2008 has been quite a year for the country’s aviation industry. Over the past six months, China has created a giant new aircraft company to make jumbo jetliners in competition with Boeing and Airbus; it has merged the country’s two largest aircraft makers into one company; it successfully tested its first domestic commercial jetliner; and it announced orders for the new aircraft from a unit of General Electric.

In May, China formed China Commercial Aircraft Co. (CCAC)  to make jumbo jetliners, capitalizing the new company with registered capital of 19 billion yuan ($2.7 billion). The state-owned Assets Supervision and Administration Commission alone invested 6 billion yuan, becoming the largest shareholder. Shareholders of the new company also include China Aviation Industry Corporation I (AVIC I) and China Aviation Industry Corporation II (AVIC II), two of China’s main state-owned aircraft makers.

In June, China announced the merger of AVIC I and AVIC II into a new company, Aviation Industry Corporation of China (AVIC). The new company, which formally started operations on Nov 8, has 10 major business segments, covering general-purpose aircraft, helicopters, transport aircraft and engines. AVIC has dozens of subsidiaries involved in its various business lines, 21 of which are listed. In 2007, AVIC I reported revenues of over 100 billion yuan ($14.7 billion), while AVIC II’s sales were approximately 10 billion yuan ($1.5 billion). In a recent announcement, an official of the company said that AVIC is targeting revenues of one trillion yuan ($146 billion) by 2017.

In November, China announced that it had successfully tested its first entirely domestic-made jet aircraft. The ARJ21, which stands for Advanced Regional Jet for the 21st Century,  is designed to carry between 70 to 80 passengers on short-haul flights.

Also in November, CCAC announced the sale five ARJ21 planes to General Electric for delivery in 2013.The aircraft leasing arm of General Electric also signed an option to buy an additional 20 planes, in a deal that could be worth $735 million. GE supplies engines for the aircraft and plans to lease the aircraft to China’s domestic carriers for use within China.

Although China appears to be making rapid progress in manufacturing this very complicated, sophisticated product, Silicon Hutong’s David Wolf provides an excellent historical summary of China’s quest to produce jetliners and describes how the events of this year actually represent the culmination of 35 years of effort, beginning in the 1970s.

However long it has taken, China’s emergence as a potential competitor to Boeing and Airbus in the manufacture and sale of jet aircraft illustrates once again how the combination of an open-door policy and a large market enables China to attract the best technology from around the world. With air traffic in China expected to grow 8.9 percent per year, Western companies simply don’t want to miss out on the next big aviation growth market. We have seen how the same scenario has played out in autos and other industries and has enabled China to close its technology gap with the rest of the world. With the China market growing so quickly, the pace at which technology is being transferred is also quickening.
 
About one-half of the equipment on the ARJ21 is made by U.S. companies. In addition to the engines that are made by GE, for example, Parker Hannifin Corp. makes the fuel, hydraulics and flight control systems for the planes, and Rockwell Collins Inc. provides radios, navigation equipment and other avionics systems. Summing up the motivations of U.S companies helping China to enter this market, even if it ultimately leads to future competition for their own companies, Clayton Jones, CEO of Rockwell Collins, said “We understand that they may want to develop an indigenous industry, but we want to stay a part of it as long as we can. If I don’t move in there, somebody else will.”

In the wake of the financial crisis, China is also now looking at another way to get advanced technology from the West for its aviation industry, this time through acquisitions. At the Zhuhai air show in early November, AVIC announced that it plans to acquire a foreign general aviation aircraft maker  to shore up its technology capabilities. Citing Tan Weidong, president of AVIC’s general aviation unit, China Daily reported that the deal is expected to be closed by the end of the year. The name of the acquisition target was not disclosed.

By providing access to its large and growing market, and now using its cash, China can gain access to whatever technology is required to make any product in the world. Now more than ever, Western manufacturers need to establish or beef up their China operations if they also want to participate in the continued growth of the China market.