For business, possibly
nowhere in the world is the balance between risks
and reward more obvious than within the Chinese
aviation market. On one hand is the lucrative
Chinese market, with its growing middle class
eager to travel within the country, around the
region and across the world; yet on the other is
an aggressive government-funded aviation sector,
hungry to develop its own industrial national
champions that can compete with the likes of
Airbus and Boeing.
To make this tension
that much more interesting, there are obvious
national security implications to this sector as
know-how in commercial and general aviation
inevitably directs and informs
parts of China's fast-growing
defense industry.
While the aviation
market shows the shortsightedness of protectionism
(are we really to turn our backs on the phenomenal
market opportunity in China?), it equally shows
the limits of nationalism (are we OK that the
price of entry to China's aviation market is a
once-in-a-generation technology transfer to their
manufacturing base?).
In this sense, being
successful in China's aviation sector tests the
idea that both the developed West and an emerging
China can benefit from one another in the short-
and mid-term. For companies in the West, this will
require not only successfully selling high
technology exports into China today, but also
maintaining a clear competitive edge that allows
Western companies to continuously distances
themselves through new products and technologies
from emerging Chinese competitors.
The
American and European companies that are most
successful in China understand the trade-off they
are making: in most cases they have to agree to
joint ventures that manufacture products in China
for the Chinese aviation sector. The inevitable
loss of know-how is viewed by them as a manageable
risk given that their cutting-edge product design,
development and production takes place in their
respective home countries; but they are not
without illusion as to where this transfer of
established technologies could ultimately leave
them.
They know better than most that
China has structured similar deals in the past
within other industries - high-speed rail as just
one example, pharmaceutical drugs as another - and
definitively in the first case, but lagging in the
second - and carved out leadership positions by
standing on the shoulders of technology which came
out of their original joint ventures.
Why
make such a trade? Because, as the recently
released report by the RAND corporation, "Ready
for Takeoff: China's Advancing Aerospace Industry"
shows, the Chinese market is simply too important
to the world's aviation manufacturers for them to
make any other choice.
The authors of the
report write that "China is already the world's
second-largest national air travel market,
trailing only the United States. This market,
moreover, is likely to grow rapidly over the next
two decades - an estimated 4,000 new passenger
aircraft are expected to be purchased by Chinese
airlines over this period."
Given the many
uncertainties rumbling through Western economies,
the sheer depth and breadth of the aviation market
in China compels Western business to find a
strategy that will work. Part of what provides
American and European aviation executives
confidence that this trade-off is likely to work
in their favor are the unique challenges to being
successful in the commercial aviation market. As
Roger Cliff, one of the authors of the recent RAND
report and a specialist on China's aviation sector
shared with Asia Times Online, "While making a
commercial airliner these days may not be rocket
science, integrating the systems so they actually
work is not a trivial task. There is a high entry
barrier to prove your system is as safe and
reliable as what is already on the market. People
do not want to take a chance on an untested
design, and Boeing and Airbus have an advantage
here."
Cliff added, "Another element is
reliability - you can be safe but break down more
frequently, which creates high variable costs. It
isn't that Chinese manufacturers can't achieve
this, but they have to prove they can."
An
awareness that, while the mountain may be high, it
can still be climbed with time and resources, has
led many industry analysts to measure China's
progress by focusing on the two highest profile
examples of its aviation sector from the
Commercial Aircraft Corporation of China (COMAC):
the ARJ21 designed to compete against the regional
jet (RJ) manufacturers Bombardier and Embraer, and
the C919, which has been designed to compete
against the medium range, narrow body Boeing 737
and Airbus 320.
According to Cliff, the
C919 in particular illustrates the competitive
advantage still goes to Airbus and Boeing. For
airlines, "costs are very important, and early
reports suggest that the airframes of the ARJ21
and C919 are heavy for their size, that they do
not provide for as many passengers per gallon of
gas burned."
What does that mean to an
airline? Cliff sees the answer as critical to
properly framing China's status in the aviation
market: "For an airline evaluating the ARJ21 and
C919, even if their up-front costs are lower,
their longer-term efficiency is not as good, and
that is a problem."
Brad Perrett, the
Asia-Pacific bureau chief for Aviation Week,
echoes Cliff's perspective. "There is little sign
so far of the ARJ21 being a commercial success.
Technically it has had great trouble. It is
possible that the C919 will also be commercially
unsuccessful."
But Perrett was quick to
point out that "it can be taken for granted that
the C919, whether commercially successful or not,
will serve its strategic function of raising the
competence of Chinese commercial aircraft
building."
