China Airborne (19 page)

There was an extra safeguard for jobs in Duluth that most news reports left undiscussed. If the new Chinese owners wanted to make the planes in China and have them sold in any market except their own, they would need to receive a new production certificate from the FAA and its international counterparts. Certification is a time-consuming and extremely painstaking process, the prospect of which would presumably keep jobs in Duluth for the foreseeable future. If the Chinese owners did take this step, it would be a sign that they were serious about building up their own Chinese abilities in aerospace, rather than just buying foreign assets. The acquisition, while the most heralded, was only one in a continuing series that Meng Xiangkai had
overseen. His CAIGA group, designed to produce future rivals to Cessna, Hawker Beechcroft, Gulfstream, and—if it didn’t already own it—Cirrus, was one of several subsidiaries of the catch-all Chinese aviation consortium AVIC. Before coming to CAIGA, Meng had been head of another subsidiary, the Xi’an Aircraft Industry (Group) Company (which for some reason goes by the English acronym XAC). In 2009, he signed a deal by which XAC bought an Austrian company called FACC, a component supplier to Boeing and Airbus.

In an interview with the Chinese press after that sale, he explained why he thought it so important to look for further takeover targets: “If we remain at the low end of the aviation industry chain, it will do us no good in the international division of labour and we will never be able to find an equal partnership,” he said. “If we want to survive in the aircraft manufacturing industry, we must keep an open mind and have an international vision.”
²
Toward that end, after his move to CAIGA early in 2010, Meng had arranged the purchase of Epic, a small-jet company based in Oregon, in March, 2010, and in September the purchase of Teledyne Continental, in Mobile, the main manufacturer of piston engines for small airplanes including Cirrus.

In July, 2011, the Cirrus sale passed government security reviews in both the United States and China. On behalf of CAIGA, Meng Xiangkai issued a congratulatory statement. “We are very impressed with Cirrus’ performance in the global general aviation industry,” he said, in Chinese ceremonial hortatory style. “It has a very strong record of consistent product excellence, comprehensive safety features, an outstanding management team, and a highly skilled workforce who operate from advanced production facilities.”
³
To mark the occasion and to welcome a team of engineers, trainee pilots, service representatives,
and other CAIGA staff members who were coming to Duluth for familiarization and training, Cirrus officials draped a huge banner across the hangar where officials from both companies would speak. It expressed greetings and hearty welcome to the new partners arriving from CAIGA.

Just before the ceremony, one of the CAIGA officials asked his Cirrus counterpart please to take the banner down before the speaking began. What was the problem? “The banner says ‘partners.’ But we are not partners. We are the owners.” The concept of ownership had survived the communist era intact.

The world’s established aircraft-makers have one big question about China. It is their specific version of the question the rest of the world has about China as a whole. In its simplest form: Is China more of a threat? Or an opportunity? If it’s both, is it more of one or the other? If the answer to that question is uncertain, when will outsiders know which is more likely? And is there anything they can do to bend the result in the direction they would prefer?

In the special world of airplanes, the question takes the form of balancing the opportunities of the world’s fastest-growing market with the challenges posed by the world’s most rapidly expanding industrial base. The great promise for Boeing and Airbus, and for their smaller brethren like Embraer and Gulfstream, Cessna and Beech, is to sell more of their products in the one country likely to increase its fleet dramatically in the next ten years. The great nightmare for these same companies is that the price of entering the Chinese market will be joint ventures, technology transfers, potential theft of intellectual property, and local-content requirements that in effect force them to create and foster the Chinese competitors who will one day unseat them. Even if a resurgent China does not create competitive aerospace companies of its own, it might use its always
growing financial reserves simply to buy up whatever firms have become world leaders, as it began doing in 2010 in the helicopter, engine, and small-aircraft ends of the market.

The balance between opportunity and threat will depend on decisions being made now and in the next few years by companies, financiers, and governments in North America, Europe, South America, India, and elsewhere, of course including China. The obstacles the Chinese face are different from what is generally assumed outside the aerospace industry, and more imposing than many people inside or outside China might guess.

The Chinese efforts in this regard are significant in their own right, because of the importance of the aerospace industry to American exports and general high-tech success. They also offer a near-perfect distillation of the strengths and limitations of China’s larger attempts to will its way up the ladder of high-tech industrial economic value. That is, they illustrate very clearly the unusual combination of traits that have characterized China’s efforts in other fields: openness to foreign efforts combined with a determined effort to increase the Chinese share; a powerful role for state ownership and government guidance combined with room for private initiative. So far, the Chinese efforts look more like an expensive way to pursue national grandeur than a real step toward economic, technological, military, or strategic power. But that could change.

