:: February 2018 Letter ::
One pleasure of middle age is revisiting places after a multi-decade interval. In January I enjoyed a visit to Moscow, where I hadn’t been since 1986. There had been a few changes. In 1986 there was zero economic or political freedom. Today, there is no political freedom and the economy is a hideous mutation of state capitalism. But in 1986 shabby stores sold pre-broken umbrellas, mystery sausage, and off-color socks. People got in line for these goods, regardless of shoddiness. Today, there’s plenty of personal economic freedom. You can buy anything in Moscow; even stuff I thought was embargoed. The rest of Russia is another story, but Moscow’s city center resembles Rodeo Drive, only with snow. The juxtaposition of oppression and consumerism is jarring.
Until recently many experts assumed that China’s high level of personal economic freedom would lead to political freedom, or at least a pretense of political liberalization and economic openness. Yet current events – from enacted limits on Western companies to Xi Jinping’s accession to president-for-life status – show that this is not the case. In fact, China appears to be morphing into the equivalent of Putin’s Russia, yet with a much more dynamic economy. The consequences for the world aviation industry might be serious.
Consider the aviation market in both countries. Consumer economic freedom allows Chinese and Russian airlines to buy Western jets and allows passengers to fly on foreign airlines. But manufacturing is another story. All aerospace production is in the hands of both countries’ governments and will stay that way. Nobody talks about privatizing Russia’s United Aircraft or China’s COMAC. But there’s a big difference: Russia’s market for its home-built jets is insignificant, while China is now the largest jetliner market in the world.
Back in the USSR, state-owned industry produced inferior yet weirdly impressive funhouse mirror images of many Western jets, from the 727 (Tu-154) to VC-10 (Il-62) to Concorde (Tu-144). Since the airline industry was also state-owned and the state economy protected from any international competition, these jets could be assured of reasonably large production runs. Today, Russia’s sluggish economy and cash-strapped government won’t provide enough cash to build jetliners. Even if the nation’s airlines were forced to buy Russian planes, they aren’t big enough or sufficiently funded to support domestic programs.
China is different. The country took 22.8% of world jet deliveries in 2017 (plus leased aircraft). Its banks and lessors played an even larger role in world jetliner finance. But on the other hand, China has a tiny fraction of Russia’s aerospace intellectual property (IP). Russia’s MS-21 may have a miserable domestic market, but it’s likely to be a respectable jetliner. By contrast, China’s first jet, the ARJ21, is a heap of junk; even its Western avionics and engines are nearing their sell-by date. The C919 may be better, but since China’s industry is staying in the hands of the state, its products won’t challenge Airbus and Boeing in free markets anytime soon.
But what about unfree markets? Back when Russia had plenty of pals with goofball socialist economies it could sell its jets abroad, often as part of countertrade deals. As late as 1991, the Tu-154 was the single most common jet type in Chinese airline service (zero Tu-154s are now in Chinese airline service, a fact which could serve as a poster ad). Today, Russia’s best friend is Syria, which is not buying jetliners. But again, China is in a different place. In fact, COMAC recently began talking about selling its jets abroad as part of China’s two major international trade schemes, the 21st Century Maritime Silk Road and the One Belt One Road plan.
I asked my old friend Benn Steil, author of the recent (and superlative) The Marshall Plan: Dawn of the Cold War, whether China’s big trade initiatives could succeed as an export market creator for Chinese aircraft. He pointed out that unlike the Marshall Plan, which provided grant money, China’s schemes were all about creating export markets for China’s domestic industrial overinvestment. That includes everything from trains to ships to planes. We could soon see jetliner sales involving heavy levels of tied aid, provided by cash-rich China to foreign countries as long as they buy Chinese infrastructure and industrial products (such as the C919).
This isn’t a one-way story. The Trump Administration’s latest round of metals tariffs, with promises of more barriers aimed at Chinese exports, could precipitate retaliation against Boeing jets. And if China mandates that its airlines buy C919s and 929s, and uses its state power to export them, they will justify their actions with the US’s own actions, and the US’s general retreat from globalization. Incidentally, you can track trends in China’s protectionism here: http://chinadashboard.asiasociety.org/winter-2018/page/trade.
There are many obstacles on the road to this dystopian scenario. Not only does China’s industry have a lot of work to do, but in terms of commercial aviation they may be on the wrong road altogether. A Soviet industry model usually results in a Soviet outcome. The C919 could turn out to be as useless as the ARJ21. The CR929 twin aisle JV with Russia sounds synergistic, but it could easily be a recipe for internecine strife (see my CR929 column, aviationweek.com/commercial-aviation/opinion-why-sino-russian-widebody-project-not-another-airbus). Putting up barriers to Western jets would damage China’s leverage in trade negotiations. Also, Chinese airlines have minds of their own, with large installed fleets of Western jets. And, the A320neo Tianjin line and 737MAX Zhoushan completion line complicate any Chinese plan for autarky. Chinese airlines could say they’re buying local when they buy Airbus and Boeing planes built or completed in-country.
As for the linkage of Chinese jetliner exports to government aid packages, that would be extremely expensive, and would not generate profits for anyone involved – not China, not Chinese industry, and not the recipients of the aircraft. As Chinese economic growth slows with time, this may prove to be an unaffordable luxury.
China in 2018 is clearly a much more complex aero market than Russia in 1986. But the picture today is concerning, with echoes of 1986. An aluminum curtain may be rising between two parallel aviation industries: one in the West, and an inferior copy, based in China and catering to the home market and its client states. For China, in the long run, it won’t end well. We’ve seen this movie before, and it never ends well. As the NY Times put it, Xi has put China “on a collision course with history.” But In the middle term – around 2025-2035 – they might make a go of it, cutting off the West’s hottest aviation growth market.
Yours, ‘Til China Northwest Resumes Tu-154 Operations,
© Richard Aboulafia 1997-2006, All rights reserved.