Commercial Aircraft Corporation of China (Comac) Attempts to Break the Airbus-Boeing Duopoly, Will It Succeed?: an Industry Analysis Framework Applied By
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Commercial Aircraft Corporation of China (Comac) Attempts to Break the Airbus-Boeing Duopoly, Will It Succeed?: An Industry Analysis Framework Applied By Jose L. Fuentes B.S. Industrial Engineering (1997) Universidad de Los Andes Submitted to the System Design and Management Program in Partial Fulfillment of the Requirements for the Degree of Master of Science in Engineering and Management ARCHVES at the Massachusetts Institute of Technology June 2011 © 2011 Massachusetts Institute of Technology All rights reserved Signature of Author Jose L. Fuentes System Design and Management Program May 2011 Certified by James M. Utterback Thesis Supervisor David J. McGrath jr (1959) P e sor of Management and Innovation a4 Professor 9f-ngiglherg gystems Accepted by ~'Patrickl-lale Director System Design and Management Program (This page is intentionally left blank) Commercial Aircraft Corporation of China (Comac) Attempts to Break the Airbus-Boeing Duopoly, Will It Succeed?: An Industry Analysis Framework Applied By Jose L. Fuentes Submitted to the System Design and Management Program on May 23th, 2011 in Partial Fulfillment of the Requirements for the Degree of Master of Science in Engineering and Management Abstract Using an industry analysis framework, this thesis analyzes whether the recently established Commercial Aircraft Corporation of China (Comac) is likely to break the Boeing-Airbus duopoly in the industry of large commercial airplanes. The selected framework for this thesis is comprised by the following two principles: 1) "The nature and degree of competition in an industry hinge on five forces, one of these being the Threat of New Entrants, which depends on the height of Entry Barriers." (Porter 1979, 1) 2) "In order to cope with the competitive forces in an industry, there are three potentially successful generic strategic approaches to outperforming other firms in the industry: overall cost leadership, differentiation, and focus." (Porter 1980, 35) The results from the barriers of entry analysis suggest that Comac enjoys full unconditional support from the Chinese government as the development of an aerospace industry is deemed as national interest. However, the firm faces a high barrier of entry derived from the advantages the incumbent companies have in terms of their learning and experience curves, which allow them to effectively conduct research and development and innovate. In the long run, as the companies seek sustained competitive advantage (Porter 1984, 34), I find that Comac will mainly rely on generic strategy 'cost', while the incumbents counteract by adopting mainly generic strategy 'differentiation' and 'focus'. This thesis claims the chances of success for Comac largely depend not only on finding the right strategy for a proper balance between 'cost' and 'differentiation', but mainly on the Chinese government being able to maintain protectionist policies in place. In other words, the Chinese government must continue to decide for the domestic airlines what airplanes they should buy. This conclusion is reached by analyzing the history of all previous attempts by China to develop a national jet-which have all been unsuccessful- and the recent history of high-tech industries where China represented the world's largest market and there was a national interest for technology transfer. Thesis Supervisor: James M. Utterback Title: David J. McGrath jr (1959) Professor of Management and Innovation and Professor of Engineering Systems (This page is intentionally left blank) Table of Contents Abstract...................................................................................................................................3 List of Figures........................................................................................................................... 6 List of Tables ............................................................................................................................ 7 1. Introductionto Document Structure...............................................................................8 1.1 R esearch Motivation .................................................................................................................................... 8 1 .2 Th e sis Sco p e .................................................................................................................................................... 8 1.3 T h esis O bjectiv e ............................................................................................................................................. 8 1.4 T h esis Meth o d ology ..................................................................................................................................... 8 1 .5 T h esis Stru ctu re.............................................................................................................................................8 2. Introductionto the Commercial Aircraft Manufacturing Industry.................................. 9 2.1 Introduction to this Chapter.....................................................................................................................9 2.2 Last Century: Milestones in Evolution of Airplane Models and Production Systems.......9 2.3 Current State of The Industry ............................................................................................................... 10 2.4 Market Outlook 2010-2029 ................................................................................................................... 11 2.5 Key Takeaways Before Framework's Analysis ......................................................................... 11 3. Framework Definition................................................................................................. 13 3.1 Introduction: Selection of Framework.......................................................................................... 13 3.2 Porter's Threat of Entry Force........................................................................................................ 14 3.3 Theory on Coalitions in Global Industries ................................................................................. 15 4. Framework Application to The Chinese Commercial Aircraft Industry..........................17 4.1 Introduction to this Chapter.................................................................................................................. 17 4.2 Assessment of Barriers of Entry ..................................................................................................... 17 4.2.1 Supply-side economies of scale ............................................................................................................ 17 4.2.2 Demand-side benefits of scale .............................................................................................................. 20 4.2.3 Customer switching costs ....................................................................................................................... 21 4.2.4 Capitalrequirements................................................................................................................................22 4.2.5 Incumbent advantages independentof price (learning and experience curves).........24 4.2.6 Unequal access to distributionchannels................................................................................... 26 4.2.7 Restrictive government policy..............................................................................................................26 4.2.8 Expected retaliationfrom incumbents....................................................................................... 32 4.2.9 Summary of Assessment..........................................................................................................................33 4.3 Long-Run Assessment.............................................................................................................................. 34 4.3.1 Introduction:Sustained Competitive Advantage and The Three Generic Strategies.34 4.3.2 Adoption of GenericStrategy 'Cost'............................................................................................ 34 4.3.3 Adoption of GenericStrategy 'Differentiation'..................................................................... 35 5. Conclusions.....................................................................................................................40 Appendixes ............................................................................................................................ 43 Bibliography..........................................................................................................................82 Endnotes................................................................................................................................ 84 List of Figures Figure 1 - Single Aisle Market - New Airplane Programs Under Development.......................10 Figure 2 - Porter's Five Forces Framework in the Commercial Aircraft Industry ....... ..... 14 Figure 3 - Aircraft Design Evolution - First & Second 43 years; and MD-1 1, BWB Comparison .36 List of Tables Table 1 - Motivations for Coalitions in Global Industries .......................................................... 16 Table 2 - Global Exports of Manufactures (Billion of US Dollars) ............................................ 18 Table 3 - China and US Exports of Manufactures (% of Global Manufacture) ............. 18 Table 4 - Average Salary