Can a state-owned company that's just five years old take on Boeing and Airbus? Comac, China's aircraft maker, has exceedingly lofty ambitions.
Five of us are jammed into the cockpit of China’s latest manufacturing feat. We’re on the outskirts of Shanghai, inside a gleaming factory of the state-owned Commercial Aircraft Corp. of China, known as Comac. Two security guards patrol the sprawling assembly area below and keep an eye on us visitors wearing white laboratory coats. I’ve already been admonished for trying to sneak a coffee onto the floor.
There are two types of airplane here. One is a small regional jet called the ARJ21. The other is the one we’re inside. Named the C919, it’s the kind of large jetliner you would fly in from Atlanta to New York. “The better one!” says a public relations man, one of four Comac employees huddled in the cockpit the size of a small car.
Inside, the men pull down bright-green glass displays. They wiggle a joystick. Instruments are examined. Someone points out the plane’s similarities to an Airbus jetliner, and the group begins talking about China’s one day joining the aviation industry’s elite players, Airbus and rival Boeing. They seem to be saying, “This is the plane that gets us there.”
Only after we walk down the stairway back onto the factory floor a few minutes later does the full reality settle in: We’re staring up at a life-size model plane made of plastic. The green displays aren’t real. The actual C919 is still being designed.
Comac is an aviation experiment on a scale the world has never seen. The five-year-old company aims to go from constructing model airplanes to producing commercial jetliners in less than a decade — in an industry that’s been dominated by Europe’s Airbus and America’s Boeing for so long that “duopoly” as a description seems to have shed any negative meaning.
Comac is a state-owned corporation that began in 2008 when China’s government combined a handful of aviation companies from the country’s previous failed efforts to build a successful jetliner. (Comac inherited the ARJ21, which was started years before by another company, in the deal.) The government pumped $3 billion into the new venture, promising much more, in a bid to overcome the country’s dependence on Boeing and Airbus, which control 70% of the world market.
News that China was entering an industry as nationalistic as aviation was less shocking than the rushed timeline it created for itself. Comac announced that its first jet, the C919 (the C refers to China, 9 sounds similar to a Chinese word meaning forever, and 19 is for 190 passengers), would compete against the world’s most popular jetliners, Boeing’s 737 and Airbus’s A320, and would hit the skies in just six years, in 2014.
“It’s a brazen attitude — going straight into the most popular market,” says Phil Seymour, president of the International Bureau of Aviation consulting firm, an adviser to the Western companies Comac has in its cross hairs. “I’m surprised because I thought they would have gone for one of the niche products to get credibility over 10 or 20 years.”
In some ways China has little choice but to get into aerospace. Airbus expects Chinese airline-passenger traffic to pass that of the U.S. by 2032 — already it’s the world’s second-largest market — and Boeing says the country will buy an additional 5,580 planes, valued at $780 billion, over the same time (nearly the number of commercial planes that exist in the U.S. today).
China, a country flush with $3.7 trillion in foreign-exchange reserves, would rather spend billions on the risky proposition of creating an airplane industry than continue sending billions in plane orders to the U.S. and France. “China has so much, they can spend $10 billion, then $10 billion, then $10 billion, and they’ve still got a bunch of money burning a hole in their pocket,” observes John Dowdy, who leads McKinsey’s aerospace and defense practice from London.
Aside from having mounds of cash, China does have more than a passing knowledge of airplanes; it’s been a key supplier of aircraft parts for years. Comac constructs a tail section of Boeing’s 737 called the horizontal stabilizer and makes cargo-door frames for the A320. China has also proved it can at least assemble planes: Ever since 2009, in the northern town of Tianjin, the Chinese have put together more than 130 A320s as part of a joint venture, although it hasn’t been involved in design.
But aerospace is a tricky business, and money and skills don’t guarantee success any more than following a soufflé recipe does. About 4 million parts go into a plane. Successful jetliners are judged by single-percentage-point differences in fuel efficiency. There’s no room for the design and manufacturing missteps that have plagued China in recent years, from tainted milk to high-speed train crashes and shoddily constructed schools.
