2. Shifts of production. Among the criteria the Chinese government obviously watches very closely are foreign companies’ willingness to teach local Chinese firms and workers to do what the foreigners did. Thus Airbus set up its only assembly plant outside Europe in Tianjin, not far from Beijing, in the late 2000s, where it assembled most of the Airbuses that China agreed to buy. Similarly, GE agreed in 2011 to share engine technology with a COMAC subsidiary, as part of an arrangement to supply engines for the C919; Boeing increased its reliance on Chinese suppliers; the small-plane manufacturers Cessna and Diamond set up production plants in China; and others in the business shifted their production to where they hoped the market would be.
3. Transfer of knowledge. By legitimate learning or unauthorized copying, Chinese firms quickly learn what the foreigners know, leading to:
4. The natural conclusion. Lower-cost production at higher volumes from Chinese factories, with bigger shares of the market inside China, which in turn becomes a platform for exports around the world. Former Western industry leaders must find another business.
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.
The marketplace and technological concepts behind the Dreamliner were the direct opposites of those applied by Airbus in its development of the world’s largest airliner, the A380. Plans for both airplanes were first sketched out in the late 1990s, with engineering, development, and testing stretching out over most of the next decade. The A380, which, depending on seating layout, could hold between 500 and an appalling 825 passengers, was intended for very heavily trafficked hub-to-hub routes in airline “hub-and-spoke” systems. It would carry people from London to Dubai, from New York to Frankfurt, from Singapore to Shanghai. Once at those hubs, passengers would switch to smaller airplanes for “spoke” flights to their real destinations.
The Dreamliner was designed for lower-capacity “point-to-point” flights. Depending on its seating layout, it would hold between 210 and 290 passengers. But it would do so with lower fuel costs and emissions, and with more attention to interior comfort and layout, than previous Boeing or Airbus models. Boeing’s market planners believed that the world’s hub-and-spoke networks were becoming unsustainably clogged. An airplane that could operate profitably with smaller passenger loads would allow airlines to offer more of the point-to-point routes—Singapore direct to Seoul rather than through Tokyo, Rome to New York nonstop rather than through Heathrow—that most travelers preferred.
In addition to this shift from prevailing practice in market concept, the Dreamliner also represented a change in Boeing’s manufacturing strategy. Starting as far back as the 1960s with the 747, Boeing had successfully outsourced parts of each aircraft model’s production. The 747’s fuselage was outsourced to Northrop; then Japanese and Italian companies produced major components of the 777, which was a technological and commercial triumph. The difference with the 787 was that Boeing went much further in its outsourcing, in what one industry analyst described to me as a “big, dumb, costly mistake.”
With the 787, Boeing outsourced not simply specific components but much of the design and integration of the aircraft, which had been its distinguishing advantage. A larger share of the plane’s components and subassemblies would be contracted out to suppliers, including many in Japan and some in China. Less of the work would be done start-to-finish under Boeing’s own control. This was economically rational, in that many contractors could beat Boeing’s internal price. But in a larger business sense it proved problematic, since delays from the contractors and difficulties in combining and coordinating their work caused a rippling series of postponements in the Dreamliner’s delivery date.
“Boeing’s goal, it seems, was to convert its storied aircraft factory near Seattle to a mere assembly plant, bolting together modules designed and produced elsewhere as though from kits,” Michael Hiltzik, of the Los Angeles Times, wrote in early 2011, as the plane’s delivery was postponed yet again.4 “But it ended up costing more and slowing the plane, and reducing the company’s control over the technologies that would be the longer run sources of value.… As a result of this whole setup, a plane that was designed to be a breakthrough in many ways—longer ranged, more efficient, quieter, dominant in its market share, a smarter approach for point-to-point travel than Airbus’s giant A380—this plane missed its opportunity in being at least three years later and grievously over cost.”
The many obstacles in COMAC’s way
It would seem logical enough to fear, therefore, that the combination of forces set up in China would almost certainly lead to the rise of COMAC, the C919, and the rest of the Chinese aerospace lineup—and the consequent eclipse of Boeing, Airbus, Embraer, and the other foreign competitors. So many factors are working in China’s favor: scale, finance, control of the market, control of supply chains, lower-cost labor, ability to make the foreign companies with the advanced systems do its bidding. So many corresponding perils endanger those foreign firms.
