VZCZCXRO9111
RR RUEHCN RUEHVC
DE RUEHGH #0055/01 0301123
ZNR UUUUU ZZH
R 301123Z JAN 09
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7579
INFO RUEHOO/CHINA POSTS COLLECTIVE
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 0515
RUEHUL/AMEMBASSY SEOUL 0345
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8208

UNCLAS SECTION 01 OF 04 SHANGHAI 000055 
 
SENSITIVE 
SIPDIS 
 
STATE ALSO FOR EB/TRA/AN 
TRANSPORTATION FOR X1, X40 
TRANSPORTATION FOR OFFICE OF INTERNATIONAL AVIATION 
USDOC FOR ITA DAS KASOFF 
NSC FOR TONG, LOI 
TREASURY FOR OASIA/ISA HAARSAGER, WINSHIP 
 
E.O. 12958: N/A 
TAGS: EAIR EINV ETRD ECON KIPR ELAB CH
SUBJECT: CHINA SETS SIGHTS HIGH FOR NEW REGIONAL JET 
 
SHANGHAI 00000055  001.2 OF 004 
 
 
This cable is Sensitive But Unclassified (SBU) and for official 
use only.  Not for transmission outside USG channels. 
 
¶1.  (SBU) Summary:  China's ambition to produce a domestically 
designed and manufactured aircraft, the ARJ21 "regional jet", is 
nearing reality.  During a January 8 visit to the Commercial 
Aircraft Corporation of China (COMAC), Consulate officers talked 
with company executives and viewed the plane that passed its 
initial test flight in November.  U.S. suppliers provide seventy 
percent by value of the ARJ21's parts, giving U.S. companies a 
significant stake in its success.  COMAC hopes to obtain 
necessary certifications within two years and deliver the first 
planes to customers before the end of 2010.  However, U.S. 
Federal Aviation Administration (FAA) involvement in the 
validation of the ARJ21 has stalled, clouding the prospects of 
obtaining U.S. certification.  Besides the ARJ21, COMAC also 
plans to develop a large commercial aircraft.  Outside 
observers, however, question the commercial potential of the 
ARJ21 and the large commercial jet.  Because the success of the 
aircraft is a matter of patriotic pride, the Central Government 
and Shanghai Government are going to great lengths to promote 
the project.  End Summary. 
 
Background on COMAC the ARJ21 and Plans for a New Jumbo Jet 
--------------------------------------------- -------------- 
 
¶2. (SBU) The regional jet will be China's first domestically 
designed and manufactured commercial aircraft.  The ARJ21 was 
designed with a flight range of 3,700 km, which enables airlines 
to provide point-to-point services to over 80 percent of the 
existing domestic air routes in China.  The ARJ21 has a maximum 
of 90 seats for single class seating and 78 seats for mixed 
class seating. 
 
¶3.  (SBU) The project was initiated in February 2002 under 
guidance from the Central Government.  In 2003, the Avic I 
Commercial Aircraft Company (ACAC), formerly known as Avic I, 
applied to the General Administration of Civil Aviation of China 
to begin the certification of the ARJ21.  In the same year, ACAC 
began developing and manufacturing the plane in Shanghai.  In 
May 2008, COMAC was set up to oversee the development of the 
ARJ21. (Note:  Although COMAC oversees the project, ACAC still 
serves as the responsible legal and operational entity of the 
ARJ21.)  COMAC International Cooperation and Supplier Management 
General Manager Tao Zhihui said the total registered capital of 
COMAC is USD 2.8 billion, and it has the following shareholders: 
the State-owned Assets Supervision and Administration Commission 
of the State Council (31.5 percent), Guosheng Group (26.3 
percent), ACAC (26 percent), and China Aluminum Corp, Baosteel 
and Sinochem (5.26 percent each).  (Note:  Guosheng Group is an 
investment arm of the Shanghai Municipal Government.  End note.) 
 
 
Initial Test Flight Completed with More to Come 
--------------------------------------------- --- 
 
¶4. (SBU) During a January 8 visit to COMAC, the Consul General 
and Econoffs talked with company executives and viewed an ARJ21 
that passed its initial test flight on November 28, 2008.  The 
hour-long test flight was revealed by state media only after the 
plane had landed.  COMAC plans to conduct a second test flight 
of the same aircraft in early February, after which the aircraft 
will be relocated to Xian for further certification testing.  A 
test flight for a second prototype aircraft is scheduled to take 
place in April, followed by a third aircraft in June, according 
to Tao.  The prototypes were also on display during our visit to 
COMAC. 
 
