Market Focus : U.S. Aircraft Firms Compete on China ‘Trunkliner’ Deal : The venture to build passenger jets would be worth up to $4.5 billion over 10 to 15 years. Boeing and McDonnell Douglas are battling for the plum.

The Chinese government is preparing to choose a U.S. partner for a 150-aircraft co-production venture that would upgrade the Chinese aerospace industry and perhaps make it a major supplier of components for American jetliners.

Waging battle for the deal, estimated to be worth at least $4.5 billion over 10 to 15 years, are Boeing Co., currently the largest supplier of aircraft to China, and McDonnell Douglas Corp., already involved in a co-production venture in Shanghai.

This “Trunkliner” project, initiated by China with a request for co-production proposals to fit its specifications, would provide aircraft for expansion of passenger services by the Civil Aviation Administration of China (CAAC). But an even more important goal, Chinese officials have said, is infusion of U.S. technology.

The two American firms have been told that a decision on which one is favored will come soon. Further negotiations with the front-runner, however, would be necessary before a final contract could be signed.

The project reflects “the strong Chinese desire for themselves to have the best science and technology in the world in the area of aviation,” commented a Beijing-based analyst who spoke on condition that he not be further identified. “They’re trying to achieve a certain level of science and technology. That is their standard in measuring their level of performance. It’s not an economic standard.”

Under both companies’ proposals, the 150 aircraft would be assembled over a period of 10 to 15 years, beginning in 1996, at the Shanghai Aviation Industrial Corp.’s main factory in Shanghai. All the planes would be purchased by CAAC.

McDonnell Douglas is currently engaged in co-production of MD-82 jetliners at the Shanghai facility under a contract signed in 1985. Twenty-two MD-82s have been assembled there, with 23 more of these 147-seat aircraft due to be built before the contract expires in 1994. The total value of this project is about $1 billion.

The Shanghai factory makes the doors for these jetliners, and it has begun making horizontal stabilizers, which form part of the tail. A factory in the central China city of Chengdu has started making nose sections that will go into some of the yet to be assembled airplanes. But most components are simply shipped in from the Douglas Aircraft Co. division of McDonnell Douglas in Long Beach.

Chinese input, primarily labor on the airframe, contributes about 10% to 15% of the value of the MD-82s produced in Shanghai, according to Gareth C. C. Chang, president of McDonnell Douglas Pacific & Asia Ltd., which oversees the corporation’s activities in China.

McDonnell Douglas is paid by its Chinese partner, the Shanghai Aviation Industrial Corp., both for the components shipped from Long Beach and for technical assistance in Shanghai, Chang said. The Chinese company then sells the finished jetliners to CAAC through a government supply firm.

If McDonnell Douglas wins the nod for the Trunkliner project, it proposes to build MD-90 twin-jet aircraft with engines from International Aero Engines AG, a five-company consortium led by United Technologies Corp.’s Pratt & Whitney Division and Rolls-Royce.

The MD-90 will have a longer fuselage than the MD-82, a more fuel-efficient engine and more advanced avionics. The version built in China would also have landing gear specially designed to spread the airplane’s weight across more wheels, thereby avoiding damage to thin-surfaced runways.

Boeing is proposing its twin-engined 737-300 model, with engines by CFM International Inc., which is a joint venture of General Electric Co. and Snecma of France. Both companies’ planes would seat about 160 passengers.

Under both proposals, aircraft factories in various other cities around China, which until now have been involved primarily in military production, would make parts for the jetliners assembled in Shanghai. Aircraft design modifications, which form part of both proposals, are intended not only to customize the aircraft to China’s needs but also to provide opportunities for Chinese engineers to learn more about aircraft design.

China’s initial specifications for the project required that Chinese input comprise at least 51% of the value of the finished aircraft, although there seems to be some flexibility on this point. China also wants the deal to include exports of Chinese components for use in aircraft assembled in the United States, which would help it cover some of its costs. This means that an important part of the project would be for the U.S. company to assist Chinese factories in upgrading their ability to make top-quality components.

Under Boeing’s proposal, a factory in Xian would build the 737-300’s fuselage, most of the tail would be made in Shenyang and a Chengdu factory would make the nose, according to Stephen Wong, Boeing’s manager for business with China. Other major components, including the wings, would be imported, and the airplane would be assembled in Shanghai.

Chang said his firm’s proposal calls for the same Xian factory to make either the fuselage or the wings of the MD-90, with the Chengdu factory making the nose section and the Shenyang factory also involved. About 90% of the airframe would be made in China, he said. About two-thirds of the jetliner’s value would come from imported components, but more than half of the labor hours would be Chinese, he said.