Through the Mao era, aviation was backward, mainly military, and strictly government-controlled. Through the first twenty-plus years of the opening under Deng Xiaoping, it remained backward, and also remained more government-controlled than
most of the rest of the economy, which was gradually being liberalized. In the early 1990s, under President Jiang Zemin, the giant conglomerate called AVIC, the Aviation Industry Corporation of China, was created from the diverse aerospace factories and organizations that had been part of the military or other government ministries. In the late 1990s, AVIC was split into two groups: AVIC 1, dealing with large airplanes and military aircraft, and AVIC 2, for smaller airplanes and helicopters. And in 2008, it was all reorganized once again, this time in the reconsolidated Commercial Aircraft Group of China, or COMAC. That is the main institution now pursuing China’s airplane-building plans.

COMAC and its subsidiary groups are theoretically independent businesses but in reality are part of the great penumbra of state-influenced organizations in China. The influence, as we have seen in the cases of Weinan and Zhuhai, comes not just from national officials but also from provincial and city officials hoping to be part of a new boom, or to somehow make it happen in their hometowns. As with so many aspects of modern China’s tech-based industries, the organizations share both corporate and governmental traits. As Tai Ming Cheung, of U.C. San Diego, pointed out in a 2010 report on Chinese aerospace prepared for the United States–China Economic and Security Review Commission, a group that keeps a watchful eye on signs of Chinese military and technical predation, the creation of AVIC and COMAC signaled several steps toward more market-minded operation of a still government-guided operation.
¹
This reorganization, Cheung wrote, was a necessary corrective for the legacies of the Mao era, including “the widespread duplication and balkanization of industrial and research facilities.”

What do the resulting entities make, and do? In principle,
COMAC and its allied Chinese subunits represent nearly the entire range of aerospace activity.
²
At the most sophisticated end, Chinese companies are near completion of one “regional jet” competitor, known as the ARJ21, which would compete with Embraer and Bombardier models (and in U.S. terms might be used for, say, the Washington–Charlotte or Seattle–Spokane routes). It would hold about ninety passengers, it has been in development since 2008, and nearly all of the orders that have been placed are from “captive” airlines—the state-controlled Chinese domestic lines. COMAC is also beginning development of its C919, a “single-aisle” airliner comparable to—and, its developers hope, eventually competitive with—the Airbus A320 or the Boeing 737. At the bottom end, Chinese companies have for years made a number of Soviet-style, antique-looking planes used mainly for crop-dusting and similar chores.

COMAC and some still military-controlled companies are also planning to build almost any other flying-related product you can think of. Rockets to launch satellites. Satellites themselves, including a system to rival the existing United States–run GPS network. (And since the current GPS system is not just “United States–run” but managed by the United States Air Force, it is hard to blame the Chinese military for recommending this step. War between the United States and China is unlikely, but if it happened, the PLA would not want to have its navigation systems vulnerable to disruption by the other side.) Apart from the large-scale commercial airliners to compete with Boeing and Airbus, there will be smaller regional planes to compete with Embraer and Dassault, and private aircraft to compete with Cessna and Hawker Beechcroft. Helicopters to fill what seems to be an enormous market void. And behind all of these is the same integration in the global supply chain that has made
China a low-wage, low-value power in many electronic projects, and that makes Japan and Germany high-value-component producers now.

If you were going to write the script by which Chinese aerospace interests convert their current plans into eventual world dominance, the steps might be described as follows:

That’s the model, which with variations has shown up in other industries from light electronics to clean-energy products to cars. And there are many people who argue that it will inescapably apply in aerospace as well. In 2001, when the prospect of Chinese-made airliners was largely speculative, a Boeing engineer laid out a trenchant internal case that the company’s reliance on outsourcing would send it into a cycle of self-inflicted decline, opening the door to aspirants from China and elsewhere. The engineer, an Australian named L. J. Hart-Smith, argued that outsourcing would undermine Boeing’s ability to create succeeding generations of high-value aircraft, since insights about those future offerings often came from the hands-on experience of making and tinkering with the current
product line. He also showed the perverse conflict between the pressures and incentives on each of the component parts of the system. For example, a company that produced struts or other small but crucial components of an airplane would optimize its profit for that strut. But in doing so it would have no incentive to worry about Boeing’s larger efficiency and quality control as it matched that strut to components coming from a variety of other sources.
³

In principle, Boeing or other outsourcers would foresee and allow for all these variations, and coordinate instructions to its suppliers so that they all served Boeing’s larger goal. Companies from Walmart to Dell and Apple have used worldwide supply chains to their evident advantage. But subcontractors make computers for Dell and clothes or toys for Walmart in batches of millions per year. They have daily opportunities to refine any part of the process that isn’t working, and at relatively small cost if a few days’ production goes bad. It is different for airliners, which are produced in small quantities and at very high unit costs. The multiyear delay and huge cost increases of Boeing’s 787 “Dreamliner” seemed, by the time of its introduction, in 2011, to illustrate all of the concerns Hart-Smith—and the Machinists’ Union, which naturally opposed outsourcing—had raised within Boeing a decade before.