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Civil Aircraft Programs

China's civil aviation transport dates to the founding of the People's Republic of China in 1949. At that time China had only 12 small aircraft for civilian use. Since then, more than 1,400 cargo aircraft, passenger planes and multi-purpose aircraft of 30 types in eight series have been developed and manufactured in China. Through long-term efforts and experience, China's civil aircraft industry has acquired the basic capability of civil aircraft design, manufacturing, testing and certificate verification.

From 1987, China's civil industry has made concerted efforts to separate company military functions from commercial products and services, and create an open commercial transport market with efficient administrative backup. The original China Aviation Industry Company (AVIC) was split into 2 groups - China Aviation Industry Corporation I (AVIC I), and China Aviation Industry Corporation II (AVIC II). AVIC I focuses on large- and medium-sized aircraft, while AVIC II gives priority to feeder airlines and helicopters.

The People's Republic of China is investing significant resources to become a competitor in the civil aircraft industry. With its regional jet program nearing the flight testing phase, the Chinese are embarking on a new program to develop a 150-seat narrow-body aircraft that would compete with aircraft currently sold by Boeing and Airbus. The effort to create a competitive civil aircraft production program in China is in part motivated by growth in domestic demand for air transportation, which should generate demand for over 3,000 new aircraft by 2026. Attempts to capitalize on this demand have led established manufacturers to engage Chinese manufacturers in various joint ventures while simultaneously eyeing the Chinese as future competitors.

Technological advancement of China's aviation industry has been directly related to cooperation and investment from international firms. Western companies have sourced parts from China for several decades, including the recent move by Boeing to source the 787 rudder from Chengdu Aircraft Industrial Corporation. On the other hand, non-Chinese firms have played a significant historical role in the development of aircraft by Chinese firms.

Many of China's early aircraft were based on Russian designs, though that cooperation stalled with the downturn of Russia's aviation industry. Later, U.S. and other western companies partnered with Chinese companies to incorporate western engines and components on Chinese aircraft. For example, starting in the late 1980s and into the early 1990s, Pratt & Whitney established joint ventures with Chinese firms to manufacture turboprop engines for several of China's Y-series transport aircraft. More recently, at least 19 U.S. and European aerospace companies have supplied major components on the ARJ21, including the engines (GE), avionics (Rockwell Collins), flight control systems (Honeywell, Parker Aerospace), and the landing gear (Lieberherr Aerospace). Western companies have partnered with Chinese manufacturers to co-produce aircraft in China, though these programs have had mixed results.

On two prior occasions, China unsuccessfully attempted to produce a commercially viable Large civil aircraft (LCA - civil aircraft seating 100 or more passengers, or civil aircraft weighing over 15,000 kg). The first attempt in the 1970s resulted in the "Yunshi" Y-10, a 707-style aircraft; however, the aircraft was not competitive with other LCA available at the time, and the program was halted after only two were produced.

After the conclusion of the Y-10 program, the Ministry of Aviation devised a 'three-step take-off plan', with the goal of building a 180-seater plane by 2010. The plan was to start with the assembly of the McDonnell Douglas 80/90 series of planes, which would provide China with an understanding of the skills needed to assemble a large modern aircraft. The second phase involved the intention to co-operate with a leading manufacturer, in order to jointly design and manufacture a state-of-the-art 100 seater plane, to go into service around 2005. This was the 100-seater Air Express 100 (AE-100) joint venture between AVIC and Airbus. The final phase involved self-design and manufacture of 180-seater aircraft. One by one each of these objectives fell by the wayside.

The joint venture with McDonnell Douglas started in 1985 to produce MD-80 series aircraft exclusively for China's domestic market. One of the most extensive U.S.-Chinese civil manufacturing partnerships was a program started in 1985 with McDonnell Douglas to assemble MD-82 aircraft in China. Thirty-five of these aircraft were produced, five of which were sold in the U.S. market. In 1992, a second joint venture was formed by McDonnell Douglas and two Chinese companies to produce MD-90 aircraft. This plan was amended in 1994 in favor of a plan whereby the Shanghai Aircraft Manufacturing Factory (SAMF) would produce 20 of the so-called Trunkliner aircraft independently of McDonnell Douglas. In 1994, McDonnell Douglas finalized an agreement to coproduce MD-90s in China, but only three of the planned 40 aircraft were ever assembled, and the project was cancelled in 1998. This program failed after only three aircraft were produced, in part because McDonnell Douglas stopped supplying SAMF with raw materials after its merger with Boeing.

