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Who Will Fly With Beijing?


International Business: CHINA

WHO WILL FLY WITH BEIJING?

In the smog-choked industrial city of Xian in northwestern China, executives from Western aerospace companies such as Boeing, General Electric, Rolls-Royce, and United Tech- nology's Pratt & Whitney unit have grown into a cozy community. Holed up mostly in the same hotel, they spend much of their off hours hanging out with each other and talking shop. They even see each other regularly at work, since all are dealing with the two state-owned factories in Xian that make airframes and engines.

But make no mistake. The competition among the Western aerospace companies for Chinese business is intense. Now, their battle for market position is entering a decisive stage. That's because Beijing is expected to choose a Western partner for a $2 billion Sino-Korean consortium that will build a new 100-seat commercial jet in China. Jockeying to win the deal are Boeing, McDonnell Douglas, Daimler Benz Aerospace, and a French-British-Italian joint venture called Aero International (Regional). Possibly within weeks, Beijing is expected to announce the two finalists, most likely Boeing and the European consortium. With demand in China expected to top 200 planes over the next decade, the winner will have an inside track in this big new market.

ON THE MAP. The Chinese hope to be even bigger winners. Whoever gets the nod could provide China with the design and manufacturing knowhow to put it on the global aerospace map. The aircraft program and others like it underline Beijing's intent to push its aerospace industry to a new level after years of merely assembling components and midrange jets for McDonnell Douglas (table). Using its domestic market as a lure, China wants the giants to help it produce aircraft and engines both for its home market and for export. "China wants to be at the same level industrially as the West," says a Western diplomat in Beijing. "They're trying across the board to come up to international standards."

Despite press reports that the Europeans have the deal locked up, insiders say the competition is still going strong as Beijing tries to squeeze greater technology transfers out of the contenders. The Europeans are generally reckoned to be willing to transfer more technology because unemployment and profit pressures are greater on them. Moreover, the prospect of shifting manufacturing to China is more controversial among U.S. workers, and American laws on tech transfer that could further China's military ends are tougher.

The 100-seater is just one piece of a broad Chinese strategy in aerospace. Already, China exports its own simple military planes, helicopters, and turboprop commercial jets, although only to other developing nations. GE, Pratt & Whitney, and Rolls-Royce all produce engine components and are discussing new engine projects in Xian. The Chinese also want to work with Boeing to produce a smaller commercial version of its Chinook helicopter.

China is unlikely to emerge as a threat to Boeing or Airbus Industrie in their home markets. Although China has become a reliable, low-cost source of tail and nose sections, it is at least a decade behind the West in design, material sciences, avionics, customer support, and service. Even if Chinese engineers mastered production of a 100-seat aircraft, many of the technologies required to manufacture it are mature and widely available in the marketplace.

Some experts doubt whether the 100-seater program is commercially viable. "The market is full of companies in that area," says Richard J. Latham, president of UTC International, China. Daimler's commuter unit, Fokker, for example is losing money and laying off workers. Moreover, China's 40 carriers enjoy growing management autonomy and are less interested in 100-seaters, argues Jim Eckes, managing director of Hong Kong-based leasing firm Indoswiss Ltd. Because passenger demand inside China is surging and carriers lack skilled pilots, carriers may want to stick with larger Boeing 737s.

But nobody can stay away from the 100-seater competition because it's just a matter of time before Asia has its own regional plane program. Over the next 20 years, predicts British Aerospace's Avro International Aerospace unit, Asia will purchase 30% of the 2,100 planes sold in the 90-to-120-seat range. For several years, Boeing, Daimler, and McDonnell Douglas have tried to form their own plane groups in Asia and have been wooing partners in Japan, Korea, Taiwan, and elsewhere.

The breakthrough came in March, 1994, when South Korean President Kim Young Sam signed a memorandum of understanding with China. Korean Air Co., which makes parts for Boeing, and Samsung Aerospace Industries Ltd., licensed to make jet fighters, are key players on the Korean team. The Chinese and Koreans recognized that to make the venture click, they had to attract the technology, financing, marketing, and service of a Western giant.

The decision to vie for the venture represents a major shift for Boeing, which had long resisted pressure from Beijing to enter a co-production program. A source close to Boeing says the company "seems to have recognized that the Chinese will [make the plane] anyway." During two months of walking the picket lines, Boeing's unions attacked the company's presence in China as part of a scheme to transfer jobs from the U.S. But executives close to the bidding say Boeing's offer stresses global help in marketing, training, and servicing and doesn't threaten the production done by American workers.

WILLING. GE figures it has little to lose in working with the Chinese. GE makes some parts of its CFM56 engine, used in the 737, in China. But since components for the engine--a collaboration between GE and a French partner--are sourced in Italy, Germany, Canada, and France, GE would be redistributing work done overseas anyway, says David A. Voeller, manager for China aircraft engine operations. For its part in the 100-seater program, GE is offering to help build a small version of its CFM56 engine. Voeller says the company is "willing to go pretty far" in transferring knowhow, because the basic technologies it uses are old. Besides, China "may be the only market for this engine."

As they compete to get Beijing's approval, the aerospace companies recognize the need to be careful about giving away too much technology. "If they teach the Chinese how to make planes really well, they won't be doing business here in 10 to 15 years," says the Western diplomat. But with the Chinese expected to spend $40 billion on aircraft over that period, no one can afford not to play China's game.

China's Aerospace Drive

COMPONENTS

Making tail sections and nose cones for Boeing, others.

COMMERCIAL JETS

Building midsize MD-80s and MD-90s in joint venture with McDonnell Douglas. Negotiating with Western partners to form $2 billion consortium to make new 100-seat commuter plane.

HELICOPTERS

Working with French and Singapore partners on E-120 light helicopters. Discussing with Boeing plans to build commercial version of Chinook military chopper.

ENGINES

Providing parts to Rolls-Royce, General Electric, and Pratt & Whitney. Talking with GE and others to co-produce engines for the proposed 100-seater.

TURBOPROPS

Seeking U.S. certification for 19-seat Y-12 and 50-seat Y-7, now exported mostly to developing nations.

DATA: BUSINESS WEEKBy Pete Engardio in Hong Kong, with David Lindorff in Xian, Dexter Roberts in Beijing, Tim Smart in New Haven, and Stewart Toy in Paris


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