By Bernhard Zand
Source: Der Spiegel
China's slowing economy has German industry worried about its
exports to Asia. But as it goes about beefing up the transportation
sector, the country poses a completely different threat in the
longer-term.
For a military site, the Dachang Air Base in the northern part of
Shanghai has a very civilian appearance, a little like the campus of an
American university, with widely spaced bungalows and buildings, plane
trees, ponds, lawns and the Volvos, Jeeps and Buicks of employees.
Along with several assistants, aviation engineer Li Jieke, 66, a tall,
elegant man, is giving a tour of the grounds along with an assistant.
Foreigners are an uncommon sight here, and foreign journalists are
especially rare. "No photos, please," says Li, as we approach the
airfield, where several People's Liberation Army jet fighter are parked
in formation. "Let's take a drive over to our building instead, to the
civilian aircraft."
In Dr. Li's hangar, photographs are only permitted in selected
locations, and only from specific angles. The ARJ21 Xiangfeng is being
assembled there. It is China's first domestically developed modern
airliner, the pride of its engineers and the hope of its aviation
industry. ARJ stands for "Advanced Regional Jet," and Xiangfeng means
"Flying Phoenix." The number 21 stands for the 21st century.
Development of the short-haul aircraft began in 2002, and it took off
on its first test flight in 2008, after a few delays. But then the
wings proved to be too weak, and there were problems with the aircraft's
electronics, landing gear and ice testing. Certification had to be
postponed several times.
COMAC, the Chinese state-owned aviation company, plans to deliver the
first aircraft this fall, five years later than planned. "It wasn't
easy to get the Phoenix off the ground," says Li Jieke. "Building a safe
airliner is the biggest challenge for a modern industry."
China,
the world's second-largest economy and largest trading nation, produces
steel and cement, manufactures garlic presses and soccer jerseys and
assembles smartphones, tablets and computers. But if the government
planners in Beijing have their way, China will also develop and build
pacemakers, high-performance cameras and industrial robots in the
future. And eventually it will also build a large jet with engines that
are not produced by General Electric, like those on the ARJ21.
Beijing is extremely ambitious. No matter how difficult it is, China
must build its own large aircraft after the ARJ21, said President Xi
Jinping during a visit to COMAC in Shanghai last year. The president
currently flies to state visits on an American aircraft, a Boeing 747.
He doesn't seem to like that. "In the past, someone said the best choice
for us is to rent (passenger aircraft) from others and then buy (them)
and that the last option is to make our own," he said. "We have reversed
this notion. We will invest more to develop and produce our own large
aircraft."
A Turning Point
The world is currently very interested in the economic issues
associated with this claim. Exactly how strong is China's economy? Will
the country remain the "workbench of the world," dependent on ideas and
orders from the West? Or will it manage to complete the jump to an
innovative economy, one that can compete in high-tech fields? And will
this make the country, which is mainly a buyer of high-quality German
products at this point, a threat to German industry?
China's ambitions as an industrialized nation are especially apparent in the three major areas of the
transportation sector:
the automobile, railroad and aviation industries. This is where it
becomes evident how Beijing's planners are proceeding, what they have so
far achieved and what setbacks they have already endured.
All three industries are currently at a turning point. The Chinese
auto market, a guarantee of growth and profit for 35 years, is in
crisis. Growth rates are noticeably declining for the first time, both
those of domestic automakers and of some of their international partners
and competitors. The Volkswagen Group, which generates almost
two-thirds of its profits in China, reported a 4-percent decline in
sales in the first half of 2015. And as a result of two devaluations of
the Chinese currency, the yuan, the prospects for German carmakers have
been further dampened in their most lucrative market.
In contrast, the Chinese railroad industry is fast becoming a world
leader. Chinese railroad companies are receiving more orders than ever
before. The country's rail, locomotive and rolling stock manufacturers
are not just selling their products in China and in the developing
countries of Asia and Africa, but are beginning to receive orders from
the United States and Europe. German national railroad Deutsche Bahn
will open a purchasing office in China this fall, which is alarming news
for its main supplier, Siemens.
The civil aviation industry, the youngest of China's transportation
industries, is about to undergo the greatest transformation of all.
Boeing estimates that Chinese airlines will buy about 6,000 passenger
aircraft in the next 18 years, or about six aircraft a week. More than
60 of the country's current 200 airports are now being expanded and
modernized, and there are plans to build 30 new ones. It is only a
matter of time before China becomes the world's largest aviation market.
