POSITION & HOLD
an editorial opinion

China speeds up bizav growth



By Marvin Cetron
President, Forecasting International


Suniing Appliance Gulfstream G550 arrives home at NKG (Nanjing, China), 16 hrs by train south of Beijing—or 68 min by bizjet.

China is building a future in the air. It is doing so with the assistance of aircraft manufacturers in the West, who might be expected to view helping prospective Chinese competitors as a form of slow, inevitable suicide. Yet thus far both sides are benefitting—and can expect to continue doing so for years to come.

In recruiting Western partners, China is gaining access to technologies that would have taken it far longer to develop on its own—by which time its competitors would have moved on to still better hardware and production methods. Western firms in turn gain access to the fastest growing aviation market in the world.

What follows is strictly a view from the US. It suffers from all the limitations imposed by distance and probably a few that result from American parochial interests.
That said, in some ways it is hard to go too far wrong in writing about China.

Almost anything anyone says about China probably will be true in one part of the country, false somewhere else, and not quite certain anywhere. It will also be incomplete, as this article inevitably must be.

This is a vast land, nearly the size of the US and with 4 times the population. Decades after the disastrous Cultural Revolution of the 1970s, it is racing as fast as it can to develop a modern economy, spread prosperity to several hundred million desperately poor citizens, and build enough political and military power to become Asia's unchallenged leader—all while trying to maintain its Communist regime.

At the same time, the economic revolution touched off by Deng Xiaoping's market-based reforms in 1978 has spawned a population of entrepreneurs eager to cash in on the opportunities their giant land has to offer. Their enthusiasm can be little short of mindboggling for anyone accustomed to more developed societies.

Why build in China?

In generations past, China's main attraction for immigrant manufacturers was the availability of cheap labor. This is no longer the case, at least in the high-tech field of aviation. "Salary costs are in line with other major industrial countries," reports Embraer Executive Jets Pres Ernie Edwards. "There are some tax advantages when you build in China.

They are not huge, but when you talk about $31 million or $32 million, any reduction makes it easier to sell an aircraft compared with those built outside the country."
However, the real attraction may be simple access to the Chinese market. China is hungry for technology. This is probably the major reason for its purchases of Continental and Cirrus Design. For companies wishing to do business in China on favorable terms, technology is increasingly the price of admission.

The situation is clearest in looking at Airbus and Boeing. For Beijing, bizjets are an interesting market, but a much less pressing concern.

"The key appears to be an aggressive program of local production," Roger Cliff and his colleagues write in a 2012 RAND report on China's aerospace industry. "For example, in 2005 a group of Chinese airlines contracted with Boeing to purchase up to 60 787s—a deal worth $7.2 billion at nominal list prices.

Later the same year, it was announced that Boeing had selected a number of Chinese manufacturers as suppliers to the 787 program, including several single-source contracts on some of the largest components awarded to a Chinese supplier to date. In all, Boeing sold a total of 117 aircraft to Chinese airlines that year, making 2005 Boeing's most successful year in China to date."

Airbus secured a similar triumph that year, in much the same way. The company obtained an order for 150 A320s worth nearly $10 billion. It soon came out that Airbus had agreed to set up a final assembly line in China—a move that transferred significant new technology (new to China, that is) to its Chinese partners.

Airbus's Tianjan factory carries out final assembly of A320s. Siting it in China appears to have brought Airbus nearly $40 billion in orders.

It was the company's first assembly line outside Europe. As a purely manufacturing decision, it was a bad move. Aircraft made in China are more expensive for Airbus, which still has most of its supply lines in Europe. But the company received a contract for another 150 A320s and 20 A350s the following year.

More contracts have followed. In 2007, Airbus received its largest order from China, for 110 A320s and 50 A330s—a deal worth $17.4 billion. In Nov 2010, Airbus received yet another order, this during President Hu Jintao's state visit to France. Valued at $14 billion, it called for delivery of 50 A320s, 42 A330s and 10 A350s.

Boeing too has signed notable deals with Chinese supplier. One bought $500-million-worth of spare parts. However, it has not sent an assembly line to China. Perhaps as a result, between 2006 and 2010 Boeing sold only 287 airliners in a country whose aircraft market it once dominated.

However, Boeing has joined a series of partnerships in China. In Apr 2011, for example, it announced a $21-million project to expand its Boeing Tianjin Composites joint venture with AVIC. The company produces components for Boeing airliners, but at this point composites are a well established technology—nothing to satisfy the hunger of Beijing's development planners. More joint ventures are likely to follow, and to transfer more immediately valuable technologies, if Boeing wishes to keep its accustomed status as the country's most favored aircraft builder.

Beijing knows what it wants and rewards those who agree to its terms. It is less generous to those who do not. In any case, the possible risks of technology transfer are not a significant issue, says Embraer's Edwards. "China today is really a developed nation," he explains. "It is by no means a third world country. It's only a matter of time before they are building their own aircraft, with or without our help."

Great expectations

Dassault landed a $1.2-billion deal with Minsheng Financial Leasing for 20 Falcon jets at the 2011 NBAA convention, in addition to 5 Fal­con 7Xs ordered earlier in the year.

There is a lot at stake in the battle for Chinese market share. At the end of 2010, Chinese airlines operated 1597 aircraft, including 140 regional jets. Those numbers are destined to grow rapidly, with Embraer estimating that by 2030 the Chinese airline fleet will number 4565 aircraft.

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