By September 1998 China's AE-100 program was scrapped. Many people in the Chinese aircraft industry felt that it had been let down not only by Boeing and Airbus, but also by CAAC, which had refused to order either the MD-90 or the planned AE-100. Following the collapse of the proposed joint production plans for the AE31X and the MD-90, Airbus and Boeing both responded with offers of considerably enhanced participation by AVIC in the production of sub-systems.

The rapid expansion of AVIC's non-aviation business in the 1990s created a company which consists of a relatively small aircraft firm, by all measures other than size of workforce, within the shell of a vast diversified conglomerate. In 1999, China established 10 new state-owned enterprises (SOEs), two of which were aerospace related. All of China's large aerospace-related institutes were operationally merged with enterprises in their area of specialty. The two industry leaders for aircraft are China Aviation Industry Corporation I (AVIC I), which focuses on large- and medium-sized aircraft, leasing and general aviation aircraft, and China Aviation Industry Corporation II (AVIC II), which produces small aircraft, feeder aircraft, and helicopters. AVIC I and AVIC II and their subsidiaries have about 560,000 employees.

By early 1999, debate over how to restructure it in the light of its own internal problems and the explosive changes going on in the world industry outside became increasingly intense. In early 1999, the Chinese government decided to split AVIC into two fully integrated parts, AVIC 1 and AVIC 2. The stated goal of the reform was the 'break up of monopoly and the fostering of fair market economy mechanism' (China Daily Business Weekly, 31 January 1999). While the world's leading aerospace corporations were in the midst of an unprecedented epoch of consolidation, the Chinese aerospace industry was being divided into smaller segments. After the restructuring, the new AVIC 1 took over businesses in manufacturing interceptors, interceptor-bombers, tankers, transporters, trainers, and reconnaissance airplanes while the new AVIC 2 focused on helicopters, transporters, trainers, and general aircraft.

In 2002, the combined total sales of AVIC 1 and AVIC 2 were less than one-tenth of Boeing's and one-fifth of Lockheed Martin's, and a large fraction of their revenues was from diverse non-aerospace products. Their combined total revenues are only about one-fifth of the revenue of aerospace suppliers United Technologies and Honeywell, respectively. However, AVIC 1 and AVIC 2 together employed over 400,000 people, more than twice as many as Boeing and Lockheed Martin. If AVIC's aerospace division adopted Western manning levels, then the entire aerospace division would employ only around 5,000 people. If AVIC's entire engine division were a separate company, and adopted Rolls-Royce's manning levels, it would employ only around 1,200 people. Moreover, the world leading aerospace companies have multi-billion dollar market capitalisations. This enables them to finance M&A through the stock market even if they have negative profits.

In line with the policy of 'military to civilian conversion' and the strategy of 'civilian supports military', AVIC had been turned into a vast empire of diversified businesses. By 1997, AVIC manufactured more than 5,000 types of non-aviation products. In real terms, the sales of non-aerospace products rose by around 23 per cent per annum from 1979 to 1997. Automobiles, auto components and motorcycles together accounted for 62 per cent of the total value of AVIC's revenue in 1997. Sales revenue of motor vehicles accounted for 72% of the total sales revenue of AVIC 2.

AVIC had progressed from purely compensation trade to becoming a competitive global supplier of components, including being the sole suppliers of some items (B-747 wing rear ribs, B-737 maintenance doors, BAe 146 doors, Dash-8 cargo doors and LM2500 turbine disks). Following the collapse of the proposed joint production plans for the AE-100 and the MD-90, Airbus and Boeing both responded with offers of considerably enhanced participation by AVIC in the production of sub-systems. Boeing is leading in that strategy with 74 per cent of all parts built in China going to Boeing. Airbus agreed that AVIC could 'participate in the development' of its 107-seat A318 programme, but, to date this remains very limited in scope. In the foreseeable future China's sub-contracting industry seems likely to lag far behind the level of sales and technological sophistication achieved by the sub-contracting industry in Japan and South Korea. Despite AVIC's intense efforts to win contracts and their substantial growth, China's sub-contracts with the global giants are small-scale. In 2001, AVIC 1's total subcontract sales were around a mere $120 million, the size of a small-scale engineering company in the West. In the aero-engine sector, the total output value of the joint venture between Xian Aero-engine Company and Rolls-Royce to manufacture turbine blades will be only around $30 million at full production in the early 21st century.

