China's Large Aircraft Program Gains Momentum: When Will It Take off?
With its decision earlier this year to relaunch its large aircraft program, China has signaled its intent to challenge Boeing and Airbus SA’s dominant positions in the global market.
On February 26, China’s Premier Wen Jiabao hosted a meeting of the Standing Committee of the State Council, during which the special working group on the large aircraft program presented its feasibility report. The program was given the green light to proceed and a large aircraft share-holding company was set up by the committee to facilitate the kick-off of the program.
These actions are strong signals that, after the abortion of its first large passenger plane development program -- “Y-10” -- in the 1980s, China has decided to relaunch its plan for R&D on large aircraft.
Economic and Strategic Concerns
Large airplanes refer to those cargo planes with a payload of more than 100 tons or trunk liners with more than 150 seats. They are the most widely adopted aircraft in civil aviation. Before giving the go ahead to the program, the Standing Committee of the state council set up a special working group -- an experts committee -- to carry out an independent study. Six months later, the working group came up with a report titled, “Feasibility Report on the Large Aircraft Program.”
The State Council believes that to manufacture large aircrafts is a major strategic decision made by the central government of China and a long-cherished aspiration of the Chinese people as well. The 50-year history of the Chinese aviation industry has also helped establish a foundation for developing large aircrafts. But perhaps a more important driving force is the huge market potential for the large aircrafts. According to an estimate from Boeing, China needs 2,100-2,400 passenger planes in the next 20 years with a total value up to $197 billion.
Moreover, large aircrafts production is a highly sophisticated and advanced industry which will have an enormous “pulling” effect on industries such as machinery, electronics, metallurgy, chemical, material, energy and IT. It will play a key role in promoting the national economy and upgrading industrial technology. According to Liu Daxiang, deputy director of the Technology Commission of China Aviation Industry Corporation I (AVIC I) and Academician of the Chinese Academy of Engineering, the return on every $10,000 investment in the aviation industry will be as high as $500,000 to $800,000 in 10 years. The program will also inspire a sense of pride in the country.
Technology No Longer a Barrier
According to information available at this stage, this program will involve several ministries and be headed by a vice-ministerial level official. The R&D investment is roughly estimated to be 50-60 billion RMB. The program will have two parallel projects on both military and commercial aircrafts. The military project is said to be located in Xi’an, while the commercial project will be established in Shanghai.
Liu Gaozhuo, the former president of AVIC I and a member of the National Political Consultative Association, told Cai Jing, a major Chinese finance magazine, that the platform for the large aircrafts program will be set up this year.
Due to the formidable requirements of sophisticated high technology, the enormous funding needs and the length of time it takes to build large aircraft, up to now only the U.S., EU and Russia boast the capacity to make these large planes. Boeing and Airbus SA are the de facto duopoly in the international civil aviation market.
For China, its decision to go ahead with this project is based on its 50 years of experience in aircraft manufacturing. According to Li Fangyong, the chairman and CEO of Shenyang Aircraft Industry Co., China has established a fairly complete aviation industry system with integrated R&D and manufacturing bases for mainframe, aeroengine and airborne equipment. China’s R&D capability is almost as high as that of the U.S., EU and Russia, and the country has already been a supplier of major components for both Boeing and Airbus.
In the last 30 years of the 20th century, due to the restraints of funding, national defense technology and the civil aviation market, China’s large aircraft program experienced major setbacks and constant delays. In February 1985, China’s first proprietary large aircraft program -- “Y-10” -- was aborted after 15 years of endeavor. The national government has since overhauled its strategy, trying to adopt an alternative model of “exchanging market for technology” by making efforts at joint cooperation with McDonnell-Douglas and Airbus in manufacturing aircrafts. However, the joint project was aborted in the 1990s. Chang Zhenya, an aviation expert who participated in the McDonnell-Douglas project, recalled that the key technologies were closely guarded by the foreign partner. Core technologies -- such as aerodynamic design, compound material, avionics and aeroengine -- were strictly off limits during the cooperation.
After the failure of the “exchanging market for technology” strategy, China’s new R&D initiatives -- such as the MA-60 and the ARJ-21 -- have both adopted the system integration model as a transitional arrangement. This involved the procurement through open bidding of engines, electronic systems and different parts of the mainframe from eight domestic and 19 foreign suppliers. The concept of independent proprietary R&D is no longer the only option.
Fu Shu La, president of China National Aero-Technology Import & Export Corp., disclosed that the newly approved large aircraft program will adopt a global risk-sharing partnership model, in which the partners will not only produce components but also co-invest from the start, taking the share of risks while sharing profits accordingly.
