China's emergence as an oasis of prosperity in a depressed global aerospace market has led to renewed Western interest in co-operation
ANDREW DOYLE / SINGAPORE
After several false starts, the world's major aerospace manufacturers are again ready to ramp up industrial co-operation with their Chinese counterparts, this time taking a more cautious approach to avoid repeating past mistakes.
Aircraft builders can be forgiven for getting excited about China, where gross domestic product has increased by an average of 7% a year in the past decade. Growth in passenger traffic over the next 20 years is expected to far outstrip that of any other region in the world, and the country's airlines will need hundreds of new aircraft.
Estimates vary, but China is expected to absorb about 1,600 airliners seating more than 100 passengers over the next 20 years, establishing the country as the largest aviation market outside the USA. Many observers believe it is only a matter of time before China joins Japan and South Korea as a viable major risk-sharing partner for future airliner programmes.
China's low labour costs - despite overmanning in aerospace - have made it an attractive location for production of relatively simple, but labour-intensive parts, which are then shipped to final assembly lines in Europe, the USA or elsewhere.
Foreign manufacturers have always been willing to offer work to local Chinese companies to help win favour with the government, which must approve all airliner purchases. This used to take the form of direct industrial offsets arranged through the China National Aero-Technology Import-Export Corporation worth a predetermined proportion of the contract value, but this has changed following China's December 2001 accession to the World Trade Organisation (WTO).
Industrial co-operation between Chinese manufacturers and their Western counterparts is now entering a new phase. Under the terms of its WTO membership, China agreed to "not impose any provisions of offsets or other forms of industrial compensation when purchasing civil aircraft, including specified types or volumes of business opportunities".
However, at the time China unsurprisingly indicated it was "not in a position to commit to joining the Agreement on Trade in Civil Aircraft at the present stage".
Procurement rules
The latter agreement contains rules limiting government-directed procurement of civil aircraft, inducements to purchase and state support for the civil aircraft sector. It also eliminates import duties on all civil aircraft, engines, parts, components and flight simulators. In force since 1980, the agreement has 26 signatories to date.
In contrast, China's airliner purchases are centrally planned and airlines must submit their acquisition plans to the government for approval. The process can take months, if not years.
Furthermore, Beijing has slapped a 17% value-added tax (VAT) and 6% import duty on foreign-built regional jets with a structural weight of less than 25,000kg (55,000lb), but the larger airliners built by Airbus and Boeing attract VAT of only 6% and a 1% import tax. Government approvals for regional jet orders have also been painfully slow in materialising, and Beijing's failure to give Hainan Airlines the green light to buy 21 more Fairchild Dornier 328JETs helped push the US-German manufacturer towards bankruptcy.
Although no official explanation has been offered, the government is widely believed to be seeking to prevent Chinese airlines from purchasing large numbers of foreign-built regional jets until an indigenously developed alternative becomes available, or Western suppliers award more substantial production contracts to their Chinese counterparts. This is despite the fact that VAT is also theoretically applicable to Chinese-built aircraft such as the Xian Aircraft (XAC) MA60.
The taxes, which some observers believe contravene the "spirit" if not the letter of WTO trade rules, have made it all but impossible for Bombardier and Embraer to sell their products in China. Models falling below the 25,000kg threshold include the Bombardier CRJ 200, 700 and 900, Embraer ERJ-135, -140, -145 and 170, and Fairchild 328JET and 728.
As a result, regional jet builders are negotiating to place more work with Chinese conglomerates China Aviation Industry (AVIC) I and II in the hope that Beijing will soften its stance on the issue.
Chinese industry sources say Beijing realises its policy "may have to change, and is internally evaluating how quickly". The Civil Aviation Administration of China began encouraging airlines about three years ago to embrace regional jets to help develop the country's air transport system as a hub-and-spoke network. However, China Southern and Wuhan Airlines are still awaiting clearance for their ERJ-145 orders and China Eastern wants to finalise its deal for CRJs.
