The dragon takes flight chinas journey toward building its c 91

University of Denver Digital Commons @ DU Electronic Theses and Dissertations Graduate Studies 1-1-2012 The Dragon Takes Flight: China's Journey Toward Building Its C-919 Large Passenger Aircraft and Its Impact on the US and Boeing Derek Adam Levine University of Denver Follow this and additional works at: https://digitalcommons.edu/etd Part of the Chinese Studies Commons, and the International Relations Commons Recommended Citation Levine, Derek Adam, "The Dragon Takes Flight: China's Journey Toward Building Its C-919 Large Passenger Aircraft and Its Impact on the US and Boeing" (2012). Electronic Theses and Dissertations.edu/etd/1388 This Dissertation is brought to you for free and open access by the Graduate Studies at Digital Commons @ DU. It has been accepted for inclusion in Electronic Theses and Dissertations by an authorized administrator of Digital Commons @ DU. For more information, please contact jennifer.edu,dig-commons@du.

The Dragon Takes Flight: China's Journey toward Building its C-919 Large Passenger Aircraft and its Impact on the US and Boeing ____________ A Dissertation Presented to The Faculty of the Josef Korbel School of International Studies University of Denver ____________ In Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy ____________ By Derek A. Levine March 2012 Advisor: Joseph S. Szyliowicz © Copyright by Derek A. Levine 2012 All Rights Reserved Author: Derek A.

Levine Title: The Dragon Takes Flight: China's Journey toward Building its C-919 Large Passenger Aircraft and its Impact on the US and Boeing. Szyliowicz Degree Date: March 2012 ABSTRACT Despite the enormous risk associated with the development of a large indigenous airliner, China after a failed attempt in the mid-1980s, since 2003 has decided once again to embark on a journey toward the development of a 190 seat commercial airliner. Nations are typically interested in the development of indigenous airliners because of the potential spillover effects that years of research and development have on the economy and the military. Equally important is that China no longer wants to relinquish its large commercial airplane market to foreign companies such as Boeing and Airbus with their market expected to constitute nearly 25% percent of the world’s demand worth $340 billion.

With the aviation industry naturally driven toward a natural monopoly, the Chinese government has agreed to not only subsidize the C919’s development, removing the potential risk associated with launching a technologically advanced aircraft, but upon the aircraft’s arrival, which is expected in 2016, but also guarantee sales of the plane by forcing its State-owned airlines to purchase it. This could potentially be harmful to current commercial aircraft producers Airbus and Boeing. If the three manufacturers: Boeing, Airbus and COMAC split the market in three ways, it will dig deep into the profits of all three manufacturers. This may force Boeing to contract the size of their work force, including skilled engineers and scientists, thus slowing down the process of ii innovation and product efficiency and the ability of the military and the economy reaping such benefits.

This dissertation weaves the work of Peter’s Evans’s “Embedded Autonomy and Michael Porter’s “Determinant Model” to determine that given the current nature of the Chinese state, it possess an adequate level of embedded autonomy to implement favorable policy for constructing an internationally competitive airliner, which consists of both creating an innovative airliner and selling enough of them to develop scale economies. A state’s institutional configurations whether it possess a high level of autonomy, high level of embeddedness, or a balance between the two, influence the essential society variables in Porter’s Determinant model for developing industry differently. Using a combination of primary source and secondary data from China, the United States and France, which include conducting interviews with key officials and experts in the aviation field from those countries, this research project compares and contrasts the institutional arrangements of China in the 1980’s during its failed attempt at commercial aircraft development with today and concludes that different internal structures lead to different levels of effectiveness and success with respect to implementing policy choices favorable to the development of the commercial aviation industry. Secondly, this Dissertation looks at the potential implications the success of the C919 may have on the United States and Boeing and the ways in which Boeing might prepare to meeting the challenges it faces.

iii ACKNOWLEDGEMENTS No dissertation could ever be complete without overwhelming support from mentors, family, colleagues, and friends. Much of my personal life was put on hold while I made frequent trips to China to conduct fieldwork and spent several years writing this manuscript. I owe an unrepayable debt of gratitude to my mentor and friend, Dr. Ming Xia, without whose guidance and advice this project would not have been conceivable.

He has time and time again shown me the light and brought me back from despair. A special thanks to my wife, Xiaodong, who managed to help me set up interviews with important scholars and professionals in the field of aviation in China, and for her help in transcribing some of those interviews from Mandarin to English. Without her support, this dissertation would have lost a degree of its originality. I thank my committee, Chair Joseph Szyliowicz, Frank Laird, Alan Gilbert, and Andrew Goetz for their patience, words of encouragement, and most of all for having helped me distill my dissertation into a clear, concise and coherent form that would have otherwise been a stream of unconscious thoughts.

Thanks to Barry Sheinkopf as well, who helped me edit the entire manuscript. My work is infinitely better because of their gracious feedback and comments. I would also like to thank those people in China, some of whom choose to remain anonymous, who graciously shared their life experiences, stories, and knowledge of the aviation field and business practices of China with a “lao wai.” This dissertation is dedicated to my family, my wife Xiaodong and my parents: Elliott, Patricia, my brothers Jason and Bobby, and my sister Autumn, for their endless love and support, without which the project would never have been realized. iv TABLE OF CONTENTS Chapter One: Introduction.

