Land of plenty for global aerospace companies

International aviation companies are increasing their joint venture and partnership investments in China in a Mainland industry that returns 10% annual growth.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

April 1st 2015

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As the second largest domestic airline market in the world - and fast heading towards the number one spot – every aviation company that counts wants to be in China. Read More »

The economy of the Asian giant may have slowed to 7%, from 15% 18 months ago, but that’s still good enough for global aerospace companies intent on building their businesses at the heart of the world’s fastest growing aviation region.

However, as the leaders of some of the most sophisticated international aviation companies in the world learn every day, you can’t win China’s business or build businesses with Chinese partners unless you understand – and live - the ways of the world’s most populous country.

'More and more, we want to be perceived as part of the scene in China, not just foreigners'

Laurence Barron Chairman Airbus Group China

Airbus Group China chairman, Laurence Barron, is quick to concede the big European manufacturer made early mistakes in its China strategy. Back in the 1980s, when sales representatives were flying into the country, they were struggling to sell aircraft.

“It doesn’t really work covering China from outside China,” he said. “You have to be on the ground. We learned that lesson after the first ten years when we had not make much impact here.”

Barron cited a second lesson. “It can’t be a one way street. You have to give back something. We’ve done that by sub-contracting aerostructures, both on aircraft and helicopters. We’ve done that with our engineering centre here in Beijing, the A350 program in Harbin, which led to the composite manufacturing centre. We have done it with the final assembly of A320s and A319s in Tianjin and possibly, in the future, A330 outfitting and delivery,” he said.

At competitor Boeing Commercial Airplanes, Ihssane Mounir, the U.S. manufacturer’s senior vice president sales for Northeast Asia (covering China, Japan, Korea and Taiwan), echoed the same message. He said acclimatizing to China’s culture and learning how it worked was crucial for success.

“That is the one thing I would advise anybody to do. You really can’t judge from the outside. You have to go in and become part of the fabric. Understand the people. Understand where they’re coming from and then you see there’s a lot of logic to the madness, there’s a lot of logic to the order and it works,” he told Orient Aviation.

China managing director of big U.S. communications and aviation electronics firm Rockwell Collins, Robin Ho, has another piece of advice. “Number one, you need to be patient because sometimes the investment you put in may take a little bit longer to recoup than planned. But for sure this market is very promising,” he said.

“Number two, Oriental cultures respect long-term friendships and relationships instead of just contractual relationships. You have to form a partnership here. If you’re only doing it for one-way business you probably won’t be here for long.”

For those who learn the lessons the rewards are forecast to be massive. The country’s commercial airlines are projected to need more than 6,000 new jets over the next two decades, worth more than $700 billion.

That’s one new jet arriving in the country every 29 hours for 20 years. For aircraft manufacturers, engine makers, avionics and systems suppliers, maintenance, repair and overhaul (MRO) businesses and every link of the supply chain, China’s aviation business appears to be an ongoing bonanza.

At the same time, Chinese aerospace is on the brink of producing commercial aircraft, backed by a government that is bent on seeing the nation become an aerospace superpower.

China is now is well on the way, with AVIC (Aviation Industry Corporation of China, owner of the Xian Aircraft Corporation) and COMAC (Commercial Aircraft Corporation of China) working on home-built products, including AVIC/XAC’s MA60 turboprop and COMAC’s 90-seat ARJ21 regional jet and the 190-seat passenger jet, the C919.

It is little wonder that Western manufacturers such as Boeing, Airbus and Embraer, engine-makers such as Rolls-Royce, GE and Pratt & Whitney, MRO providers, and systems suppliers like Rockwell Collins and Honeywell, are investing billions of dollars in their China operations.

'They will be competitors, but they will be collaborators and partners'

Ihssane Mournir Senior vice president sales Northeast Asia Boeing Commercial Airplanes

And as Barron, Mounir and Ho said, none of their efforts are one directional. They involve a deep commitment on the ground and development of long-term partnerships with local Chinese.