However, technical innovation cycles are longer in aviation than in
the automobile and rail sectors. China will have to hurry up if it hopes
to break the global duopoly of Boeing and Airbus -- and benefit from
its own boom in the process. What lessons is the Chinese leadership
learning from the two other industries? And what will the consequences
be for Americans and Europeans?
The Automobile Boom
It's summer 2015 at a car show in Xiamen, a prosperous port city in
Fujian Province. The first visitors are already standing in line outside
the convention center at 7 a.m. Despite the ticket price of 50 yuan, or
€7 ($8), per person, entire families are there.
The convention center consists of two large buildings. Cars made by
Chinese manufacturers are exhibited in one building. Outside China, the
domestic brands -- Chery, Geely, Great Wall, Dongfeng, SAIC -- are known
only to industry experts. The dealers are advertising their small and
mid-sized cars with ear-splitting presentations. Some exhibitors are
sitting in their model cars with the windows closed, playing with their
mobile phones while they wait for customers.
International brands -- BMW, Peugeot, Porsche, Daimler and Ford --
are on display in the other building. It is quieter there, even though
the crowds of customers are significantly larger. "Demand fluctuates,"
says Xie Xiaoping, who is touting an SUV at the Toyota booth, "but
interest has grown steadily over the years."
Western manufacturers clearly dominate the luxury category. German
brands Audi, BMW and Mercedes alone command 70 to 80 percent of the
premium market. About half of all of Daimler's S class models are now
sold in China, where the S class is the first car purchased by 12
percent of customers. Unlike Audi and VW, which recently suffered
significant setbacks, Mercedes saw its sales grow by 20 percent in the
first half of 2015.
But foreign companies also dominate the small-car or so-called volume
segment. About two-thirds of all automobiles sold in China have
international brand names, while only 38 percent of the 1.5 million cars
sold in June were entirely Chinese-produced.
DER SPIEGEL
Graphic: Chinese Automobile Sale
This Western dominance was never planned, and certainly not by the
Chinese. The government in Beijing drafted three goals when it began
building its own auto industry in the early 1980s. The first was to
import Western technology. The second was to establish a clearly
structured automobile market with a small number of efficient
manufacturers. The third was to make money -- especially foreign
currency, which China lacked at the time -- by exporting vehicles.
To achieve these goals, Beijing brought foreign manufacturers into
the country, but it also forced them to enter into joint ventures with
Chinese companies. To be a part of China's automobile boom, foreign
companies had to enter into relationships with Chinese state-owned
businesses.
Lessons Learned
Most of these goals were not achieved. There is no ongoing technology
transfer, and Chinese cars have not become export hits, as planned.
Even the Chinese have trouble distinguishing among their domestic
manufacturers' logos.
Nevertheless, Beijing long adhered to the joint-venture requirement,
because the Chinese-international joint ventures have reached, and even
exceeded, another objective: They have been more money with the
production of Western, brand-name cars for the Chinese market than both
sides had ever dared to hope.
As US expert Gregory Anderson writes in his seminal book on the
Chinese auto industry, "Designated Drivers," "it is more profitable in
the short-term for state-owned enterprises to produce foreign-branded
cars than it is for them to pour money into development of their own."
If the money is right, Beijing's practitioners of state capitalism are
apparently more interested in the capital than in state objectives,
acquiring Western technology or international market dominance.
Anderson's explanation is that China's state-owned carmakers are
geared toward quick profits, growth in absolute figures and preserving
jobs. Entrepreneurial risks are systematically avoided. The managers of
state-owned companies appointed by the government "have been most
content to allow their foreign partners to contribute complete vehicle
designs, which are then assembled by Chinese workers and sold under
foreign brands."
There are three lessons to be learned from the development of the Chinese auto industry to date.
Firstly, the political leadership's objectives are important, but
they are less influential than often assumed in the West. China has a
large auto industry today, but it doesn't resemble what the government
planners wanted at all.
Secondly, if the market develops differently than expected, the
system is flexible enough to adjust. Even if Beijing would prefer
something different, the Chinese like Western car brands better than
their own. As a result, Chinese state-owned companies are still
producing Western brands after 35 years, and they are making money in
the process.
Thirdly, the party wants to preserve its power and, in times of
declining growth rates, is increasingly oriented toward social
stability. Technology transfer and the development of domestic
industrial capacity are seen as desirable, but it is more important to
China's provincial and city governments that companies can guarantee
jobs.
Railroads for the World
A high mountain valley in Qinghai Province, two hours from the
village where the Dalai Lama was born. The D2704 express train from
Ürümqi to Lanzhou has reached an altitude of 3,600 meters (11,811 feet)
when it rushes through the first of two tunnels through the Qilian
Mountains, traveling at 250 kilometers per hour (155 miles per hour).
