The System of China’s Aviation Industry: Evolution and Revolution

The origin of China’s aviation industry can be traced back to April 18, 1951, when China established the Bureau of Aviation Industry under the Min­istry of Heavy Industry for the purpose of maintaining military aircraft. In other words, China’s aviation industry started from military applications. At the end of December 1953, the former Soviet Union transferred manufac­turing technology for the Yak-18 trainer (including engine) to China, along with complete technical information and prototypes. In July 1954, the Yak-18 trainer was assembled successfully at China Nanchang Aircraft Manufacturing Corporation (CNAMC) under the designation CJ-5. In October of the same year, the former Soviet Union transferred manufacturing technology for the production of MiG-17 fighters to China. In September 1956, Shenyang Air­craft Corporation assembled the MiG-17 fighter successfully, which the PRC named the J-5. These two types of aircraft are milestones in the development of China’s aviation industry. On June 4, 1965, the Q-5 attack aircraft, a vari­ant of the later J-6 that CNAMC produced from copying the MiG-19, made its maiden flight. Mass production of the Q-5 began in 1969. The Q-5 can be regarded as the first military jet developed and manufactured by China.

China’s Bureau of Aviation Industry was reorganized successively into the Third Ministry of Mechanical Industry (1960-1982), the Aviation Ministry of Industry (1982-1988), and the Aviation and Astronautic Ministry of Indus­try (1988-1993). Starting in 1993, China ushered in three waves of organiza­tional transformation in its aviation industry.

The first wave began in 1993, when the PRC restructured the defense indus­tries under its direct administration into large, state-owned enterprise groups including China National Nuclear Corporation, China Aerospace Corporation (CASC), China Aviation Industry Corporation (CAIC), China Shipbuilding Cor­poration, and China Ordnance Industry Corporation. CASC and CAIC were incorporated by splitting the Ministry of Aerospace Industry. It was hoped that through an enterprise-oriented structure, the industry’s manufacture, research and development (R&D), maintenance, and sales could be integrated and better managed so as to enhance its operation and productivity, and the industry could be run and developed from the perspective of enterprise management.

The second wave began in 1998 when China abolished the Commission of Science, Technology, and Industry for National Defense (COSTIND), which was set up by the PLA in 1982, and created in its place an institution of the same name directly under the State Council. The new COSTIND’s main duties were to supervise production of military products and development of defense industry; study and formulate policies, regulations, and laws on the conver­sion of military technologies and products to civilian use; and administer bid­dings from defense firms. In the same year, the PLA formed the General Arma­ment Department (GAD) to assume the procurement function of the former COSTIND, and integrate equipment-related offices within the General Staff and General Logistics systems and some procurement units under the General Logistics Department. The GAD is responsible for defense procurement, life­cycle management of weapons, and maintenance of the weapons research and testing base of the PLA.

In 1999, China divided each of the big five military conglomerates into two independent companies, forming 10 major defense science and technol­ogy groups. In 2002, China created China Electronics Technology Group Cor­poration (CETC) as the 11th large military enterprise group.2 One of the recon­struction efforts is to split CASC into AVIC I and AVIC II.

It was out of this climate that China embarked on its third wave of defense industrial organizational reform. China’s 2006 defense white paper outlines the development direction of its defense industry and the focuses on “consolidating its foundation, making independent innovation, and speeding up the implemen­tation of the strategy of transition and upgrading, so as to ensure the produc­tion and supply of military equipment and promote the development of national economy"’3 In September 2007, COSTIND, the State Development and Reform Commission (NDRC), and State-owned Assets Supervision and Administration Commission (SASAC) jointly issued the “Guiding Opinions on Promoting the Transformation of Defense Industries into Joint-Stock Enterprises.”

This document encourages military enterprises to implement share­holding system reform and structural transformation, while making full use of civilian strengths in national defense building.4 In October of the same year, Hu Jintao revealed in his report to the 17th National Congress of the Com­munist Party of China (CPC) that the country should “adjust and reform the systems of defense-related science, technology and industry and of weapons and equipment procurement,” and “establish a sound system of weapons and equipment research and manufacture that integrate[s] military with civilian purposes and combine[s] military efforts with civilian support.”5 These devel­opments indicated that to facilitate military modernization, China was paving the way for the third wave of reform of the defense industry.

On April 1, 2008, China established a new state agency, the Ministry of Industry and Information Technology (MIIT), and reorganized COSTIND into the State Administration of Science, Technology, and Industry for National Defense (SASTIND), which is subordinate to the MIIT. The MIIT assumed authority to oversee the 11 major military-industrial enterprise groups origi­nally under COSTIND, basically achieving unified management over the mili­tary and civilian industries.

