:: June 2020 Letter ::
The Black Swan is massively overused as a cautionary creature. Instead, consider a better metaphor for our times: The Gray Rhino. Black Swans are unexpected and rare events, visible only in hindsight. Gray Rhinos (see Michele Wucker’s superb book, www.thegrayrhino.com) are events you can observe coming, like a large, charging animal. You can react. But much of the time, you don’t.
China’s de-coupling from the West, its government’s decline as a trustworthy entity, and the country’s commensurate decline as a commercial aviation market together constitute a Gray Rhino. This month saw two big events that feel like the unpleasant arrival of a horned beast: the PRC’s formal, illegal violation of Hong Kong’s judicial independence, and the first COMAC ARJ21s entering service with China’s big three carriers. The second event is less disgusting from a human rights standpoint, but quite important from an aviation market standpoint.
Rather than walk through events better described elsewhere, I’ll take the liberty of explaining my view of China, as an observer and as an aviation industry analyst. I went there in 1991 as a traveler, and, like most young people who go there, I loved it. The government still paid lip service to communism, but Chinese citizens were clearly better off, and even more free, than they’d been for centuries. There was so much energy, and so much interest in the outside world. Tienanmen had happened just two years before my visit, but this looked like a mere setback, a tragedy resulting from something inexorable moving too fast for the authorities to accept.
Also, Hong Kong in 1991 was something special, a brilliant mix of cultures. It was a beacon of political light, perhaps representing the future of China. In 1997, I visited HK a month before the UK handed it over; despite a few ill winds, they nevertheless had a notional half-century of autonomy and personal freedom ahead. I honeymooned in HK in 2001, and all was still great.
From my professional standpoint, China was a remarkable story too. Lifting over a billion people out of poverty predictably created the biggest single aviation growth market in the world. In 1991, one China flight I took was on a Tu-154, at the time the single most common jet in the country’s fleet. But by 2000, China started to show up as a source of demand for Western jets, accounting for 2% of all deliveries that year. From there, it was a straight ride up; at its peak in 2018, China took 23% of all jets built by Airbus and Boeing.
But something went wrong a few years ago. The PRC’s actions in Xinjiang resemble something my grandparents saw in Czarist Russia, and perhaps something other family members saw in Europe a few decades later. The PRC’s actions against its neighbors, particularly Vietnam and Taiwan, increasingly resemble those of a bully, trying to start a fight to score points at home while the economy weakens. The Trump administration hasn’t handled it well, but it’s hard to ascribe blame to them, either. China is now governed by a gang of 12 year olds with nuclear weapons and first-rate surveillance technology. As the US and other countries take refugees from Hong Kong, relations with China will worsen. Meanwhile, in 2019, before COVID-19, the Chinese aviation market also softened for the first time, falling by 50% from 2018. This decline likely reflects a much weaker economy that the government does not want to admit.
This month’s National Security Law in Hong Kong is a tragedy, and it’s also evidence that the PRC government’s word is worthless. Much is being said elsewhere on the HK tragedy, but turning back to aviation, this month Air China, China Eastern Airlines and China Southern Airlines were each forced to take their first COMAC ARJ21 regional jets. Deliveries of this miserable aircraft began five years ago, but until now all went to marginal airlines (Chengdu, Genghis Khan), rather than serious carriers that would prefer to operate anything else but this pile of junk. The Big Three carriers were able to avoid ordering the plane until last year. The HK clampdown and the ARJ21 foisted on China’s flying public…that’s a captive city state, and a captive aviation market. China seems to be turning its back on the world.
The ARJ21’s mandated arrival at the Big Three moves us towards a gray rhino (ironically, the ARJ21’s technical qualities also resemble an aeronautical rhino’s) that started charging at us some time ago. It has become increasingly clear that China’s jetliner industry isn’t geared towards competing in the world; rather, it’s aimed at a future where China stops importing strategic goods, and relies on its own products (read my views on what might happen next in Aviation Week – tinyurl.com/y7r88yqj – and in Foreign Policy – tinyurl.com/y5x38oq3). Once the PRC closes the borders to Western jets in favor of their own, one of the last arguments in the West for free trade with China will vanish. In short, these three ARJ21 deliveries this month are the harbinger of a dystopian future.
What does this new situation with China mean for our industry? Depends on who you are:
1. Jetliner companies. For the jetliner market, China will likely come back…once. Assuming a return to growth around 2023, China will still need to import plenty of Neos and MAXs, since the C919 won’t be ready yet. But this uptick will be a last hurrah. China’s captive airlines will be forced to take C919s and CR929s instead of Airbuses and Boeings. The 919 and 929 will hopefully be less horrible than those ARJ21s.
2. Defense primes. For the US ones at least, this rhino is good news. The coming election will be about China, and both sides will position themselves as hawks, with sustained high defense spending. There has already been a DoD-wide shift towards systems designed for the Pacific, and that will continue (the B-21 will lead the way, followed by KC-46, and anything related to long-range/persistent ISR). Plus, as things get worse with China, the more Western firms will be allowed to sell weapons to Taiwan (and the more eager Taiwan will be to buy them).
3. Commercial aviation suppliers. This is the tricky part. Many have made big investments in China, and many have a significant role in China’s jetliners. They’ve always needed to be mindful of IP theft and displacement by indigenous products, but now it’s inevitable. Suppliers also face Western technology embargoes, particularly as relations between China and the West worsen. After all, in aviation, almost everything is dual-use.
As for the rest of us, all we have is a memory of a time when China offered incredible promise: it would one day combine a brilliant culture, political openness, and a fantastic aviation market. Perhaps the past three decades have been a colossal delusion, but it was a beautiful delusion.
Yours, ‘Til History Turns Again,
© Richard Aboulafia 1997-2006, All rights reserved.