Chinese Commercial Aviation Cleared for Take-off

There is a clear understanding in Beijing that the best way for China to achieve its ambition in civil aviation—namely to build its own fleet of commercial craft—is to work in partnership with Airbus and Boeing, rather than flying solo or partnering with Russian companies (China Brief, September 30, 2004). Beijing has employed this strategy over the last twenty years or so, working with both Airbus and Boeing to produce components and subassemblies as a first step on the long road to manufacturing its own indigenous aircraft. Through this exchange, Chinese aviation technicians were able to learn a great deal of expertise, and as its economy amplifies, China’s importance will also grow for Western companies as an important aviation export market.

According to Boeing’s forecast, China will demand many more aircraft over the coming twenty years than Boeing had initially expected in 2006. Boeing predicts that between 2007 and 2026, China will purchase 3,400 new aircraft worth $340 billion, while Rolls-Royce foresees a demand for 3,100 aircraft over the same period. As a result, domestic demand on the Chinese aviation industry to excel and deliver domestically-built aircraft will only increase. In conjunction with the development of commercial carriers and civil helicopters, skills in the Chinese aircraft maintenance, repair and overhaul (MRO) sector are rising rapidly. How Chinese industry will adapt to domestic pressure remains unclear. What is clear is that it would be wrong to underestimate the ability of the Chinese aviation industry to learn lessons from its past mistakes such as manufacturing low-quality or clones of Western, Soviet and Ukrainian civilian craft, or foresee an obsolete Chinese aviation industry infrastructure that is unable to compete on the global market; likewise, it would be short-sighted to dismiss the industry as merely imitating Airbus and Boeing designs.

Latest Milestones for Chinese Commercial Aviation: Partners but Not Yet Competitors

In June 2005, China Aviation Industries Corporation I (AVIC I) and Chinese Aviation Industries Corporation II (AVIC II) signed a contract to be sole suppliers in China of composite structures for the Boeing 787. Two years later, in June 2007, Boeing signed contracts worth $500 million with four AVIC I and AVIC II subsidiaries to manufacture Boeing 747 and Boeing 787 components.

In July 2005, Airbus (Beijing) Engineering Center was formally inaugurated in Beijing. On June 28, 2007, Airbus signed a joint venture contract with a Chinese consortium on the establishment of an A320 Family Assembly Line in China. The consortium comprised Tianjin Free Trade Zone (TJFTZ), AVIC I and AVIC II in Beijing. Construction of the final assembly line in Tianjin commenced on May 15, 2007, while production of its first aircraft in China will begin in August 2008. On November 26, 2007, Airbus and AVIC II have agreed to set up a joint venture manufacturing center in Harbin. The center will be established in the first quarter of 2009 and will produce composite parts for the A350 XWB.

AVIC I and AVIC II

The AVIC I group is a large enterprise that produces both military and commercial craft. The major civil facilities include Shanghai Aircraft Industry, Xian Aircraft Industry Corporation, Shenyang Aircraft Industry Corporation and Chengdu Aircraft Industry Corporation.

During his presidency of AVIC I—which lasted from 1999 to 2006—Liu Gaozhuo listened very carefully to officials from well-known U.S. and British aviation companies such as Boeing, General Electric, United Technologies Corporation and Rolls-Royce. He noted the data-driven principles of the Six Sigma methodology for eliminating defects, “lean manufacturing,” “best practices” and the imperatives of understanding the customer. Gaozhuo paid close attention to these aviation officials because he realized that his task was to prepare AVIC I to step into the world of these companies (Aviation Week and Space Technologies, July 24, 2006) and perhaps one day compete against them. According to Gaozhuo, although these efforts have been paying off and AVIC I has made some improvements, “there is still a long way to go” (Aviation Week and Space Technology, July 24, 2006), and the leadership of the AVIC I should not rest on its laurels and become complacent. With an increased focus on civil aviation and the manufacture of commercial carriers, in June 2007, the AVIC I group announced that much of China’s commercial aircraft industry would be separated from its military sector and would transition into publicly listed companies. Lin Zuoming, the new president of AVIC I, said that he hopes that such a move will make it easier for Western companies to do business in China’s civil aircraft manufacturing sector. In the past the difficult issue of technology transfer dominated the Western-Chinese agenda since Chinese aircraft manufacturers have usually built both military and civil aircraft, thus any spin-off of civil technology might have inadvertently aided China’s military aviation industry.