Boeing has more than 8,000 planes flying around the world fitted with parts made in China. It has been involved in China for more than 40 years. “When you come to today’s landscape it’s a lot more than just Boeing helping,” said Mounir.

“It’s a stronger partnership. They’re not just buying from us. They’re helping us on the supply side, the manufacturing side and the research front.”

Boeing has partnerships with AVIC and COMAC that include a composite facility in Tianjin, manufacturing of parts for the 737, 747, 777 and 787, and a big MRO facility, Boeing Shanghai Aviation Services.

“So we have come a long way in what we do in China, what we do for China and what China does for us. From a dollar spent standpoint, we are somewhere between $800 million and $1 billion in spending with our suppliers in China. We are putting a lot of money into China,” Mounir said.

Airbus, with more than 30 years in China, also has built a strong presence in the country with its main office, a training centre and a spare parts facility in Beijing, as well as the A320 final assembly line in Tianjin and a composite facility in Harbin.

It has an agreement with AviCopter, the helicopter division of AVIC, to co-develop a new helicopter, known as the EC175 in Europe and the AC352 in China. Some 5% of the airframe for the new A350 is supplied by Chinese companies.

“We’re here for the long-term,” said Barron. “As a result, you build relationships with government, with airlines, with industry, with cities like Tianjin and Harbin. More and more, we want to be perceived as part of the scene in China, not just foreigners.”

It is interesting to examine how Airbus achieved its current strong position in the Chinese market, given that it trailed Boeing for years in aircraft orders. After the company sold its first plane to China - an A310 to China Eastern Airlines in 1984 - it continued to lag behind Boeing.

In the next decade it only had about 20 aircraft in China. Then there was a change in strategy.

Airbus opened a Beijing office and established a joint venture training and support centre with China Aviation Supplies (CAS), which was completed in 1997. As a result, Airbus’ share of the in-China fleet rose to about 25%, albeit still well below Boeing’s penetration of the market.

“Then, in 2004, we said to the Chinese Government that we wanted to catch up with Boeing and that we wanted to have half of the in-service fleet, not a quarter. We wanted to draw level. The answer was pretty much ‘well if you want to be equal with Boeing in terms of in-service fleet you should be equal with Boeing in terms of purchasing or sub-contracting to Chinese industry’,” Barron said.

“We discovered that while we had been sub-contracting since 1985, our volume was pretty low and was only a quarter of what Boeing was doing. It was pretty clear we had to improve procurement from China, which we proceeded to do.

“Management at the time set targets to match Boeing and to double the actual dollar amount of procurement. The original goal was to draw level with Boeing in 2007 and double the amount by 2010. All that was put in motion,” said Barron. Airbus achieved its targets two years early.

Rockwell Collins’ Ho said you can’t sell your product without any investment in the market place. “You have to find a good partner that can help you to secure your business or expand your business in China. On the other side, the Chinese government is encouraging that kind of co-operation between the local company and an international company like us,” he said.

Robin Ho, Rockwell Collins China

Rockwell Collins’ advanced avionics were selected for AVIC’s new MA-700 regional airliner. Its joint ventures (JV) include an agreement with AVIC Bluesky to establish a commercial simulation joint venture in China that will design, manufacture, market and service flight simulators.

With the Xian Aviation Science and Technology Company it jointly developed a full-motion engineering simulator for the C919 and also has a JV with China Electronics Technology Avionics Company for developing and manufacturing the communication and navigation systems for the aircraft.

AVIC Leihua Rockwell Collins Avionics Company opened a facility in Wuxi in June 2013 to develop and manufacture integrated surveillance system products for the C919. Collins Aviation Maintenance Services Shanghai Ltd. is another JV, between Rockwell Collins and China Eastern Airlines, which provides aftermarket services and support of avionics and in-flight entertainment equipment for Chinese airline customers.

Clearly, most of these partnerships are working well. In December, Airbus celebrated the 200th delivery of an A320 assembled at Tianjin. “It’s public knowledge that we have talked about and signed MoUs to potentially set up an A330 completion and delivery centre, which would also be in Tianjin next to the A320 facility, provided we have a significant number of orders,” Barron said.

