Thumbing through the March issue of Esquire magazine, I came across an advertisement for Borders Books and Music. The ad was a listing of collections of great songs of musical legends. Alongside names like Stevie Ray Vaughn, Johnny Cash, Willie Nelson, Bruce Springsteen, and Janis Joplin I noted with distress the title of an album called “The Essential Kenny G.”
As I said earlier this evening to the Imagethief, no matter what you think about those artists, you have to admit to hearing that old Sesame Street jingle “one of these things is not like the other, one of these things just doesn’t belong…”
And so the music lover in me is choked with a single question.
The Airbus Problem
Which brings me, in a roundabout way, an even bigger stumper:
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There has been considerable talk in the mainstream press recently suggesting that Airbus is apparently in the final stages of choosing a site in China to build an assembly line for it’s A320 series of single-aisle aircraft. Airbus have apparently also agreed to set up an engineering center and employ 500 engineers in a venture with China Aviation Industry Corporation (AVIC, both AVIC I and AVIC II ) to do work on Airbus’ newest project, the A350 long-haul twinjet. Finally, they’ve agreed to raise their level of component purchases from China to $120 million a year by 2010.
All of which makes me ask: why? What does Airbus hope to gain?
Five Reasons to Take the Plunge
Ken Kedl, the well-spoken China strategy consultant, suggests in a recent podcast that there are five primary motivations for a company to make a major move into China: customer pull, attractive market, competitive threat, operational efficiencies/cost savings, or stakeholder push.
Let’s look at these in the context of Airbus’ effort to move onto the ground in China.
It can’t be customer pull – the airlines appear to be happy buying aircraft manufactured in Europe. It doesn’t cost much to ferry a plane from Europe to China, and each delivery means a bunch of airline guys get a free jaunt to Europe on the company tab. Plus, you have the assurance of all of those well-paid, technically outstanding European engineers building your plane, rather than a guy who a year ago was patching holes in Antonovs in a hangar in Inner Mongolia.
Sure the market is attractive, and huge. But Airbus is already here, and their business has been on a 20-year-long upswing in China. There is no indication in any of the talk leaking out of Toulouse that Airbus will suddenly get a market they’ve never had before as a result of this move.
As to competitive threats, Airbus already has 40% of the 100-passenger-and-above planes operating in China, and the government is ensuring (regardless of how horribly this screws up the operating economics of Chinese airlines) that Airbus and Boeing each get about half of the new large jet orders. So they’re at 40% heading toward 50%, and for political reasons things are not likely to get a whole lot better. What is Airbus’ stated goal in China? You guessed it – a 50% market share. And local rivals? There just aren’t any.
Would it be cheaper or easier for them to build the aircraft in China? Probably not – the cost of shlepping components from Europe, keeping a bunch of expat engineers and managers in fine corporate pasha style, and of setting up an entirely new factory suggests that the challenges will be considerable, and they might not save a cent. As cheap as labor may be in China, you don’t hire unskilled labor to assemble a jet airliner – not if you plan on staying in business. They will pay top dollar for the best labor, they’ll have to invest considerably in training, and they’ll face the same issues that all of us in the skilled labor market have to face – skyrocketing salaries, high expectations, and ridiculous turnover. Even if they wrote off the cost of setting up the factory, there is no guarantee that they will ever get as efficient in China as they are in Toulouse or Hamburg.
European Egos and Chinese Cadres
Which leaves us with two possibilities. Kedl’s “stakeholder push,” and Wolf’s “policymaker pull.”
Usually, when none of the economic reasons that might drive a company to make a big move in China, the leap is usually compelled by somebody back at headquarters who has it in their head that, regardless, the effort makes some sort of “strategic” sense. Maybe it is the shareholders, maybe it is the boss, but somebody very powerful believes that it simply has to be done.
Could it be that someone very high up at Airbus is thinking about his legacy, and that becoming the first (okay, well, counting McDonnell Douglas, the second) major aircraft manufacturer to begin assembling airliners in China will secure that legacy? Is it some grand vision, some civil-aviation manifest destiny that drives these Grand Europeans? Or is Jaques Chirac driving this, believing that an Airbus plant in China will somehow steal the thunder of les Américains?
All very possible. The history of business is replete with questionable strategic moves made by testosterone-infused CEOs, and Chirac is delighted with his Airbus, one of few European Champions in French industry.
There is another possibility, however. I like to call it “policymaker pull,” which is shorthand for government officials making significant (and sometimes rash) promises to secure a large or prestigious project.
I’d say it’s entirely possible that someone fairly high in the Chinese government intimated that if Airbus were to begin manufacturing in China, the government could pass a law mandating that airlines give first preference in purchases to locally-assembled aircraft. That would mean more aircraft sales and more market share, especially if Airbus were to get a good 1–3 year head start on Boeing in that process.
I have no doubt that the four cities currently in contention for Airbus’ favor (Tianjin, Shanghai, Xi’an and Zhuhai) are making all kinds of incredible offers to support and subsidize such a plant, falling over each other for this high-prestige project. Subsidies could do much to offset the initial setup and operating inefficiencies of the plant.
All of which means that regardless of the motives and the economics, Airbus executives will find a way to justify this to shareholders. If, that is, the shareholders don’t dig too deep into the fine print.
Pay No Attention to the Man Behind the Screen
China wants to build a local industry to manufacture airliners, so much so that I would expect to find it in the next five year plan. They have good reasons. They need lots of planes and want to keep as much of that money at home as possible. Airliners are a great export product and will be for a long time. And, of course, the industry creates its own ecosystem manufacturing sub-assemblies, parts, and doing fabrication of products from advanced materials.
The country has tried to go it alone with AVIC I and AVIC II and has failed to create a commercially viable commuter jet, much less a large jetliner. So policymakers will follow a simple formula: invite the foreigners in, learn the business, and little by little take the business away from them.
It has happened in computers – the guts and components (if not the complete units) of desktops, laptops, and servers are predominantly made in China. It is happening now in cars – China is now a net exporter of automobiles. And it will happen with airliners if Airbus and/or Boeing let it happen.
Airbus is not just bringing in an assembly plant. They’re going to train 500 engineers how to design and build modern jetliners at AVIC I and AVIC II, enough to form the core of an entire industry in the future. In short, what Airbus is about to do will likely create a new Chinese competitor in the large airliner business in return for what could wind up being a temporary market advantage.
Airbus will undoubtedly argue that the airliner business is increasingly driven by advances in technology, and as long as Airbus continues to leap ahead technologically, China will never become a true competitor. That may be true, but the boys in Toulouse may do well to read (or re-read) Clayton Christensen’s The Innovator’s Dilemma. At some point, airlines around the world may well realize that they only need so much tech in their aircraft, and if that happens both Boeing and Airbus will be left skimming the ever-shrinking high-end of the market.
The Thin Green Line
About the only force that stands in the way of Airbus making this fairly short-sighted move is Airbus’ own shareholders, more precisely the shareholders of EADS and BAE Systems Plc. At some point, they need to decide whether they are comfortable with the China deal. When they do, I hope they ask the leadership of Airbus some very hard questions to make sure that Airbus isn’t getting ready to hand over the family jewels. And I hope they take the answers with some healthy skepticism and keep digging.
I hope they also ask a question that nobody will be comfortable answering: “if this is such a great deal, why isn’t Boeing going for it? What does Boeing know that we don’t?” Because it would be a real shame if this was all happening because the Chinese were manipulating some deep seated inferiority complex at Airbus about their chief rival.