U.S. companies have portrayed the project as potentially strengthening the winner’s position in world markets.

Chang said that the co-production project aims to create “a long-term strategic alliance and partnership to compete successfully in the world market.” A key aspect in this, he explained, is that China could supply parts that would help the firm hold down the cost of production in Long Beach. He also indicated that while the 150 planes called for in the Trunkliner project are all intended for use by China, it is possible that additional aircraft could be made for export.

Wong said he believes that China’s combination of “ability and knowledge in building airplanes” plus its “low labor costs” will ultimately make it “the most economical, capable aircraft supplier in the world.”

“I say China can offer Boeing quality products at a lower cost--perhaps the lowest in the world,” Wong said. “I feel if we want to be competitive in this field, we have to capitalize on this opportunity that China offers.”

China, for its part, could benefit from new export opportunities beyond those directly tied to the trunkliner program, Wong said.

Boeing offers China the opportunity to provide all model work as major suppliers to Boeing, he explained. “They are already providing us parts for the 747 and 757. We could expand that into larger components. It’s an unlimited opportunity (for China), simply because we have 60% of the market in the world for commercial airplanes.”

Wong, noting that China is already a major producer of military aircraft, said he did not believe that the widespread shortcomings in quality control that afflict many Chinese industries present any serious problem for airplane co-production.

“We’ve been buying parts from China for 10 years,” Wong said. “The quality is excellent. The delivery is excellent. We’re most happy with it.”

Officials of the Ministry of Aeronautics and Astronautics Industry, which will oversee the project, have said that technology transfer ranks as the top priority.

“The purpose of the project is . . . above all, to improve the technical level of the country’s aircraft industry,” Tang Xiaoping, vice president of the China National Aero-Technology Import and Export Corp. (CATIC), commented to the official China Daily. CATIC, a state-owned corporation under the aeronautics and astronautics ministry, will be the main Chinese partner in the venture.

But China’s mixed goals for the project have given rise to bureaucratic infighting between CAAC, the ultimate purchaser, which has openly favored Boeing, and the ministry, which has seemed to lean toward McDonnell Douglas.

“Some airports, airlines and even pilots say they would prefer Boeing because they favor the jets which already play an important role in China’s aviation fleets,” China Daily reported. “But McDonnell Douglas may be preferred by the aeronautics ministry since both sides have cooperated (in the MD-82 project) in Shanghai.”

The McDonnell Douglas proposal also offers China greater opportunities to participate in the design process, which may boost its attractiveness for the ministry.

Because of these bureaucratic conflicts, the final choice is expected to be made by Premier Li Peng and the powerful State Planning Commission, a Beijing-based analyst said.

Li met in early February with McDonnell Douglas chairman John McDonnell in Beijing. Last October, he met with Boeing chairman Frank Shrontz.

The premier has offered encouragement to both sides but at the same time sought to play them off against each other.

“Li praised McDonnell Douglas Corp. for its active cooperation with China and said that China wishes to expand that cooperation,” the official New China News Agency said in a report on Li’s meeting with McDonnell. “He also called on McDonnell Douglas to further involve itself in competition with other companies concerning cooperative projects with China.”

On Catching a Flight in China

The Civil Aviation Administration of China (CAAC) controls the activities of several nominally separate regional airlines, such as Air China, which handles almost all international routes, and China Northwest Airlines, which flies such domestic routes as Beijing to Xian.

CAAC’s fleet includes about 210 passenger planes, of which two out of three are large or medium-sized jets, mostly built by Boeing. It also has a fleet of over 200 cargo aircraft.

CAAC operates 53 international passenger routes--including a once-a-week Beijing-Shanghai-Los Angeles service--and 372 domestic routes, many of which also offer service only once or twice a week. It flew 16.6 million passengers in 1990.

CAAC typically charges foreigners higher prices than Chinese citizens on domestic flights.

The one-way, Beijing-Shanghai airfare for a Chinese citizen, for example, is the equivalent of $63.50; for a foreigner, $81. (The cheapest standard fare charged by American carriers to fly from San Francisco to Seattle--roughly the same distance--is currently $165.)

CAAC charges Chinese citizens and foreigners alike $221 to fly from Beijing to Hong Kong. By comparison, the least expensive Los Angeles-to-Puerto Vallarta, Mexico flight, which is roughly the same distance, now costs $195.