Talking Point

In it for the long haul

Should Airbus and Boeing worry about the Chinese C919?

Come fly with me: The C919 passenger is unveiled in Hong Kong

If you want to understand China’s aerospace future, all you need to know is your alphabet. There’s an A for Airbus, a B for Boeing; and now a C from China.

That was one interpretation of the unveiling of a China-made commercial jet prototype – the C919 – at an air show in Hong Kong last week.

“The C919 comes after Airbus and Boeing, so you will have ABC in the aviation industry” was the confident sound bite on offer from the aircraft’s chief designer, Wu Guanghui.

The unveiling was just a few days after another aerospace milestone – the start of airborne trials for the Chinese ARJ21 regional jet in Shanghai.

The 70-seater aircraft is undergoing airworthiness tests, with the plan being to get domestic regulatory approval by late 2010.

Taken together, the two pieces of news are prompting a surge of interest in the Chinese aerospace sector, and particularly its prospects for creating a homegrown aircraft maker.

So, a new challenge for Boeing and Airbus?

Traditionally, the two companies have dominated the market for wide-body jets.

But not all airline executives are altogether happy with their performance.

Tony Tyler – chief executive at Hong Kong flag carrier Cathay Pacific – was also at the city’s airshow last week. And he took the opportunity to criticise Boeing and Airbus for an ‘escalation clause’ – which he said saw aircraft component prices rise over their lengthy production schedules.

Why, Tyler asked, was this ecalation necessary when costs should actually be diminishing?

In fact, it was leading to situations in which an aircraft seat could end up costing as much as sports car, he quipped.

Clearly not ideal for the average airline, which tends to be rather pleased with itself if it can get anywhere close to covering its cost of capital.

So airline CEOs might be hoping that a new kid on the block might stir things up a bit (especially if the industry’s new boy has some solid financing behind him).

Plentiful funding is something that the C919 will enjoy. In an industry in which accusations of state support and unfair competition are commonplace, a new Chinese aerospace champion can expect to be backed to the hilt, by a government with the wallet to finance the ‘mother of all state subsidies’.

So biggest is always best?

The C919 announcement enjoyed loud acclaim, with a predictable fanfare for “China’s first home-made jumbo”.

Size matters in the high-testosterone world of aircraft manufacturing, and the Chinese are keen to measure up against the biggest and the best.

This means going head-to-head with Boeing and Airbus, as well as their commanding share of wide-body aircraft exports.

Even so, Xinhua and its state media peers seem to have got a little ahead of themselves.

The C919 is planned as a single-aisle aircraft with a seating capacity of up to 170. This takes it a little over the 150 seats that the Chinese are using to define the threshold for “jumbo” capacity – but still some way short of the twin-aisle aircraft (like the Boeing 747) more commonly associated with jumbo status.

Of course, the C919 could well go on to become a larger, twin-aisle aircraft.

But this is all some way off – something that was immediately apparent in Hong Kong, where the C919 showed up only in model form. A big model, for sure, but still a long way from being cleared for take-off.

Still, Boeing and Airbus are on the Chinese radar?

Probably not for a decade or so, say industry spokesmen from COMAC (the recently formed Commercial Aircraft Corp of China).

Prospects for the ARJ21 are more advanced. The Global Times reports that 208 orders have been received so far, which is fuelling hopes that the ARJ will compete well with rival products from Canada’s Bombardier, Brazil’s Embraer, Sukhoi of Russia and Mitsubishi of Japan. China’s domestic market looks like a good fit too, with shorter trip lengths between the growing number of small-to-mid-size airports offering an ideal backdrop for the ARJ to make its break-through.

So airlines are interested in the ARJ?

Yes, but the order book consists almost entirely of Chinese (and state-controlled) airlines.

GE is the only international customer, and it’s an ARJ engine partner (with high hopes for a leading role in developing the C919 too).

Still, it makes more sense for the ARJ to be sold to the domestic market first, where arm-twisting and the power of patriotic persuasion should be more effective.

Fortunately, demand is likely to be greatest here too; Boeing predicts 3,700 aircraft will be sold to Chinese operators in the next 20 years.

Don’t expect to see the C919 carrying passengers until 2016 at the earliest, however. That’s when planners hope to see it competing with aircraft similar to the current Airbus A320 and Boeing 737 types.

By then demand is expected to reach 100 aircraft a year, as the C919 will “surely be cheaper” than other models, says Chen Jin, COMAC’s sales head.

How this will be achieved isn’t clear, although there is hopeful talk of greater fuel efficiency.

Foreign airlines will need much more convincing on how the overall economics (full ownership costs and not just the price tag) stack up, especially when Chinese manufacturers are playing catch up in terms of R&D expertise, and after-sales service and support.

Then there are the broader questions, like whether international passengers will be happy flying around in aircraft with a “Made in China” label.

There’s no denying that this could be a factor, if the Russian experience (Ilyushin and Tupolev jets have struggled to sell outside their domestic market) provides any lessons.

But this should be less of an issue in 10 or 15 years than it might be today – especially as perceptions of Chinese technology improve.

Think of advances in the Shenzhou space programme, for example (last September, astronaut Zhai Zhigang completed the country’s first spacewalk).

Moreover, foreign manufacturers are now building aircraft in China themselves (although they may not choose to shout it from the rooftops).

Airbus expects to have manufactured at least 250 aircraft in Tianjin by the time the C919 goes into full production.

And the Chinese are not complete newcomers?

Far from it – they built their first civil aircraft back in the early 1970s, when two Shanghai Y10s were constructed via a reverse engineering of the Boeing 707.

This was largely a political project, to be lauded as evidence of the country’s scientific progress.

The next stage was to learn more about how to commercialise the advances, through a series of cooperative projects with McDonnell Douglas. This culminated in a 1992 deal to produce 190 MD90 class jets in four China locations.

In fact, only two MD90s ever rolled off local production lines, in part because Chinese airline managers refused to give up on buying their favourite Boeings.

But the experience was still crucial, as the technical platform created through the McDonnell Douglas deal underpins the current ARJ21 design.

There is no reason to believe that future work with the ARJ will not lead Chinese engineers on a similar (and probably faster) learning curve to the C919.

So foreign manufacturers have a fight on their hands?

Not quite yet, but the day may be coming.

Then again, the ARJ launch is a boon for foreign firms too, as it brings opportunities for the 19 overseas suppliers involved in its assembly. The 21CN Business Herald further estimates that the C919 project could be worth an addiitional $200 billion to suppliers in coming years.

Still, COMAC’s Wu Guanghui makes no effort to disguise the masterplan: “We will choose foreign-manufactured products like engines in the beginning phase, but we will also independently do the research and manufacturing work at the same time.”

So for the foreign manufacturers, this all looks like something of a Faustian pact.

The allure of the Chinese market means that they must come to China, and increasingly set up there.

Embraer, like Airbus, has JVs with northern Chinese partners. Engine makers Rolls Royce, as well as Pratt and Whitney, have Chinese manufacturing and overhaul facilities. Boeing claims that 60% of its 9,600 aircraft have components made in China.

But this means opening the door further to their Chinese competitors of the future.

The challenge is not going to materialise overnight, and much will need to be learned from the experience of the ARJ21, when it starts out operating primarily within Chinese airspace.

But if things go to plan, the ARJ is only the first step into a brave new aerospace world.

Within a decade it might be the droning of a larger version of the C919 – a true Chinese jumbo – that you can hear overhead.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.