So it could well be that the aerospace industry rankings of 2030 will start with COMAC, and maybe include other private Chinese firms before they get to shrunken versions of Boeing, Airbus, and Embraer. Or perhaps, like Cirrus and Epic, those companies will by then have been absorbed into the Chinese production system.
Since that seems so obvious a conclusion, it is worth considering just the opposite possibility. Perhaps the aerospace industry will reveal the limits of the Chinese model, rather than its limitless power. In other words, a China capable of creating its own Boeing, its own Airbus, would have to be a transformed China from the one we know now.
According to Richard Aboulafia, an aviation expert with the Teal Group, a market-analysis firm, in Washington, “There are two ways to build an aviation industry. Smart and dumb. The way China is doing it is not the smart way.”
Aboulafia is not the only analyst who has made the case that the spend-first, think-later approach that has kept the Chinese economy humming but has led to such overbuilding of apartments, toll roads, railways, and even airports, will not succeed when it comes to buil
ding modern airlines and airliners. But he makes the case more vividly than most.
“An awful lot of China’s aviation effort has been simple boosterism on a massive scale,” Aboulafia told me in Washington in the summer of 2010. “You’ve got a lot of ‘activity’ related to this plane.” He was talking in specific about the new Chinese regional jet, the ARJ21, but he meant the larger C919 as well. “People are getting paid. People are getting rich. It’s all adding points to the growth rate of the GDP. The question is whether it’s going to lead anywhere at all.” And his argument is that, on current evidence, it will not.
Aboulafia has a larger theory about the circumstances in which state-guided catch-up industrial policies, like what China is trying to apply in aerospace, can and cannot pay off. In brief: world industrial history is full of examples of successful government sponsorship of industry, especially in high-tech fields. But it contains even more examples of wasteful, misdirected, ill-timed, or corrupt undertakings. Governments, Aboulafia argues, should be very selective about what they back, with a bias toward keeping hands off, since they are so likely to be wrong. And he concludes that most of the signals about China’s aerospace ambitions are highly discouraging—if, that is, their purpose really is to foster internationally competitive aerospace companies rather than just keeping people on payrolls now.5
Aboulafia’s analysis also turns on the peculiar circumstances that make building and selling a $100-million airliner so different from building a $20,000 car or a $50 electronic device, or even a $100-million dam, all activities in which China has proven to excel. Those special circumstances include:
• The sheer impossibility of becoming successful in aviation quickly. Anyone stepping on a Boeing airplane knows that other passengers have gotten on Boeing planes—and, in a statistically overwhelming majority of cases, have gotten off safely at the other end—for most of a century. Anyone getting on an Airbus knows that they have been in comparably safe operation, by the thousands, for several decades. Bombardier, Embraer, and Fokker have been increasingly familiar factors in travel.
By definition, it would be decades before Chinese-made planes could rack up as long a safe-operating history as the established companies already have—even if those first few decades were completely accident-free. (And even if the background reputation for low-defect production from Chinese factories was a match for Airbus’s or Boeing’s, which it now is not.) Moreover, operating an airline and maintaining airplanes requires a constellation of skills found in few other industries. Repair facilities, with spare parts and trained engineers, have to be ready wherever the planes might fly. Companies must learn to deal with highly—and properly!—intrusive safety inspectors, for both aircraft and crew.
• The world’s aircraft-certifying agencies work closely with one another, and the U.S. FAA and its European counterpart, the European Aviation Safety Agency (EASA), in effect set standards for the world. Unless a Chinese-built—or Brazilian- or Japanese-built commercial airplane—can pass the onerous steps necessary for a “certificate of airworthiness” from the FAA, it won’t even be considered on the high-end international market. (AVIC and its predecessors have exported small numbers of Soviet-designed airliners over the years, but only to developing countries, mainly in Africa, that don’t care about international certification and have bought the planes as part of larger trade or aid deals arranged by China.) An aircraft company’s reputation—like that of a university or a medical center—can be built only over a span of many years, and depends both on single huge events (is there a crash?) and the accumulation of millions of customer experiences day by day.
In short, challenging as it may be to set up a factory in southern China capable of producing defect-free iPads, that is nothing compared with the cost, complexity, and multi-decade commitment necessary for making airplanes that the world’s airlines will base their financial and operating plans on.
