has been a difficult year for Boeing, which was forced to delay the first flight of its much-anticipated new 787 the Dreamliner for the fifth time in June. While the military side of Boeing's business has suffered a number of setbacks recently, the US-based company continues to have some well-running and profitable programs. Chief among them is the Boeing 737, of which more than 3,000 have been sold after launching 42 years ago, according to USA Today. With the world's best-selling jetliner, Boeing expects to turn 150 to 200 more of them a year off assembly lines for another decade.
Boeing realizes a new competitor is on the horizon. “There is no doubt that [China] will be someday in the commercial airline business,” Jim McNerney, Boeing's chairman and chief executive, was quoted as saying in April 2007. The former Boeing chief said he could envisage co-operating with Chinese partners, though said it would remain a “tough competitor” with its own developing product line-up.
A Chinese-made Airbus
Boeing and Airbus are using China as a production base. Earlier this year the first Airbus 320 stamped “Made in China” rolled out of the factory the European company opened in the northern Chinese city of Tianjin. It was the first time a major manufacturer has fully assembled an airliner in China. This has company employees in Europe worried they may soon be out work, says Andrea James of the Seattle-Post Intelligencer in a blog post.
Airbus says it plans to make four aircraft a month by the end of 2011. “Our Final Assembly Line (FAL) here in Tianjin and this first aircraft delivery outside Europe mark an important milestone in our strategic long-term partnership with China and the Chinese industry,” Tom Enders, Airbus president and CEO, said in a company statement. “This FAL is state of the art, second to none in the world. And so are the aircraft manufactured here in Tianjin.”
Airbus has been getting the bulk of China's new orders since 2004 and hopes to control 50% of the market by 2013. China has become the world's second largest aviation market after the US and is estimated to need 2,670 passenger planes in the next 20 years.
Boeing is also dependent on China. Last year, the company bought parts from 11 different Chinese suppliers for its 737, 747, 767 and 787 aircraft, the company's website says. Other Chinese-made parts on the 737 include the vertical tail fin, tail cone, sections of the fuselage and the exit doors over the wings. This reliance on outsourcing for key components has angered many of Boeing's rank and file and has been a source of labor union conflict.
The Challenges China Faces
When it comes to building jets, China's low-cost workforce is not all that significant an advantage. Many investors say China is losing its global competitiveness because wages are on the rise.
At same tine the yuan has already appreciated by approximately 20 percent against the dollar over the last two years, which makes imported technology and components cheaper to buy when priced in the American currency. Industry expertspredict as much as two-thirds of the airplane's components would be expected to come from outside the country.
Airlines do not buy airplanes based on cost alone. The price tag of an aircraft accounts for only 3% to 5% of the plane's total operating cost over its 20-year lifetime. Foreign certification is the key to the real prize of export sales. Expect a huge political fight if planes from China reach this stage. Analysts said that China can not rely exclusively on demand from its domestic sales in order to recoup development costs.
Martin Craigs, president of Aerospace Forum Asia in Hong Kong, was quoted in Businessweek as saying, "Building an aircraft is not even half the battle. Delivering it and supporting it over a lifetime is what really matters." In the past year, both Airbus and Boeing have suffered a number of delays that have worried clients and made shareholders flee.
There is also the issue of government support. Boeing and Airbus have been fighting it out in the WTO about government subsidies for a number of years. Boeing has claimed Airbus has an unfair advantage. With 100% government backing, some Western critics ask how can they not? It will never be "level" playing field with China's government support, they say.
Conclusion
Despite some well-publicized quality problems, the fact is China's industrial capacity continues to grow and improve in quality in many sectors, including aerospace. Time will tell if the ARJ21 is able to pass the quality test. Soon we will see if it is able to compete against existing players such as Bombardier and Embraer. This should give a clear indication on how they can compete in the full-size commercial aircraft business.
Some industry experts say that fears about China quickly taking orders away from Boeing and Airbus are overblown. It is likely to take China decades to develop a range of jets to mount a proper challenge to the Boeing-Airbus duopoly.
Disclosure: No positions
