By William Patalon III
Money Morning/The Money Map Report
As a journalist who has followed both the aerospace sector and China's global emergence for many years, I can honestly say that I wasn't surprised when China recently announced its intent to get into the jumbo-jet airliner business.
But for investors with an interest in long-term profits, this is a story that's well worth a detailed look. It will leave you with a very clear understanding of why China is a "must invest" kind of market. And it will demonstrate, yet again, how committed China is to becoming a world economic superpower, as well as the tenacity that's likely to make that happen.
Let's start with a look at the basics.
Two weekends ago in Shanghai, the Chinese government unveiled its first "jumbo" passenger aircraft company, a venture that's labeled as the Commercial Aircraft Corp. of China Ltd. (CACC). By "jumbo" jet, China is referring to the so-called widebody airliners that carry 200 to 800 passengers and make globetrotting trips to almost any point on the globe.
Right now – and for many years – the world jumbo-jet market has belonged to just two companies:
- The Boeing Co. (BA), the U.S.-based airliner industry pioneer that's America's biggest exporter.
- And the pan-European venture, Airbus SAS, a subsidiary of European defense giant EADS NV.
With its 747 "Jumbo Jet," Boeing both defined and dominated the jumbo market. The jetliner, with its distinctive humpbacked silhouette, made its first commercial flight in 1970, and held the passenger-capacity record for 37 years – a mark that was finally eclipsed by the Airbus 380.
Lockheed Corp. – now Lockheed Martin Corp. (LMT) – was the first to pull the ripcord on the jumbo-jet market. Its L-1011 TriStar jet had been the third widebody jet to enter operation, following the 747 and the McDonnell Douglas DC-10, which was built by McDonnell Douglas Aircraft Corp, a defense/commercial airliner firm. Lockheed launched the jet in 1968 and, thanks to hugely disappointing orders (it only built 250 of the jets), ceased production in 1984.
McDonnell Douglas stayed around a bit longer. But it finally merged with Boeing in 1997, joining a long list of aerospace firms swallowed up by bigger suitors.
If the jumbo-jet market sounds like a tough one to crack, that's because it truly is. But those difficulties don't emanate from a lack of demand: The market is huge.
The $3 Trillion Shopping List
Indeed, over the next 20 years, Boeing has forecast that air carriers worldwide will require 28,600 commercial aircraft with a value of $2.8 trillion. The Boeing forecast is generally viewed as the world's best analysis of the global market for commercial airliners and cargo aircraft. And this forecast isn't limited to jumbo-sized passenger jets: It includes short-range connector planes, regional jets, cargo planes and the jumbos.
The huge revenue potential of the global airliner market – combined with the low number of viable competitors and the high barriers faced by new potential entrants – has been a big reason that Money Morning's investment gurus all view Boeing as a promising profit play for years to come. Not even China's plans will change that viewpoint.
But with such a large potential market, many observers find it surprising that there aren't more potential players.
That's changing – or at least it is at the lower end of the market. China and Russia are both well along on government-backed programs to develop a regional jetliner for sale to global customers. In the past month or so alone – as was reported here in Money Morning – Japan entered the regional jetliner shootout: Japan's Mitsubishi Heavy Industries Ltd. (PINK: MHVYF) has unveiled a plan to develop a "regional" jetliner for use by airlines all around the world. The development work alone is expected to cost several billion dollars, but the program has the backing of both Toyota Motor Corp. (TM) – the world's No. 1 automaker by sales – and the Japanese government.
Mitsubishi Heavy hopes to have the jet in the air by 2013 and is aiming to sell 1,000 of the airplanes over the next 20 to 30 years, grabbing one-fifth of expected new demand in a market that is projected to roughly quintuple to more than 5,000 planes by 2026.
However, it could be a bumpy flight: Incumbents Bombardier Inc., of Canada, and Embraer (Empresa Brasileira de Aeronautica SA) (ERJ) of Brazil, currently dominate the short-range jetliner market. Both the China and Russia ventures will take wing well before Japan's new jet, and the eventual existence of all five combatants in this slice of the airline market could lead to some pretty congested airspace – especially since several players are expected to link up with market-savvy foreign heavyweights, including, potentially, Boeing.
As tough as that sounds, attacking the jumbo-jet market will be tougher still. Even with fewer contestants.
Jumbo Challenges for a Jumbo Jet
The tremendous appetite for capital, the engineering challenges that range from complex aerodynamics to new composite materials, and the need to be able to manage a string of suppliers scattered about the globe are just a few of the hefty demands that make this mountain too high for all but a few global companies to climb.
Right now, in fact, there are only two new jumbo jet programs under way, either in development or in testing, and both have been riddled with technical problems that have resulted in pushed-back delivery dates. There are:
- The Boeing 787 "Dreamliner," a replacement for the company's Boeing 767. It's making heavy use of composite materials and depends heavily on a network of global suppliers, and delays have pushed the delivery date for the first jets well into next year.
- And the Airbus A350, a replacement for the Airbus A330/A340 line, and a program whose many delays have pushed its delivery date out to an estimated 2012 or 2013, according to several sources.
Given that huge companies such as McDonnell Douglas and Lockheed have gone up against Boeing and failed, many analysts are skeptical about the "commercial prospects" of a jumbo jet designed and built in China. China has virtually no experience in this market and the two other (known) attempts – ventures with Douglas and Airbus – ended in failure.
And even if China succeeds, it'll be a good 20 years before U.S. or European airlines flying China-built jets will be ready to lose your bags on a regular basis.
That's probably a good estimate. But China clearly isn't deterred by such long time frames. The country reorganized its aviation industry back in 1999, establishing 10 state-owned companies – each with carefully defined mandate, reports GlobalSecurity.org.
