Case Analisys : Airbus in China

1. Identify the key management issues facing Airbus in China.

Since 1985, cooperation between Airbus and China covers the commercial, industry and research sectors. Laurence Barron, president of Airbus China since January 2004 is willing to expand this cooperation with Chinese aviation industry. Heading this way, a joint venture was launched in September 2008 owned by the European aircraft-maker for 51%, with the remaining 49% held by a Chinese consortium that comprises Tianjin Free Trade Zone (TJFTZ) and China Aviation Industry Corporation (AVIC). In addition, already six Chinese companies are involved in manufacturing parts of the Airbus jet liners, adding a strong “Chinese flavor” to the big airplane family.

Airbus in China faces many management issues that I’m going to identify. First, since June 2011, the state-owned manufacturer Comac (Commercial Aircraft Corporation of China) entered into competition with both aircraft companies Boeing and Airbus by presenting its new aircraft: the C919. This became possible because of the technology transfer induced by the many aircraft companies’ joint-ventures created these past decades in China. Comac benefited from this efflux and will probably be able to compete with the experienced eastern companies. This was led by the strategy of most companies that consisted in assembling many parts of their aircraft in China.

The stateowned company will benefit from many advantages since it knows its market better than any foreign company and that the government has a lot of power in China. In addition, language and cultural barriers, such as the “Guanxi” which relates to social networking and interactions between Chinese people will play in favor of the new local company that will be able to sort out the best agreements and manage their employees with efficiency. Other issue faced by Airbus is their relationship with the Chinese government. Indeed, in concerns of duties and taxes, China becomes the more and the more coercive with

MREJEN Corentin

Wednesday, October 10 2012

overseas companies and high trade barriers are maintained to protect domestic firms from foreign competition. This fact coupled with the will of Comac to compete with other aircraft companies will have a negative impact on taxes for Airbus considering the fact that the government will be in favor of the spur of the state-owned company. This is the result of a lack of the rule of law in the Asian country that usually leads to widespread government corruption. In many cases government “connections” determines which company shall be successful in China. Airbus will be facing this lack of rules, regulation and transparency that might lead them to harsh and unfair competition with the Chinese airline company. Moreover, it’s important to point out the issue of the balance of interests in a joint venture.

As a reminder the aim of it is partnership. The difficulty relies on the ability of each partner to foresee and agree what relationship and commitments between them are needed. This type of structure involves the share of problems and risks and responsibility in solving the issues they face. If the partners of the joint venture have unequal interests in the joint venture, relative to total business it can represent a threat for one of the partners. Some of all the partners’ interests may change, when they realize the opportunities that can be offered to them in other markets.

For instance, Tianjin Free Trade Zone, which is the place where the Airbus is assembled, is planning on exporting its products to overseas aircraft companies. The supply chain was originally designed for the Chinese market. If Chinese manufacturers decide to do so it will reduce the market shares of both Boeing and Airbus. China Petroleum and Sinopec (one of the major energy company in China) are currently working with Airbus on the development and promotion of renewable fuel for use in regular commercial aviation in China. This fuel will be wholly produced in China. This implies a risk concerning its proliferation to the local companies such as Comac, taken as an example.

The lack of transparency in China plus the fact that Comac is a state-owned company represents a potential danger for Airbus that will probably face patent issues. Indeed, intellectual property is difficult to secure in China and infringement or copycat of one’s brand products are often produced by other companies. Sometimes local protectionism is capable to dilute the strength of central legislation or the power of law enforcement. Actually, it may happen that the government assists local counterfeiters by letting them hide their production lines in safer places. When counterfeiters have good acquaintances with the local government or law enforcement, they may find an umbrella for their counterfeiting activity.

MREJEN Corentin

Wednesday, October 10 2012

2. On each of these issues, give some specific advice to Laurence Barron, president of Airbus China. Laurence Barron is British and was born in 1951 in Dover, England. He was appointed President of Airbus China in January 2004. In this position, he is responsible for Airbus' overall activities in China including business development, commercial activities, customer services and industrial co-operation. In order to counter the issues faced by Airbus, many decisions can be taken by him. First, concerning the arriving of the new challenger Comac on the aviation market, Airbus can try to avoid the technology transfer by different manners.

