China and Commercial Aircraft Production: Harder than It Looks

No one can ever accuse China of thinking small. When it decided to enter into commercial aircraft manufacturing, it knew that it was going up against one of the world’s greatest duopolies: the Boeing-Airbus stranglehold on the medium-to-large jetliner business. These two companies produce nearly every 100-seat-and-above passenger plane flown by nearly every airline in the world. Given China’s recent successes in consumer electronics, semiconductors and the automobile industry—not to mention its progress in such technologically daunting enterprises as manned space flight and fifth-generation fighter aircraft—it is little wonder that it believes it can break into this highly lucrative market. And it could happen when it comes to commercial aircraft. At the Zhuhai Airshow in November 2012, China announced an order for a further 50 of its new C919 large passenger jet (Xinhua, November 13, 2012).

At the same time, perhaps no other industrial sector has such high barriers to entry. Only in recent years have Boeing and Airbus had any meaningful competition, and even then only at the very low end of the business: Canada’s Bombardier and Brazil’s Embraer both produce smallish jetliners that can seat up to 125 passengers. Other companies that have tried to play in the “big boys club” of commercial aircraft production—such as Mitsubishi, Sukhoi and Indonesia’s IPTN— all have failed miserably (“Is China Leading the Rebirth of Asia’s Commercial Aircraft Industry,” China Brief, April 29, 2010). So why should China succeed?

In the first place: size. China is the world’s second largest national air travel market and also the fastest growing. China buys around 200 new passenger jets every year, about one-eighth the world’s total demand (China Daily, August 27, 2009) [1]. Consequently, there is a huge domestic market to tap into and build upon.

In the second place: pride. The decision to enter the large commercial aircraft market was made at the very top, by the State Council of China and by the Central Committee of the Chinese Communist Party. The Commercial Aircraft Corporation of China Ltd. (COMAC)—the state-owned company created in 2008 to take charge of passenger jet development—is wrapped in self-described “aeronautical patriotism,” and it views its mission as equivalent to the nation’s development of nuclear weapons and the launch of the country’s first satellite (“Message from Chairman,” COMAC Website, Undated).

Current Chinese Commercial Aircraft Programs: Think Medium

COMAC currently has two passenger jets in the works. The first is the ARJ-21, a medium-sized regional jet seating between 90 and 105 passengers, and designed for short-haul flights of less than three hours. Launched in 2002, during the Tenth Five-Year Plan (2001–2005), the ARJ-21 is intended first and foremost to meet China’s burgeoning demand for internal air transport. Estimates are that the country will require up to 1,000 such regional jets over the next 20 years (China Daily, November 11, 2008). The ARJ-21 had it maiden flight in late 2008, and the plane has already secured over 300 firm orders. Over the next two decades, COMAC hopes to build 850 ARJ-21s, at a rate of 30 per year [2].

The second Chinese airliner currently in development is the C919 narrow-body jet, initiated in 2008. The C919 seats 150 to 200 passengers, which puts it in roughly the same category as the Boeing 737 and the Airbus A320. Nearly 400 of these airliners have already been ordered. COMAC plans to conduct the first flight of the C919 in 2014 and begin deliveries by 2016 (Xinhua, November 13, 2012). Other passenger jets are also envisioned and COMAC already has begun to plan for the production of two wide-body airliners: the 300-seat C929 and the 400-seat C939.

In addition to the homegrown ARJ-21 and C919, China is expanding local commercial aircraft manufacturing via the licensed-production of Airbus and Embraer passenger jets. As part of a deal with Airbus, China currently is assembling Airbus A320 and A319 commercial airliners in Tianjin, specifically for the Chinese market (that is, no export sales are permitted…yet). The Tianjin production facility produced its 100^th A320-series jetliner in mid-2012, and it is striving to assemble four aircraft per month (“Airbus in China,” Airbus Website, Undated) [3]. Meanwhile, Embraer has a joint venture with the Harbin Aircraft Industry Group to co-produce the 50-passenger ERJ-145 regional jets (“Chinese Commercial Aviation Cleared for Takeoff,” China Brief, February 29, 2008).