8 Porter's Diamond of National Competitive Advantage. 23 Dissertation Research Questions. 39 Sources of Data. 42 Chapter Two: Evolution of the Large Aircraft Industry.

45 Government Airline Regulation. 47 Jet Engine Technology Revolutionizes the Industry. 49 Competition Among American Aircraft Manufactures. 50 The European Consortium: Airbus Fills a Niche in the Market.

65 Deregulation of the American Market. 70 Differences in Industrial Policies of Boeing and Airbus. 72 Airbus Challenges Boeing In Various Sectors of the Market. Response to European Subsidies.

87 Airbus Accusation of U. 91 Failure of GATT Agreement. 94 Chapter Three: The Development of the Y-10 Passenger Aircraft. 100 Predatory State under Mao.

100 Porter’s Determinant Model and its Application to the Y-10. 105 Demand for the Y10. 105 Factor Conditions for the Y-10. 109 v Related and Supporting Industries.

129 Suppliers and Related Industries Involved in the Making of the Y-10. 132 Firm Strategy, Structure, Organization and Rivalry. 157 Y-10 Structure, Organization and Rivalry. 181 Chapter Four: The Development of the C919 Aircraft.

188 The Intermediate State under Deng. 189 Roles Played: Demiurge, Custodian, Midwife and Husbandry. 193 Demand for the C-919. 202 Massive Corruption in Awarding Large-Scale Research Grants.

221 C-919: Supporting and Related Industries. 233 Cultural Differences Makes Cooperation with M. 246 Aviation-Related Industries and Suppliers. 268 C-919: Firm Strategy, Structure and Rivalry.

286 Chapter Five: Conclusion. 292 The Intermediate State. 298 Roles under the Intermediate State. 303 Competing with the C-919.

307 A New Strategy for Competing in Commercial Aviation. 311 Potential Impact on Boeing. 311 Potential Impact on Airbus. 313 Strengths and Weaknesses of the Framework.

314 The Framework and High-Speed Rail. 346 Appendix A: Interview Questions. 346 Appendix B: Statistical Data and Tables on China. 348 vii CHAPTER ONE INTRODUCTION Only a few countries have successfully developed a commercial aviation industry.

Most that have tried have failed: The size of the investment is usually greater than a firm’s worth. Therefore, any country seeking to develop an indigenous aircraft must be willing to provide subsidies or other forms of assistance to its airplane manufacturer in order to minimize the risk of monetary losses that could potentially bankrupt it. As a result, only Europe’s Airbus has thus far been able to successfully pose a direct challenge to American dominance in the large passenger airplane market. With the massive amounts of money channeled by the members of the European Consortium (France, Great Britain, Germany, Spain, etc.) over the last twenty years toward developing, producing, and marketing large passenger aircraft, Airbus has managed to capture about 50 percent of the market in an industry that has traditionally been driven toward a natural monopoly.

Now, with demand for commercial aircraft in China over the next 20 years expected to constitute nearly 25 percent of the world market, and to exceed over $340 billion (3,560 jumbo jets and 993 regional jets), the Chinese have embarked on a 1 journey to produce a 190-seat passenger aircraft (COMAC 919) within the next five years.1 Like Airbus, the support of a government will make entry possible for China, whose emergence into the industry is expected to have major implications for both the United States and Europe. The Uniqueness of the Aviation Industry Nations typically attempt to develop an indigenous airliner because of the potential benefits to its economy and military. The level of a country’s indigenous aircraft is usually indicative of the level of scientific and technological development in both sectors, advances in one of which will spill over into the other. However, for a state to successfully break into the aviation business, it must understand the industry’s unique economics and competitive nature,2 which, as is true of other high-technology industries, demands above average spending on research and development, and greater employment of scientists and engineers, so the university system must provide modern facilities and skilled faculty.

The aviation industry differs from most other high-tech industries because the huge up-front development costs and immense technological risk associated with the launch of an aircraft create a natural monopoly protected by barriers that defeat typical market forces. It takes years of losses for a new firm to develop a family of aircraft and produce it on a scale large enough to benefit from economies of scale. Therefore, 1 “China to Deliver a Fleet of ARJs by 2012”, Industry Research Solutions, www.com/Blog/2009/02/China-to-Deliver-a-Fleet-of-30-Homemade-ARJs-by-2012. 2 states are inclined to offer aircraft-manufacturing firms assistance in the form of subsidies to offset the risk associated with their development.

A state wishing to develop an indigenous airliner must be aware of the huge price tag associated with integrating numerous technologies and systems originating in unrelated industries and fields, the cost of which lies somewhere in the ballpark of $4 to 6 billion in up-front expenditure and materials.3 Even if a firm has the capital to meet these costs, there is no guarantee it will earn enough revenue to realize a profit. Even when a state issues subsidies to aircraft manufacturing firms, they still face immense risks associated with the launching of a new aircraft. Industry leaders will, if possible, choose to remain competitive by making slight modifications to already proven models and delay innovation because the costs remain enormous, and to draw on their economies of scale to maintain a competitive advantage over start-ups producing similar aircraft. By comparison, airline manufacturers new to the industry must look to find a niche in the market through product innovation and differentiation, which can be ruinously risky because of technological uncertainties.

Government intervention reduces the risk by issuing subsidies and protection to its indigenous firms, which also prevents a natural monopoly from occurring.