Evolution, Progress & Status of Commercial Aviation Manufacturing Industry in China

Introduction: Indigenous Innovation in a Burgeoning Market

China has seen a phenomenal economic rise since the economic reforms of 1978. In the last four decades, its GDP has increased by 95 times from $150 billion to $14,280 billion, and GDP per capita has increased by 65.5 times from $156 to $10,217. During the same period, its annual air travel has increased by 429 times from 1.54 million to 660 million. In the last two decades alone, air travel in China has increased by 600 million per annum. To sustain this rapid rise in air travel, the aviation industry required more seating capacity through commercial planes, which have grown from 527 in 2000 to 2,950 in 2016 and 3,722 in 2020, an increase of 606%.

Figure 1: China’s Commercial Air Fleet Source: China Statistical Yearbook
Figure 1: Chinese Commercial Air Fleet (Source: China Statistical Yearbook)

China currently represents 10% of the global commercial aircraft market, providing a big opportunity for commercial aircraft manufacturers in the coming decade. The Chinese government understands the importance of this sector: similar to treating other industries it deemed strategically important, China started using industrial policies to foster the development of national champions and reduce the country’s dependency on foreign manufacturers. As part of this strategy, the Chinese government administered preferential policies to entice foreign manufacturers to boost offshore manufacturing capacities and transfer technologies to China, which greatly benefited nascent Chinese companies lacking the technical know-how. Furthermore, in creating the Commercial Aircraft Corporation of China (COMAC) and Aero Engine Corporation of China (AECC), China has fostered an ambition to compete with the likes of Boeing and Airbus on a global scale.

History of Commercial Aircraft Manufacturers in China

The Chinese aircraft manufacturing industry has historically produced aircraft exclusively for the air force of the People’s Liberation Army – the commercial aircraft manufacturing industry has been given a low priority. In the 1970s, China had its first shot at building a commercial jet when Shanghai Aircraft Manufacturing Company (SAMC) developed the Y-10 jet, which was similar to the Boeing 707. In the early 1980s, a series of successful test flights were conducted for the Y-10 jet, however, the program was shelved and later discontinued due to design and cost problems compared to the available planes produced in the West.

In 1983 after the cancellation of the Y-10 program, the Chinese government developed a “three-step plan” for developing a commercial jet industry. As per this plan, the country would start by domestically manufacturing aviation parts and assembling foreign designs. Later, it would develop its design with foreign assistance, and manufacture domestically without any foreign assistance by 2010. Embarking on its journey, the Shanghai Automotive Group (SAIC) signed an agreement with McDonnell Douglas to assemble the MD-82/83 airliner in Shanghai. However, after assembling 35 planes in eight years, McDonnell Douglas merged with Boeing and discontinued the program.

In 1997, China formed a consortium with Airbus and Singapore Technologies to develop a 100-seat regional plane. However, Airbus pulled out in 1999 due to the Asian financial crisis, and the program ended. A Chinese aircraft manufacturer signed a joint venture (JV) in 2002 with Embraer to produce ERJ-145 aircraft in Harbin, China, but again the JV struggled and came to termination in 2011. Finally, in 2008, Airbus and a Chinese consortium were set up to perform the final assembly of the Airbus A320. 

Policies to Promote Commercial Aircraft Manufacturing

Despite its strong and growing economy, China is still catching up on aircraft manufacturing: it has been importing its commercial aircraft or producing them domestically under licenses from foreign firms. The Chinese government sees developing and manufacturing an indigenous commercially viable passenger plane as a signal of its growing economic prowess and technological superiority. To achieve its goal, the government has adopted a “three-step plan” and given high priority to growing the industry. Several high-level plans demonstrated high-level support, such as the “Middle- and Long-Term Development Plan for the Civil Aviation Industry (2013–2020)” and the “Made in China 2025” plan. 