U.S. - Big Supplier of Components 
----------------------------------- 
 
¶5.  (SBU) According to Jin, U.S parts make up roughly seventy 
percent by value of the total ARJ21 components.  Some of the 
larger components include General Electric CF34-10A engines, a 
Parker Aerospace fuel system, a Hamilton Sunstrand APS 2300 
auxiliary power unit, a Honeywell flight control system and a 
Rockwell Collins FMS 4200 flight management system.  Jin said 
for the upcoming jumbo jet project - and in contradiction of 
Shanghai press reports that appeared shortly after our January 8 
 
SHANGHAI 00000055  002.2 OF 004 
 
 
factory visit - COMAC would also prefer parts from U.S 
suppliers. 
 
FAA Certification of ARJ21 up in the Air 
---------------------------------------- 
 
¶6.  (SBU) According to FAA officials based in China, the FAA 
program to evaluate the certification capability of the CAAC, 
and to simultaneously validate the aircraft to U.S. 
certification standards, has stalled.  The FAA established an 
office in Shanghai in the summer of 2006 to mentor the CAAC 
during the initial stages of their certification process and 
enable CAAC to successfully undergo a "shadow certification" 
program.  (Note: The term "shadow certification" is used because 
transport category airplanes such as the ARJ21 are not part of 
the bilateral agreement with China.) However, the FAA shadow 
certification has not yet begun due to a disagreement with CAAC 
over the methods in which they validate already-FAA-certified 
airplane components, such as aircraft engines, imported into 
China.  CAAC is requiring more design details of the components 
than is required under the existing bilateral agreement.  The 
delay in the start of the shadow certification has not yet 
reached the critical stage as the ARJ21 is already behind 
schedule.  However, further delays could jeopardize the FAA 
shadow certification altogether as it would be too late for FAA 
to witness certain critical certification events.  FAA continues 
to discuss this topic with the CAAC with a hope to resolve the 
issue in the near term. (Comment:  CAAC's demand for detailed 
information on U.S. airplane specs coincides with the Shanghai 
Government's announcement of a new company to produce an engine 
for the nation's large commercial airline.  FAA and U.S. engine 
aircraft producers worry the CAAC is requesting the additional 
information so it can simply be handed over to AVIC Commercial 
Aircraft Engine Co. Ltd, which will produce engine parts for the 
nation's large commercial jet.  End comment.) 
 
Orders Lined Up for 2010 Delivery 
---------------------------------- 
 
¶7.  (SBU) COMAC hopes to deliver the first ARJ21 planes to 
customers before the end of 2010.  It currently has orders for 
206 aircraft.  Some of the buyers include Shanghai Electric 
Leasing (30 aircraft), Shenzhen Financial Leasing (20), Shandong 
Airlines (10) and Shanghai Airlines (5).  Another purchaser will 
be Kunpeng Airlines, in which the U.S. airline Mesa is a 
partner.  Some of the orders are based on written contracts 
while others are based on oral agreements, according to Tao. 
(Note:  In a separate January 2009 conversation, a high level 
Shanghai Reform and Development Commission official revealed 
that the Central Government had mandated that certain 
state-owned airlines purchase a certain quota of the ARJ21.  End 
note.)  Jin said the 2010 delivery is presently on a tight 
schedule and could be delayed. 
 
Hopes for Larger Market, But Will Not Compete with Boeing 
--------------------------------------------- ------------ 
 
¶8.  (SBU) Although there are not yet any orders from outside 
China, ACAC and the Central Government hope that it will gain a 
foothold in other emerging markets.  Jin also noted that the 
ARJ21 will not compete directly with Boeing and Airbus because 
it is targeting a niche market of shorter, regional routes. 
 
Economic Downturn Not Hurting Orders 
-------------------------------------- 
 
¶9.  (SBU) Jin said that the global economic downturn has had 
little impact on ARJ21 orders since most of the orders are from 
domestic airlines.  (Note:  Because of the economic downturn, 
CAAC has urged state-run carriers to cancel or delay aircraft 
deliveries.  The policy does not apply to the ARJ21 since it is 
a domestic aircraft.)  According to Jin, China's stimulus 
package, which calls for the establishment or expansion of 
regional airports, will actually boost demand for the ARJ21 in 
the long run.  COMAC plans to expand its aircraft production 
capacity within five years and hopes the Chinese economy will 
have recovered by then. 
 
