Boeing, Airbus: Prepare for Turbulence

On the apposite date of July 8, 2007, Boeing will unveil the first assembled 787, its long-expected widebody jet. But with so much attention on the Boeing’s heated competition with Airbus, new developments in aerospace are slipping by unnoticed—especially in emerging-market countries like China, where some of this century’s big aviation action may well take place.

Later this year, the Chinese state-owned company ACAC will unveil China’s first “homegrown” commercial jetliner: the ARJ21, a regional jet seating 70-100 with a range of 1,800 miles. When the ARJ21 takes flight, it will be for China a prouder moment than the 787’s unveiling will for Boeing. China’s aerospace ambitions are bigger than the ARJ21, and they may have big global consequences.

The weeds of nationalism grow well in aviation’s garden. As a source of national pride, commercial air service represents one of the last bastions of resistance to globalization.

The Soviet Union set the standard for a nationalistic aviation sector. Its state-owned and -run companies produced military and civilian aircraft at the direction of the state. Aeroflot used only Soviet-produced aircraft—many of which had poor fuel efficiency, were extremely noisy, did not meet Western safety standards, or had sub-par engines. The Soviets were also notable for exporting their aircraft to their client states worldwide. One could find Soviet planes from Cuba to China, from Angola to Azerbaijan. Through its worldwide ideological empire, the Soviet Union found a ready market for its “homegrown,” poor-quality aircraft.

We should not worry—yet—that China’s planes will surpass the technical achievements of Boeing and Airbus. China’s new jet will enjoy up-to-date engineering, but its engines, flight control system, and avionics will be U.S. imports. China hopes to market the ARJ21 internationally, but for now, only Chinese airlines have ordered it. According to China Daily, ACAC expects its plane to eventually control up to 60 percent of the domestic Chinese market for its size. The rapidly growing Chinese aviation sector has aerospace companies worldwide licking their chomps, and the China’s own aerospace ambitions will cool foreign competition there.

Also of concern is China’s growing network of virtual client states, especially in Africa, Southeast Asia, and Latin America. Mauro De Lorenzo, a resident fellow at the American Enterprise Institute, has identified China’s strategy in Africa as “trade, investment, and aid.” China trades for much-needed raw materials, especially oil. It also invests, backing commercial ventures in developing countries and sponsoring infrastructure projects like railroads and refineries in Angola and pipelines in Sudan. Finally, China ties foreign aid to countries welcoming commercial projects and rewards allies with visits by top Chinese officials such as President Hu Jintao and Premier Wen Jiabao.

While international trade rules prevent China from forcing any airline (even a Chinese carrier) to buy its products, it is not hard to imagine what countries like Venezuela and Angola (the beneficiaries of billions of dollars in Chinese investment in their oil industries, to name only two) might do when their flag carriers are faced with a choice between a signature Chinese jet and, say, a Boeing. The recipients of Chinese largesse tend to have state-dominated aviation sectors, meaning that government intervention on behalf of friendly industrial agents like ACAC would not be difficult.

China has bigger plans than a regional jet. It hopes to build a homegrown jumbo jet by 2020 and become a global competitor to Boeing and Airbus. But we should be wary of China’s ambitions. Unlike Boeing and Airbus, ACAC and other Chinese aerospace companies are likely to be centrally managed by Beijing. And through its foreign activities, it has not only a huge domestic market but also a network of global buyers who would need little soft persuasion to buy a particular plane, lest the supply of Chinese money be shut off.

One of the reasons Boeing chose the moniker 787 was that this plane was to be heavily marketed in Asia, where eight is thought to be a lucky number. When the 787 rolls out on July 8, it will remind audiences that China is trying its own luck in aerospace. With its own global market, China’s luck might be quite good—something for both Boeing and Airbus to keep in mind.

This article was originally published on TCS Daily on July 6, 2007.