With regard to the aviation industry, AVIC I and AVIC II were set up with the goal of fostering internal competition and undertaking international outsourcing business as original equipment manufacturers (OEMs). The two conglomerates produce different lines of products to reduce overlapping busi­nesses. Nonetheless, the split caused resource diversion, redundancy, and low efficiency, and went against the growth-through-merger trend of the leading aviation giants in the world.

Once China decided to undertake the development of large aircraft, COMAC was founded in 2008, and AVIC I and AVIC II were merged to form AVIC. On the surface, the newly established groups look similar to their pre­decessors. However, they have completely new structures and market posi­tioning. The primary duties of COMAC include the design, assembly, sale, maintenance, and after-sale service of large passenger aircraft. AVIC is mainly responsible for the development and production of military aircraft, small to medium civil aircraft, helicopters, and engines, and for carrying out aviation research and flight testing. For its secondary tasks, AVIC also functions as a supplier to COMAC, manufactures airframes, engines, and airborne equip­ment for large passenger aircraft, and undertakes outsourcing business for for­eign civil aircraft companies. In addition, AVIC Commercial Aircraft Engine Co., Ltd. (ACAE) was set up in 2009 to be the main contractor producing the engine to be used in the large aircraft project.

Aviation Industry Corporation of China. AVIC has a registered capi­tal of RMB 64 billion, nearly 200 subsidiaries, and about 400,000 employees. The company has total assets reaching RMB 290 billion. The reorganization of AVIC was an endeavor to regroup and adjust each subsidiary according to its specialties, and realign and optimize company resources. After the reor­ganization, AVIC headquarters has 14 divisions directly under it in charge of 10 key business segments.6 At present, the restructuring of AVIC headquar­ters and subsidiaries has been completed, and consolidation of the 10 busi­ness segments is in full swing. After its birth in the wake of the reorganization, AVIC launched a development strategy of “market-oriented reform, center – of-excellence-based integration, capital operation, globalization-based devel­opment, and industrial-scale-based growth,” and “integration into the world aviation industry chain, integration into the regional economic development circles.” According to AVIC, the company is aiming to grow more than 20 per­cent annually and achieve 1 trillion yuan in sales by 2007.

Commercial Aircraft Corporation of China (COMAC) and AVIC Com­mercial Aircraft Engine Corporation (ACAE). COMAC has a registered capital of RMB 19 billion and six primary shareholders—SASAC, AVIC, the Shanghai Guosheng Group (representing the Shanghai Municipal People’s Government), Aluminum Corporation of China (CHINALCO), Shanghai Baosteel Group Corporation, and China Sinochem Group Corporation (Sinochem). COMAC can be regarded as a fully state-owned company of the PRC.7 COMAC leader­ship came from senior government officials; COMAC Chairman Zhang Qing – wei and General Manager Jin Zhuanglong are the former COSTIND Minister and Vice-Minister, respectively. COMAC is the executive body of China’s spe­cial science and technology project for the R&D of large passenger aircraft. It has three centers—the R&D Center, the Final Assembly Center, and the Cus­tomer Service Center, and a consortium of subsidiaries such as AVIC I Com­mercial Aircraft Co., Ltd. (ACAC), Shanghai Aircraft Design and Research Institute, and Shanghai Aircraft Manufacturing Co., Ltd. COMAC is respon­sible for the overall design, system integration, marketing, airworthiness certi­fication, and service of large passenger aircraft.

Short-term goals proposed by COMAC include the following: through the introduction and absorption of foreign technology and independent inno­vation, making breakthroughs in key technologies concerning the C919, and obtaining airworthiness certification; completing research and development of the ARJ21 regional aircraft, obtaining airworthiness certification, making delivery to customers, establishing mass-production capacities, and expand­ing market shares; and setting up a system of R&D, production, marketing, and customer service for civil aircraft. Long-term goals include achieving the industrialization and series production of civil aircraft; carrying out mainte­nance and repair of civil aircraft, developing financial leasing and other related businesses, and expanding the industry chain of the civil aviation sector; and becoming a civil aircraft manufacturer that owns independent intellectual property rights and enjoys international competitiveness.

With a registered capital of RMB 6 billion, ACAE is invested by its con­trolling shareholder AVIC and shareholders such as Shanghai Electric Group and Shanghai Guosheng Co., Ltd.8 The remaining 30 percent of ACAE shares is planned to be bought by private enterprises. The main function of ACAE is to carry out R&D, production, sales, and maintenance of civil aircraft engines, and to provide technical consultation. Its key tasks include constructing an engine R&D center and a basic technology center, recruiting engine experts at home and from abroad, establishing technical cooperation with foreign engine manufacturers, seeking to build up an international R&D team and hiring pro­fessional organizations for technical advice and marketing consultation.