Zhou Jisheng, the former vice chief engineer of Shanghai Airplane Plant, suggested that the future share-holding company could mainly be in charge of the general assembly as well as marketing, sales and service, while the engine and airborne equipment -- which account for 50% of the total production cost of the large aircraft –- could be procured internationally,
Cheng Bushi, the former vice chief engineer of Y-10, further suggested that Y-10 could be an important reference for the new program. “Y-10 has achieved breakthroughs in some key technologies and its mainframe is still the most commonly used in the world today. The advancement of aviation technology in recent years has mainly taken place on engine, electronic equipment and new materials. Therefore, improvements based on Y-10 as the prototype would be a more feasible way to go ahead.”
A research fellow at Stanford University also argued that at the present stage, technology is no longer a major barrier for China’s large aircraft program. Instead, the investment and financing system, the operational capability and the market development are of critical importance.
It is important to mention that a few days after the large aircraft program’s approval by the Standing Committee of the State Council, the Commission of Science Technology and Industry for National Defense (COSTIND) issued two documents titled, “Guidelines on Promoting the Development of the Civil Sector of Science Technology and Industry for National Defense” and “Guidelines on the Participation of the Non-Public Sector in the Development of Science Technology and Industry for National Defense”. Both documents welcome non-state-owned involvement in military products and encourage unrestricted military enterprises to go public.
Many experts believe that with such a new policy, the new company is expected to be market-oriented. The company will realize the diversification of investment, and bear the responsibility for engineering, general assembly, marketing and sales. Meanwhile, the company will also include investments from local governments and possibly, the involvement of private capital or a public offering.
As for the formation of the new joint venture, many analysts have coincidentally mentioned the AVICI Commercial Aircraft Co. (ACAC), saying that the latter would probably become the basis for the new venture. ACAC was founded in September 2002 as China’s only company with limited liability on commercial aircrafts. Based in Shanghai, ACAC is a joint venture co-founded by 15 organizations and institutions including AVIC I. It is the liability and operation entity of ARJ-21, the first new-generation regional jet, of which China owns complete intellectual property rights. ACAC also manages marketing, sales and customer service for the ARJ-21 jet.
Apart from the enthusiasm within China, leaders of the Russian aviation industry have also expressed their interest in participating in the Chinese program, according to Russian media, which suggest that negotiations are well underway. The plan is to develop new model(s) with a capacity of 270-350 passengers on the basis of Russia’s IL-96 passenger plane. In fact, the Russian News Agency reported in September 2005 on a proposal from Russia’s Ilyushin Aviation Complex to conduct joint R&D of MC-21 passenger planes with China. The proposal suggested that the production of the plane be located in China and that the products replace Russia’s TU-154 passenger planes by 2012.
Scott Carson, president and CEO of Boeing Commercial Airplanes, pointed out that there have been no official invitations from either the Chinese aviation industry or the Chinese government for Boeing to participate in the program, and that if the opportunity comes, Boeing will review the program to see if there is an opportunity to participate.
“If China really succeeded in producing large passenger planes, we might be a potential buyer,” commented Petteri Kostermaa, vice president and board director of FINNAIR in charge of the strategic planning of flight courses. “But it will be a very challenging journey and China has to do it through cooperation (with core technology owners such as Boeing or Airbus). After all, they are the only manufacturers at present.”
There are also concerns about this ambitious program. China’s efforts started in the 1970s and were forced to a halt in the 1980s. It will be difficult to restart after so many years and to catch up with the entrenched players. After all, it took Airbus 20 years to be at the same level as Boeing.
Another major challenge for China’s large aircraft program is to earn a reputation as a reliable supplier. China has to learn lessons from Russia’s bad example in after-service in the 1990s and clear up newcomers’ negative impression of the aviation industry. The ARJ-21 new regional jet may become an opportunity for China to reinvent itself in this respect, but until now the plane has never been sold to any foreign airlines.
The shortage of qualified talent will also constitute a bottleneck in the program. At present, The First Aircraft Institute of AVIC I, the largest of its kind in China, has only about 1,000 research and design staff in its Xi’an headquarters and Shanghai branch combined. However, according to the experience of Airbus’ A380, the R&D team for a program of this scale should have at least 5,000 employees.
Scott Carson of Boeing Commercial Airplanes pointed out again that the structure and design of airplanes are far more difficult than the assembly. The difficulties in sales are mainly to do with the credibility of the designer and the manufacturer. Credibility is based on large aircraft operators’ experience in operating the products of certain manufacturers: The quality of products, the reliability of delivery schedule, the performance of the aircrafts and customer service are all crucial factors in the sales of airplanes. These are major challenges for China’s large aircraft program in the future.
As Cui Degang, deputy director of the Science and Technology Committee of AVIC II, notes: “China’s prospective large commercial airplanes should not be inferior to the existing products of Boeing and Airbus in three key criteria: safety, reliability and comfort. Otherwise we can’t survive the competition.”