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China looking to seize a slice of global aviation pie

Last week, the Commercial Aviation Corp of China (Comac) announced that the C919, China’s first homemade large passenger jet, had chalked up its 730th pre-order.

The first C919 passenger jet made by the Commercial Aircraft Corp of China (Comac) is pulled out during a news conference at the company's factory in Shanghai. Reuters file photo

The first C919 passenger jet made by the Commercial Aircraft Corp of China (Comac) is pulled out during a news conference at the company's factory in Shanghai. Reuters file photo

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Last week, the Commercial Aviation Corp of China (Comac) announced that the C919, China’s first homemade large passenger jet, had chalked up its 730th pre-order.

Those numbers will not necessarily make Boeing or Airbus quake; Boeing estimates Chinese airlines alone will require 5,420 new single-aisle planes by 2036. Ultimately, though, they could herald the end of global aviation’s great duopoly. Most of the C919’s orders come from state-owned Chinese companies, some of whom probably would not have placed them if given a choice. The C919 is technologically out-of-date and has been repeatedly delayed; it is unlikely to enter commercial service before 2020.

The plane is cheap, though — reportedly 10 per cent less expensive than the competition — and designed to be good enough not just for China, but other emerging markets where air travel is booming and regulations are less strict than in the developed world.

The hope is that cost-conscious carriers in Africa and Asia will embrace a plane that they can afford and that does most of what they need, even if its technology is not cutting-edge.

Chinese manufacturers have a track record of winning market share with similar products, matched to the limited means and needs of developing-world consumers.

In mature economies, China is largely known as a contractor for some of the world’s most famous brands, such as Apple. Elsewhere, it is identified more with low-cost goods targeted at poorer consumers. Those Chinese brands have been beating out more expensive competitors for years despite their poor reputation for quality.

For example, between 2012 and 2014, China’s total share of Kenya’s imports increased from 12 to 23 per cent, leading to a 10 per cent overall drop in the unit price of manufactured goods in the country.

Meanwhile, during the first quarter of this year, Chinese smartphones claimed 51 per cent of the Indian market, besting better known but more expensive international brands such as Samsung Electronics and Apple.

Many if not most of those phones would not sell in more developed markets with stricter standards and higher consumer expectations.

Chinese manufacturers have also begun to demonstrate a greater ability to innovate. For example, Sany Heavy Industry, China’s largest heavy-equipment manufacturer, spent much of the last three decades making and selling low-end excavators and cement trucks in China and other developing countries.

Rather than challenge international competitors like Caterpillar on the basis of quality or technology, Sany built up market share on price, local connections and cheap financing — all of which were aided by generous Chinese government subsidies.

That approach allowed Sany to grow fast, generate economies of scale and, ultimately, begin investing in research and development. Today, Sany and other heavily subsidised Chinese equipment makers are narrowing the quality gap and winning customers in developed countries and among quality-conscious equipment buyers, including top mining companies.

That is roughly the path that the Chinese government would like to see the C919 follow. Launched in 2008, the plane is part of a long-term effort to build out a Chinese aviation industry capable of competing with Airbus and Boeing.

More broadly, the hope is to upgrade China’s role from manufacturer and assembler of products such as off-brand smartphones and tractors, to world-class innovator.

The stakes involved in making jets are much higher than with cement mixers and phones, of course. But Comac is not flying blind.

The most important components in the C919, including the engines and most electronics, are made by non-Chinese companies with decades of aerospace experience.

While Comac does not have Boeing’s long history integrating components into a jet, the C919’s many delays suggest the company is taking the time to learn, rather than rush.

As a flagship enterprise, Comac has the luxury of time — and a very nearly blank cheque to keep spending until they get it right.

If Boeing and Airbus are likely to retain their pre-eminent positions, the developing world should provide enough demand for Comac to become a reasonable third alternative for many buyers.

According to the International Air Transport Association, global air passenger growth will nearly double over the next 20 years, with the bulk coming from Asia-Pacific.

China and India alone will put more than 1.1 billion new passengers into the skies. And according to Boeing, flying them around will require more than 10,000 new planes.

For China, that is the ticket to breaking into the global aviation industry. BLOOMBERG

ABOUT THE AUTHOR:

Adam Minter is an American writer based in Asia, where he covers politics, culture and business. He is the author of Junkyard Planet: Travels in the Billion-Dollar Trash Trade.

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