Selling Chinese Aircraft in a Protectionist US Climate
How should a brand new Chinese aircraft manufacturer go about entering the US market?
When it comes to displays of industrial might, few industries can compare to the prominence of the aviation industry. While this industry has been dominated for several decades by the duopoly of Boeing and Airbus, Commercial Aircraft Corporation of China (COMAC) was founded in 2008 to create a Chinese competitor to these market leaders. As part of the state-owned Company’s mission to push Chinese-made aircraft into the global aviation market, COMAC is highly motivated to enter the US market1. Yet recent protectionist political movements in the US impact the viability of this move.
Aviation is a global industry, and one where friendly international governments are likely to act in unison with one another on regulatory manners given the cross-border nature of travel and aircraft supply chains. As such, if COMAC is going to develop a reputation as a major global player in the aviation industry, they should target the US as a key market. This comes by way of gaining permission to fly in US airspace, as well as permission to sell aircraft into the US market. The appeal of the US market is due to the practical fact that the US is the largest aviation market as well as the emotional fact that this will enhance COMAC’s global brand and image2. Yet as we have seen in the past couple years, there has been a rise of protectionist rhetoric in the US that challenges this endeavor. COMAC’s management team should be concerned with how US-China relations impact their goals.
To this end, the Civil Aviation Administration of China (CAAC) has been negotiating with the US Federal Aviation Administration (FAA) to reach an agreement regarding the sale of Chinese aviation products into the US. Specifically, in October 2017, the two agencies signed the Implementation Procedures for Airworthiness (IPA) agreement which “allows each authority to leverage approvals completed by the other with respect to design, production, and airworthiness3.” While not an all-encompassing approval for aviation products, this agreement does significantly aid the process of gaining US regulatory approval for Chinese aviation products (and vis versa). In the short-term, COMAC is continuing to work with the CAAC and FAA to gain US regulatory approval for its ARJ21 and C919 aircraft, as well as pursuing similar approval agreements with the European Aviation Safety Agency4. Yet securing regulatory approval is only half of the battle, as COMAC also wants the US and other Western markets to commercially accept its aircraft. Today, the C919 (the larger and newer of the two aircraft) is decades behind comparable Boeing and Airbus aircraft as it relates to efficiency and reliability. To this end, over the medium-term, COMAC is continuing to work with respected international suppliers to push forward the development of its aircraft and make them more attractive to Western airlines5.
Given the significant length of the aircraft development cycle, most of the other steps that COMAC should be taking in the short- and medium-term relate to sales and regulatory pursuits. Even though selling into the US market would represent an enormous victory for COMAC, the Company needs to be realistic about these sales prospects. Therefore, in the short-term, COMAC should be placing most of its efforts behind selling into emerging markets where rapidly growing low-cost carriers may be more receptive to a less expensive aircraft alternative (the C919 is rumored to be about 10% less expensive than the competition)6. Gaining traction outside of China is critical to establishing international credibility given the fact that the Chinese state-controlled airline industry may be required to purchase COMAC aircraft, undermining the validity of the hundreds of domestic orders the Company has received thus far5. As it relates to the US, COMAC’s short-term priority should be securing FAA permission to fly in US airspace. Then, after COMAC has gained some traction outside of China, it should turn its sales efforts to the US and other developed nations. Certainly, this will be a far more difficult sale, but by this point, if successful, there will be sufficient COMAC aircraft landings and takeoffs in the US to substantiate the Company’s credibility. Yet ultimately, even if COMAC is never able to secure a sale to a US carrier, the fact that Chinese-made aircraft are flying into and out of the US on a regular basis would represent a significant win for COMAC in the global aviation market.
As it relates to the future strategy of COMAC and how the Company should deal with the risk of US protectionism, I have two main unanswered questions:
- What should COMAC’s strategy be if the US decides to pull back from the IPA agreement or is reluctant to cooperate on regulatory approvals?
