Embraer says it could cease production at its Harbin assembly line if it is unable to reach a resolution with Chinese authorities on taxes imposed on imported components.
Speaking to Flightglobal at its Beijing office, Embraer China president Guan Dongyuan says the manufacturer has to pay an average of 3% import duty on components that are brought into China. On top of that, it is also slapped with an additional 17% in value-added tax.
"So there's a 20% cost associated to tax on our components that makes our production costs here higher than our Brazilian line. This is something very strange. How can you justify local production here in China then? It's a big challenge," he says.
Harbin Embraer Aircraft Industry - a joint venture between Embraer and AVIC - is producing Legacy 650 business jets. The facility first assembled the ERJ-145 when it was launched in 2003, and was then spared import taxes. The tax issue however surfaced last year after Embraer switched to producing the Legacy 650, after delivering 41 ERJ-145s from the line.
The company had wanted to produce the E-190 regional jet in China after the ERJ-145 ceased local production, but Chinese authorities did not approve this.
Guan says the situation "is not ideal" since the facility only builds two aircraft a year due to the high taxes, when it has the capacity to produce up to 15 aircraft annually. It has delivered four Legacy 650s from the line.
The airframer would also like to raise the production rate, considering it is forecasting a demand for 835 executive jets in China over the next 10 years.
"We hope we can get some feedback as soon as possible. We cannot take too long a time, we have to make a final decision before the end of next year," says Guan.
While Embraer does not rule out the possibility of ceasing production in China should no resolution be reached, Guan stressed that this is a situation the manufacturer is trying to avoid. This is since Embraer is very satisfied with its partnership with AVIC, and that besides the strong demand for executive jets, it is also forecasting a demand for 1,050 regional jets in China over the next 20 years.
"If we can't [resolve this issue], all other foreign companies that want to come into China will face the same problem, unless they set up in free trade zone areas, but there aren't so many free trade zone (FTZ) areas with local infrastructure," says Guan, adding that free trade zones were only implemented after Embraer had set up shop in Harbin.
Embraer has so far delivered 165 aircraft to China, and has a firm order backlog of 69 aircraft.
Source: Cirium Dashboard
