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Note To China: Get Out of the Airplane Business -- Leave It to Boeing and Airbus

Stocks in this article: BA

Santa Monica, Calif. (TheStreet) -- A new report by the Rand Corporation said China should get out of the aircraft manufacturing business, where it is hopelessly behind Airbus and Boeing (BA) and losing ground.

Commercial aviation manufacturing "is a huge waste of money for China," said Keith Crane, director of the Rand Environment, Energy and Economic Development program and co-author of the report "The Effectiveness of China's Industrial Policies in Commercial Aviation Manufacturing."

China has already spent more than $7 billion to develop the C919, a narrowbody aircraft. The problem is that "by the time it gets out there in the market, it will be a full generation behind the Boeing 737MAX and the Airbus A320neo," Crane said in an interview.

Being so far behind means that the C919 "will be competing against used aircraft, where you are really in a very tough position," he said. "The bottom of the used aircraft market is scrap value, (where) you just look at how much you can get out of it."

Asked whether Chinese could overcome buyer resistance by cutting the price of its aircraft, Crane responded: "If it's a generation behind and lacks improvement, that could not be overcome by cutting the price. For an airline, it's not the price that drives a purchase. It's down-time and fuel efficiency."

China is also developing a regional jet, the ARJ-21, which "has also been expensive," according to the Rand Corporation report, which noted that "most of our interlocuters were skeptical that either the C919 or the ARJ-21 will ever be commercial successes.

The principal problem, the report said, is that "foreign companies are not given the same treatment as their Chinese counterparts (or) are afraid that their intellectual property rights will not be safe (and) they will remain cautious about what technologies they bring to China.

"If China wishes to become fully integrated into the global commercial aviation manufacturing industry, China's government would be well advised to change its current policies to create a more equitable business environment for both foreign and Chinese commercial aviation manufacturers."

Aviation consultant Richard Aboulafia of Virginia-based Teal Group, who has read the report, said Rand did "a good job of documenting (what) has been an open secret in the airplane business," which is that flawed government policies have led to the failure of Chinese aircraft manufacturing.

"The Chinese have great talent, a great market, and great resources," Aboulafia said. "You have to work awfully hard to destroy its prospects of getting into commercial aviation."

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