Reorganizing the Aviation Industry to Promote Commercial Aircraft Production

To develop and build the ARJ-21 and C919, China cobbled together several competing aircraft manufacturing groups into a single consortium, known initially as the AVIC I Commercial Aircraft Company (ACAC). Members of ACAC included the Shanghai Aircraft Research Institute, the Xi’an Aircraft Design and Research Institute, the Chengdu Aircraft Industrial Group (CAIG), the Xi’an Aircraft Industry Group (XAIG), the Shenyang Aircraft Corporation (SAC), and the Shanghai Aircraft Manufacturing Factory (SAMF). The Shanghai and Xi’an research institutes were responsible for designing the aircraft, while workshares were distributed among the four manufacturing companies accordingly:

• CAIG: nosecone
• XAIG: wings and fuselage
• SAC: tail assembly, pylon and vertical stabilizer
• SAMF: horizontal stabilizer and final assembly (AVIC I, www.acac.com.cn, undated).

To further aid the development of its aviation industry, China also recently decided to re-consolidate its aircraft-manufacturing sector. In 1999, Beijing broke up its large defense-oriented state-owned enterprises into smaller units in the hope that these new industrial groups would compete with each other and therefore become more efficient, innovative and market-oriented. Hence, the old Aviation Industries of China (AVIC) was split into AVIC I—which manufactured fighter jets and undertook most large commercial aircraft projects—and AVIC II— which had responsibility for building helicopters and trainer aircraft. From the beginning, however, it was apparent that these two new industrial groups would overlap very little in terms of products, and so any benefits of competition were few. Additionally, AVIC I appeared to get the bulk of the lucrative and prestigious aviation programs, while AVIC II staggered along with a handful of less glamorous projects.

In 2008, therefore, Beijing re-merged AVIC I and AVIC II back into a single unit, again called Aviation Industries of China. This new AVIC regards this reconsolidation as creating sufficient “critical mass” so as to more effectively and efficiently develop new indigenous aircraft and aerospace technologies, both in the military and commercial sectors. It is also likely that the new AVIC foresees so much work coming out of future commercial aircraft production that it will require the involvement of the manufacturing centers of the old AVIC II to help fill all the orders.

With the re-merger of AVIC, ACAC was absorbed into the COMAC consortium. This new civil aircraft company has responsibility both for building the ARJ-21 and for developing the C919 passenger jet. COMAC is jointly owned by the reconsolidated AVIC, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), the Shanghai Guosheng Group as well as several other state-owned corporations including Baosteel Group, Sinochem, and the Aluminum Corporation of China.

Paper Airplanes?

Back in 2010, in an earlier China Brief article, this author argued the following:

“The success of the ARJ-21 will revitalize the Asian commercial aircraft industry. For the first time, this part of the world will have a product that can compete in an industrial sector historically dominated by North Americans and Europeans. More importantly, China could eventually become a hub for regional civilian airliner production, bringing in other aerospace firms from throughout Asia to partner on follow-on commercial aircraft projects” (“Is China Leading the Rebirth of Asia’s Commercial Aircraft Industry,” China Brief, April 29, 2010).

In point of fact, however, this prediction has turned out to be at best premature, if not totally wide of the mark. Rather, there are growing doubts as to whether China will ever be a major player in the global commercial jetliner sector.

The ARJ-21 and the C919 may look good on paper, but serious challenges confront China when it comes breaking into the passenger jet business. In the first place, both airliners are already heavily delayed, due to technical and other setbacks. The ARJ-21, for example, was two-and-a-half years late in achieving first flight. In late 2010, the plane’s wing failed its predicted load rating during static tests; wing cracks as well as problems with the aircraft’s avionics and wiring also have been reported. Altogether, the ARJ-21 is already at least five years behind schedule, and initial deliveries are not expected before the end of 2013, if even then (Reuters, June 8, 2012).