About the only thing clear so far is that the Chinese have embarked on a costly and uncertain path. Comac is spending billions to develop planes that aren’t much different from its competitors’. It’s outsourcing the C919’s major components, just as Boeing did in its oft-delayed and criticized 787 Dreamliner project. Most of all, success in the airline business rarely goes as planned. As Seymour, the adviser, sums it up: “Either it will work out wonderfully or fail spectacularly.”
I’m riding shotgun in a black Buick that’s zipping through the congested Shanghai roads that ensnare the city of 24 million. A company driver keeps one hand on the wheel, the other on a console keypad. At each hint of traffic, he taps on the keypad’s buttons to produce different police-car sounds. There’s dun dun dun dun to part cars in front of us, and a more menacing whop whop siren when the first sound doesn’t work.
The company car is luxurious and immune to traffic. It turns out to be quite useful because Comac’s operations, from manufacturing to research and design to customer support, are spread across the sprawling metropolis, which has been a cradle of China’s flight ambitions for more than a century.
In 1911 a Frenchman named René Vallon flew a biplane over Shanghai to mark the first heavier-than-air flight in China, eight years after the Wright brothers took off at Kitty Hawk. But aerospace in China mostly sputtered until the late 1970s, when the Chinese produced a large jetliner called the Y-10, modeled after Boeing’s 707. Manufacturing and customer service buildings were constructed across Shanghai (some are used by Comac today). But the Y-10 was so inefficient that the program was shut down after just one plane flew.
Shanghai’s past failures matter little now because building a modern airplane has become an exercise in outsourcing. Today manufacturers seek the best global suppliers to eke out even the tiniest efficiency, since airlines generally operate on such thin margins.
Internally Comac calls its way of building planes an “airframer supplier” model. That means that suppliers provide almost all the key components while Comac handles design and assembly.
Many of those suppliers are Western companies that sign joint ventures with Comac to win business. It’s a sensitive subject for many foreign companies, which say China’s policy of sharing technology amounts to a “pay to play” approach. For example, a GE joint venture with France’s Safran called CFM is providing engines for the C919, but CFM has refused to do a joint venture with one of Comac’s partner companies because of concerns over sharing trade secrets. “We have technology we want to protect,” Chaker Chahrour, CFM’s executive vice president, told a media roundtable in July.
Comac executives, in turn, acknowledge they have little technology expertise and play down what the company can accomplish on its own. “Comac must learn how to walk first before running,” says Jin Zhuanglong, Comac’s quick-smiling chairman, who holds a Ph.D. in economics and previously worked in China’s satellite and spacecraft industry. It’s a scorching morning, and we’re surrounded by a dozen handlers dressed in black pants and short-sleeved dress shirts as a camera crew tapes our interview — only Jin’s second with a Western journalist. The chairman wants to temper expectations. Through an interpreter he says things like, “We have experienced daunting problems in the past five years” and “We need time to grow up” and “Comac is young and our capabilities are weak.”
He continues in this vein for 30 minutes, describing the challenges facing the young company, until he moves on to the C919. That’s when he starts conceding the potential for the airplane to shake up part of an industry dominated by two big players. “I’ve always maintained the point that we won’t be a big challenge for Airbus or Boeing in the short term,” Jin says. Then, inching forward in his chair, he adds, “but in terms of some single product, we might be competitive.”
The C919 will prove whether Comac has the right stuff. The smaller, earlier jet, the ARJ21, which was started six years before Comac was officially formed and has been making test flights since 2008, has faced delays and regulatory problems. Overweight, less efficient than competing aircraft, and six years late, the plane is the mark of an immature company, analysts agree.
The C919, meanwhile, looks like the spitting image of an Airbus A320. The two planes’ wingspans are the same, at 35.8 meters, and overall lengths differ by just a meter. (The C919 is 38.9 meters long, and the A320 is 37.6 meters.) The materials are largely the same too. While the original C919 design called for composite material for the center wing box — the area where wings attach to the fuselage — Comac scrapped the idea earlier this year after it saw Boeing’s struggles with the Dreamliner’s composite frame. The fuselage is now entirely aluminum-based, similar to materials used in almost all jetliners.
