CHINA MULLS FINANCING OPTIONS FOR AIRLINER PLAN
By Richard McGregor and Andrew Yeh in Beijing
Thursday, March 22, 2007
The announcement by China's cabinet late on Sunday that it had made an “important strategic decision” to research and develop the manufacture of large passenger jets would have come as no surprise to foreign aviation groups.
China has never attempted to hide its desire to enter a market dominated by Boeing of the US and Europe's Airbus.
Its ambition was publicly laid out as recently as last year in a government science and technology paper.
“China surely wants to build its own aircraft,” said Xie Li, a professor at the Civil Aviation Management Institute of China in Beijing. “It wants to be able to make money off itself.”
The attractiveness of the China market is not in doubt.
Airbus's latest forecast puts China in second place behind only the US by both the number and value of jets needed between 2006 and 2025 with a market for 2,929 large aircraft worth $349bn (£180bn, �62bn).
The announcement, through the central government's official website, contained no details about the project, but information trickling out suggested how Beijing might tackle what is likely to be one of the country's most expensive and challenging industrial undertakings.
According to an article yesterday in Caijing, the finance magazine, seed funds for research of Rmb50-60bn (£3bn-£4bn, $6bn-$8bn, �bn-�bn) would kick off the project. There would be two research and development centres, reflecting the dual priorities of the project – one in Shanghai for commercial aircraft and a second in Xian in central China for the military.
Other potential sites, said Professor Xie, were Chengdu and Shenyang, cities with an aviation history.
On top of the seed funds, however, the funding becomes more complex.
Although the Chinese government is willing to help state-owned companies in so-called strategic sectors with initial funds – and, once they are operating, tax breaks – such support is given on the basis that enterprises will become self-sustaining.
“The government will invest, but they will want to see a credible case that the project will eventually make its own way financially,” said a Beijing-based aviation consultant who declined to be named.
A host of options are being considered to take the company forward after the initial start-up money, ranging from support from local governments to private investment and partial public listings.
Martin Lin, China managing director of Rockwell Collins, said Beijing could establish a consortium with mostly Chinese stakeholders, and perhaps some foreign partners, not unlike Airbus.
“The start-up may be sufficient, but you can't rule out private sector involvement,” he said. The first step would be the creation of a “project company” involving government agencies such as China Aviation Industry Corporation I, known as AVIC 1, which handles large aircraft manufacturing.
“That process should be fast,” said Professor Xie. “But how exactly it happens after that is still uncertain.”
Local aviation politics will play a role, and might have been behind the stand-alone announcement by the State Council on Sunday night.
While it will be involved, for example, AVIC 1 may not be a central player in the Airbus project to build an assembly plant in the coastal city of Tianjin.
The assembly plant, a first for Airbus, was announced last October and is due to begin assembling A320 single-aisle, short-haul jets in early 2009.
In that respect, the stand-alone announcement could suggest support for AVIC 1 from the central government in its ambitions to take the lead in China in the new project, which will compete eventually with Airbus.
“It is their preferred solution to do it themselves,” the Beijing-based aviation consultant said.
China is planning to launch next year a homemade regional jet, the ARJ-21, with about 100 seats.
It will be a crucial dry run for the commercial success of the larger planes.
“Until this is successfully launched, in commercial terms, no one [in the local industry] will benefit,” said Mr Lin.
The regional jet's engines will be made by a foreign company, a reminder that even if China can develop a successful large plane manufacturing industry, making engines is a different and perhaps even more difficult challenge.
Chinese officials privately say they are worried that Sunday's announcement will make companies like Boeing and Airbus even more wary about transferring technology.
