March 22, 2021, © Leeham News: Embraer wants to become a big player in China.
“We see a huge market potential there,” said Arjan Meijer, CEO of Embraer Commercial Aviation, in an interview with Nikkei Asia. The news outlet continued, “The company expects worldwide demand for 5,500 jets with up to 150 seats over the next 10 years. A third of that will come from Asia, with a large part of it from China, Meijer added.”
However, China presents risks and few rewards to companies wishing to gain a significant foothold. This is especially true for commercial aviation companies. China has high ambitions for the commercial aviation industry. Partnering with China in this sector produced more heartbreak than success.
McDonnell Douglas was perhaps the earliest Western aircraft manufacturer that partnered with China. An MD-80 final assembly line was established in Shanghai in the 1980s. I visited this plant in December 1988. At the time, China was still years behind the West on even the most basic FAL requirements.
Industrial-strength electricity capacity wasn’t available to power the factory without reducing power elsewhere in the city. Rolling brown-outs were the norm then. The FAL was hand-built—there was no automation. McDonnell Douglas sold a few dozen MD-80s to Chinese airlines, which were reluctant to take them because of quality concerns. The MD-90 succeeded the MD-80. Although few were sold—MDC was nearing its end by this time—Delta Air Lines later acquired Chinese-built MD-90s on the secondary market. Boeing closed the line after the 1997 merger with MDC.
Bombardier’s venture into China hoping for quid-pro-quo sales of the Q400 turboprop and C Series was a dismal failure. Bombardier awarded fuselage section contracts for the airplanes to the Shenyang Aircraft Corp. Shenyang’s performance was so poor on the C Series that Bombardier, in foresight, had a backup plan to produce fuselage sections in Montreal. BBD activated this plan for the early production airplanes.
Despite the relationship, no C Series sales were completed with China. Instead, Intellectual Property was shared, benefitting China but not Bombardier.
Even Embraer is no stranger to the risks of doing business in China. An ERJ-145 FAL was established with the hope of selling the small regional jet widely in China. Few sales resulted.
Western suppliers of aero systems are required to establish joint ventures with local interests in exchange for contracts. But they complain they must do so, and they worry that IP transfer, or outright theft, threatened their products and development. Besides transferring “yesterday’s” technology and beefing up firewalls and defenses against cyberattacks, there is little they can do if they want to do business in China.
Boeing contracted with the Chinese for components on several 7-Series airplanes. But it’s never established an FAL in China. There is a 737 completion center that installs seats and paints airplanes in China, but this is minor work.
Airbus, seeking to break Boeing’s virtual monopoly in sales to China, established several component production centers and, finally, an A320 FAL in Tianjin. Despite the confidence that it had sufficient protections against IP theft, several cyberattacks on the FAL system were reported within the first year. But Airbus’ business ventures, the FAL and an A330 completion center paid off in ways none of the previous efforts did. Airbus is a major supplier of aircraft to China, eventually surpassing Boeing.
Embraer’s Meijer didn’t indicate to Nikkei that he’s considering locating an E-Jet E2 FAL in China. Instead, he hopes the 190/195 E2, which fit in nicely between the AVIC ARJ21 and the COMAC C919, will be attractive companions with high sales.
But the Chinese are unlikely to settle for being mere buyers. Embraer’s financial difficulties and the chaos created by the failed Boeing joint venture are well known. So is Embraer’s desire to partner with someone to develop a 70-90 seat turboprop, a project with a challenging business case at best.
China no doubt will demand more from Embraer than a completion center or a supplier relationship.
Whether the rewards will be worth the risks and the cost remain to be seen.