Plans for a Large Commercial Jet 
 
SHANGHAI 00000055  003.2 OF 004 
 
 
-------------------------------- 
 
¶10.  (SBU) The ARJ21 is only part of China's plan to compete in 
the airline market - it also plans on manufacturing a 
"trunkliner" large commercial jet, which will directly compete 
with certain Boeing and Airbus models.  COMAC will oversee the 
development of the new large commercial jet.  On January 18, the 
Shanghai Government announced the inauguration of a new company, 
AVIC Commercial Aircraft Engine Co. Ltd, which will produce 
engine parts for the nation's large commercial jet.  The 
Aviation Industry Corporation of China (COMAC's parent company) 
is 40 percent owner, with Guosheng Group and Shanghai Electric 
Group each owning 15 percent stakes.  The R&D center and the 
assembly center for the engines will both be located in 
Shanghai. 
 
¶11.  (SBU) According to media reports, Shanghai Party Secretary 
Yu Zhengsheng and Mayor Han Zheng both attended the January 18 
ceremony and praised the establishment of the newly formed 
company as helping Shanghai achieve its ambition to become 
China's "aviation base."  Local press reports highlighted that 
all facets of the large commercial jet project - from material 
sourcing and production  ultimately will be done in China as the 
country aims to reduce its reliance on overseas suppliers.  Jin 
said that, in contradiction of Shanghai press reports however, 
COMAC would prefer parts from U.S suppliers for the large 
commercial jet. 
 
COMAC Attracting Top Engineering Talent 
----------------------------------------- 
 
¶12.  (SBU) Tao said COMAC has little problem attracting and 
retaining China's top engineering talent because of its location 
in Shanghai and competitive salary.  According to Tao, the 
starting salary for COMAC's engineers is about USD 650 per 
month, and there are ample opportunities for promotion and 
salary increases.  Most of COMAC's engineers are recruited from 
Xian, Beijing and Shanghai because these cities are home to 
China's aviation universities. 
 
Comment 
------- 
 
¶13.  (SBU) China's quest to manufacture commercial aircraft is 
tightly wrapped up with national pride.  Local and national 
media outlets regularly report on developments related to the 
ARJ21 and longer-term jumbo jet plans.  For example, on January 
9, 2009, Xinwen Lianbo ran a short piece showing the ARJ21 
factory floor with the three test planes to simply show China's 
accomplishments.  Following the November 2008 inaugural ARJ21 
test flight, the state media hailed the flight as "China's entry 
into the ranks of the world's passenger aircraft makers." 
 
¶14. (SBU) However, little heed is given to whether the aircraft 
can effectively compete on the open market without government 
assistance.  In a January 2009 conversation with Congenoff, a 
senior Shanghai Airlines procurement official said that 
diversifying airline fleets with this new type of aircraft will 
be an expensive proposition because of the costs of stocking 
different repair parts and training technicians.  He added that 
many Chinese airline officials were initially opposed to the 
idea but were strong-armed into placing orders for the ARJ21 by 
the Central and Shanghai Governments.  Also in January, a senior 
official from Juneyao Airlines, Chinese largest private airline, 
seconded the opinion about the costliness of diversifying 
airline fleets to include the ARJ21 and said that concern is the 
main reason the company has refrained from placing orders for 
the ARJ21.  The CEO of Delta told the CG that this size plane is 
"redundant" because other commercial aircraft are already 
available to fill the seating and range parameters for which the 
ARJ21 has been designed, evincing pessimism about the ARJ21's 
sales prospects and profitability. 
 
¶15.  (SBU) Chinese officials have also used the aviation 
projects to tout China's indigenous innovation.  In his January 
13 Work Report to the annual plenary meeting of the Shanghai 
Municipal People's Congress, Shanghai Mayor Han Zheng stated 
that the "the large commercial aircraft project will be 
expedited" as part of "boosting homegrown innovation."  Much ado 
 
SHANGHAI 00000055  004.2 OF 004 
 
 
has also been made about the ARJ21 as a model for China's 
development of its own intellectual property.  However, our 
Shanghai Airlines procurement interlocutor noted that much of 
the innovation originated from Boeing, Airbus and their 
established suppliers.  He explained that as those two companies 
source more and more of their parts from China, however, ACAC 
will be able to acquire more knowledge of how to put planes 
together. 
CAMP