By Joseph C. Anselmo, Michael Mecham Beijing, Beijing

Three of the world’s four leading aircraft manufacturers have decided that selling in China requires bricks and mortar. Airbus assembles A320s in Tianjin, Embraer builds ERJ 145s in Harbin, and Bombardier sources fuselages in Shenyang for its Q400 turboprop and expects to do the same for the CSeries. All work through joint ventures that expose the Chinese to foreign technology and manufacturing expertise in return for access to the world’s second-largest aviation market. Then there is Boeing, which stands out in contrast to the “Made in China” approach. The U.S. airframer sources an array of aircraft components from Chinese suppliers, from horizontal stabilizers and the aft tail section on Boeing 737s to the rudder for the Boeing 787. But the cornerstone of its strategy is to cement ties through relationships, not high-profile airplane factories. “At the very top level, it’s all about being viewed as a good partner,” says Boeing Commercial Airplanes President and CEO James Albaugh. “We have a partnership that goes back to 1972.” His reference is to then-President Richard M. Nixon’s historic visit to China. First impressions are important: Nixon’s Air Force One was a Boeing 707. By the end of that year, China had bought 10 of them. Since the early 1990s, Boeing has helped train more than 37,000 Chinese aviation professionals, from pilots, engineers and mechanics to air traffic controllers, airline managers and government regulators. It also is working with universities and the China Academy of Sciences on research projects that could benefit both sides in areas such as biofuels, structures, materials, wireless communications and nanotechnology (see p. 52). “The smart approach to China is aligning our strategy at some level with their aspirations in a place that’s synergistic, versus cannibalistic,” says Boeing International President Shep Hill. “We want win-win. I know that’s hard to achieve, but it can be done.” In other words, Boeing is not going to risk sharing technology or expertise that could further China’s government-mandated drive to develop an aircraft industry to compete with Boeing and Airbus, not only domestically but also on the global stage. “You’re not going to sell in China unless you’re partnering and have a presence,” Hill says. “But that also raises a tough strategic question: ‘What’s the level of collaboration with a country and a company that has a stated goal of building a competing aircraft?’” Ron Epstein, an aerospace analyst with Bank of America Merrill Lynch, says Boeing is applying the same strategy in China and other fast-growing markets, such as Brazil and India. “It’s all about relationships,” he says, recalling two days he recently spent at a Boeing research center in India that he describes as a brokerage. “It’s all about working with Indian industry and universities and positioning the company as a good citizen.” But that strategy has not stopped Boeing from losing market share in China. In 1998, after it acquired McDonnell Douglas, Boeing held a commanding 69% of China’s in-service aircraft with more than 100 seats, compared to Airbus’s 13%. Its European rival, which did not aggressively enter the market until the mid-1990s, has whittled that lead down to 56%. In 2010, the European manufacturer delivered 111 jets—22% of its global production—compared with 74 for Boeing. To Airbus China President Laurence Barron, those numbers are proof that his company’s drive to establish a local manufacturing footprint is the way to go. “It’s a question of results,” he says. “And the results show that our strategy has worked.”

But others question whether Airbus’s gains in China are simply a reflection of its overall success. The company accounted for 52% of the value of global deliveries last year, up from 28% in 1994, according to the Teal Group. “They’ve picked up market share all over the world,” says Epstein.

A delay in deliveries of the 787—Chinese carriers have ordered 59—explains some of Airbus’s recent advantage. And Boeing officials allow that their European rival may have won extra orders by building an A320 assembly plant in Tianjin. But other factors are also at play.

By doling out big-ticket airplane orders at opportune moments, Chinese leaders—who must approve airlines’ purchases—can deflect criticism of their nation’s massive trade surpluses with the U.S. and European Union. They can also use them to make political points. In 1996, for instance, when friction ran high between the U.S. and China over Taiwan and the World Trade Organization, then-Chinese Premier Li Peng trumpeted a $1.5 billion order for 30 A320s on a state visit to France, some from a previously all-Boeing customer.