For a state-owned enterprise
like COMAC whose objectives start with satisfying
Beijing's strategic economic planning first, and
the market's expectations for successful return on
investment from the C919 program a distant second,
even a commercially unsatisfactory C919 program is
still a victory.
Yet, experts believe
Beijing will do everything it can to make the C919
program a commercial success. Says Perrett:
"Chinese central government airlines have already
placed small orders for the C919 under presumed
direction from the central government. Hainan
Airlines has also ordered, probably because doing
so was politically wise. As an offering from a
company with no record in certifying, delivering
and supporting commercial aircraft, the C919 is
unattractive to any airline that is not under
state pressure."
What remains to be seen
is whether China packages the C919 into part of
its already expansive and growing state-to-state
economic programs, offering developing economies
an especially attractive alternative to the more
established platforms and pricing schemes from
Airbus and Boeing.
Cliff believes that
Beijing may face more reluctance to embrace the
C919 than might be thought: "While COMAC has
around 100 orders for the C919, these contracts
have no-penalty cancellation clauses in them. For
Chinese airlines, a third type of airplane in the
fleet only complicates their logistics, which,
given outstanding questions about the C919's
efficiency and safety, is problematic."
Perrett agrees with this, commenting that
"Chinese airlines will order it only under
direction or at greatly subsidized prices, until
it has proven itself to be an efficient, reliable
and safe airliner". And while pushback from
China's airlines may be enough, Cliff also
believes it is possible the Chinese consumer may
be equally reluctant: "I do think there is also a
perceptual barrier with the Chinese consumer who
will ask themselves 'do I want to fly in a Chinese
made and designed plane?' ... They can overcome
that, but it will take time."
But Beijing
may judge its commercial aviation sector on the
basis of more than the success or failure of
programs like the ARJ21 and C919. The motivation
behind China's push to fund programs like the C919
is a combination of national pride (the desire for
an all-too-literal "flagship" made in China from
Chinese designs), and a desire to migrate key
dual-use technologies from the commercial to
military side. If managing the possible creation
of new competitors on the commercial front through
forced joint ventures and transfer of technology
is difficult enough, managing the inevitable loss
of technology and know-how integral to defense
aerospace remains a critical question.
As
the March 22 RAND report stated, "There is no
question, therefore, that foreign involvement in
China's aviation manufacturing industry is
contributing to the development of China's
military aerospace capabilities. There is also
little doubt that this is a deliberate policy of
the Chinese government."
And, as Cliff is
quick to point out, "While China is well behind
the US and the European Union in military areas,
they are catching up rapidly." A country that,
according to the RAND report, had until recently
struggled to build an acceptable turbofan engine,
now is attempting to field a fifth generation
fighter.
Cliff acknowledges that the gap
is narrowing. "We [the United States] flew our
first fourth generation fighter, the F-15, around
1974. China put their first, the J-10, into
service in 2006 ... China's first fifth generation
fighter, the J-20, took its first flight in 2011,
and shortened the delivery cycle so it can enter
service by 2018."
Impressive gains, but
Cliff is quick to urge caution in assuming the
comparisons are valid: "I am not going to claim
the J-20 is comparable to the F-22. The reality is
no one really knows ... a fifth generation fighter
is not just stealthy; in the case of the F-22 it
has super-cruise capabilities, thrust vectoring,
advanced radar, and digital data links."
This impressive shortening of the product
development cycle by China's military industrial
complex is not explainable without an appreciation
that some of China's capabilities in this arena
migrated from commercial aviation. But, as Cliff
made clear, not everything did. "After all, I
don't think hiding from radar is something you
want in a commercial aircraft."
Yet the
question remains for analysts like Cliff that "we
don't know to what degree the engineers involved
in the design of commercial aviation go back to
the military side of the house - there are lots of
question marks about how that works ... Overall,
it has to help to some degree."
This lack
of transparency is not unique to the aviation
market; it plagues all of the dual-use
technologies that are manufactured in the US and,
in some cases, sold to China. As the RAND report
wrote, "The policy choices here are far from
black-and-white, and it is unclear whether the
United States could significantly improve its
security through alterations of its policy toward
civil aerospace cooperation with China without
having a significant negative effect on US
economic interests."
Now that China's
aviation market has been opened and its
manufacturing base has been seeded with skills
from American and European companies, Western
government have no choice but to walk an
increasingly fine line between policies that
encourage export sales of high-value airliners,
but somehow compartmentalize off technologies that
are key to Western defense platforms.
Benjamin A Shobert is the
managing director of Teleos Inc
(www.teleos-inc.com), a consulting firm dedicated
to helping Asian businesses bring innovative
technologies into the North American market.
(Copyright 2011 Asia Times Online
(Holdings) Ltd. All rights reserved. Please
contact us about sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