Unlike Airbus and Embraer, which had an E145 regional jet assembly line in Harbin (it was converted to assembling the Embraer Legacy business jet in 2012), Boeing has not opted to build or assemble planes in China.

“You have to look at what makes sense for the country. What makes sense for us. What makes sense for them at any given time,” said Mounir. “It’s not that we are not looking at it. It’s not that we will do it. I can’t really say whether we will do something like that or not.

“All I can tell you is we look at what adds value for both parties. We are doing some pretty advanced composite work in Tianjin. We have a very large joint venture facility doing that. Then, we look across the land and we have more than 6,000 people who are working on various projects. We are constantly asking ourselves what else could we do with the Chinese to add value for both them and us.”

To many, the perceived elephant in the Chinese room is the possibility that the country’s aviation industry will become a major competitor for established global aerospace manufacturers. Boeing and Airbus are not daunted by this development.

 “Yes, they will absolutely be a competitor and I think they will be a formidable competitor,” said Mounir. “They will have their airplanes flying in the jet category, the C919, and we will just have to compete.

“Competition makes us all better. It will keep us on our toes. They will push us to be better. But I think there will be areas of co-operation where we can work with them to see how we can both bring value to the table. They will be competitors, but they will be collaborators and partners.”

Barron agreed. “It is a perfectly legitimate desire on the part of a country like China to develop its own civil aerospace industry. I think it will be a long time before they succeed, but I believe one day they will,” said Barron.

“As far as we are concerned, what’s wrong with competition? Airbus was born into competition, to compete with Boeing, McDonnell Douglas, Lockheed, Fokker and a whole lot of manufacturers and we succeeded. We’ve been very good at it, so why should we worry about it.

“If one day the Chinese are better at something than us it would be a kick in the butt for us. We will have to go back to the drawing board and try to leapfrog them. That’s what’s been happening for years between Airbus and Boeing. Instead of just sitting back and saying let’s make what we make and make money, we have constantly tried to outdo each other by launching better aircraft, better derivatives. It’s a great fight and it’s good for everyone.”

Mournir said: “You do have an indigenous industry that is climbing the learning curve very fast and it is adding value to the global market of aerospace. It is something we can tap into because China is spending a lot of money on these developments and projects. As such they are spending a lot of money, time and effort on growing the industry.”

“So, it becomes very important and very interesting for us to look at what can we bring to the value chain of aerospace for everybody. That’s why we are paying very close attention to it. Its an industry that has been pegged as strategic for China and therefore they are developing it and I think there will be some value add beyond what we have seen going forward.”

At Rockwell Collins, Ho said it is better to be working together in the same market “so we can grow together instead of doing it on your own. If you have a trustworthy partnership, we can enjoy the benefit of the market together instead of ending up in a competitive situation”.

One other issue that concerns many firms entering China for the first time is how to deal with the tough regulatory regime and a government that rules with an iron fist. But companies that have been in China for years said it is not really a problem.

“In fact, we’ve been having a pretty harmonious working relationship with the authorities. There’s something to say about order and good planning,” said Mounir. “I didn’t understand it at first.

“I come from a culture where you’ve got to liberate and liberalize to the maximum possible. So you can imagine I had a little bit of a struggle with the concept initially. Even if you look at the five-year planning and how the planning occurs it’s given us plenty of room to navigate and plenty of room to address market requirements.

“The CAAC (Civil Aviation Administration of China) has been doing an incredible job making sure the infrastructure is there, the safety measures are there, that the training is in place. From a regulatory standpoint, they are doing their job. They are doing it well and they are paving the way for success in the market for the airlines, especially for the start-ups and the LCCs.”

Looking ahead, Mounir said: “We are looking at what can we do together, what can we do for one another because there is a strong appetite on the Chinese side to learn more and come up that learning even faster. And we do have to accommodate that desire curve because the partnership needs to be both ways. It can’t be just that of a seller. So I am working very hard with my colleagues and others trying to figure out what you do next in China to keep going forward when it comes to industrial co-operation and collaboration.”