Last November, Airbus reaped orders valued at $14 billion when Chinese President Hu Jintao visited Paris. Two months later, Hu spread the wealth in Washington, giving final approval to the purchase of $19 billion worth of Boeing 737s and 777s, a politically adroit announcement, despite the fact that the airplanes had been ordered in 2007-09.

Adding another wrinkle to the competitive landscape is Comac’s development of the C919, a new 737/A320-sized jet that is, in effect, a Chinese fuselage outfitted with sophisticated Western components. “The costs of developing an airplane are high,” notes Albaugh. “You need to have about 30% of the market to survive.”

That 30% can only come at the expense of Boeing and Airbus. The good news is that China’s aviation market is growing so rapidly that there should be room for more players. Boeing expects the country will see deliveries of 4,330 new jets worth $480 billion during the next two decades; Airbus’s forecast, which does not include regional jets and excludes Hong Kong and Macau, envisions demand for 3,127 new passenger aircraft worth $384 billion during the same period. Barron sees room for three major airframers. “I’m not all that worried,” he says. “The market will be huge. By 2030, it will probably be the No. 1 market in the world.”

Western aerospace executives in China are quick to shoot down what they see as some common myths about the relationship between the country’s state-owned enterprises and its airlines. Chief among them is the thought that as part of its paramount role in directing economic development, Beijing micromanages every aircraft order.

Ordering a new jet “is a very complicated decision process,” explains Guan Dong Yuan, president of Embraer China. “Airlines have to consider market demand, the government, local interests—and they need to make money. The government can, to some extent, influence their decision, but not totally.”

McDonnell Douglas learned that lesson in the 1990s on the Trunkliner program when it assumed that Beijing’s blessing of the project to coproduce MD-80/MD?90 jets would tap a gusher of orders. Two decades later, some Western suppliers to the C919 are envisioning hundreds of government-mandated orders for the new aircraft. “If you look at the number of Airbus A320s and Boeing 737s flying in the country, in just a couple of years those are going to be C919s,” Eaton Corp. Chairman/CEO Sandy Cutler said recently. “They have the ability because [the government] owns all of the airlines. They can turn the switch and say, ‘OK, effective now we’re buying C919s.’”

Others say it is not that simple. Chinese aviation industry officials say the stronger the airline, the more likely it is to push back at government interference. “I don’t think the government will ask airlines to buy all C919s—just a few,” says Huang Wei, an official at the Civil Aviation Management Institute of China, which trains more than 13,000 students each year. In fact, Comac has announced fewer than 100 firm orders for the C919 to date.

Some Western executives predict Comac will seek to bolster those numbers with deep discounts to gain sales and market share, and thus further the government’s ambition to develop a globally competitive aircraft industry. They believe Comac may be willing to accept razor-thin profit margins—or even losses—that investors in Western aircraft manufacturers would never tolerate.

While Boeing acknowledges that the C919 and Airbus’s Tianjin venture present new challenges, the company has managed to snare at least 150 orders for 737s in China since 2007, the year Airbus established its A320 venture. “The Chinese are great at playing competitors against one another,” says David Wang, who retired last month as president of Boeing China and is now a consultant.

Boeing’s Hill acknowledges that Airbus’s successes in recent years would suggest, at least to the casual observer, that it is beating his company in China. “That’s absolutely fair,” he says. “They have a stated goal of getting to 50% [market share] and they may do that.” But he dismisses the notion that Airbus could gain a dominant lead. “Ultimately, this is going to come down to the best product, price and relationship in China, and as a result we think we can stem the tide,” he says. Airbus’s recent market share gain “is not a trajectory that will keep going.”

And so the battle between the world’s two largest airplane makers continues, each trying to penetrate the world’s second-largest economy with a different strategy for making friends in high places.

Photo Credit: Boeing