Looking East: promising future for China's aerospace industry.

• Author: Hughes, Nate
• Position: Analysis

China's plans to create a new civil aviation company in the first quarter of 2008 could signify much more than prospective competition in the regional jetliner class. The shift is emblematic of an evolving mindset in China's defense industry--one with far-reaching consequences.

Huang Qiang, secretary-general of China's commission on science, technology and industry for national defense, confirmed rumors in January that the nation would create a new aviation company before March.

In 1999, five bulky state-owned administrative entities of the domestic defense industry were reorganized into 10 major military-industrial groups, two of which have since seen success as Aviation Industry of China (AVIC) I and AVIC II. Working together, the two groups are responsible for the design of the advanced regional jet of the 21st century (ARJ-21), China's first indigenously produced civilian jetliner.

With passenger, executive and freight versions, the ARJ-21 was designed from the ground up with the needs of the Chinese regional aviation market in mind. Despite its homegrown design, however, some 50 percent of its components are foreign made. While the ARJ-21 is probably not destined for major sales in the U.S. market, certification will be sought from the U.S. Federal Aviation Administration, a process that will provide Beijing with much insight into standards and procedures of the U.S. aviation industry.

Focusing on larger civilian aircraft, the new Chinese company--to be named AVIC III--will represent the next milestone in the shaping of China's aircraft manufacturing sector, even as it results in infighting for resources among the three groups. Ultimately, AVIC-produced civilian aircraft--and military variants--could well find a market among countries that cannot afford state-of-the-art Western technology.

Reform in China's aircraft manufacturing sector is part of a larger shift in mindset from Soviet defense industrial thinking to more Western models in which the crossover between military and civilian technological applications is recognized and exploited. In April 2005, testifying before the U.S.-China Economic and Security Review Commission, a senior fellow in trade and productivity at Manufacturers Alliance/MAPI Inc. said the Chinese defense industry went through "a fundamental restructuring" from 1997 to 1999 that shifted control of defense enterprises from the military to the civilian government.

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