Airbus May Hit An Air Pocket Over China

Why its plan to build narrowbody planes there could come up short

It looks like a great leap forward for Airbus. The European planemaker is set to announce the site of an assembly plant in China, its first ever outside Europe. The facility, likely to be built near Beijing or Hong Kong, could start rolling out A320 planes by 2008. The plant is part of a major push by Airbus to pull even with Boeing Co. (BA ) in China's fast-growing aviation market. Airbus first disclosed plans for the factory last December when it inked a $10 billion deal with China for 150 narrowbody A320s. With China's low labor costs, the promise of free land, and the prospect that Airbus' investment could spark more Chinese orders, the factory seems a smart bet.

Well, maybe not. Airbus isn't likely to save money building planes in China. Wings, fuselages, and other components would still be made at Airbus' European factories and shipped to China for assembly. The expense of transporting them and setting up a complex supply chain, along with recruiting and training Chinese workers, would wipe out labor cost savings, analysts say. Airbus executives, citing the sensitivity of ongoing negotiations, declined comment. But a spokesman acknowledges that Airbus' main reason for the plant is to gain greater access to the Chinese market.

A Chinese factory, though, could exacerbate an Airbus problem: an overreliance on lower-margin narrowbody sales while Boeing wins more orders for widebodies. Because 85% of the 1,055 orders logged by Airbus last year were for narrowbodies, its order book was worth $10 billion less than Boeing's, although Boeing sold 53 fewer planes. The pattern held true in China. While Boeing on Apr. 12 announced a $6.4 billion deal to sell 80 slimmer 737s to China, its recent Chinese orders have been split between narrow and wide planes. Boeing's order book includes 74 new 787 widebodies, totaling about $9 billion. By contrast, more than three-fourths of recent Airbus China sales have been the narrow planes. A Chinese A320 plant will give officials even greater incentive to swing narrowbody orders to Airbus. Says Richard L. Aboulafia, an aerospace analyst with the Teal Group in Fairfax, Va.: "It is a massive self-inflicted wound."

Why doesn't Airbus try building bigger planes in China? It is, after all, launching a new widebody, the A350, to compete with Boeing's new 787. The problem is Chinese industry has neither the technical expertise nor the financial resources to play a role developing new aircraft. In Japan, Boeing has long relied on giants like Mitsubishi Heavy Industries, Fuji Heavy Industries (FUJHY ), and Kawasaki Heavy Industries (KWHIY ). All have knowhow in composites and other technologies. And with loans provided by the Japanese government, they're also shouldering about 40% of the 787's development costs.


Airbus already buys components from Chinese suppliers, including emergency exit doors and engine mounts. It also vows to double Chinese procurement, to $120 million annually by 2010. Even so, the company estimates that just 5% of the new A350's components will come from Chinese companies, which aren't yet able to supply complex parts such as wings.

Even basic assembly in China has not panned out for some Western aircraft makers. Brazil's Embraer (ERJ ), which opened a factory in Harbin in 2002 to make regional jets, has so far delivered only nine planes. McDonnell Douglas, the U.S. aerospace company later acquired by Boeing, set up a factory in Shanghai in the 1990s to build MD-80 and MD-90 jets. Plagued with quality problems and logistical snafus, it produced 55 planes before being shut down in 2000.

Airbus figures the risks are worth taking to gain an edge in China, where it now has just a 30% market share. Chinese carriers are expected to order almost 2,000 planes over the next 15 years.

China has also made clear it wants to create its own aircraft industry. So Airbus may figure that by building plants locally it can forestall development of a Chinese competitor. "Airbus is being farsighted. It's a gee-whiz, highly symbolic move," says Martin Craigs, president of Aerospace Forum Asia, a Hong Kong-based group representing aviation suppliers. But for now, Airbus' ticket into China sure doesn't look like a bargain.

By Carol Matlack, with Stanley Holmes in Seattle and Frederik Balfour in Shanghai

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