- Should COMAC focus any attention at all on selling into the US market or is this a lost cause altogether?
Word count: 796
Endnotes
- COMAC – About Us. (n.d.). Retrieved November 14, 2017, from http://english.comac.cc/aboutus/introduction/
- IATA Forecasts Passenger Demand to Double Over 20 Years. (2016, October 18). Retrieved November 14, 2017, from http://www.iata.org/pressroom/pr/Pages/2016-10-18-02.aspx
- FAA Enhances China Aviation Safety Partnership. (2017, October 27). Retrieved November 14, 2017, from https://www.faa.gov/news/updates/?newsId=89010&omniRss=news_updatesAoc&cid=101_N_U
- Moss, T. (2017, November 7). China Aircraft Exports Cleared for Takeoff Under FAA Deal. The Wall Street Journal. Retrieved November 14, 2017, from https://www.wsj.com/articles/china-aircraft-exports-cleared-for-takeoff-under-faa-deal-1509947425
- Bradsher, K. (2017, May 5). China’s New Jetliner, the Comac C919, Takes Flight for First Time. The New York Times. Retrieved November 14, 2017, from https://www.nytimes.com/2017/05/05/business/china-airplane-boeing-airbus.html
- Minter, A. (2017, September 24). China Could Seize a Bit of the Skies. Bloomberg View. Retrieved November 14, 2017, from https://www.bloomberg.com/view/articles/2017-09-24/china-may-seize-a-bit-of-the-skies-for-itself
This article stands in almost direct contrast to the articles written on Boeing vs. the C-series program where Boeing worked with the U.S. government to create huge tariffs on imported airplanes from Canada, and effectively blocked direct sales from Canada. However, China has two large advantages to Canada in this regard – 1. the Boeing supply chain is dependent on China whereas it is only lightly dependent on Canada. 2. Boeing is heavily targeting the Asian airplane market. Both of these reasons mean that Boeing and the U.S. government must be much more careful in their interactions with COMAC so as to not create retaliatory action.
One interesting aspect that I would argue is the overall size of the markets. While the North American market is currently dominant, the future market outlook actually predicts the Asian market eclipsing the U.S. market and eventually greatly surpassing it by 2035. It is actually more important for Boeing to be able to sell airplanes in Asia, than it is for COMAC to be able to sell airplanes in the U.S. just based on pure market size. However, the needs filled by a very small COMAC plane vs. the needs filled by a much larger Boeing or Airbus plane are very different, and most airlines will need both. On a basic level, I believe COMAC should try to enter the U.S. market, but should focus the majority of its efforts on the Asian market.
(http://www.boeing.com/resources/boeingdotcom/commercial/about-our-market/assets/downloads/cmo_print_2016_final_updated.pdf)
I think your synopsis of the opportunity for COMAC is exactly correct. While COMAC’s long-term goals may be to compete with Boeing and Airbus in North American and European markets, that seems a long time away. The efficiency issues you raise will serve as a buffer to stop Western airlines from seriously investing in COMAC planes in this generation, the reliability represent a more serious brand risk for COMAC. American and European consumers are likely to scare easily in the face of any reliability concerns, so even selling to airlines which serve select cities in North America and Europe could be a mistake until reliability levels are equal or close to equal those of entrenched aircraft providers.
Further, COMAC, as a state-sponsored player, will be subject to the same trade concerns which have dogged the Boeing – Airbus – Bombardier relationship, but on a grander scale. The American, European, and Canadian manufacturers are headquarters in close strategic allies, but have still continually battled over trade concerns in national and international trade bodies. Chinese trade relationships were already a point of international contention before the recent isolationist trend, so it would seem to be next to impossible for COMAC to compete effectively with these carriers in one of their home markets without extensive trade disputes. Layer on the fact that COMAC is a state-owned entity, and almost by definition receives state subsidies equal to or in excess of those enjoyed by Western aircraft manufacturers, and it seems extremely unlikely that it will be able to compete for sales in the United States or Europe at any point in the near future.
