Richard Aboulafia: September 2015 Letter

Dear Fellow Foreign Dignitary Visit Enthusiasts,

In honor of Chinese president Xi Jinping’s recent visit to the US (and to Boeing), I have prepared a two-page China market study. The bottom line finding of this mini-study: China matters more than ever as an aircraft market. It matters less than ever as an aircraft producer.

Good news first: China is setting records as a market, in many ways. Last year saw 268 Airbus and Boeing deliveries to China, or 20% of total world deliveries. That’s a record for China in raw numbers, and a record as a percentage of the market. In 1991,China accounted for just2%ofworld deliveries. In 2007 that figure was just 12%.

China is also now the largest jetliner market in the world. Last year Airbus and Boeing delivered 182 jetliners to US airline customers, or just 13% of total industry output. All these numbers exclude new lessor deliveries to airlines, which wouldn’t tip the balance in the US market’s favor.

Most importantly, China is also now the last BRIC standing. While Boeing deliveries to China went from 9% of total jets delivered in 2007 to 18% last year, the company’s exports to Brazil, Russia, and India collapsed. The three countries accounted for 12% of Boeing’s output in 2007, but just 5% last year.Given the direction of the Brazilian, Russian, and Indian economies, it’s not surprising that deliveries to those countries have fallen to just 2% of Boeing deliveries in 2015 (through the third quarter). Meanwhile, China has risen to 20%. In aviation today it’s useless to talk about the BRICs. It’s just China.

Interestingly, the numbers show yet again that having a China production line does no good at all for an aviation company. In 2007 (two years before Airbus’s Tianjin line opened) Airbus delivered 68 jets to China (15% of company output), easily beating Boeing, which delivered just 39 (9% of Boeing output). Since then, with the Tianjin line going full throttle, Airbus has grown its China deliveries to 140 jets, a 10.9% compound annual growth rate (CAGR). In the same period, Boeing deliveries to China grew to 128 jets, an 18.5% CAGR. If new leased jet deliveries are added,Boeing delivered 155 jets to China last year, or 21.4% of all company deliveries. Boeing’s market growth in China significantly outperformed Airbus, and Boeing didn’t need to invest in an in-country production line. Of course, Airbus could have asked McDonnell Douglas or Embraer for their opinions about a China line. Both of them had miserable China production line experiences.

Speaking of China facilities,while President Xi visited,Boeing announced an agreement with China to build a 737 completion center. This is a completion center, not a manufacturing center or a final assembly line. Transplanting a completion center involves surrendering all of America’s vital technologies associated with carpet stapling, painting, and seat installation. In other words, it won’t enable China’s aerospace industry development. In fact, talking about in-country production lines and completion centers brings me to the not-so-good news for China: they’re moving backwards as an aircraft manufacturer, at least in relative terms.

Consider: the new Boeing center will open around the time 737MAX deliveries begin. Meanwhile, in March 2014 China signed an agreement with Airbus extending the Tianjin line to cover production of the next-generation A320neo series. So, China is building facilities for imported aircraft that compete with its own C919. This reflects a lack of confidence in the C919, as well as a Chinese airline preference for Western jets.

Meanwhile, September saw another delay announced for the ARJ21, China’s second jetliner (after theY-10) and possibly the first to enter production. The new schedule calls for it to enter service next February. The original plan, when the jet was launched 12 years ago, was for it to enter service in 2007. It’s the heaviest jetliner (on a per-seat basis) designed in many decades, which is not surprising since it’s basically a shrunken DC-9. It’s powered by GE’s CF34 engine,which has been around for 40 years and will soon exit production for everybody else.Any airline using this aircraft will be at a severe competitive disadvantage relative to any carrier using modern aircraft.The ARJ21 launch user is Chengdu Airlines, which, bizarrely, is owned by COMAC itself.

The only possible defense of this aeronautical atrocity is that it’s a learning experience. China’s attention is now turning toward the larger C919, itself delayed until around 2019. Yet the same fundamental problem that hobbled the ARJ21 – a demand for technology transfer from all Western suppliers without any intellectual property protection for these suppliers – is in play for the C919, and will likely ruin the bigger jet too. As for the next step, there’s talk of following the 919 with the 929, a twin aisle model. The plan is for China’s state-owned aircraft industries to build it with help from Russia’s state-owned aircraft industries. The outcome of this fiasco is basically pre-ordained. And don’t forget my favorite theme in aviation: new market entrants have almost no chance. The CSeries train wreck illustrates that vividly.

There’s worse news. Last year, according to the US International Trade Commission, China provided just $482 million in parts and structures for all US aircraft primes, including Boeing. That’s less than half of Mexico’s role in US aircraft manufacturing ($1.16 billion), and just 10% of Japan’s role ($4.86 billion). Relative to 2013, last year China’s output grew by a mere 5.9%. Mexico’s grew by 37.7%. The average year-over-year increase for the top 15 suppliers was 15.1%. This kind of structures and components work is how you build an aerospace industry, and it’s more profitable than less risky than building home-grown aircraft. In pursuit of its ill-advised jetliner programs, China has neglected huge opportunities in the global aircraft manufacturing supply chain.

To look at China’s aviation position from a more positive angle,most economists agree that the Chinese economy needs to move away from production for foreign markets and towards domestic consumption. As far as our industry is concerned, that’s exactly the way the country has been heading.

In addition to small and big market studies,my job is to write aircraft reports.Updates this month include the Rafale, C-17, Super Puma, AH-1, Tiger, Avanti, and the Military Transport overview. Have a great autumn.

Yours, ‘Til Beijing’s Aviation Museum Gets Its First ARJ21 Next Year,

Richard Aboulafia