The ABC’s of Aviation: Airbus, Boeing, China
A corporate strategy article by Thunderbird students Brett Davis, Don Dennis, Tras Obsuwan, Kyungwhan Park and Ryan Wegner
How comfortable would you feel if you boarded an aircraft that was entirely developed, manufactured, and assembled in China by a wholly-owned Chinese company? That reality may occur in the near future. With global industry revenue projected to increase to $4 trillion by 2029[i], of which approximately 12% [ii] is expected to occur in the Chinese market, new competitors are quickly strengthening their positions in the historically duopolistic airline industry. Amongst these players is Commercial Aircraft Corporation of China (COMAC), a Chinese state-owned aircraft manufacturing company, which is focused on fiercely competing with industry leaders Boeing and Airbus. COMAC’s aspirations are to obtain market share and at the behest of the Chinese government reduce the country’s reliance on foreign airline manufacturers.
COMAC’s advancement in this market is fueled by acquiring different processes and technologies through numerous partnerships involving technology transfers. These partnerships include a $ 2 billion agreement with GE for avionic systems intended to be utilized in the first 2,300 C-919 aircraft cockpits. Additionally, COMAC’s parent company reached an agreement with Boeing in June 2011 to open an innovation center in Xi’an, China[iii]. This contract includes hands on training for Chinese employees and is intended to play a key factor in assisting COMAC to successfully learn and integrate many of Boeing’s effective business practices into its own operations.
Other technology sharing partnerships include Airbus, Honeywell, United Technology and Embraer. While technology transfers via partnerships are important factors in COMAC’s growth strategy, China’s lack of intellectual property protection has led many western based firms to share older technologies and processes whereby safeguarding their latest technological advancements. Accordingly, integration of these non-cutting edge technologies could prove detrimental to the quality and efficiency of COMAC’s initial production plans and may hinder its ability to compete globally.
The Chinese government plays a strong role in facilitating growth as well as the competitive advantage of its airline manufacturing industry. This was evidenced in China’s tenth 5-year plan which placed aviation among the top three strategic industries for development. The Chinese airline industry is financed through heavy government subsidies as well as generous state funding which consists of extremely low interest rate bonds. Government intervention in this industry could lead to lack of transparency and rampant corruption that are both credited as causes for past safety failures.
In further evaluations of this new airline production initiative, three words come to mind, “Made in China…” What has become synonymous with this phrase? High quality? Reliability? Safety?
If the events of July, 23 2011 are any indicator of this phrase’s significance, the above descriptors are a far cry from reality. On that day, a devastating crash on the state’s newly completed high-speed train sparked a public relations nightmare for China’s developing technological sector. Originally this accident was attributed to a lightning strike. However, it was later confirmed by the Shanghai Railway Commission that the crash, which resulted in 39 deaths and over 200 other injuries, was caused by a safety system failure. According to An Lusheng, head of the Shanghai Railway Bureau, the system “failed to turn the green light into red.” While the Chinese government has vowed to punish those responsible for this negligence and to place a greater focus on safety in its train sector, it has yet to be seen whether China is truly dedicated to achieving global quality and safety standards.
Two days before the crash, the state-run People’s Daily newspaper rebutted criticism of the Beijing-Shanghai high-speed rail and boasted about the train’s superior technology. A Chinese Railway Ministry spokesperson further expanded on this rebuttal by claiming his country’s high-speed rail technology was far better than that of Japan’s bullet trains. In contrast, Japan’s bullet train network has run for 47 years with a near-perfect safety record.
Six days after the high speed train accident, another incident occurred involving a radiation leak on a Chinese nuclear submarine. The leak’s root causes were believed to be substandard construction and rushed training. The government reacted to this information by imposing bans on news coverage of the situation as well as censoring other forms of media outlets, including over 1,000 Chinese websites.[iv] The media censorship of these disasters served to further bolster frustration and discontentment among the Chinese public.
In a November 2010 case that raises questions about safety, construction quality, and the effectiveness of the nuclear regulatory body in China, Kang Rixin, the former head of the China National Nuclear Corporation, was sentenced to life in prison for abuse of power and acceptance of bribes.
There are many additional instances that portray the same underlying concerns associated with the Chinese in the global economy. For example, there is a lack of transparency and accountability within state-owned enterprises in China that gives rise to shortcuts which jeopardize safety and quality for high growth development.
Although these disasters have caused turmoil amongst the Chinese public, the country is not only continuing its production in these industries but has increased its focus on additional sectors of the transportation industry, namely the airline industry.
In late November COMAC unveiled the C-919, its future staple airliner, which is intended to compete with the Boeing 737 and Airbus 320 for the sweet spot of the airline market. With a cost expected to be 20% lower than its powerful competitors[v], COMAC has already received commitments for 100 units[vi] from Air China, China Southern, China Eastern and Hainan Airlines, as well as the U.S.-owned GE Capital Aviation Service. Governmental controls have garnered guarantees from the two largest Chinese airline companies to solely purchase airliners from COMAC in the future. The Chinese government has significant influence and maintains the ultimate approval over domestic airliner purchases whereby creating a future barrier to sales for foreign competitors in the China market.
These commitments and government support are strong indicators of the potential strength of the C-919 introduction. However, these government supported pre-production commitments may create a moral hazard in which COMAC may follow the traditional Chinese approach of cutting corners in either its materials or electrical components. This could very likely be used as the manner of bringing the C-919 to market at a reduced cost but would ultimately run a very high risk of product failure which could tarnish the C-919’s reputation and ability to expand globally. This view is shared by Lu Jian, an expert on airline design and head of the department of mechanical engineering at Hong Kong University who stated “there will be pressure from the government to use Chinese planes but if there are safety or reliability issues the airlines can and will refuse.[vii]”
COMAC’s 2016 delivery plan for the C-919 initially focuses on the Chinese market where government protectionist policies support COMAC’s growth. The Chinese government may use its large domestic market to rapidly expand COMAC’s production and could subsidize foreign sales to position the company to be a dominant global player in the commercial airline sector.
Strategic forecasts predict the C-919 to expand on a global scale. While this expansion is estimated to occur after successful integration into the Chinese market, the C-919’s competitively priced mid-sized design has already raised interest with Ryan Air, an Irish based discount airline. Although COMAC has not received firm international purchasing commitments, yet, it expects sales to surpass 2,000 units in the next 20 years.[viii]
As quality production has consistently been an underlying issue in Chinese manufacturing, it is likely to be a thorn in the side of COMAC’s future expansion plans. However, with the support and backing of the Chinese government, the question is not IF but WHEN COMAC will be capable of manufacturing quality airliners and effectively competing in the global market.
[vi] (Global Security)
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