The train travels in darkness for one-and-a-half minutes, then it's
light outside for a few seconds, and then dark again, as the train
enters the second tunnel, the world's highest, and one that can
accommodate high-speed trains.
"Four minutes," says civil engineer Ren Shaoqiang, 48. "It takes only
four minutes for a train to travel along a stretch of rail that took us
four years to build." Ren, a muscular man with a crew cut and a
wrinkled jacket, supervised the construction of the most difficult
segment of the 1,800-kilometer Lanxin route, which connects the sparsely
populated western provinces of Ganzu, Qinghai and Xinjiang. Thanks to
the work he and his 2,000 men put in, Ren appeared on the cover of an
industry journal from Japan, a country that sets the highest standards
in railroad construction.
"The Japanese are still a few steps ahead of us," says Ren, "but we
are probably the best by now under conditions like those up here." The
Qilian Mountains are a young, geologically unstable range. "It's as if
we had driven two tubes through a mountain consisting half of sheer rock
and half of millet gruel," he says. "But as you can see, it works."
The development of China's high-speed network is an epochal
achievement. The first ultra-high-speed train began operating only eight
years ago, and today the network covers 16,000 kilometers of track,
more than the high-speed routes of all other countries combined. Some
2.5 million travelers use these routes every day, or a total of about
three billion by the end of 2014. China has the longest and
highest-altitude high-speed railroads, and the country's (and the
world's) longest railroad bridge spans a distance of 164 kilometers.
DER SPIEGEL
Map: China's High-Speed Rail Network
As with the development of its auto industry, Beijing also courted
Western and Japanese partners in the rail sector, and as with the auto
industry, the government demanded that they enter into joint ventures
with Chinese state-owned companies and share their technology.
The railroad executives of the four world market leaders, Siemens
(Germany), Bombardier (Canada), Alstom (France) and Kawasaki (Japan)
faced a dilemma: Should they hazard their know-how, or access to
possibly the world's largest railroad market?
In the end, all four companies and many suppliers went to China. They
adhered to a logic that then Deputy Premier (and the current head of
the government's anti-corruption unit) Wang Qishan summarized in a
meeting with European business executives in 2009: "I know you have
complaints. But the charm of the Chinese market is irresistible."
The results of this cooperation are completely different than in the
auto industry, and became apparent much faster. There were also setbacks
in the construction of the rail sector, including a severe train
accident in 2011 and a series of corruption scandals. Nevertheless,
Beijing has achieved what it wanted: a modern high-speed network and an
internationally competitive railroad industry.
Ambitions and Criticisms
From railroad construction to signaling technology to locomotive and
railcar construction, in almost every field the Chinese have managed to
expand foreign construction plans (which they also continue to buy) and
adjust them to their needs. Many engineers in middle management, like
Ren Shaoqiang, have worked abroad, and some are now invited to the West
to share their expertise. "We are standing on the shoulders of other
giants," says Ren, "but now we have gathered experience and massive
amounts of data, which others cannot have to this extent."
China's railroad companies have since become competitors to their
former mentors. China is building railroads in Turkey, Saudi Arabia and
Argentina, and subways in Kuala Lumpur, Ankara and Boston. It is bidding
for major projects, with international partners in some cases, like the
planned high-speed rail line between Los Angeles and San Francisco.
On June 1, China combined its two rail giants, CSR and CNR, creating a
railroad company that is larger than the rail divisions of the previous
world market leaders combined.
But as ambitiously as Beijing is pushing its way into the world
market, there is still persistent criticism within China of the
country's railroad policy. "The project to build high-speed rail lines
no longer makes economic sense," says transportation expert Zhao Jian of
Jiaotong University in Beijing. "I would stop further construction
immediately."
A few of the 33 high-speed routes, such as the one between Beijing
and Shanghai, are profitable, says Zhao, but the majority of the routes
are losing money. "Of the planned 160 pairs of trains, only 27 now
travel between Xi'an and Zhengzhou." Instead of its high-speed network,
he explains, China should expand freight traffic by rail, which now
accounts for only half as much freight volume as in 1998. "It's time
that we started budgeting more reasonably."
There are also three lessons to be learned from the short history of China's high-speed rail routes.
Firstly, Beijing now has a better idea of what it wants from foreign
companies than when its car industry took off, and it is concluding
agreements with them that are advantageous for its own companies. Its
engineers are also more advanced than they were 30 years ago, and the
time when they merely copied what others had invented is drawing to a
close.