As a result of the June 2007 decision, AVIC I’s Shanghai Aircraft Manufacturing Factory operation—which is responsible for the final assembly of the ARJ21 civil craft—will become part of a listed company, AVIC I Commercial Aircraft Corporation (ACAC), whose shares will be sold in China and on the foreign stock exchange. The operation of Xian Aircraft Industry Corporation will be reorganized as a listed business that will later become the core of a civil manufacturing group encompassing the civil facilities at the Chengdu Aircraft Industry Corporation and Shenyang Aircraft Industry Corporation. On August 28, 2007, Lin Zuoming, announced that AVIC I had separated its subsidiaries’ civilian production from their military production to form Shenyang Commercial Aircraft (SAC) and Chengdu Commercial Aircraft (CAC), both with their own management board.

AVIC I’s programs include the manufacture of the fifty-seat turboprop MA60—of which the company hopes to sell at least 300 to foreign customers by 2020—and the first indigenously designed ARJ21 regional jet aircraft for the commercial market. The first aircraft rolled off the production line on December 21, 2007, in time for flight-testing to begin in March 2008. During the 2006 China Air Show in late October and early November of that year, Russia offered its assistance in the development of the ARJ21. Although China has taken on the design and development of the ARJ21 by itself, it has turned to 19 foreign suppliers, none of them from Russia. This was, and still is, a clear signal to Russia that China is not interested in cooperation as Russian commercial aviation is not considered by Chinese authorities to be a serious partner in the business. The program seek to expand its sales base beyond China, so it could be argued that the ARJ21, for now at least, is spearheading China’s ambition to be a global player in the commercial aviation industry (Flight International, August 28-September 3, 2007, 38). ACAC plans to establish a representative office in the United States, and later a subsidiary, to spearhead its sales push into the U.S. market. AVIC I is strongly emphasizing customer service. Now, even before the ARJ21 takes to the air, a customer support center has been built in Shanghai and has begun training operators.

In early November 2006, AVIC I had confirmed plans to manufacture commercial craft that could accommodate 150 passengers, thus putting it in competition with Airbus and Boeing. AVIC I plans to design the aircraft over the next five years and fly a prototype in 2011. Beijing hopes that the country’s first indigenous large aircraft will be airborne in about 10 to 15 years. On September 28, 2007, Russian Deputy Prime Minister Alexander Zhukov said that the Russian aviation industry is interested in joining the project. The Chinese reaction to Zhukov’s proposal remains muted since China is not interested in cooperation with Russia.

AVIC I and AVIC II may merge part of their commercial aircraft businesses into one corporation to help China compete on the global market for large aircrafts. Details are hazy, but the State Commission of Science, Technology and Industry for National Defense (COSTIND) are responsible for the plan. Chinese news sources reported that the National People’s Congress approved the plan to set up a corporation for developing large aircraft in February 2007, and in September 2007 established a preparatory committee chaired by the COSTIND Minister Zhang Qingwei and concurrently vice-chaired by COSTIND Vice-Minister Jin Zhuanglong, AVIC I President Lin Zuoming and AVIC II President Zhang Hongbiao. This corporation may be established as early as March 2008 (China Times, January 28).

This project is an ambitious endeavor and it remains unclear how it will play out. It appears that the U.S. and European aviation industries take the long-term challenge seriously, not least because the country will be able to draw on the support of the large demand from its domestic airlines. Steven Udvar-Hazy, chairman and chief executive of International Lease Finance Corporation, said in early March 2007 that both China and Russia could develop aircraft capable of competing with the Boeing 737 and Airbus 320 families within 15 years, with government backing and the technology gained from both companies. John Bruns, Boeing’s vice-president for China, stated in clear terms “it would be naive of us to think that our two companies [Airbus and Boeing] are going to dominate this industry forever.” However, Bruns’s statement runs counter to the opinions of some European and U.S. aviation industry officials who continue to believe that the Chinese aviation industry is still lagging behind. These officials maintain that they will only believe the Chinese business jet market has arrived when they see it.

