11/30/2010

Chinese Competition in the Aircraft Industry

As Americans seem to focus more and more on the present, along with its quarter to quarter short term results, China continues to invest in long-term projects. China has teamed up with Western suppliers such as Honeywell and GE to start a state-owned aircraft design and production industry. China knows that with its growing economy and increased demand for air-travel that it is projected to order more and more aircraft from Boeing and Airbus. That is unless it can supply that demand through its own state-owned aircraft industry as this article in Bloomberg points out, “China Takes Aim at Boeing and Airbus”. The Chinese being a competitor in the aircraft industry is becoming a reality as Western suppliers of Boeing and Airbus are on board. I wonder if this increased competition will bring down the price of both commercial and private aircraft. I am also curious if this will affect the price of air-travel.

3 comments:

Dave said...

This is a bad idea.

But, centralizers are full of bad ideas, and China's economy is still heavily centrally planned.

The market for airframes used to have many competitors. They've all been eliminated because it is an industry where economies of scale are critical.

The "exception" to this is Airbus. However, Airbus has a reputatation as a profitable company that is not grounded in facts. Airbus has been a net money loser over its lifetime, and a realistic examination of economic rather than accounting profits would show that it is unlikely to ever be profitable.

And that's why the Chinese want to create another Airbus. No ... really. They think they're different. When people we know act this way, we often say something like "they've started to believe their own BS". This is what is going on with China. This is what happened with Japan in the 1980's. It isn't much different with what happened with day traders in 2000 or 2008.

Macroeconomically, China has been harvesting the low hanging fruit. Doing this makes it seem like making money is easy. It isn't. It gets worse. The people most likely to make this inference are those who aren't making any money at all: those on the sidelines, like central planners in Beijing.

Beijing is loaded with MBA's who've had a course like this, and get the theory and the history showing that an idea like this won't work. Once again, they probably won't get listened to.

Five years ago you could have predicted that eventually China would get into the airframe business because the people in power would think it's a good idea. Today you can predict that in 10-20 years, China will have an airframe manufacturer that people will tell lies about so they can confuse its positive accounting profits with positive economic profits.

hope i pass said...

I tend to agree. Having a government owned and operated enterprise can be sloppy at best. I do however wonder how it will do competitively against private manufactures world wide, knowing that it will be highly subsidized.

Dr. Tufte said...

We spend a lot of time in the U.S. worrying about other countries subsidizing their firms.

Microeconomically, there is some concern here: the domestic firm will be at a disadvantage.

Macroeconomically, the story is just the opposite. China is directing investment politically, and this tends to be inefficient. So, there is an opportunity created for competitors to industries that aren't subsidized.

On net, it tends to be a good thing for one country when another country is dumb enough to subsidize their own industries.