Will China Join the Jet Set?
Move over, Boeing and Airbus. China wants to build its own commercial jet by 2020. Ambitious? Sure. Realistic? Maybe. No one disputes China's ability to produce a credible airliner—but making it fly in the marketplace is another thing. The country has been a parts supplier to Western aircraft makers for decades and is building its own 70-80 seat regional jet, the ARJ-21. But for China to compete, it will seriously have to examine the kind of value it can bring to airlines.
Today more than ever, innovation is the path to prosperity for the commercial aviation industry. The likes of Boeing (BA), Airbus, and General Electric (GE) have developed advanced aerospace technologies such as new, lighter materials that have helped to make air travel faster, safer, and cheaper. If the Chinese intend to use lower labor costs to undercut Boeing and Airbus on price, airline CEOs will probably just yawn.
That's because carriers are far more interested in driving down the cost of flying. The recent success of Boeing's carbon fiber 787 Dreamliner underscores the changes in the industry. The Dreamliner will carry 250 passengers in a composite fuselage that, along with new advanced engines, will improve fuel efficiency by 20% over similar-sized rivals, and cut maintenance costs by more than 30%. That's important, because fuel efficiency rules the boardrooms of airlines. Over the life of a widebody aircraft flying the longest routes, fuel will cost more than four times the sticker price of the airplane, according to brokerage Merrill Lynch (MER).
What's more, China's low-cost advantage may not even be that advantageous for commercial jet manufacturing. Why? China will still have to depend on Western engine makers and avionics suppliers to keep its new jets flying safely and find a market outside of China. Problem is, these suppliers make the high-value components and are in no danger of being replaced. The regional jet business bears this out. General Electric is supplying the engines for China's ARJ-21, and Rockwell Collins (COL) the avionics.
If China starts manufacturing a 150-seat plane, as it announced on Mar. 19, it likely would build the fuselage and wings and assemble the aircraft. But since foreigners would supply the rest of the components, China's share would represent about 40% of the overall cost of the plane—and less than half of that is work that might benefit from low-cost labor.
So that could give the Chinese plane a cost advantage of perhaps 10% over similar offerings from Boeing or Airbus. "That's not insignificant," writes Merrill Lynch analyst Charles Armitage. "But it translates to about 2% of operating costs" for carriers over the lifespan of a jetliner.
Even finding the workers China needs may be tough. As Airbus prepares to build its A320 jets in China starting in 2009, it's worried about getting experienced aviation-industry hands. So the European company isn't planning to experiment with any new processes in China. Says Alain Flourens, head of the A320 program at Airbus: "We're going to copy and paste" the same production techniques used on its European assembly lines. That's hardly going to move the Chinese to the forefront of airplane manufacturing.
So why do it? For strategic reasons, China wants to make its own planes. And there's certainly a domestic market for them. Chinese airlines are expected to buy 2,650 new passenger aircraft over the next 20 years, worth $289 billion, according to commercial-airplane experts. Still, the risks are enormous. Even veteran manufacturers have stumbled badly at times, with Airbus' troubles in building its A380 super jumbo just the latest example of how unforgiving the industry can be.
Sure, China can make toys, steel, ships, and even cars. And it's getting better at all of them. Airplanes, though, may be a stretch, even for a nation as ambitious as China. "If you want to practice manufacturing cars, that's fairly non-risk," says Martin Craigs, president of Aerospace Forum Asia, a Hong-Kong-based industry association. "But you don't have that luxury with airplanes. You have to be 100% right from the start."