Alongside the manufacture of the first indigenous large aircraft, AVIC I aims to deliver engines with greater thrust than the two main Western engines: the CFM56 of the French company Snecma and the V2500 of Canadian firm Pratt and Whitney. According to Chakar Chahrour, General Electric’s general manager for Asia-Pacific commercial operations and sales, “Within twenty years China will be building its own engines.” For the time being the manufacture of indigenous engines remains the weakest link in the chain.

In early August 2007, it was reported that Xian Aircraft Industry Corporation, a manufacturer of the MA60, plans to develop a 70-seat regional craft, designated the MA700. The new regional aircraft will increase its capability to compete with Europe’s ATR and Canada’s Bombardier, which are both 70-seaters. ACAC has another plan for breaking into Western markets, which relies on the Canadian-based Bombardier. In June 2007, AVIC I and Bombardier disclosed at the Paris Air Show that the Canadian company is to partner with ACAC on the ARJ21-900, a 105-seat stretched version of the ARJ21-700, and is investing $100 million in the project. AVIC I, meanwhile, has agreed to invest $400 million into its aircraft enterprises to prepare them to work on the planned Bombardier CSeries of 110-130-seat carriers.

AVIC II, on the other hand, is made up of the following civil manufacturers: Harbin Aircraft Industry Group, Hongdu Aviation Industry, Shaanxi Aircraft, and Shijianzhuang Aircraft Industries. In addition to civil aircraft it also manufactures helicopters.

AVIC II is planning to make a major push into general aviation. Zhang Hongbiao, president of AVIC II, said that AVIC II plans to merge its subsidiaries Harbin Aircraft Industry Group and Shijiazhuang Aircraft Industries. He added “Hongdu Aviation Industry will also be brought in.” Following the latest split of the civil and military businesses within AVIC I, Zhang Hongbiao said that, “We want to separate the civil and military” aspects of Shaanxi Aircraft. He added, however, that “it does not mean we will combine the civil [business] of Shaanxi Aircraft and Harbin Aircraft” (Flight International, September 11-17, 2007). Thus, it remains unclear what kind of organizational structure the commercial sector of AVIC II will establish in the future.

Even though AVIC II is the smaller of China’s state-owned aviation groups, it actively participates in building the Brazil Embraer ERJ 145 under licence as an important element in its commercial future. Harbin Embraer, a joint venture of AVIC II’s Harbin Aircraft Industry Group Hafei Aviation Industry and Embraer, launched a licensed production program for ERJ 145s in China in February 2004. According to AVIC II Vice President Liang Zhenhe, the ERJ 145 has been worth between $800 million and $900 million for the company.

During the 2006 China Air Show, mentioned above, AVIC II suggested that the civil helicopters inventory would increase from about 140 at year-end 2005 to 2,763 by 2026. Liang Zhenhe also noted that demand will be driven by security services, the energy industry and environmental monitoring agencies. The 2008 Beijing Olympic Games and 2010 International Expo in Shanghai will also be contributing factors. The proposed boom in helicopter production may also be accompanied by the opening of more maintenance facilities and increased pilot training. Whether helicopters will be largely produced by the Chinese enterprises or by Western companies such as Eurocopter and Sikorsky remain to be seen.

Shaanxi Aircraft and the Antonov design bureau are establishing a Beijing Engineering Center with 50 engineers, about half from Shaanxi Aircraft. The center is to work on the Shaanxi Y-8 derivative of the An-12 and the Y-5 derivative of the An-2 transport aircraft, as well as new 30-ton and 60-ton cargo aircraft.

To conclude, it is important to remember that the final structure of the Chinese aviation industry has not yet been put in place and everything remains in flux. At the same time, the Chinese aviation industry is developing rapidly, and changes within the industry structure demonstrate the determination of the government to build a first-rate enterprise capable of competing with both Airbus and Boeing. The goal of building an indigenous commercial carrier is no longer a hypothetical but a reality. The difficult question that China’s industry executives will have to face is whether they can develop an aircraft that is good enough to win out against the best that Airbus and Boeing can deliver. Timely delivery of the aircraft, its reliability and—as a result—the trust of the public to fly in such a carrier, together with first-rate customer service support are the key areas that need to be thought through carefully and monitored from start to finish.