China's new regional aircraft a hard
sell By David Fullbrook
SHANGHAI - First place for the world's hardest
job today in aerospace - the design and manufacture of
aircraft - may well be held by Chen Jin, vice president
of AVIC I Commercial Aircraft Co (ACAC) here, charged
with selling the ARJ21 regional jet.
Second
place goes to the far better-known Harry Stonecipher,
wrestling to turn around Boeing after scandal and the
ignominy of falling behind Airbus in orders. A strong
contender for the third-hardest job in aerospace today
is Airbus's engineering team, struggling to shave a few
tonnes off the giant A380 airliner.
But back to
Chen Jin in China. Bringing a new aircraft to market,
especially against entrenched competitors, is never
easy, harder still when your company is unknown and your
country a relative newcomer to the assembly game. So far
his team has notched up 41 orders for the 78-seat
ARJ21-700, selling 20 to Shenzhen Finance Leasing and
the rest to Chinese airlines at a current domestic list
price of US$25.5 million each. Manufacturers usually
offer fat discounts on list prices.
Chen expects
to reveal a deal for six more, possibly including the
first 105-seat ARJ21-900s, with a local carrier at
Zhuhai's November air show, where business and cargo
mockups will be unveiled. "It's just the start," he said
in an interview with Asia Times Online.
With
experienced foreign rivals now manufacturing 50-seat
regional jets in China, partly to circumvent heavy
import duties, ACAC home turf is not quite its own.
Chen, however, is confident ACAC will be unaffected.
"Bombardier [Canadian] and Embraer [Brazilian] are
targeting China too, but we will be first in the
domestic market because we understand the customer
better."
China's booming economy, slow land
transport and fast-rising incomes are fueling demand for
air travel. Modern but still expensive regional jets in
particular appear to have a golden future thanks to
their low operating costs. However, that will be
unlocked in part by the lower prices manufacturing in
China should deliver. "Now all the aircraft
manufacturers look at the market in China because it is
developing fast. We too have to concentrate on China for
the same reason," Chen said.
Still, it is
obviously a lot easier for ACAC to build a customer base
and develop after-sales support in the market it knows
best, more so given the tight links many observers
believe exist among the government, state-owned
aerospace firms, and airlines. Arguably such bonds
existed in the West a few decades ago, and still do to
some extent.
Long legacy of inferior Soviet
airliners Even so, Chinese airline executives
have a marked preference for Western aircraft, a legacy
of being stuck with inferior Soviet airliners for so
long, making a new Chinese aircraft a hard sell.
China's great potential remains just that -
great potential - in part because deregulation has
slowed after a burst of consolidation activity. No doubt
the big three legacy carriers are fighting a rear-guard
action, fearing the entrance of nimbler new airlines.
"Deregulation may gradually lead to more orders. The
industry may develop as it has in the United States if
deregulation proceeds," said Chen.
Though ACAC
is preoccupied with nailing down orders in China, its
sights are set elsewhere. "Our main markets are Europe
and the US. If we cannot succeed there it's not a real
success," said Chen. Early days though these are, ACAC
is already scouting for deals. "We visited Air France
last April. In September they intend to visit us," said
Chen.
Japan is also going to be finding its way
into the sales team's itinerary. "There's great
potential there. The ARJ21 has been designed for short
runways in western China. Similarly in Japan shorter
runways are not uncommon. High comfort will appeal to
the Japanese too. It's a market we will be paying more
attention to," said Chen.
On paper at least, the
ARJ21 handsomely outperforms its competitors by using
shorter runways at higher altitudes, flying further
while offering a roomier cabin and more space between
seats.
Sales in developed markets are on hold,
however, until the aircraft passes muster with engineers
and pilots responsible for certification at the US
Federal Aviation Administration (FAA) and the Joint
Aviation Authority. With the first flight not due until
late 2006, certification is unlikely before 2008.
Consequently ACAC's foreign sales will start
closer to home. "It will depend on whether FAA
certification is required. So we will target countries
were FAA certification is not required initially. Our
first overseas sales will probably be in Southeast
Asia," said Chen. "Developing the overseas market cannot
wait for FAA certification."
While these
countries all require FAA-certified aircraft for
international flights, that is not generally so on
domestic routes. Vast countries such as Indonesia, the
Philippines and India could well make good use of an
affordable regional jet. Sales to Southeast Asia are
also attractive in the early stages because geographical
proximity makes providing maintenance and spares support
easier. By the time sales begin in faraway developed
markets, that crucial support should be firm.
Manufacturing plus customer
service "For the first stage, by the end of the
year construction of the training center and spare-parts
center will start," said Chen. "We are selling a
product-plus service. We are developing manufacturing
and customer service concurrently."
ACAC will
use an online system similar to Boeing's to manage spare
parts - not altogether surprising, with Boeing holding a
number of "technical contracts" with ACAC. The
spare-parts and training facilities' first phase will
cost 300 million yuan to 400 million yuan ($36.25
million to $48.3 million). A flight simulator, costing
$10 million, will be ordered this year, probably from
China Eastern Airlines.
ACAC may not provide
support globally. "It will totally depend on the market.
We may use subcontractors or joint ventures to provide
local spares support," said Chen.
While ACAC's
150 managers are mulling such questions, 1,000 engineers
at First Aircraft Design Institute are working toward
assembly of the first aircraft at ACAC's northern
Shanghai factory beginning late 2005 or early 2006.
"According to the master schedule by the end of the year
90% of the manufacturing drawings and 50% of the systems
drawings will be released," said Chen.
AVIC I
subsidiaries are handling much of the manufacturing.
Xi'an Aircraft is building the wings and central
fuselage, Chengdu Aircraft the nose and Shenyang
Aircraft the tail. Shanghai Aircraft handles final
assembly, attaching the GE CF34-10A engines and
installing the Rockwell Collins avionics.
Development is costing 5 billion yuan, a
relative bargain, partly because ACAC has shifted some
of the costs on to its suppliers. Other costs, labor in
particular, are cheaper than elsewhere. "Senior
engineers in the US earn over $100,000 a year. That's
much more than me, the vice president of the company,"
said Chen. "This is why our aircraft will be more
competitive then other aircraft in the market. However,
we are still trying to reduce costs where we
can."
Even so, ACAC will have to sell 150
aircraft to break even. Failing to meet that target,
which will almost certainly require significant overseas
sales to achieve in good time, will reflect how well
ACAC manages risks.
"I think there are four
major risks we face now: can our schedule meet the
airlines' delivery demands? Can we control costs to keep
prices down? Will the aircraft performance meet the
specification? Can production meet demand? We're trying
hard to minimize them," says Chen.
Concerned
that it may risk losing orders, ACAC is not using
composites such as Kevlar and other types of special
plastics pioneered in military aircraft in the 1980s at
this stage. "For airlines, composites are difficult to
repair, which is why the ARJ21 is almost entirely metal.
They just aren't ready yet. Later, once composites are
commonplace and maintenance is firmly established, we
will probably make much greater use of composites," Chen
said.
With composites used extensively in the
Airbus A380 and Boeing's touted 7E7, that time may come
by the end of the decade, which gives ACAC's suppliers,
especially Chengdu, which is the 7E7 composite rudder
contractor, time to hone their composites craftsmanship.
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