Comac has hired more than 100 foreign experts — many of whom have been in the game for decades — for the C919 program. People like former GE Aviation executive Jack Lee, who joined Comac in 2010 after a career in the U.S. with GE and Raytheon. His wife still lives in their home in Wichita. Lee’s job is to prepare the C919 for government certification, a bureaucratic process of rules and regulations. Comac will seek approval for the plane from the Federal Aviation Administration, in addition to approval from China’s equivalent, the CAAC.
Before Lee arrived, he says, Comac knew little about FAA or CAAC standards. On the ARJ21, for example, employees never tested the integrity of parts shipped by suppliers, a crucial step in meeting certification standards. “They thought the usual inspection was enough!” Lee says with the incredulity of a quality-control man. Once production on the C919 begins, Lee plans to introduce global standards to test vendor components to avoid the delays that have hampered the ARJ21.
With the first C919 at least a year away from being assembled, there’s a groundswell of construction to prepare to build it here, just south of Shanghai’s main international airport. An aluminum-bending plant, which will produce the plane’s body, sits empty except for huddles of German-made equipment. Across the road the plane’s final-assembly building is three football fields long and wide enough to fit two planes next to each other. A 20-man crew is finishing the concrete floors. A moving assembly line will deposit ready-to-fly planes for customers onto a 1.9-mile road that leads to the airport’s new fifth runway. But for now the massive building just sits empty.
In recent years China has learned it can’t build motorways fast enough to connect millions of people in large eastern cities with the west. But it can build airports. Between 2011 and 2015, China will have constructed more than 80 new airports and expanded another 100, according to the China Daily newspaper. In far-flung cities like Shennongjia, in central Hubei province, workers have blown the tops off mountains to build new runways.
The first customers of the C919 — China’s home airlines — won’t have much choice when it comes to purchasing planes. Forty-six airlines operate on the mainland, but three state-owned airlines — China Air, China Southern, and China Eastern — control 80% of the flights.
Even if the C919 compares weakly with Boeing’s 737 or Airbus’s A320 in fuel efficiency, the state-controlled airlines will be pressured to buy. Of Comac’s 400 orders for the plane, almost all come from Chinese airlines or Chinese leasing companies. (The exception is GE’s aircraft-leasing unit, which has ordered 20 of the planes.)
Citigroup and others estimate the sale price of a C919 to come in around $75 million, about $10 million less than the next generations of the Boeing 737 and the Airbus A320. Analysts speculate that the price might be low enough to lure a low-cost Western airline if the C919 ends up being similar in efficiency to the competition.
That speculation has been encouraged by an outspoken Irish accountant who also happens to run one of Europe’s most profitable airlines. “I believe they’re all fucking Toyota Corollas,” says Ryanair CEO Michael O’Leary when asked about the technical differences between Boeing, Airbus, and Comac. O’Leary has used bluster to his advantage. Stories about Ryanair’s charging for toilets and plans for standing seats have created reams of free publicity for the ultra-low-cost European carrier (its average fare is 40 euros, or about $55), even though plans like those two are unlikely ever to go through. O’Leary orchestrates his public relations with a mix of P.T. Barnum showmanship and Richard Branson rebelliousness.
Which is why the industry was thoroughly skeptical when O’Leary announced in 2011 that Ryanair would cooperate with Comac on details surrounding the C919 — and even said it may become the first Western airline to place an order. Ryanair hasn’t promised to buy any planes, but according to the agreement, it will share what it wants in a plane. Comac will presumably build to the specifications.
What Ryanair really wants from Comac comes down to a numbers game. International safety regulations say airlines must employ one flight attendant for every 50 passengers. The most passengers Ryanair can carry on its Boeing 737s today is 189. If Comac builds an extended version of the C919 and adds 31 more seats to its all-economy-class 168-seat layout (other versions of the plane will hold 190 passengers), Ryanair can fly 199 passengers without adding an extra attendant. “If we fly those 10 extra seats on every flight we operate a day, for 364 days, with an average fare of 40 euros,” O’Leary says, “that’s $1 million in revenues almost straight to the bottom line each year over a 20-year life.”
Ryanair and Comac meet twice a year, and O’Leary says he is confident the company will build a 199-seat airliner by 2021. That would be a perfect window for a new plane, he adds, as Boeing and Airbus work on new variants of the 737 and A320 over a similar timeframe. “Those extra seats will be a game changer for the Chinese if they can make them,” O’Leary says.
