Comac: China's Challenge to Airbus and Boeing

Countries that hope to build national aviation industries can learn from Beijing's fast-moving program to develop a made-in-China jet

By Anil Gupta and Haiyan Wang

China is fast learning the ABCs of aircraft manufacturing: A as in Airbus (EAD:FP), B as in Boeing (BA), and C as in the Commercial Aircraft Corp. of China, or Comac. Approved in February 2007 by the State Council—China's cabinet—Comac's mission is to produce homegrown jumbo jets and by 2020 to become the third major player in the worldwide commercial aircraft industry.

If all goes according to plan, Comac's first product, the C919 (a single-aisle plane with over 150 seats) could start competing with the A320 and B737 by the second half of the current decade. These types of planes constitute the single largest-selling category of commercial aircraft. Over the next 20 years, China is expected to buy about 100 such planes every year. Not coincidentally, Comac has indicated that after the initial ramp-up period, it expects to produce about 100 C919s annually and help China end its reliance on imported airplanes.

Comac represents the epitome of China's ambition to create national champions that will go on to become major global competitors. Large commercial planes constitute not only a sizable market (Boeing's revenues in 2009 were $69 billion) but also one with very high entry barriers. Chinese companies trying to enter other tech industries such as biotech, telecommunications equipment, supercomputers, software, and semiconductors face a highly contested terrain with multiple competitors and an ongoing stream of new entrants. In contrast, the jumbo jet industry has not seen a single new entrant other than Airbus over the last 40 years. In fact, given the exit of such players as McDonnell Douglas and Lockheed Martin, the field has gotten smaller. Large commercial aircraft are not merely technologically complex on multiple fronts, they also present extreme complexity in manufacturing and are sold to a very conservative set of customers—passenger airlines. Unlike a supercomputer or a telecom switch, the failure of a jumbo jet can literally kill hundreds of people and bring an airline to its knees.

Any success by Comac in realizing its mission would be a landmark development in China's rise as a technological superpower. Commercial aircraft constitute the single largest category of exports from the U.S. Over the next 20 years, China is destined to be the single largest market for such planes. Since Comac appears well on its way to a flying start, these principles could also serve as lessons for other countries with long-term ambitions to develop commercial aircraft industries.

Comac Stakes for key institutions

First, ensure that the new venture has adequate capital. Comac started out in 2008 with 19 billion yuan ($2.8 billion) in paid-up capital. A year later, it received a credit line of 30 billion yuan ($4.4 billion) from China's Bank of Communications. Combined, this adds up to over $7 billion in start-up funding for Comac alone, not including the capital base of subsystem suppliers such as AVIC (Aviation Industry Corp. of China), a big, state-owned enterprise involved in the production of military aircraft and smaller commercial planes. To put these numbers into perspective, Boeing spent an average of $3.9 billion annually on research and development during the last five years.

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