Can China beat the duopoly?

As a New Zealander I am aware of the duopoly market every time I send a text or visit the supermarket. Defined as a market in which two firms dominate, duopoly markets around the world include Coca-Cola & Pepsi, Gillette & Schick, Moodies & S&P, and Airbus & Boeing.

The Economist article Flying the flag outlines the launch of Commercial Aircraft Corporation of China (CACC) by the Chinese government which, it hopes, will reduce the reliance on Airbus & Boeing for its national air transportation needs.

Who could blame them? Communist countries have always been blindly nationalistic and the Chinese prime minister announcement was in line with his launch statement:

“The Chinese people must use their own two hands and their wisdom to manufacture internationally competitive large aircraft. It is the will of the nation and all its people to have a Chinese large aircraft soar into the blue sky.”

There are predictions of double digit growth until 2012 when it will slow to 9 percent. Airbus predicts that they will need 2,800 new planes by 2026 ... what an opportunity! Will China be able to take on the aerospace duoploy and produce an aircraft that Chinese airlines will commit to?

Firstly, what does China know about the aircraft industry? The business model for aerospace industry mean Airbus & Boeing rely on a global supply chain, of which China has been a been a part of for the last 20 years, building their knowledge base ever since. Even though the distributed supply chain has caused delays for both major manufacturers their must be some well grounded arguments for both to switch to a global manufacturing process. So can new players compete?

Secondly, lets look at history to give context. The only successful emerging market producer of aircraft is Embraer from Brazil. It was a 30 year cash drain, and is just producing a competitive product after a long and troubled road. However, Embraer is the exception. Indonesia has tried but failed just like Japan. Question: How long is China's pipeline?

CACC inherited a 70 seat regional jet program from China's previous attempts which it hopes will be a starting point for its 200 seat rival to the Airbus 320 and Boeing 737. More recently Airbus also announced a joint venture with a Chinese firm, unsurprisingly associated with CACC, who see the transfer of knowledge as a cost of doing business in China.

Government subsidies could define the success of CACC and knowing this Boeing highlighted WTO rules which discourage market distorting subsidies. This raises an interesting point: Have Airbus or Boeing received such subsidies in the past?

Ultimately, to be successful, CACC needs to produce aircraft that airlines want. If Airbus or Boeing can provide a better offering to Chinese airlines then only extreme government intervention will produce a successful company to challenge the current duopoly.