April 2011 Letter

Dear Fellow Sino-Aero-Doubters,

“Know why this place stinks? You’re a loser in your home town. Where do you go? Los Angeles.” Thus spoke my friend Richard, an incorrigibly cynical LA-based coffee dealer with uncharitable thoughts about his home city. I like LA, but it does attract a lot of people with unrealistic aspirations – wannabe scriptwriters reduced to waiting tables, etc. Recent industry news made me realize that LA and China have much in common, in an oblique way. China is where marginal aircraft programs go. And they frequently suffer fates that make waiting tables seem like a happier outcome.

We’ve seen a new wave recently of China-bound aircraft programs. Embraer agreed to build its Legacy 600/650 business jets in China. Aviation Industries of China (AVIC) and China Aviation Industry General Aircraft (CAIGA) purchased Cirrus, resulting in some dumb grandstanding by US politicians. CAIGA also purchased Teledyne Continental Motors, and some rights to bankrupt Epic Aircraft. Bombardier signed an MoU with China’s COMAC covering future jetliner cooperation. Also, Sino-Swearingen, a peripatetic disaster, made one last desperate effort to sell itself to China. They were sold instead to a metal shop with oblivion to follow, making the others look lucky.

Of the new China developments, the most intriguing is the Bombardier/COMAC agreement. The two companies will look at jetliner commonality and joint sales efforts, but no concrete steps were announced. Some have posited this MoU as a harbinger of an emerging player alliance, one that could challenge the Airbus and Boeing duopoly. But the reality is that COMAC and Bombardier have considerable product overlap, and there is nothing to discuss. In fact, the latest agreement follows a previous MoU that went nowhere. At the June 2007 Paris Air Show, AVIC agreed to build the CSeries fuselage, while Bombardier agreed to help AVIC develop a 90/140-seat ARJ21-900. Since then, China has ordered exactly zero CSeries jets. And the ARJ21-900 looks dead.

Yet look at the situation from Bombardier’s perspective. The company’s business jets and trains are doing great. But the commercial side faces an uncertain future. The CRJ line is gradually fading out, and the CSeries remains an enormous gamble. It still doesn’t have a launch user, and there are just two airline customers after three years of trying. Worse, Airbus’s Neo is using the CSeries as a punching bag. With Airbus accelerating the A319 Neo and going after Republic, there’s a risk the CSeries remains a marginalized product. If I ran Bombardier, I’d think about a backup plan. Like so many other marginal programs before, that backup plan might be to use China as an exit strategy for the company’s commercial aerospace unit. Selling the commercial aerospace unit to China would be like sending their underperforming kid to LA to try to get a job in the movies.

All of these developments fit an historical pattern. China has provided a home of last resort for many aircraft over the years. Some of the last MD-80s were built in China. The disastrous MD-90 was going to be built there too. Boeing’s dead 717 was cursed from birth as the MD-95, born with a Shanghai production line. The last pre-Neo A320s will be built in Tianjin. Fairchild Dornier’s 728JET program was sold to China, although the buyer, D’Long Investments, went bust too. After building the final thirtysomething ERJ 145s in China, Embraer failed to convert its Harbin facility to an ERJ 190 line. As a consolation prize it gets to build Legacy 600/650s there instead, which means basically more ERJ 135/145s at a similarly low rate. Industry jokesters Alliance Aircraft ended their weird existence by announcing a production line in Harbin. And remember the other China production ideas that died: DASA’s MPC 75, Airbus/DASA’s A31X, and Airbus’s AE-100 (the “Asia Express!”). Even Lockheed tried to sell its L-1011 line to China, back in the 1980s.

Aircraft manufacturers go to China either with the mistaken belief that they will receive adequate resources to grow, or because nobody else wants them. Manufacturers also overrate China’s market for a particular type of plane, just as screenwriters and actors overestimate LA’s ability to provide jobs in their fields. So, if you have a marginal business case, it’s off to China for you.

It’s difficult to understand what China is thinking with all of this. State-owned banks give out loans for almost anything that enjoys political support. There’s not a lot of discipline or due diligence behind Chinese aerospace acquisitions. They seem to be throwing aero programs in a pile, hoping to reach aviation critical mass. The wreckage of the MD-80 program led to the insta-wreck that is the ARJ21. The A320 line will enable the C919, which, if it somehow manages to work out as planned, will resemble an A320 Neo, but with inferior performance numbers, and arriving at the tail end of the A320’s lifetime. If they take the Cirrus lines back home to China, they lose their FAA production certificate, which would be very tough to replace. China has about 1,000 small GA planes. The US has well over 200,000. Which market matters more?

But keep in mind that China’s aviation industry isn’t in the hands of the country’s fast-growth private sector. It’s run by government ministers, who are not known for understanding market needs and opportunities. It’s as though the Department of Motor Vehicles was working to build a car industry. Look what’s happening to China’s high speed rail plans, another government-directed, state-funded national infrastructure scheme. A few months ago, it was touted as a brilliant and unstoppable development, clear proof of the superiority of China’s state-planned economy. Today, it looks like a poorly-managed disaster, with inadequate technology and excess capacity, a serious misuse of investment cash. There’s a risk that some, or even all, of China’s aero industry plans are headed down the same road.

This process has been going on for quite some time. A book I’d recommend for perspective: China Takes Off: Technology Transfer and Modernization, by E. E. Bauer, a retired Boeing executive. On page 290, you can find this passage, describing China’s industrial policy goals: “Aircraft manufacturing is considered as the ‘flower of industry,’ reflecting the industrial level of a nation, and the Chinese are determined to reach parity with the West. Achievement of parity is proving to be elusive. The plan first to build small and medium airplanes and then expand to larger and more sophisticated machines is good in principle, but is progressing much more slowly than the Chinese planners had anticipated.”

Don’t look for this book at your local Barnes & Noble. It was published 25 years ago, in 1986. I found it in a used bookstore. The industrial plans described in the citation above refer to events in 1983.

Which is a better fate, LA for scriptwriters, or China for aircraft? That’s easy. The odds of making it in LA’s entertainment biz are slim, but some ambitious and talented people make it big. By contrast, there are no China aircraft program success stories. The reason is simple. Imagine if the LA entertainment industry were regulated, funded, and owned by the government. That’s China’s approach to aircraft, in a nutshell.

For a superb overview of China’s aero industry today, see the April 19 Aviation Week. And back in the world of firm aero programs, April WMCAB reports include the annual Business Aircraft overview, F-15, Eurofighter, Gripen, CN-235/295, EC135, and EA-6B. Have a great month.

Yours, ‘Til The 728JET’s Ghost Returns,
Richard Aboulafia