Meanwhile, two indigenous Chinese regional jet programmes are under way: AVIC I's ARJ21 79-99-seat aircraft family and AVIC II's study of a 30-50-seater.
AVIC I has set up a dedicated programme company called AVIC I Commercial Aircraft Company (ACAC) to manage development of the ARJ21. ACAC groups together teams from AVIC I companies XAC, Shanghai Aircraft Industrial (SAIC) and others, which are working to achieve an ARJ21 first flight by 2006 and service entry a year later.
The new company is to be formally unveiled at Airshow China 2002, which starts on 4 November in Zhuhai. The ARJ21 is being worked on primarily in Shanghai, where design and assembly will take place.
Drawings released so far show the ARJ21 to be a rear-engined, T-tail aircraft, similar to the Boeing MD-80/90, a number of which were licence-assembled in China between 1985 and 2000. The latter project was shelved after a total of 35 MD-80s and a pair of MD-90s had been produced in Shanghai, primarily due to a lack of airline demand for the twinjets.
Two versions of the ARJ21 are planned: the baseline 79-seater and a stretched 99-seat model. AVIC I was expected to narrow the engine choice to two candidates by the start of the Zhuhai air show.
Under consideration for the engine contract are General Electric's CF34-10A, Pratt & Whitney Canada's geared-fan PW800, Rolls-Royce's BR710 and Snecma's SM146.
Antonov wooed
Industry sources say Antonov is being recruited as a major partner to take responsibility for the design and production of the aircraft's fuselage. The Ukrainian design bureau has signed several recent agreements with Chinese industry, at least one of which is understood to concern regional jet production. A full-size ARJ21 cabin mock-up is to be displayed at Zhuhai.
China's other state-owned aerospace giant, AVIC II, has separately been working on its own regional jet programme and recently selected Embraer as its partner. The tie-up has won government approval, but contracts have yet to be finalised as ownership terms and other issues are still being discussed. If the venture goes ahead, the 50-seat ERJ-145 will be assembled under licence in Harbin in north-east China.
Full details of the project are due to be announced at Zhuhai and the first aircraft could be rolled out as early as 18 months after a formal contract signing.
To date, Embraer's only Chinese airline customer is Sichuan Airlines, which operates five ERJ-145s.
Airbus, meanwhile, is expected to announce a new tranche of production contracts with Chinese suppliers at the Zhuhai air show, mostly relating to wing work. This will lead to complete A320 wing leading and trailing edges being produced in China. The long-term aim is full wing assembly, says Airbus.
The European manufacturer's ambitious attempt to forge a regional jet manufacturing joint venture with AVIC, together with Singapore Technologies Aerospace and Alenia of Italy, ended in 1998 after the partners failed to develop a viable business case. A subsequent agreement led to a group of AVIC I engineers participating in the A318 programme.
"AVIC I engineers have participated in all areas of A318 design, including management in the development and certification phase of the aircraft," says Airbus.
Four Chinese factories, in Chengdu, Guizhou, Shenyang and Xian, make parts for Airbus aircraft, including wing ribs, emergency exit and access doors, composite fin fairings and maintenance tools. The contracts are valued at more than $200 million and $10 million worth of Chinese parts were delivered to Airbus last year.
Airbus China president Guy McLeod says the company "sees opportunities to further develop industrial co-operation with Chinese industry and integrate new suppliers into its network.
"We see China as a good potential subcontracting area to be involved in Airbus programmes," he adds. Most of the subcontracts are arranged on a factory-to-factory basis by the various plants in the Airbus production system.
In September 2001, Airbus began to accelerate work to transfer a full A320 wing production capability to China. Earlier this year trial parts produced by AVIC I at its Shenyang and Xian factories were successfully installed on an A320 wing at Airbus UK, demonstrating that China has the "technical capabilities to manufacture the most complex aircraft structural components and assemblies", according to Airbus.
