CHINA ENLISTS U.S. AEROSPACE SUBCONTRACTOR IN BID TO BEAT

C O N F I D E N T I A L SECTION 01 OF 03 CHENGDU 000249 SIPDIS DEPT FOR EAP/CM E.O. 12958: DECL: 11/6/2019 TAGS: ETRD EAIR EINV ETTC PREL PGOV TRGY CH SUBJECT: CHINA ENLISTS U.S. AEROSPACE SUBCONTRACTOR IN BID TO BEAT BOEING, AIRBUS CHENGDU 00000249 001.2 OF 003 CLASSIFIED BY: David E. Brown, Consul General, U.S. Consulate General Chengdu. REASON: 1.4 (d) ¶1. (C) Summary: China is seeking the assistance of foreign aerospace companies to increase the international competitiveness of its new C919 passenger jet, due to come to market in 2016, that will compete with Boeing and Airbus. The Chinese lead firm for the project, Commercial Aircraft Corporation of China (COMAC),apparently believes that participation of experienced foreign aircraft component suppliers will speed the U.S. and European certification processes needed before the C919 can be exported to major foreign markets. Bringing the aircraft to market quickly may be crucial to the C919's success, as COMAC hopes to grab market share by incorporating fuel-saving technologies before Boeing and Airbus can build successor aircraft to the 737 and A320 series. U.S. firm Vought Aircraft seeks to build portions of the rear tail assembly for the C919. The contract would mark Vought's first opportunity to participate in the design, testing, and certification of PRC aircraft components. ¶2. (C) Comment: China previously used technology gleaned from its 1990s joint venture in Shanghai with McDonnell-Douglas on the MD-82 passenger plane to build the "Chinese" ARJ-21 regional jet. The ARJ-21, although a great leap forward in the competitiveness of China's commercial aircraft industry, still suffers from old technology that makes the plane heavy, fuel inefficient, and likely uncompetitive in international markets. With the C919, however, China hopes its new bid to crack the international market will transform COMAC into a third global player in commercial jetliners, along with Boeing and Airbus. There is no doubt that, should the C919 get to market fast enough to allow it to win significant sales, the PRC will go full thrust with a new national program to take on its two American and European competitors in even larger commercial aircraft. End Summary and Comment. China's Aerospace Challenge -------------- ¶3. (SBU) The C919 marks China's first foray into the production of large commercial transport aircraft that will compete with similar-size, single-aisle Boeing (737) and Airbus (A319, A320 and A321) planes. Press reports last year suggested a service date of 2020 for the C919, but more recent reports say flight testing will begin in 2014 with commercial roll out in 2016. Managing Director of Vought Aircraft Industries' China Operations, Joe Ylda told Consul General recently that COMAC wanted to capitalize on delays in the design and rollout of successors to the current generation of comparable Boeing and Airbus aircraft. Ylda attributed Boeing's delays to excessive outsourcing with the larger 787, which he said has also hurt Boeing financially and negatively impacted work on a successor to the 737. Airbus' delays in the A380 and A350 programs have had a similar impact on their next-generation A320, he said. ¶4. (SBU) To integrate more advanced technology into the C919, China will rely on foreign subcontractors with considerable experience in the commercial aircraft industry, Ylda said. An unnamed COMAC official recently confirmed that the C919 will make use of advanced materials and composites to reduce weight. COMAC hopes for find a foreign manufactured jet engine that is 15 percent more efficient that current engines, according to press reports. The incorporation of next-generation technologies into the C919 will likely make it competitive with similar sized, but increasingly dated, aircraft like the Boeing 737 and the Airbus A319, A320, and A321, according to Ylda. C919 Is National Project for China, Could Lead to Subcontracting Work -------------- ¶5. (C) The C919 is an important national project for China, according to Ylda, and he calculates that subcontracting work on the tail assembly of this aircraft will lead to new opportunities in China's aerospace sector. (Note: A Chinese CHENGDU 00000249 002.2 OF 003 press article last year said that the C919 project was included in the 11th Five-Year Program, which outlines priority projects from 2006-2010. End note.) Vought is already working with Chengdu Aircraft Corporation (CAC),formerly part of China Aviation Industry Corporation (AVIC) I, to produce components for Boeing aircraft, including the 757, 737, and 747-8. Ylda said his company had recently signed memoranda of understanding (MOU) with two other former AVIC I companies, Xi'an Aircraft Commercial Corporation (XACC) and Hongdu Aircraft Corporation in Nanchang. Vought plans to work with XACC to build vertical subassemblies, although Ylda did not say what work his company planned with Hongdu. He said he has been