• The surprising economics of the airplane-building business, in which all of the glamour goes to the final assembly process, in those enormous Boeing or Airbus or COMAC hangars, but much of the profit comes from supplying the components that go into the plane. Engines, electronics, avionics systems—these are the expensive elements for which the airframe itself can in business terms be a kind of delivery system, or shell. “Aircraft are being eaten by their own value chains,” Aboulafia told me in 2011. “The real value goes to the GE or Rockwell Collins”—GE, like Rolls-Royce and Pratt & Whitney, makes jet turbine engines; Rockwell Collins, like Honeywell, makes avionics systems. “They’re going for a tube with the national flag on the back,” Aboulafia told a Seattle newspaper about the Chinese projects.6 “They’re just developing a chunk of metal onto which all the real value added is inserted by Western suppliers.”
• The most important elements in developing better airplanes are all skills or technologies in which Chinese companies currently lag. These areas are better engines, more advanced avionics, design and construction of wing surfaces, and the “systems integration” of the literally millions of components that go into a modern airplane. They are fields in which a North American, European, or Japanese firm dominates, Russian firms are active, but no Chinese institution is yet competitive.
The combination of these problems showed up most acutely in the ARJ21. It was meant to be a standard-bearer for Chinese aerospace development, but because so little of the high-value work has been done in China or by Chinese firms, so far it has essentially been an elaborate container for expensive components made by European, North American, and Japanese companies.
As a product that commercial airlines might consider, it was barely plausible or competitive. It has about the same number of seats as models from Embraer or Fokker—seventy-eight in a normal configuration—but because of various inelegant aspects of design and manufacture, it weighs about ten thousand pounds more. In aviation, this is a crippling disadvantage. The “operating empty weight per passenger,” essentially the deadweight burden of operations per paying seat, was 705 pounds for the Chinese plane, versus 597 for an equivalent Embraer. This is a huge handicap for the heavier plane, or advantage for the lighter plane, in a business where every ounce matters. Indeed, if the ARJ21 receives international certification—for which the original target date of 2007 will be missed by at least five years—the most likely markets for the plane will be forced purchases by some of China’s own domestic airlines and the same developing-country customers who have bought previous Chinese products.7
“We know that this plane, the ARJ21, is completely useless,” Richard Aboulafia told me in 2010. “It amounts to a random collection of imported technologies and design features flying together in loose formation. The question it makes me ask is, How much of China’s growth is just like this? How much of it is genuinely productive? And how much is just misinvestment on a colossal scale by state owned enterprises?”
“Tell me where you want to go”
If the same standards are applied to the ARJ21’s big brother, the large C919 that is meant to compete not with Embraer or Dassault but with Boeing and Airbus themselves, many of the same concerns arise. To explain them, I’ll turn to the pilot and businessman Shane Tedjarati, whom I met in Beijing in 2011.
From childhood in Tehran he had been fascinated by aviation. When he was about ten years old, his father, a pilot, took him on a flight in a small Cessna, and Tedjarati says that “a spark was ignited” in his heart. When he was in college in Montreal, he wanted to start flight training but didn’t know how he would pay for it. His father gave him a rare Persian carpet, then worth about $3,500, as a “flying carpet” to be used toward his training costs. With his father’s help and encouragement, he earned his certificate as a private pilot while still a teenager. He was determined to continue the tradition with his own son, who earned his private-pilot certificate in Canada and the United States at age seventeen, the third generation of pilots in his family.
Tedjarati is a person of linguistic as well as techn
ical abilities. When I told him about a mutual friend whom I’d recently heard doing business near-simultaneously in four languages—English, French, Chinese, and Dutch—Tedjarati smiled politely. I asked about his language skills, and he said that he felt business-comfortable in six languages: Persian; English, which we were speaking; Chinese, in which I heard him operate several times when taking calls on his mobile phone; French, from his student years in Montreal; Arabic; and Turkish.
Tedjarati began working for Air Canada after graduation, including a stint measuring satellite reception in the Canadian Arctic. He later joined Oracle and eventually started his own consulting firm. In 1992, while still in his twenties, he came to China to be part of what he called “this dramatic human transformation.” After working for Unisys he became head of Deloitte Consulting in Greater China, where his projects included helping large state-owned enterprises make the transition to a market economy. In 2004, he was appointed head of Honeywell China and now runs the company’s operations in both China and India, its two largest growth markets.
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