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

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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

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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

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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

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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