Under phase one of the plans, Shenyang Aircraft (SAC) will start manufacturing 24 leading-edge slat track rib subassemblies, including associated machined parts, while Xian will build four leading-edge and four trailing-edge fixed structures for A320 wings.
Technology transfer
Discussions over phase two are under way. This is expected to lead to the manufacture in China of complete leading and trailing edge assemblies. "This major increase in the scale of co-operation between China and Airbus will require further complex manufacturing processes to be introduced into the SAC and XAC companies in the coming years," says Airbus.
Boeing began industrial co-operation with China in the mid-1970s. Current work packages include 737 horizontal stabilisers made at SAC; 737 vertical fins and 747 trailing edge ribs produced at Chengdu Aircraft (CAC); 757 horizontal stabilisers, vertical fins and tail sections made at XAC; and production of 757 cargo doors and 737 tail section parts at SAIC.
Boeing also has contracts with plants in Sanyuan and Chongqing for aluminum and titanium forgings. BHA Aero Composite Parts in Tianjin recently began making composite parts for commercial aircraft interiors and secondary structures.
The US company says it needs industrial partnerships in China because these are "more critical than ever to ensure the competitiveness of our products, and are also a way to access resources around the world.
"We are continuously exploring new business opportunities that are mutually beneficial and expand our presence in China," it adds. "If you review Boeing's past performance and current activities in China, our actions clearly demonstrate an aggressive growth strategy," Boeing says.
The US company stations quality and planning experts at the aircraft factories to provide on-site training for building Boeing parts and assemblies. "The emphasis is on training to world-class standards to ensure safe, reliable, high-quality assemblies at competitive prices," it says.
Canada's Bombardier has meanwhile sold 35 regional and business jets in China and is looking at opportunities to expand its relatively limited aerospace industrial activities in the country. It is sourcing parts from several factories in China.
The Canadian company's major aerospace risk-sharing partners in Asia are Mitsubishi Heavy Industries of Japan and Aerospace Industrial Development in Taiwan. However, it has an advantage in that its subway and intercity passenger trains division already has a couple of major joint ventures in China.
ATR partner Alenia is also hoping to put more work on its turboprop line into China, but has also been hit by the tax levy on regional aircraft. Only five ATR aircraft fly in China. XAC has a major subcontract to produce about half of the rear fuselages required for the ATR 72, representing eight to 10 subassemblies a year. It was awarded the work about three years ago.
"We have no problem with putting other production work in China," says Alenia chief representative China Salvatore Grasso. "We could do major parts in China," he adds, noting the country's low labour costs mean production "is viable". Grasso thinks there is a significant potential market for ATR 42s and 72s in western China on very-short-haul routes as the country moves towards a hub and spoke system.
The European Union (EU) is leading efforts to encourage the continent's aerospace companies to foster closer links with China on research projects in the hope this will lead to deeper industrial co-operation and higher sales of European-built aircraft.
EU aeronautics researchers met their Chinese counterparts in Beijing in mid-September for a two-day workshop to discuss possible joint projects under the EU's 6th Framework Programme of Research and Technology (FP6).
European focus
The aim of the workshop was to prioritise areas for joint research, match project proposals, identify tools needed for joint research and recommend actions to promote EU-China co-operation, says EU research directorate head of international co-operation Daniel Descoutures. He says the EU is trying to encourage European aerospace firms to include Chinese participation in their responses to the first call for proposals under FP6, due in December.
Joint Europe-China research possibilities include human factors in flight safety, cabin design, materials and manufacturing, smart materials, helicopters, tiltrotors, air traffic management and the environment.
Attending the workshop were representatives of Airbus, Agusta, Alenia, Dassault, Eurocontrol, the European Association of Aerospace Industries, Rolls-Royce, Smiths Industries, Snecma and Thales.
The EU hopes co-operation with China in aeronautical research could help spread the cost of developing new products and lead to increased sales of European aircraft and other aerospace equipment there. n
Source: Flight International
