Bruns: China Aerospace Industry Presents Challenges, Opportunities

More on:

Emerging Markets

China

John W. Bruns, the senior executive based in China for Boeing Commercial Airplanes, says China’s plans to develop its aerospace business present industry behemoths like Boeing and Airbus with a new source of competition, but also new opportunities for cooperation. In terms of China’s plans to build its own commercial aircraft, Bruns says the country remains decades from competing internationally, at least in terms of the market for larger jets. He says the country’s biggest obstacle is learning supply-chain management—providing ongoing support services for a global fleet of airplanes—rather than the challenge of simply manufacturing the planes.

Boeing is one of the largest aerospace companies in the world. China now is delving into the industry of aircraft manufacturing, particularly in terms of airplane parts, but also in terms of fully manufactured commercial airplanes. Ostensibly, this makes China’s airplane manufacturers a major source of competition for Boeing, yet you are working closely with the Chinese on a number of projects—and indeed helping China with some of its industrial ventures. In terms of grand strategy, what does Boeing see coming from these partnerships?

Our cooperation with China goes back to the 1970s, and we’ve been buying parts from China since 1979. Today, Boeing is actually the largest foreign customer of their aerospace industry. We’ve purchased about a billion dollars worth of hardware, and we have active contracts in place for about $2.5 billion. In the scheme of things, that’s not huge. We do a lot more sourcing from places like Japan, Europe, and of course the United States. But it’s growing, and as the suppliers here grow more capable, if it’s a win-win proposition, we’re going to put work there.

The suppliers here actually are very good. These suppliers bid for work with Boeing and they can go head-to-head with suppliers in other parts of the world and they can win. We put the work in China because it makes good business sense for us. For a particular part, these suppliers bring some of the best capability in terms of value, and ability to meet our production rates, and quality.

But from a competition angle, how do you see the plans that China has announced to build their own airplanes?

It’s kind of natural. The way we view the world, it’s naïve to think that just Boeing and Airbus are going to dominate this industry forever. Someday somebody is going to emerge and want to get into this business. It’s understandable. It brings a lot of high-paying jobs. There are a lot of spin-off benefits in terms of technology and research, so it makes sense for China to want to do this. Realistically though, for them to become the kind of capable competitor that’s going to go into a United Airlines or British Airways or Singapore Airlines—they’re a couple decades away from that because they haven’t established their brand and their credibility in the marketplace yet, and they’ve got a long way to go to do that. We don’t view our cooperation and our potential competition with China as necessarily being in conflict. We could be competing and cooperating with them at the same time.

Specifically in terms of parts production, China plays a role in the manufacturing of every airplane Boeing makes. I’m sure this varies by model, but in terms of the overall cost of building a plane, very roughly, what percentage of those costs typically go for parts manufactured in China?

It’s hard to put a figure on that. Right now they’re just building structure. You also have high-value components like engines and avionics, and it’s really hard to come up with just a percentage. The 737 is probably the best example, where we do the most work in China—they build the whole tail section, the vertical fin and the horizontal stabilizer, and then all the doors for the airplane. So if you just look at the structure, that’s more than a tenth of the structure, maybe an eighth of the structure, but it’s hard to say that it’s an eighth of the value because the more expensive engines and things skew that.

Do they make parts of the engines? How does that break down?

Well the engine manufacturers—GE, Rolls Royce, and Pratt & Whitney are the big three—do subcontracting work in China as well. So our suppliers are now placing subcontracts in China to capture some of the value that China brings. But today, for us, it’s mostly metallic structure and some work in composite material. Composite is the material our new plane is made of, the 787—it’s basically a high-tech plastic. China does not have as much capability in that area, and we have some pretty tight restrictions from the U.S. government in terms of export licensing, but there is some amount of work going on in China. They build the rudder for the 787, for instance, that’s a composite part. But the majority of the work they’re doing today is in aluminum structure, big parts, of airplanes.

What sort of restrictions does Boeing face doing business with Chinese manufacturers?

The Chinese government really encourages it. There’s very little in the way of restrictions on what kind of work we can put into China from their side—they’d like to see us do more and more.

In terms of Boeing actually doing its own manufacturing there?  Or in terms of Boeing doing business with Chinese firms that are manufacturing parts?