The Chinese government has deployed multiple policy instruments to develop its domestic commercial aviation manufacturing industry through supply-side policies. First, it merged multiple aviation industry corporations to form COMAC—a state-owned company that designs and manufactures commercial jets in China. Second, since the Chinese government understood that the development of a new airplane is a long and expensive process, it provided financial and non-financial aid hand-over-fist to the industry. In 2009, COMAC was allotted a paid-up capital of $2.8 billion along with a $4.4 billion credit line from the Bank of Communications to begin operations. Further, the local governments supported the industry by setting up industrial parks and providing other assistance to encourage aircraft manufacturers to settle in their locality. However, many have failed, and the costs of these excursions are being paid by the Chinese people, the government, and state-owned banks.

The Chinese government is creating an artificial demand for its indigenous jets C919 and ARJ-21 by a) pressuring airlines through the Civil Aviation Administration; b) mandating state-owned airlines to purchase these aircraft; c) giving low-interest credit to airlines in exchange for aircraft purchase orders. As a result, up to September 2020, COMAC has received 815 orders from 28 companies, out of which 805 orders are from Chinese airlines and only 10 aircraft from one non-Chinese company. In this way, international aviation manufacturers are lured by China to set up JVs and get immediate sales benefits. For example, SAIC-McDonnell Douglas JV was able to sell all its domestically manufactured airplanes in China. Similarly, the opening of Airbus manufacturing operations in Tianjin coincided with an order of 150 A320 airliners from China and contracts for 432 aircraft over the next four years. In the short run, this has helped Airbus to nearly equal Boeing’s market share in China. The Chinese government views JVs with foreign aircraft manufacturers as an important way to introduce modern management and production practices in China.

Another set of dominant policies revolves around technology transfer. Chinese companies have been acquiring foreign firms to access their manufacturing technologies, products, and R&D capabilities. For example, in 2009, a Chinese state-owned manufacturer acquired a 91.25% stake in an Australian company specializing in manufacturing parts using advanced composite material. The technology was immediately used to supply composite components for the C919 airframe. However, the acquired technologies aren’t extraordinarily advanced, and there are challenges to transferring them to China due to technology export restrictions in the home country of the acquired firm.

Current Status and Way Ahead

By using its economic and political force, the Chinese government is trying to achieve the policy goal of a ‘national champion’ in the global commercial aircraft manufacturing market. However, their efforts haven’t yet resulted in any noteworthy outcome. The difference between Chinese imports and exports of aircraft and aircraft parts has increased from 1990 to 2011. In addition, the manufacturing of China’s C919 and ARJ-21 is dependent on imported parts, and the projected dates for the certification have been postponed multiple times over the last six years. Boeing and Airbus have already launched their new and advanced model 737 Max and A320neo, respectively. This has made industry and international observers skeptical about COMAC’s success against Airbus and Boeing. However, China has not given up and continues acquiring aviation manufacturing companies and signing JV agreements with aviation manufacturers to assemble aircraft in China.

The development of the aircraft manufacturing industry has been a long and financially exhausting road with a low probability of success. The Chinese government has already spent billions of dollars with no clear signs of progress in the industry. The C919 and ARJ-21 are still far from safety approval with no assurance of their commercial viability and success. Hence, the Chinese government should rethink its investments and policies in this industry. Instead, it can focus on specializing in specific segments of the manufacturing supply chain and on creating a non-bias business-friendly environment for all aviation manufacturers. This might lead to better allocation of resources, increased investment, and integration into the global aviation manufacturing supply chain. Additionally, the resources saved in the process can be allocated to other national champions, creating a win-win situation for China.

Image Source: Sohu

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Aryan Agarwal

Aryan is an Eiffel Excellence and Émily Boutmy Scholar studying Masters in International Economic Policy at Sciences Po, Paris. Prior to this, he worked as a District Lead with TATA Trust and as a Research Associate with PRADAN. In the past, he was a Research Analyst with O.P. Jindal Global University and a Senior Manager with Qrius where he headed the Research team.

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