AVIC does not participate in the decisions over aircraft purchase in China. This limits its ability to place leverage on the global aircraft makers to sub-contract within China. Moreover, the main Chinese aircraft manufacturers are competing with each other to obtain sub-contract work, which weakens the overall industry's bargaining power in obtaining sub-contracts, and in settling the terms for the sub-contracts. In addition, China's sub-contractors lack ability to co-finance on a large scale. In the meantime, China's leading sub-contractors face intense international competition from Israel in military sub-contracting, and from Japan and South Korea in civil sub-contracting. China's sub-contractors are generally only able to contract for 'Level 3' contracts, compared to the sub-contract of Japan and South Korea usually at Levels 4 or 5. The latter usually involves co-financing and co-designing.

In civilian aircraft, a total of only 130 Y-7s, a small turboprop aircraft, had been produced by the late 1990s, and new orders had dried up completely. To compound matters, a Y-7 exploded in mid-air in 2000. Following the conclusion of the crash investigation, all 64 Y-7s were taken out of service in June 2001. By the end of 2002, of the 561 large jetliners (above 100 seats) operating in the mainland of China, Boeing had 406 airplanes and Airbus had 124. Together they accounted for 95 percent of the unit market share in the country.

In military aircraft, it is likely that there was a real fall in the amount of resources allocated to modernisation of China's indigenous industry during the economic reform period. The number of military aircraft produced is reported to have fallen significantly. In the mid-1990s, China had a fleet of 5000 obsolete combat aircraft, most of them based on old Soviet designs such as the MiG-21 and MiG-19 fighter aircraft, and the Tu-16 bomber. During the 1990s, Chinese fighter aircraft production facilities have produced no more than 36 planes a year. By 2002, China had about 1,000 fighter aircraft, among which over 650 are J-7 (MiG-21) series, 200 J-8 (Finback) series, and 90 Su-27s. The country's airforce was hugely reliant on the Russian Su-27s for their most advanced fighters. It is estimated that China had 513 military transport in 2002. The technical capabilities of the much-anticipated J-10 (produced by AVIC 1) are no rivals to the world's advanced fighter aircraft. Although it has a 'secure' internal market for upgrading the PLA Air Force, it only has a tiny niche export market and has political constraints in selling into those markets. This will greatly limit the economies of scale that can be achieved in producing the J-10.

At the end of the 20th Century China's capability to capture its own large domestic market for civilian aircraft, let alone to penetrate the world market, had proved negligible. China was unsuccessful in its attempt to build a commercially viable turboprop plane. China's large and fast-growing regional jet market was dominated by imports. China was unable to build a commercially successful large passenger jet. China's attempt to partner the multinationals in co-designing and building a large civilian aircraft came to nothing. China's entire civilian aircraft fleet of around 500 passenger aircraft was imported, consisting mainly of Boeings (70 per cent) and an increasing number of Airbuses. There was no sign that China was in the process of building large, globally competitive first-tier suppliers to the world's aircraft industry in sub-systems such as engines, avionics, airframes, wings, lighting or landing gear. Since the 1980s, in this, the most 'strategic' of all Chinese industries, the gap between China's 'national champions' and the global giant companies had widened drastically.

The Chinese Government remained determined to develop a domestic LCA and parts industry that will be a global competitor by 2020, despite the challenges presented by a constrained LCA and parts industry and considerable technological and market entrance obstacles. By encouraging the development of a domestic industry capable of producing jet-powered transport aircraft, China hopes to advance state-of-the-art technologies in subordinate industries such as machinery, electronics, metallurgy, materials, and information technology.

