Steady Ascent

15 April 2013

Zhuhai air show presents contradictory face to foreigners

By Frank Xie

For foreign visitors, the 9th China International Aviation & Aerospace Exhibition in Zhuhai in November brought both excitement and shock. They saw 150 civilian and military products, including a first sighting of a Chinese-made drone, as well as acrobatic performances by Chinese, Swiss and Russian teams.

That was the exciting part. The shock was to see China’s rapid progress in the production of civilian aircraft, and its rising threat to Europe and North America, whose manufacturers have dominated this sector since the birth of aviation.

Will China repeat in passenger planes its success in steel, shipbuilding and telecommunications equipment?

Leading the charge is the state-owned Commercial Aircraft Corporation of China (COMAC), set up in Shanghai in 2008 with capital of 19 billion yuan. In Zhuhai, it received 50 new pre-orders for its C919 aircraft, which seats 168, bringing the total to 380. It is due to have its first flight test in 2014.

So far 15 companies have signed orders, including British Airways, Ryanair, GE Capital and two Chinese firms: Hebei Aviation Group and Joy Airlines.

The most important player is the state-owned Aviation Industry Corporation of China (AVIC), set up in April 1951 during the Korean War. It has 11 subsidiaries that employ more than 400,000 people and it makes an enormous variety of products, including civil and military aircraft, helicopters, and engines.

In 2012, Fortune ranked it as 250th of the world’s 500 biggest companies; it has a sales target of one trillion yuan by 2020.

The aim of Beijing is to make COMAC and AVIC into global producers able to sell civil and military aircraft that can compete with any in the world. They have already exported more than 1,400 planes.

Beijing’s trump card is access to its market, which is essential for global manufacturers. The best way to access this market is local production; this has to be in joint ventures with a small number of state-owned manufacturers and runs the risk of losing the technology that provides the competitive advantage for foreign firms.

Zhuhai Show

Foreign and domestic visitors flock to Zhuhai, because it is the only international aviation show in China endorsed by the government. It has been held every two years in November since 1999.

The 2012 show saw a record number of visitors, exhibitors and contract values, a sign of how China has become one of the world’s biggest aviation markets.

It attracted 400,000 visitors, with the first four days reserved for those in industry and the last two days open to the public; an estimated 120,000 were from the aviation industry. There were 650 booths from 39 nations, including 400 from the mainland and 250 from abroad.

On show were 150 military and civilian aircraft and products, including a scale model of the J-31, China’s fifth-generation stealth fighter, which is still under development. Also on display were Chinese-made engines that can be used in fighter jets, unmanned aerial vehicles and commercial aeroplanes.

For the first time, visitors saw China’s military drone, the Wing Loong, made by AVIC. It weighs 1.1 tonnes, is nine metres long and has a 14-metre wingspan; it can fly at a maximum altitude of 5,300 metres and has a range of 4,000 kilometres; it can be used for military and non-military operations and can carry two air-to-surface missiles. It sells for less than US$1 million, far cheaper than drones made by the US or Israel, making it attractive to many countries, especially in the Third World.

Visitors saw live displays by the Chinese August 1 aerobatic team, the Russian Knights and Breitling from Switzerland.

The organisers said that 30 commercial agreements were signed during the show for 202 aircraft of different types, worth a total of US$11.8 billion.

Booming market

China has become one of the world’s largest aviation markets. In 2011, there were 290 million air passengers in China, up 9.5 percent on 2010.

By 2015, it will add 55 new airports, bringing the total available for commercial use to 230.

AVIC forecasts that air passenger traffic will see an average annual growth of eight percent between now and 2031, when it will hit 2.1 trillion passenger kilometres. By the end of 2031, the fleet size of China’s airlines will reach 5,545 airliners, including 4,594 planes, 951 regional aircraft and 764 freighters.

Boeing forecasts that, over the next 20 years, China will need 5,000 new aeroplanes worth more than US$600 billion; this demand will make China the largest commercial aircraft customer of Boeing. It aims to provide a large proportion of them.

The government wants a high percentage of these new planes to be made in China by domestic manufacturers; it also wants them to win many overseas orders.

“The goal of the Chinese is to be in a few years’ time at the same level as different parties around the world, like Airbus and Boeing,” said David Lopez Grange, general director of Spanish aeronautics firm Aritex. “Maybe it is not so far away, perhaps 10 years. China will be a very important player in the world in a few years.”

