China Takes Aim at Boeing and Airbus

At a recent air show in Zhuhai, China, two women in red flight attendant uniforms welcomed visitors to a mock-up of a new narrowbody jet that will seat up to 150 people and have its maiden flight in 2014. The plane is the C919, designed by state-owned Commercial Aircraft Corp. of China (Comac) to grab a piece of the passenger jet market from Airbus and Boeing (BA). "The interior is clean and bright, not a bad feel," says Jennifer Huo, a 34-year-old public-relations executive from Shanghai. "I feel proud that China can come up with such a plane."

One reason that China can come up with such a plane is that the companies that supply Boeing and Airbus are working with Comac as well. CFM International, a venture of General Electric (GE) and France's Snecma, is supplying all of the C919's engines. GE Capital Aviation Services (Gecas), the world's largest airplane leasing company, says it will buy as many as 10 of the new planes. "The decision to add C919s to the Gecas fleet shows our confidence in the commercial prospects for the aircraft and strengthens the relationship with our Chinese partners," Mark Norbom, president & chief executive officer of GE China, said in a statement.

Other suppliers include United Technologies (UTX) and Honeywell (HON). China's aviation industry today is at a similar stage as Airbus in its early days, says Tim Mahoney, president and CEO of Honeywell Aerospace. That's when it was a state venture with seemingly little prospect of taking on Boeing. Honeywell's four joint ventures with Chinese partners will supply parts to China's aircraft projects. One partnership focuses on flight controls, another on wheels and brakes. Honeywell also plans to expand its design center in Shanghai. "We are not just here to build an aircraft," says Bob Smith, chief technology officer of Honeywell Aerospace. "We are here to build an industry."

One goal is for the C919 to compete with the Airbus A320 and the Boeing 737. Another is "to spur the whole aviation industry," says Zhang Xinguo, vice-president at Aviation Industry Corp. of China (AVIC), a state-owned company that is helping build the airplane. The government wants to see jumbo jets, regional planes, business jets, propeller planes, and helicopters all made in China by Chinese companies.

The aerospace suppliers are positioning themselves for the day when the Boeing-Airbus duopoly will end and China horns its way in. China accounts for 22 percent of Airbus' 2010 orders and 15 percent of Boeing's orders. In the next four years, Chinese airlines are likely to double their fleet size, to 5,000 planes. On Nov. 1, Boeing said Chinese buyers will purchase $480 billion worth of aircraft over the next two decades. "There's voracious demand," says Peter Harbison, executive chairman of the Centre for Asia-Pacific Aviation, a market research firm in Sydney.

Comac has received orders from three Chinese airlines and two leasing companies, all of them state-owned, for 90 of its C919s. Even if interest in China's aircraft industry is limited largely to the home market, the growth of the country's carriers should guarantee plenty of business for Comac, AVIC, and their Western suppliers.

The icing on the cake for Chinese aircraft makers and their foreign partners would come if the Chinese start selling their planes outside of China. "The Chinese manufacturers will reduce the market share of Boeing and Airbus," says Harbison of the Centre for Asia-Pacific Aviation. "But this is not going to make a dramatic impact overnight."

China's industrial planners are willing to be patient. Huawei Technologies, Cisco System's (CSCO) big Chinese rival, needed years before it became a global player. China's high-speed train industry has been going through the same changeover from local champion to international force. Its aerospace industry may be starting the same transition. Honeywell's Mahoney is already talking about developing products "that would service not only the Chinese market but also the markets that the Chinese would provide globally. Similar to what we do with Airbus and Boeing."

The bottom line: China's commercial aircraft industry is getting help from Western aerospace companies that are branching out beyond Boeing and Airbus.

    Before it's here, it's on the Bloomberg Terminal.