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

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  • I like following these developments though when you consider that the Chinese have yet to sell a car into the US (let alone cross that quality path like Toyota/Honda and now Hyundai are doing), it does make one wonder at what point one would consider stepping foot onto a Chinese produced airplane. Just as I would STILL NEVER fly a Topolov, nor ride a Chinese high-speed train, I think realistically, we are 15-20 years away at least from a “safe” aka western-equivalent plane. Go Ryanair, needless to say I’ll take my flight dollars elsewhere. LAR

  • I would agree with you regarding Ryanair’s threat of going Chinese, it wouldn’t do anything for their already poor reputation, but Boeing/Airbus are more concerned about the 4000 planes predicted to be purchased by chinese airlines. I can recall Brits scoffing at Japanese cars in the 70’s only to see them flood the market within ten years delivering a much better product than anything made domestically. The Chinese aren’t the Japanese when it comes to a domestic focus on engineering excellence but they blatantly rip off western technology to produce good enough copies for their domestic market. We don’t have to see chinese cars in western markets to impact western producers, or chinese aircraft at our airports.

  • Yes, it took the Japanese some time to learn that low prices are not the road to success, so who says China won’t? It should not be all that difficult for them to overtake America in many fields, considering that it can’t wean itself off a cumbersome medieval measuring system. Boeing’s much delayed Dreamliner is a perfect example of what happens when you outsource precision work to metric countries that have neither the feel nor a clue about that obsolete anachronism. Airbus has no problem manufacturing in China and outsourcing around the globe because they speak all the same measurement language.

  • The article pretty much follows the conventional school of thought out there, that China will make significant inroads into Boeing and Airbus territory. But I tend to think that won’t happen very soon. What I believe will happen, which is similar to the auto industry in the last few years, is that the demand for airplanes have been under estimated. Likely, China’s market for airplanes won’t be 4000. Its likely to be 7000 or even 8000, with most of those purchased after 2020. So, while I don’t believe China is a threat to Boeing and Airbus at 2016, COMAC will have this huge Chinese market at their disposal. A market large enough to develop future products, subsidize, and then eventually launch out in to the world.

  • Im sorry this story needs to be read in context. Airbus and Boeing have much more to fear from a rejunvenated Emraer and Bombardier than anything coming out of China. It takes years and years of supply chain management to be able to sell 100s of aircraft. Making a dent in this duopolly will mean selling 1000s and i just cannot see how they will pull it off. This is not a bit like putting a compuetr together as an OEM. This is far more complex and any delays can stop production for months. MONTHS.
    The recent Chinese high speed rail issues have also highlighted the risks when buying Chinese. They simply do not have the experience to produce heavy industrial logistical transport machinery on a scale that would threaten either Boeing or Airbus.
    By teh way, Ryanair has been a very very annoying customer of Boeings from its inception. Constantly negotiating and re negotiating bids , running to Airbus at he 11th hour and coming back to get a better deal. Airbus refuses to talk to him. Boeing is fed up. Let him buy Chinses planes for his honky tonk airline. They deserve each other.
    The real news isnt if Comac is coming; its when Boeing is going bust.


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