approached by several other Chinese companies for design and build work, and believes that a contract to work on the C919 will only improve his company's prospects. ¶6. (SBU) Vought is pursuing an agreement to build the horizontal stabilizer and elevator for the tail section of the C919, Ylda explained. Vought has already received USG export licenses that cover the design, fabrication, assembly, testing, and certification of these components. It still needs to close the deal with COMAC, however, which will jointly develop the C919 with a number of other Chinese and foreign aircraft companies. Vought seeks to build additional tail components for the aircraft, but currently forecasts that Shanghai Aircraft Corporation (SAC) or Harbin Aircraft Corporation (HAC) will build the vertical fin, rudder, and pressure dome bulkhead. (Note: A press report in late September quoted an unnamed COMAC official as saying his company planned to build the horizontal stabilizer in-house, but Ylda did not mention this possibility. End Note.) Cooperation Would Mark "Firsts," But USG Support Seen As Key -------------- -------------- ¶7. (SBU) Ylda said that this project would be the first time Vought has participated in the design, testing, and certification of components for a Chinese aircraft. Engineering and design work during the initial phase of cooperation present lucrative business opportunities and increase the likelihood that Vought will have a continuing role in the production of airframe components over the life of the C919 program. (Note: Vought officials claim that changing tier one suppliers can disrupt production and lead to significantly higher costs in commercial aircraft production. End Note.) Participation in the project would also mark the first time Vought has used composite materials for the design and development of composite structures in China. ¶8. (SBU) Despite its long history in the aerospace industry and its nearly 15-year history of working in China, Vought anticipates that USG support will be crucial to a successful bid. COMAC officials said they worried that U.S. companies would not be able to provide contracted work on the C919 due to U.S. export restrictions. Competitors in Asia and Europe reportedly do not have the same restrictions, and Vought executives worry that this may leave their company at a competitive disadvantage. Of these competitors, the Italian firm Alenia has reportedly expressed interest in working on the C919, although it is unclear what components of the aircraft the company seeks to build. Ylda requested that the US Department of Commerce advocate on behalf of his company's bid, which Vought officials claim would create opportunities for other U.S. companies to supply tooling, materials, and test equipment. C919 More Competitive Than Prior Chinese Effort to Crack International Jet Market -------------- -------------- ¶9. (C) Ylda says that the composite materials his company would use in the design of components for the C919 would help overcome some of the issues that plagued the design of China's smaller, recently-completed ARJ-21 regional jet. He said that composite technology had been used in the aviation industry for more than CHENGDU 00000249 003.2 OF 003 20 years, but was not widely employed in China's ARJ-21. Ylda said that the ARJ-21 was largely copied from the now outdated McDonnell Douglas MD-82 aircraft, and is too heavy and fuel inefficient to sell well internationally. He speculated that because of these deficiencies, China would receive few orders for that plane. (Note: The ARJ-21 can seat 70-100 passengers, depending on the configuration, according to Chinese press. The larger C919 will seat 150 passengers, according to Vought officials. End note.) Comment: Reverse Engineering Challenges, Military Ties -------------- -------------- ¶10. (C) Ylda readily acknowledged that China had reverse engineered foreign technology to produce the ARJ-21, but he did not appear concerned that Vought's participation in the C919 program would leave his company vulnerable to reverse engineering of its products. He did not, however, elaborate on this point. Vought's bid to participate in this project is probably based on the perception that the company cannot afford to stay out of the Chinese market. Ylda mentioned the potential for growth in the Chinese aerospace industry and recognized the commercial challenge posed by European and Asian aerospace companies. ¶11. (C) COMAC is a newly created entity that emphasizes commercial aircraft programs, in contrast AVIC which built both military aircraft and the ARJ-21. AVIC still has ties with COMAC, however. Vought officials say that AVIC invested USD 700 million for a 25 percent stake in COMAC. The Shanghai municipal government holds another 25 percent of COMAC, and the central government holds a 35 percent share. The head of COMAC, Zhang Qingwei, is the former Director of China's Commission of Science Technology and Industry for National Defense (COSTIND). BROWN