Strong competitors

The C919 is the most serious threat to Boeing and Airbus in the mainstream commercial aircraft market.

Currently, the two firms dominate the market for single-aisle aircraft with 150–180 seats. Its other main competitor is Bombardier, based in Quebec, Canada, the world’s third largest aircraft manufacturer; it makes the C series, which can accommodate 100–149 seats.

The C919 aims to compete with the Boeing 737 and the Airbus A320. It has a long way to go. It relies on foreign technology for key parts, including the engines, to be supplied by French-American venture CFM International.

The orders it has received are not all market-driven; there is a political element, with Beijing instructing Chinese companies to buy them to provide capital and credibility to COMAC.

In 2008, it held a test flight for a smaller regional jet, the ARJ21, which seats 78–90. Since then, it has not delivered any; the project is years behind schedule.

The company faces an enormous challenge to win over major airlines and convince them of the plane’s reliability and security. The C919 is still a year from its trial flight and COMAC is little known in the world. It has a great deal to do to persuade global carriers to order this plane in preference to models they have been using successfully for many years.

Airbus and Boeing in China

Pressure from Beijing persuaded Airbus to build its first assembly line outside Europe in Tianjin; it began operations in September 2008. It is a joint venture between Airbus, AVIC and the Tianjin Free Trade Zone.

Its first A320 jetliner went into commercial operation in June 2009 with Sichuan Airlines, the first Airbus jetliner built outside Europe. The plant delivered its 100th jetliner to Air China in September 2012.

It has a contract to deliver 284 of the aircraft; this runs out at the end of the first quarter of 2016. Production there is due to peak at four aircraft a month from the end of 2012 or early 2013.

As of June 2012, Airbus had more than 800 aircraft in service with Chinese airlines. To supply them, the company built a customer support centre in Beijing, with 25,000 spare parts and a dedicated avionics repair workshop.

Over half of the Airbus fleet in service worldwide has parts produced by Chinese companies. It has several major technology transfer programmes in place, including one that will enable the complete wing of the A320 to be manufactured in China.

Boeing is also heavily engaged in China. Of its planes worldwide, 6,000 fly with parts and components made in China, including its newest model, the 787 Dreamliner.

Boeing has substantial investments in China, including production of parts and components, a maintenance, repair and overhaul centre in Shanghai, a joint centre with COMAC in Beijing to support ‘green growth’ in the industry. It has 250 Boeing employees throughout China and more than 6,000 employees at its different businesses, subsidiaries and joint ventures.

Since 1993, it has provided professional training to nearly 40,000 Chinese people in the aviation field, free of charge.

But, unlike Airbus, it does not produce any complete aircraft in China.

The challenge for both companies is how to enlarge their market share in China without giving away too much of the key technology.

In all sectors, Beijing’s strategy with foreign companies has been to trade market share for technology.

Corporate jets

Brazilian plane-maker Embraer is another foreign company that has produced aircraft in a joint venture in China, with mixed results. It produces corporate jets, another market with enormous promise in China; currently, the country has only 267, up from 78 in 2007.

Last November Embraer forecast that the country would need 650 such jets by 2022, worth US$24 billion. The main buyers are wealthy business people and corporate executives. It said in November that it had taken 28 firm orders and another five options for its corporate jets in the mainland.

In a statement during the Zhuhai airshow, Airbus announced that it had won a total of 25 orders in China for its ACJ319 corporate jet. It has a range of 11,100 kilometres and seats eight people.

Embraer started a joint venture in the northeastern city of Harbin in 2002, assembling the ERJ145 regional jet. The jets were produced until 2011. It then proposed a conversion of the production line to make E190 aircraft, but Beijing rejected this because it would have competed with the ARJ-21 made by COMAC.

In such negotiations, the foreign party is in a weak position. The state tightly controls the aviation sector and the number of companies with whom a foreign manufacturer can negotiate is small.

After two years of tough negotiations, the two sides agreed to make the Legacy 650 jet, with the first due to leave the production line at the end of 2013. The first customer for the China-produced plane is ICBC Financial Leasing, who has signed a deal with the joint venture to buy 10 jets.

It will compete with a plane made by another Sino-foreign joint venture, the Caravan single-engine turboprop, made by Cessna of the US and AVIC.