  • In order to supply its domestic market while continuing to learn how to assemble a modern, complete aircraft to Western standards, two AVIC- II companies teamed with EMBRAER (Brazil) in 2002 for co-production of their regional jet (ERJ-145) in Harbin. AVIC II owns 49 percent of a joint venture with Embraer to manufacture, assemble, sell, and provide after-sales support for the ERJ 135/140/145 family of aircraft in Harbin, China. EMBRAER holds a 51 percent share of this joint venture, investing $25 million to build a new factory for regional jet production. The first ERJ-145 rolled out December 16, 2003; the factory is also capable of producing other EMBRAER models. The enterprise delivered its first plane in 2004; slow orders, however, placed some doubt on the long-term viability of the project. On February 2, 2004, the joint venture won a contract from China Southern Airlines for five ERJs, valued at $120.6 million. At the joint venture's inception, China was projected to need about 583 regional jets seating from 50 to 110 passengers within 20 years. In September 2006, these projections began to materialize when Hainan Airlines, the fourth largest airline company in China, ordered 50 ERJ-145s and an additional 50 ERJ-190s. This order represented the first time EMBRAER's ERJ-190 has sold in China. All aircraft are to be produced by the joint venture in Harbin.
  • Concurrently, China's AVIC-I Commercial Aircraft Division (ACAC) is developing a regional jet, the ARJ21. By starting with a regional jet, China will gain valuable design, engineering, and support skills for jet-powered transport aircraft while avoiding direct competition with with Boeing or Airbus. Initially designed as a 72- to 79-seat aircraft with plans for a stretched version of 90-92 seats, it is design, engineering and support skills for jet-powered transport aircraft. The aircraft is designed to meet domestic needs, though subsequent models may be considered for export as well. The four Chinese factories that were involved in the MD-90 Trunkliner program - the Shanghai Aviation Industrial Corp., Xi'an Aircraft Co., Chengdu Aircraft Co., and Shenyang Aircraft Co.- are partnered on the ARJ21 program. As in the case of the MD-90, the Shanghai facility has taken responsibility for the horizontal stabilizer and final assembly. Xi'an Aircraft is responsible for building the ARJ21's fuselage and wing. Chengdu Aircraft, located some 400 miles southwest of Xi'an, will build the nose section, while Shenyang Aircraft will supply the tail section (empennage). As of March 15, 2007, total orders placed for the ARJ21 stood at 71 aircraft; on December 21, 2007, Kunpeng Airlines added 100 to the order book. Deliveries were expected to begin in the third quarter of 2009, with Shandong Airlines the launch customer. AVIC I hopes to sell 500 regional jets in 20 years and will seek FAA certification to facilitate exports of the aircraft. AVIC I also plans to launch a stretched version of the ARJ21, which would take the aircraft from its maximum of 90 seats to a new maximum of 105. The first ARJ21 rolled off of the assembly line in December 2007, and flight testing should begin in March 2008. The first delivery is scheduled for September 2009. Orders for the ARJ21 stood at 171.
  • China is moving ahead in its pursuit of manufacturing an LCA. Plans announced in 1996 by Chinese and Airbus officials to jointly build a 100-seat Asian Express aircraft that would be added to the Airbus product line never came to fruition. Despite this history, in October 2006 Airbus signed a Framework Agreement with a Chinese consortium to assemble A320 aircraft in Tianjin, China, with production designed to serve the Chinese market; production is scheduled for 2009. This project will give China first-hand knowledge in building another commercially-viable aircraft. Initially costing about $630 million for the production line alone.
  • The development of large aircraft is listed as one of China's 16 major development plans in the country's 11th Five-Year Program (2006-2010). The goal is to produce a large transport aircraft for civil and military purposes by 2015, with entry into civilian service by 2020. According to the president of AVIC- I, the first model of China's LCA, a freighter, should be ready by 2018, followed by a 150-seat passenger aircraft. In March 2007, China's Premier Wen Jiabao approved a plan to form a joint-stock company that would be responsible for the production of this large civil aircraft.

