Comac: China's Challenge to Airbus and Boeing

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Second, co-opt key institutions by giving them a stake in the new venture. The 19 billion yuan paid-up capital in Comac included 6 billion from the central government; 5 billion from the Shanghai government; 5 billion from AVIC; and 1 billion each from Baosteel (600019:CH), China's leading steel producer; Chinalco (ACH), China's leading aluminum producer; and Sinochem (600500:CH), China's leading chemicals producer. Even though all of these entities are arms of the government, giving each a direct equity stake dramatically increases its incentives to collaborate enthusiastically and proactively, rather than reluctantly.

Third, accumulate technological capabilities through alliances with global technology leaders. Wu Guanghui, Comac's chief designer and deputy general manager, has been on record noting that, while Comac would source parts and components globally, the company would give priority to suppliers that set up joint ventures with Chinese partners. AVIC, the primary supplier of subsystems to Comac, has played a major role here. In June 2007, AVIC established a Tianjin-based joint venture with Airbus to undertake the final assembly of the European company's A320 planes. Last year, AVIC and Airbus formed a further joint venture to produce composite material parts for the A350; two with Goodrich (GR), one for landing gear and the other for nacelle (engine compartment) components; one with Nexcelle—itself a joint venture between GE (GE) and France's Safram—to manufacture engine nacelles and components; and one with GE to develop and bid on avionics for C919. Other corporations that have set up joint ventures in China to win agreements to supply Comac include Honeywell (HON), for auxiliary power units, and Parker Hannifin (PH), for fuel and hydraulic systems.

India should watch Comac develop

Fourth, if a joint venture with a key supplier appears impossible, go for direct sourcing from the world's technology leader. This has clearly been the case with C919's engines, the plane's most complex technological subsystem. Although AVIC has set up an aircraft engine subsidiary in Shanghai, it is a long way from developing the necessary technological capabilities. There also is no indication that any of the major suppliers of big aircraft engines—GE, Rolls Royce (RR/:LN), or Pratt & Whitney (UTX)—is willing to set up an engine joint venture in China. Faced with this reality, Comac has signed a direct-sourcing agreement with France's CFM International (a joint venture between GE and Safram) to provide LEAP-X turbofan engines for the C919. Comac and AVIC executives have noted, however, that they remain committed to building engine design and manufacturing capabilities in-house.

Fifth, leverage the state's control of domestic airlines to reduce market entry barriers, dramatically reducing commercial risk. Comac executives appear optimistic that by the end of 2010, they will have signed the first order to supply Chinese airlines with 100 airplanes.

It is clear that Comac represents a sophisticated and well-considered mix of state capitalism and market logic. While smaller countries would find it nearly impossible to match China's scale, financial muscle, and technological capabilities, a handful of the larger economies—such as India—may have the potential to do so. They should benefit from keeping track of how China did it.

Anil K. Gupta (anil.gupta@insead.edu ) is the Insead Chaired Professor of Strategy at Insead. Haiyan Wang (hwang@chinaindiainstitute.com) is managing partner of the China India Institute and an Adjunct Professor of Strategy at Insead. They are the coauthors of Getting China and India Right (Wiley, 2009) and The Quest for Global Dominance (Wiley, 2008).