One is related to management. Dividing tasks between its employees can allow maintaining ignorance of the workforce concerning the global characteristics of the product or devices. If employees are separated into sectors, the knowledge of each of them concerning the final product will be limited. Second solution relies on the ability of the company to constantly provide innovation for their aircrafts. This will give them considerable advantage among their competitors and a source of productivity. Indeed, persistently evolving allows a difficult adaptation for their competitors that won’t be able to offer the same price attractiveness for example.

Third aspect on which M.Barron can rely on is the nature of the labor contracts he provides to his employees in China. By introducing provisions that can prevent from transferring technology from one company to another on a geographic region and a given laps of time can delay the technology efflux and give more protection to intellectual property. Last but not least, Airbus should geographically spread the location of its plants in varied countries instead of giving up all of its technology to the same country, for instance China, which makes it easily feasible for them to copy the whole production line. Concerning its connections with the Chinese government, Airbus will have to find out a way of being influent on the Chinese market in order to assert their rights.

If the government abuses of its power by imposing unfair duties for example or fostering the development of the local company, Airbus will be able to alter local economy on the aircraft sector by creating embargoes for China or a repercussion on the prices of their product for the Chinese market. Even if they’ve developed a lot of joint-ventures with China they still have major control of the company and have the right to make the decisions they wish. I would also advice the company to gain control of main production or distribution lines and multiplying the patents on their sub products in order to keep their market position.

MREJEN Corentin

Wednesday, October 10 2012

The unbalanced interests of a joint-venture which has lead to the will of Tianjin Free Trade Zone to export its products to overseas aircraft companies points out a lack of law force and transparency in China. I would advice M.Barron to mention in the joint-venture contract the nature of the relationship between the two companies and their agreement on producing on demand of Airbus company only.

Moreover, it seems relevant that Airbus develops a real knowledge on how the market operates and the key relationships with influent local people. By developing what Chinese people call the “Guanxi”, Airbus executives can understand and foresee interests of their partner in China. This can prevent them from facing such situations. In addition, it can be useful to segment the production between different companies in order to avoid providing the utilization of the entire product by their partner, against their will. As for the biofuel that both China Petroleum and Sinopec develop for Airbus, I would advice M.Barron to be very careful about the terms of the relationship between the three companies.

He needs to insure that the right of exploiting the new product will be dedicated for Airbus only. The lack of transparency and law force will represent a challenge for them to keep their innovation for them. Government often plays a role in promoting counterfeit products. It is important of keeping any possible doubt on the effectiveness of the patent. Non-disclosure agreements should prevent their partner from taking advantages of the intellectual property rights. This way Airbus will be able to press charges against their Chinese partner if necessary.

As a general advice, I would recommend being really careful with passing agreements and contracts with local companies implanted in China. Furthermore, I would recommend insisting on due diligence before contracting in order to ensure maximum legal security and choosing the one best partner. To finish, I think it is significant to know the market well and getting relationship with local influent people and government representatives.

MREJEN Corentin Bibliography

Wednesday, October 10 2012

 Documents

-Risk Management for Large-scale Infrastructure Projects in China Lu Youjie, Department of Construction Management

-Challenge to the Boeing-Airbus Duopoly in Civil Aircraft: Issues for Competitiveness Glennon J. Harrison, Specialist in Industry Policy

 Websites

-Airbus Website http://www.airbus.com/

-Ze Green Web http://www.zegreenweb.com/sinformer/airbus-assurera-la-conception-du-biocarburant-delaviationchinoise,59813?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+zegre enweb%2FOkzL+%28zegreenweb+%C2%BB+S%E2%80%99INFORMER%29

-La Tribune http://www.latribune.fr/entreprises-finance/industrie/aeronautiquedefense/20120718trib000709702/pekin-veut-exporter-des-airbus-made-in-china.html

-Le Parisien http://www.leparisien.fr/flash-actualite-economie/les-airbus-produits-en-chine-restent-destinesau-marche-chinois-03-09-2012-2148564.php

-Wikipedia http://en.wikipedia.org/wiki/Intellectual_property_in_the_People's_Republic_of_China