China's ambition to produce commercially-viable LCA faces many obstacles. Competition from Airbus, Boeing, and proposed aircraft from the CIS notwithstanding, a new airframe from a new company must gain the trust of both airlines and travelers, something earned over considerable time with operational experience (e.g., aircraft reliability, maintainability, operating costs, and passenger acceptance). The performance and support of this new aircraft type must, at a minimum, match the performance and capabilities of existing foreign offerings, a formidable and complex undertaking for a new manufacturer. Even success in this area does not assure sales of the aircraft, as airlines considering aircraft purchases look for significant technological or cost-savings from new aircraft; therefore, airlines gravitate towards a manufacturer and an aircraft they are familiar with versus one without discernable advantages or a track record.

China's aerospace market demonstrates the effects of managed foreign investment focused on technology acquisition. Although the aerospace sector has not been officially designated a "pillar" industry, Chinese officials certainly regard this as a strategically important sector and have allocated significant funds for development of its civilian aviation industry (along with other infrastructure projects).

The opportunity for US technological know-how to indirectly assist the PLA Air Force (PLAAF) modernization efforts does exist. Foreign aerospace joint ventures are typically established with or located near China's military aerospace factories, namely the Xian, Shenyang, and Chengdu Aircraft Factories (this includes Boeing and former McDonnell Douglas ventures) in addition to various other locations such as Shanghai. For example, in addition to co-producing the parts for Boeing, the Xian Aircraft Company manufactures China's H-6 bomber (first produced in the late 1960's under license from the USSR) and various civilian passenger aircraft. These three companies are each attempting to manufacture new-model fighter/combat aircraft for indigenous use as well as for export. Foreign partners and components are being sought for co-development but are having to depend largely on domestic technologies due to the break off of military assistance beginning in 1989. However, state-owned military aerospace industry corporations have shown a preference for focusing on commercial, profit-making endeavors rather than devoting energy, time or resources to the primary task of defense production.

The areas in which China's air force is seriously lacking coincide with some of the high-tech foreign investment areas in China. For example, among the PLAAF's most serious deficiencies are high-volume, high-quality production of aircraft and a limited command and control network. Foreign (including US) joint ventures in the aerospace and telecommunications sectors are involved in manufacturing technological products that could potentially be used to improve these military capabilities (e.g., air traffic control or global positioning systems).

There are significant gaps in China's production capabilities, such as the inability to produce large bombers, jet transports, or purpose-built attack helicopters. China did produce a prototype of a jet transport, the Y-10. The program was discontinued, however, due to reasons of market and expenditure - meaning, presumably, that with the opening up of China's economy beginning in 1978, it was far less expensive to simply purchase airliners from abroad. Thus, China appears to have demonstrated the capability to produce jet transports, but apparently at costs significantly higher than those of Western manufacturers.

Despite the challenges, China is moving ahead in its pursuit of manufacturing a larger commercial aircraft [LCA]. On June 8, 2006, Airbus and the Chinese Government announced an agreement to build a factory in Tianjin to produce the Airbus A320; production is scheduled for 2008. This project will give China first-hand knowledge in building another commercially-viable aircraft. Initially costing about $630 million for the production line alone, additional investments of between $375 and $630 million are being considered. A new runway may be built by the local government to accommodate the factory's needs.

In the past, China has been successful in securing some elements of aerospace technology in conjunction with aircraft orders, which has aided its aerospace industry in areas such as manufacturing and ATC. However, China's aircraft and systems design and development skills need continued development prior to any meaningful discussion of indigenous LCA production. It also lacks a history of building aircraft to Western standards and supporting aircraft globally, essential aspects to the global acceptance of their aircraft.

China's ambition to produce commercially-viable LCA faces many obstacles. Competition from Airbus, Boeing, and proposed aircraft from the CIS notwithstanding, a new airframe from a new company must gain the trust of both airlines and travelers, something earned over considerable time with operational experience (e.g., aircraft reliability, maintainability, operating costs, and passenger acceptance). The performance and support of this new aircraft type must, at a minimum, match the performance and capabilities of existing foreign offerings, a formidable and complex undertaking for a new manufacturer. Even success in this area does not assure sales of the aircraft, as airlines considering aircraft purchases look for significant technological or cost-savings from new aircraft; therefore, airlines gravitate towards a manufacturer and an aircraft they are familiar with versus one without discernable advantages or a track record.




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