For its part, the C919 program already has cost China over $9 billion, but there are growing questions about the plane’s finances and its ability to meet its projected milestones. In particular, the U.S. Federal Aviation Administration (FAA) has refused to certify the C919’s airworthiness until the ARJ-21 is first approved, making it highly unlikely that the aircraft will meet its 2016 deadline for starting deliveries. FAA certification is essential if the Chinese wish to sell the C919 to foreign airlines (Caixin, December 18, 2012).

In addition, neither airliner has yet broken the Boeing/Airbus, or even the lesser Bombardier/Embraer, lock on global commercial aircraft sales, nor does it look like they will do so anytime soon. Nearly all orders for the ARJ-21 and C919 have come from Chinese airlines, making it highly probable that Beijing strong-armed these companies into buying these planes. In fact, one customer, Joy Air, was purportedly established specifically to purchase and operate Chinese-made commercial aircraft (Caixin, December 18, 2012). Very few foreign airlines seem interested in either airplane; the largest non-Chinese customer for these planes is GECAS, an Irish-American company that buys and then leases passenger jets to airlines.

At the same time, many of the orders for these aircraft are only intentions to buy. According to the China Business Journal, no airline has yet put down a cash deposit to guarantee its orders. In part, this is because COMAC has declined to announce a price tag for either aircraft (Caixin, December 18, 2012).

Finally, despite its pronouncements of building aircraft with “Chinese characteristics,” COMAC is heavily reliant on foreign firms to provide critical components and technologies for these aircraft. More than 20 overseas firms are partnering on the ARJ-21, including General Electric (engines), Rockwell Collins (avionics), Liebheer (landing gear) and Parker Aerospace (flight controls). In addition, the ARJ-21’s nose cone is a direct copy of the defunct McDonnell-Douglas MD-82, which was built under license in China back in the 1990s. In fact, the entire airplane so closely resembles the MD-80/-90—with a nearly identical cabin cross-section, tail, and nose—that some have speculated that it probably uses tooling originally supplied for the MD-82 program (which could be a violation of intellectual property rights). Moreover, while ARJ-21’s wing may be new, it was designed by Ukraine’s Antonov Design Bureau. Overall, there appears to be very little that is “Chinese” in the ARJ-21, except the labor.

The C919 appears to be indigenously designed, but it too relies heavily on foreign subsystems and components. In particular, CFM International will supply its LEAP turbofan engine for the C919, and it will subsequently build an assembly line in China to produce this powerplant. Nexelle will provide the nacelle and thrust-reverser.

Other parts of China’s commercial aerospace industry also have not fared particularly well. Airbus’s Tianjin plant may have to close in 2016 if it does not secure follow-on orders, while production of the ERJ-145 at Harbin was only 41 aircraft over a ten-year period. Additionally, Embraer is now converting this line to build Legacy 650 business jets (which is based on the ERJ-145) (www.richardaboulafia.com, July 2012; Air Transport World, June 15, 2012).

A Long Ways to Go (If Ever)

It will likely be a long time, if ever, before China threatens the Western stranglehold on commercial aircraft production. Building large passenger planes is one of the most daunting undertakings in manufacturing. In some senses, it is even more challenging than manufacturing fighter aircraft, since civil airlines have to be commercially as well as technologically viable. It is one thing for the Chinese to leverage its comparative advantages in low-cost manufacturing to produce high-quality parts for foreign aircraft manufacturers, which it has done for decades (for example, China has built Boeing 737 tail sections since the 1980s). It is quite another to convince foreign airlines to trust flying their passengers in Chinese-built airliners. Safety and reliability as well as comfort and economy are at least as important as price, and China’s reputation in all but the latter is still quite poor, because of repeated scandals in consumer products.

Even if China can assure quality control of its commercial airliners, however, it will be difficult to overcome airlines’ ingrained preferences for proven products like the A320 or the 737. Consequently, it remains to be seen whether China will ever become a global powerhouse in this industrial sector. More likely, Chinese-built passenger planes probably will always remain overwhelmingly a Chinese-bought item.

Notes:

1. Roger Cliff, Chad Ohlandt, and David Yang, Ready for Takeoff: China’s Advancing Aerospace Industry, Santa Monica, CA: RAND, 2011, p. 5.
2. Ibid., p. 27.
3. Ibid., p. 28.