Given what's happened since then, with the creation of, first, a regional jetliner company and, now, a jumbo-jet firm, the language China used at the time to describe the moves now becomes very interesting.
At the time, China split its 550,000-employee Aviation Industry of China (AVIC) into two separate companies: AVIC I and AVIC II. AVIC I was ordered to focus on "large and medium-sized aircraft," while AVIC II was told to concentrate on "feed aircraft"—just the kind of demarcation you'd want if you were a country looking to assemble an airliner industry.
It takes time for expertise in such areas to develop; China can now reap the benefits of that decision a decade ago, since the country will now rely on that expertise for both the regional and jumbo-jet programs.
And China anticipates another fairly long gestation period for its jumbo-jet program. At the new aircraft company's recent inauguration – an affair so important that it was attended by China Vice Premier Zhang Dejiang – CACC General Manager Jin Zhuanglong told the state-run Xinhua news agency that "it is too early to set a timetable or make development strategy" because it will take a long time for the company to train talent and do research."
The executive also used that super-long timetable as a device to publicly downplay any competitive designs China might have on the industry-leading positions of Boeing and Airbus.
"Since large aircraft cannot be made in one or two days, CACC will pose no threat to large jet-makers like Boeing and Airbus," Jin said.
Don't you believe it.
China, alone, will require 3,400 new airplanes worth about $340 billion over the next 20 years, Boeing projected in its recent market forecast. That works out to sales of about $17 billion annually over the next two decades. About 2,650 of those commercial airplanes will be actual airliners, Airbus projected in a forecast of its own. Up to now, Chinese airlines have been placing huge orders with Boeing and Airbus to modernize their air fleets and close the customer-service gap on their foreign competitors.
And neither of those forecasts– which will also need to outfit their commercial air fleets as their economies make the leap from "emerging" to mainstream.
We're talking about a huge amount of capital here.
And China clearly wants a piece.
Asian companies have many strengths. But one of the strongest is the patience and long-term vision they're able to bring to bear on a market. That's something the "quarter-to-quarter" Wall Street mentality has beaten out of too many once-great U.S. and European firms.
Japan – with the great resolve it's bringing to the regional airliner market – is a terrific example of what I mean. Japan is packaging together its best corporate brains – Mitsubishi and Toyota – mixing in the strong-but-quiet backing of the government, and turning its team lose on a clearly defined target.
Now China's doing the same with the jumbo-jet market.
Although I detailed the appetizing statistics of the Boeing and Airbus forecasts for airliner sales in China over the next 20 years, China's leaders didn't make this decision recently. They started it in motion back in 1999 when they established those 10 aircraft companies, giving each a carefully defined technology, capability or market objective to pursue. They added several ingredients to their concoction when they launched the regional airliner program a few years back.
And now, by carefully reshuffling their storehouse of accumulated technology, mixing in $2.9 billion in "seed" money, and giving it the clear backing of the central government, China's leaders have told their aircraft industry to go after the sector's greatest prize: The jumbo jet market.
Will China succeed? It's too early to say. To be sure, they won't be unseating Boeing or Airbus anytime soon. And perhaps never.
There will be benefits, no matter what. The technology this program develops will launch a huge aerospace industry, just as it did in the United States starting back in the 1940s. The spin-off benefits will spawn China's own Silicon Valley – in several locations. Members of its fast-growing middle class will start finding cool high-tech products that they want to buy – and those products will read "Made in China." And China's defense-aerospace business will get a huge boost – as will its includes plans for a lunar landing., which
There's one other factor to consider, too. And it's a big one. China has emerged as the key catalyst for all of Asia. And with the newly established close economic ties with Japan – reported in Money Morning, though almost nowhere else, last week – China is establishing a sphere of economic and political influence that will give it a huge advantage with airline carriers throughout Asia … when and if it's able to deliver the goods, of course.
This audacious aircraft program announcement is yet another example of China's resolve to make itself a global superpower. You'll see this again and again. Watch it carefully, for this resolve will help guarantee that emergence. And if you act, it'll help guarantee your success as an investor, as well.
News and Related Story Links:
- China Knowledge: .
- Money Morning Global Economic Analysis:
Two Ways to Profit as China and Japan Quietly Forge the Most Powerful Trading Alliance in the World.
Commercial Aircraft Corporation of China Ltd.
- Xinhua News Agency (China):
China's jumbo passenger aircraft company established in Shanghai.
- BBC News:
Chinese Plane Business Gets Wings.
Aviation Industries of China [AVIC]; China Aviation Industry Corp. [CAIC].
- BBC News:
Ceremony Inaugurates Chinese Jet.
- BBC News: ?
- The Associated Press:
- Aerospace Technology.com:
ARJ21 Regional Jet Aircraft, China
- Corporate Web Site:
- The Financial Times:
Toyota funds passenger jet.
Japan's $1 billion plane project gets off the ground.
- Aviation Week and Space Technology:
Embraer Chief Questions MRJ70/90 Launch.
- Aviation Week and Space Technology:
Mitsubishi Leads Japanese Aircraft Resurgence.
- Money Morning Special Investment Report:
China's Growth Will Clear $340 Billion Worth of Airliner Sales for Takeoff Over the Next 20 Years.
- Money Morning News Analysis:
Boeing Earnings Surprise Wall Street Just One Day After Weak Dollar Forces Airbus to Raise Prices.
Private airlines ready for take-off.
China reveals astronaut's brush with death.
Bombardier CRJ900 Regional Jet, Canada.
F-2 Fighter Jet.
- Money Morning Economic Forecasting Series:
Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street."
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.