As Supply Chain Matters blog readers are aware, one of our objectives in providing supply chain management focused education is to point out and reference significant industry milestones that we believe should be monitored. Two very recent examples were the announcement of China’s first flexible display production line and our declaration of a new phase of online and Omni-channel fulfillment. We now call attention to a third significant development, one that involves the aerospace and commercial aircraft industry and its associated supply chain ecosystem.

This week, the government of China announced the creation of a new state-owned firm, Aero Engine Corp. of China (AECC). The mission of this proposed manufacturing firm is to accelerate the development, production and testing of advanced jet engines within China. In conjunction with Sunday’s state media announcement, China’s President Xi Jinping indicated that the creation of AECC is a “strategic move” to help develop homegrown aerospace companies, part of China’s current five-year plan to foster more high technology industries that can fuel future economic growth. The company would be funded with 50 billion yuan ($7.5 billion) of initial capital investment with three investors that include the government of China, Aviation Industry Corp. of China, an aerospace conglomerate, and Commercial Aircraft Corp. of China (COMAC), a manufacturer of commercial aircraft. According to a state-media report, AECC will eventually employ upwards of 100,000 workers.  Comac C919_1_350

It is common industry knowledge that the explosion of demand for new commercial aircraft designs was fueled by the ongoing and future air travel needs involving Middle Eastern countries as well as China. Currently, China’s current two homegrown passenger jet designs rely on non-Chinese manufacturers such as CFM International, General Electric and Pratt & Whitney. The newly announced COMAC C919 relies on CFM International engines for its two power plants. A homegrown jet engine designer and producer strategically allows China to less dependent on foreign manufacturers for its military aircraft needs.

As various business media are pointing out, the design and manufacturing of advanced jet engines is a very complex task requiring a lot of engineering intellectual property and production process capabilities. Today’s more advanced and fuel-efficient aircraft engine designs stem from billions of dollars and multi-year investments in component design, more advanced materials and turbine technologies.

Then there is the longstanding challenge of occurrences of multi-industry industrial espionage that often involve China’s state-owned firms. In one example, when China initially had desires to enter the high-speed industry, the country elected to partner with French and Japan producers leveraging technology transfer arrangements.  Eventually, China’s state-owned railway firms managed to copy the advanced design of components and now provide high-speed rail trains not only for China’s domestic needs but other countries as well. In a 2013 Supply Chain Matters commentary, we called attention to a Financial Times report indicating that a quarter of U.S. companies conducting business in China at that time had indicated that they have had trade secrets stolen or compromised through cyber related attacks on their China operations. China has since made overt efforts to crackdown on industrial espionage but such threats and concerns remain.

Thus far, existing aircraft engine producers have resisted technology transfer arrangements with China’s aerospace industry.  However, both Airbus and Boeing, requiring broader market access to China’s new aircraft needs, have established respective local manufacturing assembly presence in the country along with significant component suppliers as part of respective new aircraft supply chains.

The obvious question is when will AECC eventually come up with a viable aircraft engine design and production capability.  The reports that we reviewed thus far currently predict a realistic 5 to 10-year timeline window. In its reporting, The Wall Street Journal observes that while Chinese engineers have since developed military jet engines, they have yet to master technologies required to produce more powerful and reliable turbofan engines suitable for commercial transport needs.

Thus, August 2016 provides yet another milestone, that when China declared its intent to eventually be a home-grown designer and producer of commercial aircraft engines. The open question is now design methodologies and timing.

Bob Ferrari

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