Airbus is stepping up its efforts to become a major player in the Chinese aerospace sector with the opening of its final assembly line for the A319 and A320 in Tianjin.

Late last month, the Airbus executive committee held its first official meeting in China, signalling to China's political and industry establishment how seriously Airbus takes its relationship with the emerging aerospace giant. CEO Thomas Enders says he also wanted his colleagues in Airbus's top management who travel less frequently to see for themselves how China is evolving.

Airbus is now firmly committed to multiply sourcing in China in the foreseeable future. The company spent only $60 million in the country last year, mostly for wing substructures or cabin floor outfitting. But its spending is to grow to $200 million in 2010, $450 million in 2015 and $1 billion in 2020.

In addition to the Tianjin final assembly line, Airbus plans to integrate merging Chinese aerospace firms Avic 1 and Avic 2 into the portfolio of its A350XWB suppliers with a 5% workshare. Negotiations about exactly what the Chinese will contribute are supposed to be completed by the end of the year to allow for an on-time final design freeze of the new long-haul jet.

These efforts are strategically geared toward making Airbus a partner rather than an opponent of the ambitious and rapidly expanding Chinese aerospace industry that is about to fly the ARJ21 regional jet for the first time, but also plans to develop 150-seat mainline jets in the medium term.

While in China, Enders met with the director of the Civil Aviation Administration of China (CAAC), Li Jiaxiang, to discuss the way forward beyond current projects. They are understood to have reached an agreement in principle that Airbus will participate in future initiatives as a partner. Details have not yet been discussed, company officials say. "In order to be successful, you need to share - also technology," Enders says.

A first step in that direction is the Tianjin final assembly line. Airbus holds a 51% stake in the joint venture, the Airbus Tianjin Final Assembly Co., and the remaining 49% is owned by a consortium made up of the Tianjin municipality (60%), Avic 1 and Avic 2 (20% each). The agreement covers the setting up of infrastructure as well as the production of 284 A319s or A320s until early 2016. The entities are investing $600 million in the project, albeit in various forms. The Chinese are responsible for the upfront capital investment in roads, hangars and a second runway exclusively dedicated to Airbus at Tianjin's international airport. They also will pay for the shipping of parts from Hamburg to Tianjin.

Airbus is taking on the burden of sending up to 180 expatriates to Tianjin and the finance cost involved in the transport time that is calculated to be around three months initially. The Tianjin facility is almost identical to the Hamburg final assembly line, except for the location of the large exit doors. It will also adopt the identical processes. "We are not taking any risks," says Marc Bertiaux, vice president for Airbus cooperation and partnership with China.

The manufacturer hopes the investment will pay off in increased orders. Airbus China President Laurence Barron says the three large orders placed by China in the last three years would have been "possible, but not likely" without the Tianjin deal. Barron points out that the Airbus market share in the current Chinese civil airliner fleet is 39%, while recent orders now point to a share of around 60%.

Airbus chief operating officer for customers, John Leahy, says he signed memoranda of understanding for 280 more aircraft with Chinese airlines. The MOUs are subject to government approval and Leahy does not expect them to be confirmed in one step. A large chunk of the commitment, about 150 aircraft, could be firmed up before the end of the year, he says.

"Initially, [the decision to invest in China] was about market share, but it is now also about a huge pool of highly skilled engineers and about the entire region that is interesting for us," Enders says. "We want to become a Chinese company also." He claims it is too soon to speculate whether an A320 successor would be built in Tianjin as well. "But when the current joint venture agreement expires in 2016, we will not pack our things and go home."

In 2005, the Chinese had proposed four possible sites for the final assembly line, including Shanghai, Xian, Zhuhai and Tianjin. Shanghai was ruled out because the site would have been situated at a busy international airport. Xian was not considered because fuselage parts cannot be shipped to the inland city. In the end, Airbus told the government that both Zhuhai and Tianjin were fine. China picked the fast-growing harbor city 120 km. (75 mi.) east of Beijing as it has been singled out to become the next center of economic development after the Shanghai-Pudong area and Shenzhen.

With the final assembly line now officially up and running, the first Chinese-built A320 is scheduled to roll out of the factory doors in June of next year and be delivered to Sichuan Airlines. Airbus plans to assemble 10 or 11 aircraft in Tianjin next year and then ramp up production. By 2012, the facility should reach the agreed production limit of four aircraft per month. But Airbus officials say Tianjin has space to produce 7 or 8 aircraft per month.

According to Barron, the joint venture agreement does not include the A321 being built in Tianjin, though that could be renegotiated if significant demand for the type emerges in China. The A318 has been ruled out. A backlog of about 430 aircraft for Chinese airlines - almost 400 of them narrow-bodies - Tianjin cannot satisfy alone, so many A319s and A320 will be supplied from Hamburg and Toulouse. Should demand slow or production slots become available at short notice, Airbus would also deliver China-built aircraft to Western customers.

"We are making sure that they are built to the exact same standards [as those in] Toulouse and Hamburg," Barron stresses. To alleviate concerns in the airline community, the Tianjin-assembled aircraft will first be delivered to Airbus, which will then hand them over to customers. According to Bertiaux, Airbus is aware that "banks have a lot of doubts about the Tianjin final assembly." Airbus therefore invited 100 bankers to visit the site this month.

The short-term production system works as if the aircraft were assembled in Hamburg. All the major subassemblies and components are delivered to the Finkenwerder plant in Hamburg, but instead of being phased into the production flow, they are shipped to Tianjin.

That complex system of shipments also includes parts manufactured in China. Part of the A320 wingboxes are built in Xian and shipped along with other parts to Airbus's Filton site in the U.K., where the wing is outfitted before being returned to Hamburg and then sent to Tianjin. That costly process is to be replaced as soon as possible by one in which the A320 wings are outfitted in China and then delivered to Tianjin. Xian produces one wingbox per month now, but that rate is to go up to four in 2009.

With all the necessary investment and complexity involved, the joint venture is expected to break even in 2011 and make its first profit in 2012. Making the aircraft in China will initially be more expensive than in Hamburg, despite much lower labor costs. But Enders expects the cost of production to go down over time so that Tianjin will be "as efficient or better" than Hamburg.

Airbus officials believe they are well prepared to protect the company's intellectual property. "The risk is global; you don't have to be in China for people to enter your data room," says Bertiaux. Nevertheless, employee contracts include special clauses that are stronger than in Europe, and computers and other equipment are loaded with tracking software. He confirms that intellectual property violations have already occurred nevertheless, but, as final assembly is a relatively low-tech part of the process, "there is nothing interesting to steal in Tianjin," he says.

The Chinese aerospace sector has long had opportunities to study Airbus aircraft structures in detail through maintenance, repair and overhaul activities such as C or D checks, he also points out.

But Barron says the best way to protect intellectual property "is to continue to innovate." Even if China uses knowledge gained in assembling the A320 for its own competing projects, the base would still be a program developed in the 1980s. By the time a Chinese A320 competitor would come to market, Airbus will have developed a more technologically advanced A320 successor, Barron argues. If Airbus continues its strategy of technological leadership, he believes it will be extremely challenging for China to catch up quickly.