That “if ” isn’t the only unknown for O’Leary. Will his passengers fly on a Chinese jet? For that matter, would you or I? “Ninety-nine percent of my passengers don’t know what kind of aircraft they are getting on,” O’Leary says. “You trust the Chinese to make computers and medical devices, and the question is, Would you get on a Chinese aircraft? Of course!”
Indeed, it’s hard to argue that passengers in the future will put down their iPhones to check the plane information card. Even today fliers may not know they are flying on a Brazilian jet between New York and Washington, D.C. Embraer, based in São José dos Campos, has become a trusted brand that pulls in $6 billion in sales a year, after prideful aviation executives in the 1980s scoffed at the idea of anyone ever flying Brazilian.
So if Comac builds a modern jetliner, will airlines actually buy it? China’s domestic carriers certainly will. But Teal Group analyst Richard Aboulafia thinks Comac’s approach to outsourcing weakens the company’s chances of ever competing globally. He says that’s because Western companies hold back their very best technology when Comac forces them into joint ventures. “You have suppliers showing up saying, ‘Here’s our latest and best. Okay, it’s from 1984, but it’s our latest and best.’ ”
He points to the CFM engine, called the LEAP-1C, made especially for the C919, which CFM says is the same model Boeing and Airbus are receiving for their next-generation planes — except Comac’s engine is being finished a year before Boeing’s. “There’s no way it’s as good,” says Aboulafia, citing the time necessary to create new technology. In response, CFM spokesman Rick Kennedy says, “There is variation between fan sizes and other installation considerations. But the LEAP is the LEAP.”
Other skeptics, like Stanley Chao, a consultant who visited Comac half-a-dozen times over the past few years, are doubtful the C919 will even fly. Chao says his clients, who are suppliers, were surprised to hear Comac’s engineers asking the most basic questions — and then asking for shortcuts. “When we did wrap-ups in meetings, you’d consistently hear, ‘Can you tell us how Boeing did it? What vendor is Airbus or Boeing using? Can you put in sample documents that they supplied to the FAA?’ ” Chao says. “Forget why or how.” (Comac admits it lacks expertise in areas such as certification, and says it has learned valuable lessons from suppliers.)
But many others in the aviation world think Comac will gain momentum over the next decade with the C919. “It took Airbus 20 years to come up with the A320, which made Airbus,” says Eddy Pieniazek, chief adviser at aviation advisory Ascend. “It won’t take the Chinese that long.”
“Once they build the C919, we know they’re planning a 929 and 939,” says Clive Lewis, managing partner of U.K. consultant Achieving the Difference, which analyzes aviation data. “They could have a family of aircraft that will give them the ability to compete on narrow body and wide body.”
For their part, Boeing and Airbus think Comac will eventually become a competitor. “We believe Comac will succeed with the C919, but there is a long, hard road for them to go down first,” says Eric Chen, president of Airbus China, acknowledging that Airbus itself was once a small player competing against U.S. giants. And of all the countries trying to push their way into commercial aviation, including a resurgent Russia, Japan, and Canada, Boeing China president Marc Allen says, “We think China is best positioned.”
Still, Comac needs to get the C919 in the air. Chairman Jin told me that the C919’s first flight would be delayed until 2015, at least a year late. Insiders say a more realistic date may be 2016 or 2017.
Early on in my visit with Comac, I went to dinner at a nice Italian restaurant in Shanghai with half a dozen of the company’s “corporate culture” employees. After the soup, each person at the table took turns asking a question of the rest of us. I asked where they thought Comac would be in 50 or 100 years. There was a pause as the mostly twenty- and thirtysomethings thought about the question. Many of them have devoted their careers to Comac; Zhang Zhengguo, a PR man, left his wife in Beijing for the company. Another man was the first person in his family to move to a big city and work his way up to a corporate gig. His parents, who live in a rural part of China, still tend corn and wheat and have never visited a city. “It would be my wish that they fly on a Comac plane to Shanghai,” the man said.
A few minutes later, the former farm boy asks everyone at the table to quiet down. He has something important to impress upon me: “It’s the desire of the people that Comac succeeds.”
Reporter associate: Zhang Dan
This story is from the November 18, 2013 issue of Fortune.