Various Angles on Chinese Aircraft

Mark over at the Lean Blog sent me an article that I’ve been noodling for several days, describing how Cessna (a unit of Textron) has decided to build one of its planes exclusively in China.  As an aside, one aspect of blogging I have really come to enjoy is how the various lean bloggers are collaborative as opposed to adversarial, and I think together we’re really creating a learning community that is furthering knowledge of lean.

Cessna’s new 162 SkyCatcher light sport aircraft will be assembled by China’s Shenyang Aircraft Corp., Textron said in a statement. The $109,500 plane, which has 900 orders, will be made in the northeastern city of Shenyang, said Chen Yongman, senior vice president of the Chinese company.

The Cessna article is interesting as there are many aspects of outsourcing discussed, so it’s not possible to directly compliment or condemn the overall viewpoint… it’s a mishmash.  Or perhaps balanced?  But let’s start with the comment that Mark was originally interested in.

Lewis Campbell, Textron’s chairman and chief executive, said in an interview that lower manufacturing costs in China would allow Cessna to sell the airplane for $71,000 less than it would if it had built the plane at its factories in Wichita, Kan. The move also positions Cessna to play a larger role in the developing private- and corporate-aviation market in China.

As Mark pointed out, that isn’t what a shareholder would necessarily want to hear.  Nor does it fall in line with the Toyota concept that price is determined purely by the market, and profit is based on how much waste (and cost) you can take out of the equation.  That’s different than the "price = cost + profit" concept that traditional manufacturers use.

But there are several other angles to this story.  For one, personal aircraft have always been out of reach of the common person.  I’ve been taking [occasional] flying lessons, but haven’t been overly aggressive as the logistics and cost of renting, since I couldn’t afford to outright buy, and aircraft was a large downside.  $109k now makes it less expensive than buying a vacation home.  In effect Cessna has opened up a new market.

"The key to achieving 900 orders within four months of announcing the model is the aircraft’s affordability,” said Jack Pelton, chairman and chief executive officer of Cessna, in a video speech today in Beijing. 

And then there’s the fact that China itself is becoming a huge potential market, and Cessna and others are moving there simply to be closer to their customer.  That is one of the very few good reasons to go offshore.

Cessna has boosted sales in China as the country’s growth rate of at least 11 percent makes private jets, yachts and other luxury goods affordable to more people. Aircraft manufacturers, including Airbus SAS, are also moving some production to Asia’s second-largest economy to cut costs and woo Chinese customers.

"Wooing" customers is valid, but moving to China to cut costs is a trap.  As we’ve mentioned many times before, Chinese wages are inflating rapidly, and turnover among skilled workers is escalating.  Leveraging real lean manufacturing methods at domestic factories will almost always offset labor cost differentials, especially after taking into account the amoung of inventory sitting on the high seas, turnover costs and their associated training costs, and the less tangible but still real opportunity costs of losing workers with many years of experience.

And there’s even another angle to the story.

Airbus SAS, the world’s biggest planemaker, is building a factory in Tianjin, eastern China, as it seeks to win more orders in China. Empresa Brasileira de Aeronautica SA of Brazil has a production base in Harbin.  The Chinese government is working to develop a domestic aerospace industry with companies including AVIC-I [state-owned China Aviation Industry Corp. I] which has plans to build a 150-seat plane to compete with Boeing Co. and Airbus.

Remember last March when we told you how AVIC-I also supplied assemblies to Boeing and Airbus?  Our point was that the large aircraft manufacturers are transferring extensive knowledge to companies, some state-owned, that are working on projects that will eventually make them competitors.  How does that potential knowledge transfer and competitive situation fit into the long term value creation equation?

By the way, Textron and Boeing are on the "Best Lean Companies for 2008" poll.  What do you think?