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Boeing sees new competition from China

Coverage of the Airbus A380 plopping down in New York City and Los Angeles blotted out the real news in aviation Monday: an announcement the Chinese will take on Airbus and Boeing Co. in the large commercial airplane market.

Turn on the “fasten your seat belt” light. It’s going to be a bumpy ride.

Although Scott Carson, head of Boeing’s commercial airplane operations, says he welcomes the newcomer, Chinese entry into the market has got “heavy turbulence” written all over it.

Just look at who made the announcement – the State Council Executive Committee, which is China’s cabinet. Government sponsorship immediately raises a red flag.

Boeing and Airbus have filed competing claims with the World Trade Organization, each alleging the other’s aircraft development efforts have received illegal government subsidies. China Aviation Industry Corporation I, or AVIC I, is wholly state-owned.

Think there won’t be some subsidization issues here, not just in terms of capital investment, but in the way of purchase orders from state-run airlines?

As a matter of national pride, there will be pressure to buy homemade airplanes. And this in one of the world’s most coveted markets. Boeing estimates China will purchase 2,880 airplanes worth $280 billion over the next 20 years. If there is one good bit of news in Monday’s announcement, it may be the expectation China’s first large plane will not be ready until 2015 at the earliest, and more likely closer to 2020.

They do have a lot of work to do.

China already makes small and mid-sized airplanes designed for regional routes. The Xinzhou-60, which seats 50 to 60 passengers, is already in service. First delivery of the larger ARJ21, with a capacity or up to 110 passengers, is expected in 2009. The Chinese government set aside $646 million for the first stage of development.

Boeing and Airbus spent several billion dollars developing the 787 and A380, the planes they hope will carry them to industry dominance. The Chinese, who certainly have the cash, will surely spend a like amount on their new plane, which is expected to compete with the Boeing 737.

AVIC I will rely on imported engines and avionics for the ARJ21, but pledges the as-yet unnamed large airplane will be built using innovative Chinese engineering. According to Xinhua, China’s official news agency, AVIC I will also be looking for “international cooperation.”

Don’t look for much help from Boeing. Expect vigilance.

Chinese contractors, including affiliates of AVIC I, make components for several Boeing airplanes, including the 787. Boeing spokesman Peter Conte says contractors are obliged to comply with strict prohibitions against transferring company technology to competitors.

“We take great measures to protect any and all intellectual property,” he says.

But the Chinese are notoriously careless regarding such property and, given their experience as subcontractors for Boeing and Airbus, they will have insight that may help them overcome the steep learning curve that lies ahead. Which is not to say China starts from scratch.

The country has progressed methodically toward a place among the world’s aerospace powers. In the early 1990s, the country expected to accelerate its progress by assembling planes for McDonnell Douglas, an effort that ended with Boeing’s purchase of that company in 1997.

Former AVIC I General Manager Liu Gaozhou cringed from that experience. “We made a lot of efforts in the (McDonnell Douglas) cooperation project,” he said last year. “It cost us dearly.”

Conte says Boeing “respects the ambitions of other countries and companies to enter commercial aerospace,” believing that competition fosters progress. That has certainly been the case with Airbus.

In AVIC I, Boeing will have a well-financed competitor with a home-court advantage in a highly sought-after market.