First Chinese ERJ-145 complete, but no takers

 - January 31, 2007, 4:50 AM

The first Embraer ERJ-145 built in the People’s Republic of China rolled out of its assembly hangar on December 16 in Harbin, Heilongjiang Province, and flew for the first time in front of industry and government dignitaries from the host country and Brazil. The ceremonies marked the culmination of 11 months of collaborative effort, during which time Embraer and its Chinese partners–AVIC II subsidiaries Harbin Aircraft and Hafei Aviation–refurbished assembly facilities, prepared jigs and tools, hired and trained 139 employees and built the first airplane on schedule. Unfortunately for all involved, none of the airlines on hand came ready to sign a firm purchase contract, muting any proclamations of a commercial triumph until a later date.

Although billed as a breakthrough in Sino-Brazilian relations, the partnership that formally established Harbin Embraer Aircraft last January 13 resulted in large part from the Chinese government’s protectionist policies. Before the Chinese effectively suspended regional jet imports in 2001, the country had begun to reveal its market potential to all three regional jet manufacturers. Embraer, for its part, had delivered five ERJ-145s to Sichuan Airlines and won firm orders for 20 of the 50-seat jets from China Southern Airlines and for 10 from Wuhan Airlines. But when the Chinese regime reached the conclusion that the demand could help buttress its own aerospace industry, it placed prohibitively high import duties on Western products, effectively closing the market to Embraer and its competitors.

The Chinese then invited the Western RJ builders to bid for co-production agreements with its state-run aerospace agencies. Embraer won the contract for 50-seat jets, and hoped the deal would rescue its now-cancelled contracts with Wuhan and China Southern, and open new opportunities with the likes of Sichuan. Fully aware of the difficult cost environment in China, where high navigation and airport fees and extremely high fuel prices preclude the use of regional jets in many markets, Embraer nevertheless sees the vast and increasingly prosperous country as an emerging market. No one could anticipate the onset of SARS and the resulting collapse in air travel throughout Asia, however.

“Now that everything is there, we expect the activity to resume, but SARS made our life more difficult than we had planned,” Embraer vice president of commercial programs Fred Curado told AIN late last summer. “But we continue to be very positive about the decision and we believe the model will work.”

The plant in Harbin carries the capacity to produce up to 24 airplanes a year. Plans call for production of only eight airplanes this year, however, beyond which much will depend on the recovery of the Asian air-transport market in general and the extent to which the Chinese government encourages a competitive environment capable of supporting RJ operations. For example, whether private airlines will gain the right to chart their own flight paths remains an open question. Perhaps more significantly, how long will Chinese airports continue to charge the same landing fees for a Boeing 747 as for a Harbin Y-12 turboprop? Of course, only the Chinese themselves truly know.

As for Embraer’s prospects in China, no one at the company expects an immediate windfall as a result of its partnership. Rather, gaining a foothold in an emerging sector of the world’s fastest-growing economy may have to do for now.