Boeing and Airbus Put on Notice: China’s Comac Breaking Up the Duopoly Party

We wrote recently on Chinese aspirations to join the commercial aircraft “constructors club by outlining plans to develop two single-aisle commercial jets for service later this decade. The country’s recent high-speed rail crash is an unfortunate coincidence in terms of timing, because Beijing’s focus on the aircraft industry must have been going on behind the scenes for months, but it appears as if they are switching their priorities to air from rail.

The reality is, as we say, one of unfortunate timing because their recent announcements concerning development of the country’s strategic industries is part of a long-term strategy to develop China from the world’s low-cost workshop to a high value-add, high-technology producer. An FT article details the seven industries and how Beijing sees them taking a 15 percent share of the economy by 2020, up from just 2 percent today. Broadly, the plan is a guide for government spending and policy development and will inevitably involve substantial short-term opportunities for Western firms as the Chinese will require a massive transfer of technology to achieve parity in these areas.

Introducing The Players

As the article details, the seven “new strategic industries are:

● Alternative fuel cars. Investment is likely to focus on the development of hybrid cars and electric cars as well as better fuel-cell batteries;

● Biotechnology. Includes bio-medicines, new vaccines for disease prevention, advanced medical equipment and even marine biology;

● Environmental and energy-saving technologies. Energy efficiency, pollution control, clean coal, waste-matter recycling and seawater usage are among the many targets of the environment push;

● Alternative energy. Next-generation nuclear power plants, solar power, wind power, smart grids and bio-energy;

● Advanced materials Rare earth, special-usage glass, high-performance steel, high-performance fibers and composites, engineering plastic, nano and superconducting materials;

● New-generation information technology. Cloud computing, high-end software, virtual technology and new display systems; and

● High-end equipment manufacturing. Aircraft, high-speed rail, satellites and offshore equipment.

China’s aircraft aspirations are captured in the last of these industry segments and will almost certainly put a dent in the potential sales of Boeing and Airbus as the decade unfolds. Before you collapse in guffaws of laughter at the prospect of a Chinese airplane being purchased in preference to a Boeing, let us point out that China alone is planning to buy some 4,000 aircraft over the next two decades at a value of $480 billion, according to an FT article. Is Beijing really going to allow Chinese airlines to spend that much money on foreign aircraft if they believe they can make them domestically?

Just look at the high-speed rail network: most of the technology has been poached from abroad, but the trains have been built in China and now those same corporations are beginning to vie for business overseas. Nor will this trend be limited to aircraft; development of an aircraft construction industry does not happen in isolation. Just as the development of a high-speed train manufacturing industry required the installation of large extrusion presses to make carriage sections, so the development of a domestic aircraft industry will hasten development of a sophisticated domestic forging, rolling and extrusion industry capable of making aluminum, titanium and steel components to aerospace standards. A limited number of Chinese producers are already going down this road, but government support and encouragement will turn this into a flood. Producers that will then look to even out demand by exporting those same products to Boeing, Airbus, Bombardier, etc. in competition with Alcoa, Novelis, Alcan, and so on.

As we covered in our earlier article, China’s Commercial Aircraft Corporation (Comac) is building a 150+ seat, single-aisle plane called the C919 to enter service around the middle of this decade largely in competition with the 737 and A320. A Bloomberg article explains how the world’s second largest operator of Boeing 737, Ryanair of Ireland, is in cooperation with Comac to produce a 199-seat variant of the C919 for service in 2016 and beyond.

The reason for 199 seats instead of 200 is the airline is required to provide one flight attendant for every 50 passengers. By specifying the plane at 199 passengers, Ryanair can avoid one flight attendant per plane yes, they are that mean! How serious is Ryanair about buying some 200+ C919′s? Who knows — of all the bucket shop airlines, Ryanair would be the most likely to buy Chinese if the economics stacked up, but the most likely outcome is they will use the option to pressure Boeing or Airbus to do the deal they want.

The point is Comac is already having an impact on airlines’ future plans; the impact will be greater in developing countries where the maker of the plane may be less important to the passenger than the cost of the ticket. Above and beyond the 4,000 planes Boeing and Airbus were hoping to secure in the years ahead from China itself, there will be sales to other countries that, like China’s high-speed trains, will look like less of a foregone conclusion than they would have done just a couple of years ago.

–Stuart Burns