Well it’s both. China is a huge market for us, and we forecast there’s about $280 billion of airplanes they’re going to need in the next twenty years. We’re going to get some share of that market. We’d like to hope it’ll be around 60 percent, which is our current market share in China. But countries around the world that buy airplanes want to have some role in building those airplanes, and China is no different. But it’s not a formal offset program. You do have that in certain countries, and those agreements tend to happen with defense-type work. If you’re selling fighter jets to India, for instance, they may have a requirement that you have to put some percentage of that work into their country. China doesn’t do that, but there’s clearly an expectation there that they want to participate, so they’re constantly looking for ways to help us work in China.

You mentioned your projections about how many new aircraft China will need to purchase over the next twenty years. You also mentioned, before, an estimate about how long it will take for their commercial aircraft production to get up and running. If they are buying $280 billion of planes during that time, what percentage of that, realistically, would they even be capable of making themselves?

It’s going to be a challenge. Let me give you an example. If you look at Brazil, there’s a company down there called Embraer that builds airplanes. They started about thirty years ago building turboprops, and they had some success selling those to some airlines in the United States and elsewhere. In thirty years time, that company, today, is a very strong player in the regional jet business. They generally build jets [that are] one hundred seats and less. But they’re high-technology, modern, efficient, regional jets. They haven’t stepped into the market space Boeing and Airbus play in yet, and they’ve been in this business for thirty years.

The Chinese are looking at a pretty similar timeframe. They know how to build the airplanes. Building the airplane is not the challenge here for them. The challenge is figuring out how to support the airplanes and service them. Boeing has developed relationships with airlines over decades. We know how to support a fleet of something like twelve thousand airplanes around the world flying out of just about every airport. We have the infrastructure to get spare parts, to solve technical problems when they come up, to get them certified in all the different countries that operate them. It’s that softer part of the business that’s really hard—managing a supply chain. We have thousands of suppliers that we have to manage, who all contribute to building these airplanes. The trend in the industry is to have more and more of the airplane built outside of your company. We design the airplane, we do the integration and final assembly, but the vast majority of the value of building all the parts is done by companies outside. The Chinese have virtually no experience doing this. To learn that is the hard part of the business for them. Making the plane is the easy part.

Does China currently export any planes at all?

A very small number. They have a turboprop airplane called the MA60 that’s basically a derivative of a Russian design that they’ve had some success selling. It’s mostly in the third world—places like Zimbabwe, Laos. They are also developing an airplane called the ARJ21. This is a regional jet that’s eighty to one hundred seats, nominally. This is the first time they’ve designed an airplane and they’ve brought in foreign suppliers. GE is building the engines, Honeywell is providing the avionics, and they have other companies providing other systems on the airplane—about 40 percent of that airplane is actually sourced from U.S. suppliers. They’ve got one sale outside of China for that airplane. They’ve only sold around seventy, and just a handful of those have been sold outside China—I think again it was Laos that bought them. So it’s very limited experience selling outside China.

Are they selling them inexpensively? What’s the selling point for, say, Laos?

Yes, that’s their competitive advantage—price. You can get a brand new airplane at a much lower price than if you got a similar product from Embraer or Bombardier in Canada. I suspect that, as you see ties between China and Africa growing—who knows, airplanes may become part of the support that the Chinese government provides for its friends in Africa.

Are some parts of the airplane market more accessible than others? Is it less likely that they would get into these long-haul jets than these smaller planes, or is it just where you choose to invest your money?

You kind of have to master building smaller airplanes before you jump into the larger ones because the level of technology you need to build a competitive product gets higher as you go up in size. And then, of course, you’re going head-to-head with Boeing and Airbus. With smaller regional jets, most of the players are smaller companies and it’s more fragmented. So they have a better chance of staking out a claim in that part of the market. Clearly they’ve announced their intention to get into building larger airplanes. There’s no definition about this project yet, it’s still vague, but it sounds like it’s an airplane that would be competitive with the 737 or the A320, which is the smaller end of the product lines for Boeing and Airbus. But it depends who they partner with. If they decide to team up with the Russians or even the Japanese, that process could be sped up considerably. But today we don’t know enough about the project—and I don’t think the Chinese themselves know enough about it—to know which direction it’s going to take. For national pride reasons they’d like to do it themselves and show the world that they can do this. But if they really want it to be a commercial success, then partnering with someone outside of China makes more sense. It really depends what the motivation is.

More on:

Emerging Markets

China