Plane, but not simple

Chinese aerospace firm tempts foreign partners

Plane, but not simple

We couldn't resist: GE boss Jeff Immelt

Launching new aircraft is an expensive business. Boeing will have spent close to $20 billion by the time that its long-delayed 787 “Dreamliner” takes to the air. There is talk of a test flight this month.

Not that Airbus is crowing over its rival’s discomfort, as it had to shoulder at least $5 billion in delay costs for its own A380.

China’s own aerospace champion, China Aviation Industry Corporation (AVIC) does not seem especially disheartened. There has been a flurry of announcements in the last three months relating to AVIC deals with foreign partners, and it seems deadly serious about challenging its aerospace rivals.

In one of the more recent announcements – timed to coincide with Obama’s visit to Beijing in November – General Electric (GE) signed a joint venture agreement to produce avionics (the electronic systems used on aircraft) in China. An AVIC subsidiary has also partnered with Goodrich Corporation, the world’s largest aircraft component supplier, to manufacture nacelles (the casings that hold aircraft engines) and landing gear systems. A similar tie up saw France-based Safran Group commit to manufacture braking systems in China too.

This all stems from an industry reorganisation late last year under the umbrella of AVIC leadership, following years of regional rivalries. The new approach is for more coordinated action across a series of subsidiaries in which AVIC holds a shareholding interest. That includes companies that will assemble and market new aircraft (like COMAC, see WiC 31) and others (such as AVIC Aircraft) tasked with making the systems and components from which they will be built.

For the foreign JV partners, the lure is the potential sales market to Chinese airlines (and possibly further afield). China’s 70-seater regional jet, the ARJ-21, is already reporting 200-plus orders (almost all of them from state-owned airlines, admittedly). COMAC’s ultimate ambitions are for 2,500 of its 170-seat C919 jets to roll off production lines.

So, it’s little surprise that foreign suppliers want a piece of the action. But there’s an entry fee, as they will need to do their work on the ground in China, and in coordination with a local partner. As discussed previously in WiC, this is something of a Faustian pact. The Chinese admit that they plan to do their own thing, once they have learned enough from their more experienced foreign partners.

Still, this hasn’t stopped GE from heading to the front of the queue, in signing up for 25 of the ARJ-21s through its aircraft leasing division and then committing to the avionics venture with AVIC last month. The Chinese media is excited too: it thinks it is the first time that GE has granted an equal share to a local enterprise (“neither of us have the final say,” an AVIC official proudly told the Economic Observer). Furthermore, the plan is that GE will move the majority of its avionics platform for global production into the Chinese venture.

Then there was further symbolism last week with news that AVIC is acquiring Austrian composite material maker FACC (composites are materials used in wings, fuselages, windows and seats). This is the first time that a European aerospace manufacturer has been acquired by an Asian firm, Xinhua noted sagely.

AVIC is determined that Chinese firms achieve a prominent aerospace position. In phase one (the 1970s), Chinese scientists reverse-engineered a couple of Boeing 707s (just to prove that they could). In the early 1990s, state firms went through a series of deals to assemble MD90s in China with McDonnell Douglas. Only two were ever made.

Now local manufacturers are aiming a lot higher. They want to move beyond assembly and basic part production to the manufacture of complex aircraft systems and components. And AVIC plans to wave the Chinese flag across a range of capabilities (research, design, manufacture, assembly, aircraft marketing and after-sales servicing).

That is a different strategic choice to Boeing and Airbus, who have opted for more of a sub-contractor model in which they act as systems integrators rather manufacture the aircraft components themselves.

Of course, that is a choice that has been blamed for the delays on their respective new aircraft launches (90% of the 787 has been sub-contracted). The C919 is due to carry its first passengers in 2016 – so we’ll have to wait at least six years to see if AVIC can do any better.

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