RichardAboulafia.com 

:: December 2005 Letter ::

link

Dear Fellow China Watchers,

A lot of bad things happened to Airbus this year. The A380 delays, the A350’s slow start, and worst of all, the A340’s downward spiral. But this is the time of year for giving thanks. It’s important for everyone to remember the good things and be grateful. Airbus should be thankful they avoided the greatest disaster of all: a production line in China.

The trouble started earlier this month with China’s order for 150 A319/320/321s, placed when Premier Wen Jiabao visited France. As with most Airbus and Boeing orders China’s Aviation Supplies Import and Export Group (CASGC) boxed up various airline orders and placed them together. This enhances the impression that CASGC is in the driver’s seat (rather than the airlines that actually need the planes and pay for them). Airbus and the Chinese also signed an instantly hyped agreement that “describes the process to evaluate the fields of enhanced cooperation, including the possibility to establish a Final Assembly Line for single aisle aircraft in China.”

In French, Chinese, or fractured bureaucratese, that statement is meaningless. And that’s great news for Airbus. The history of jetliner production in China is grim. Disregarding the awful indigenous stuff, the biggest disaster was McDonnell Douglas’s Shanghai plant. After a huge investment, the plant built 35 MD-80s and two MD-90s. Five of the 80s had to be re-exported, to TWA. If China was going to build its own jetliner industry, that was the moment to do it. Since then their aviation ambitions have gone downhill.

Despite MD’s China fiasco, jet manufacturers haven’t all gotten the message. More recently, in 2002 Embraer built an ERJ facility in Harbin (for background on this very bad idea, see my October 2002 letter at www.richardaboulafia.com). After investing $40 million, Embraer sold six planes. Three years later after a sales campaign resembling tooth extraction, they sold six more. But the recent water contamination in Harbin (huh?) kind of stopped production there (see http://www.embraer.com.br/institucional/download/2_108-Ins-VPP-Statement_HEAI-I-05.pdf for Embraer’s strange announcement about this). The workers then retired to the bar, where they drank license-produced caipirinhas. “Hmm. They put funny stuff in our water. Maybe that’s why we signed the agreement to build planes here in the first place.”

There’s lots of smaller disasters. Chinese Su-27 orders petered out last year only after they built an in-country production line. Industry jokesters Alliance Aircraft ended their bizarre existence by announcing a production line in Harbin. Fairchild Dornier’s ghastly collapse was interrupted only by that weird D’Long Investments experience and the quickly dashed hope of Chinese exile. Boeing’s dead 717 was cursed from birth as the MD-95, born with a Shanghai production line. 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!”). Take a moment to Google them if you have time to kill.

Best of all, in December Beijing News reported that Bombardier would build its tragic CSeries in Shenyang. If accurate, this report confirms the CSeries transition from terminal to dead. Perhaps there’s a euphemism here: “I’m sorry, Timmy. Grandpa’s been taken to the China production line in the sky.”

Why does China production mean so many bad things to so many people? First, there’s the WTO. One of my dearest friends, WTO’s Agreement on Trade In Civil Aircraft (ATCA), prohibits any airline purchase preference for aircraft with local content. (http://www.wto.org/english/docs_e/legal_e/air-79_e.pdf). China’s economy is export driven, so they try to adhere to WTO (while not ATCA signatories, they have “observer” status). Sure enough, the guys who made the biggest investment in China—MD—got the worst market share of the big three (by far). Nobody in the government ever pressured a Chinese carrier to take locally-built MD planes. And today Airbus and Boeing together do about $100 million in China work annually. After all the talk, this is an absurdly low volume—around one-fifth of 1% of the total world jetliner value chain. This work bears no relation to the volume of Chinese jet orders. If there’s a Chinese official mandating industrial work in exchange for orders he fell asleep at the switch long ago.

It’s also easy for manufacturers to lose their focus in China. They need to sell to the airlines, not to the central government or CASGC. MD made a huge mistake in thinking that one point of contact, one facility, and one big investment would take the place of serious airline sales efforts. Airbus and Boeing ignored the production line idea and sold directly to the airlines.

There’s also the triumph of illusion. Everyone conspires to play up the China market, and the virtues of investment there. Politicians—Chinese and Western—love to take credit for job creation, no matter how tangential and unlikely. Companies love to announce big strategic sales initiatives, no matter how dubious. And everyone likes to threaten unions and politicians back home with the dreaded China price: “Lose the pension or we move your jobs to Xian!” or “Give us tax breaks or we move from Kansas to Manchuria!” That’s how $100 million in work gets exaggerated to the biggest new aircraft production source on earth.

Then there’s the ego factor. The banquets, the toasts, the statesmanship, the credit-taking. Which politician, which captain of industry, which sales executive can resist signing grandiose agreements while making self-important toasts with gopher bile liquor in a gaudy banquet hall? This charming but empty process was best described in Joe Studwell’s The China Dream (Atlantic Monthly Press, 2002) and James Mann’s Beijing Jeep (updated by Westview Press in 1997).

For Airbus the China line rumors implied greater access to a growing and important market. This is a false hope and a fool’s game, but given the difficult year Airbus had it was important to get some kind of positive-sounding news out there. Yet ultimately Airbus is too smart to fall into the China trap. They dodged a bullet. Good for them.

With luck Airbus will keep dodging these bullets. The A320 is a great plane and is very competitive in China. Teal will keep a close eye on the situation and will downgrade Airbus’s narrowbody market outlook only if an A320 plant opens in Shanghai.

And speaking of Asia, I’ll be on vacation there December 28 through January 16. If you need anything industry related, please contact Phil Finnegan at pfinnegan@tealgroup.com. If you need anything logistical, please contact Tim Storey at tstorey@tealgroup.com. And in the meantime, this month’s updated aircraft include the F/A-18, AH-64, Falcon, Su-27/30, E-3/E-737, B-2, E-8/E-10, A.109, BA 609, and the World Aircraft Overview. Have a great new year.

Yours, ‘Til I Get An Aircraft Production Line Job In Asia,
Richard Aboulafia

 

© Richard Aboulafia 1997-2006, All rights reserved.
RichardAboulafia.com
  ~  Last updated on January 08, 2006