Secondly, in contrast to the early stages of its industrialization,
China now has the financial resources to implement projects that promise
more prestige than economic gain. If the leadership feels it is
appropriate, as it did after the global financial crisis in 2008 and
2009, it can mobilize resources the way the United States did when it
expanded its national highway network in the 1950s.
Thirdly, even the Chinese central government's assets are not
unlimited. Beijing still wastes billions on infrastructure projects that
will probably never pay off. But calls for efficiency and
sustainability are getting louder. The leadership's master plan to
transform China from an investment and export-driven economy to a
consumption and service economy will only reinforce this tendency.
The Dream of Flying
With the possible exception of the Internet economy, civil aviation
is currently the biggest challenge for the industrialized nation. "If
China can succeed fully in aerospace, then in principle there is very
little that it cannot do," US aviation expert and
Atlantic journalist James Fallows writes in his book "China Airborne."
Unlike the auto and railroad industry, where Chinese manufacturers
compete with a large number of international brands and companies, the
competition in aviation stars one, or rather, two names: Boeing and
Airbus. It would be unrealistic to assume than an economy as big as
China's today could accept an American-European duopoly in the long run,
especially in a sector that Beijing declared a "key industry" 10 years
ago.
Today Beijing has divided up the domestic market almost equally
between the Americans and the Europeans. Boeing produces its aircraft in
the United States and has Chinese suppliers. In 2008, Airbus and a
joint venture partner built an exact copy of its Hamburg final assembly
plant in Tianjin, where it has already assembled more than 200 jets in
the A320 family. A planned A330 cabin equipment center is expected to
become operational in 2017.
The nucleus of what will one day become China's Boeing or Airbus is
the hangar on the edge of the Dachang air base in Shanghai, where Li
Jieke works. A model of the new COMAC headquarters stands in the lobby.
The site will be located directly at the fifth runway of Shanghai Pudong
International Airport. "The buildings that are already complete, and
where we will assemble the ARJ21 regional jet in the future, are in
blue," says Li. "The planned production line for our medium-range
aircraft is in white and the long-haul aircraft production facility is
in red."
The timetable, typology and nomenclature for Chinese civil aviation
have already been determined. The C919 short- and medium-range jet is
being advertised at aviation conventions. After several delays, the
aircraft is now scheduled to complete its first test flight this year,
and the C929 widebody jet will be ready by 2020.
"I don't want to hazard a prediction as to whether these plans will
succeed," says Wang Yanan, 45, of the Beijing University of Aeronautics
and Astronautics. "Chinese aviation managers are big on setting fixed
dates for maiden flights, dates that they don't stick to." The
embarrassing delays with the ARJ21 regional jet have injected a dose of
humility into the patriotically charged atmosphere in the industry, he
adds.
"In aviation, we have learned that it isn't enough to take apart a
foreign product to be able to copy it perfectly," says Wang. For
instance, minute details in alloys are critical when it comes to the
blades in aircraft turbines. This, according to Wang, is good news for
European and Americans concerned about their intellectual property.
Certain things simply cannot be copied and need to be independently
developed, he explains.
Finding a Balance
"Perhaps the aerospace industry will reveal the limits of the Chinese
model rather than its limitless power," writes US expert Fallows. "A
China capable of creating its own Boeing, its own Airbus, would have to
be a transformed China from the one we know now." The recipes the
country used to develop into a major economic power -- high volume,
quick profits, low cost and a great tolerance for product defects -- are
precisely the opposite of what is needed in this sector, Fallows
explains.
It does not appear that China will be able to make do without foreign
expertise in high technology in the foreseeable future. But it would be
just as premature to assume that the country will continue producing
only mass-produced goods into the future.
Aviation engineer Li, who spent a
long time working in the United States, returned to China 10 years ago
and is optimistic. "We will cooperate with international companies in
all fields," he says, "but there will be areas in which we have to press
ahead alone." They include electronics and, most of all, a central
element in the civil aviation industry, the development of domestically
produced engines. Li suspects that this development will probably take
longer to achieve than by the current target of 2020.
Perhaps this is the lesson that China, as an industrialized nation,
will learn from its experiences in auto and railway construction: That
even a country of its size and its ambition must find a balance between
political expectations and economic reality, and between prestige and
profit. It can study this relationship in economies that also began
their path to becoming highly industrialized nations as imitators of
foreign products, and as the "workbench of the world": Germany, Japan
and South Korea.
A red banner hangs from the ceiling above the "Flying Phoenix," the
first modern airliner that China will deliver this fall. The motto on
the banner could have been expressed by an engineer in any of these
countries: "Relying on quality = success."
Translated from the German by Christopher Sultan