To address the first of your outstanding questions, I think that COMOC will likely run into difficulty securing the regulatory approval to fly aircraft within the U.S., even on international airlines. The FAA is very focused on safety and analyzes “lessons learned” from accidents around the world. [1] Given the reliability concerns around COMOC’s aircraft, the FAA will likely scrutinize COMOC’s performance in foreign countries. Any safety incidents could be major red flags and block approval in the U.S.
I recommend that COMOC hold-off on approaching the FAA for approval. COMOC should wait until it has several years of reliable operations. If COMOC rushes through the process and gets approval prematurely, any safety incident could severely damage its reputation and inhibit the ability to sell aircraft in the U.S. down the line. Waiting until COMOC has a better product will not only make the U.S. approval process easier, but more importantly – it will also mitigate downside reputational and financial risk.
1. Federal Aviation Administration. “Lessons Learned from Transport Airplane Accidents,” http://lessonslearned.faa.gov/transport.cfm, accessed November 2017
Great article Patrick! To address your first question, I believe COMAC should leverage it’s state-owned background and mobilize the government to support its negotiation with FAA, considering China is and will be an important market for Boeing and Boeing does not want to lose China market. I believe a win-win situation could be achieved between COMAC/Chinese government with Boeing/US government.
However, to your second question, I do think COMAC should not only focusing on US market although it will give more reputation and branding effect to COMAC, while should also explore the enormous opportunities in emerging markets at the same time. US market is highly subjective to political environment in both sides. Therefore, instead of putting all eggs in one basket, COMAC should put more efforts in developing domestic markets and emerging markets overseas as priority.
It’s a very interesting market for the Chinese to try and penetrate – it seems as though in the majority of other manufacturing sectors that China has disrupted in the past 15 years, it has done so by providing a lower cost but lower quality product and often for more commodity-like goods. However, I think you rightfully point out that the aviation market lies in stark contrast to those traits, with heavy regulatory oversight enforcing strict quality standards. I am curious to see how China does when it its products are not able to compete just on price.
The main question that came to my mind when reading your article was how the end-consumer airline demand impacts this equation. The major US airlines all have customized, reconfigured, homogeneous fleets for specific types of aircraft / routes, which allows them to standardize both the product offerings they provide to clients and their maintenance / upkeep logistics on the aircraft. I would be curious whether the airlines believe there is any cost to adding an additional aircraft to their existing fleet composition (assuming that no airline fully switches their entire narrow or widebody choice from Boeing/Airbus to COMAC) due to either of these factors, and if so whether that would offset the lower price of the COMAC aircraft and thus lower the economic viability of COMAC’s products.
To your second question, I think selling aircraft in the US is a lost cause. Ben hit the nail on the head when he suggests that the efficiency issues render COMAC aircraft irrelevant from a competitive perspective. Moreover, there are reputational concerns as well that airlines must consider. Whether justified or not, the public is not going to be as comfortable stepping onto a Chinese-manufactured commercial aircraft as they are stepping on to a Boeing or Airbus today. I don’t foresee any US airline willing to take the risk to launch such a product in the market. For the same reasons (inefficiencies and reputational), US carriers never operated Soviet-manufactured Ilyushin planes, in spite of their prominence back home in Russia and other Soviet-friendly nations.
For now, COMAC would be better served developing its engineering prowess and improving on its product offering in future iterations of the C919. Given the strategic importance to China of developing a home-grown aircraft OEM, it is likely that COMAC will continue to receive considerable financial support and backing from the Chinese government. In the meantime, the business can likely sustain itself with the arms-length transactions that the government has facilitated between COMAC and the state-owned Chinese airlines. But if it has any hope of penetrating into western aviation markets, COMAC will need to significant improve the capabilities of its future planes and invest considerably in international marketing to improve its brand perception and that of Chinese-manufactured airplanes.