Should China produce E-190s?

The Chinese government is expected to decide next week whether to open a production line for the E-190 or close the joint venture with Embraer that produces ERJ-145s. Harbin Embraer is now working on producing its final batch of ERJ-145s, with the last aircraft slated for delivery later this quarter.

The joint venture needs another project to continue running as the 50-seat ERJ-145 is no longer in demand in China or elsewhere. In fact 50-seat regional jets continue to flood the used aircraft market as fuel prices rise.

Embraer has long sought China's authorisation to build E-190-family aircraft at its joint venture plant in Harbin. Even when forging the joint venture with AVIC back in 2003 it had hopes the partnership would be extended at some point to include what was then the E-170. The E-170 and E-175 are nearly impossible to sell in China due to a high import tax designed to protect the indigenous ARJ21.

Embraer has had more success selling the larger E-190, which entered service after Harbin Embraer opened, as these aircraft are not taxed nearly as heavily. The E-190’s weight falls just above the regional aircraft category that protects the ARJ21 and instead is in the same much less onerous category as the A320 and B737. Embraer has delivered 38 E-190s to Chinese customers with 28 additional aircraft on firm order.

Government protects indigenous aircraft

Embraer believes the E-190 shouldn’t be considered a competitor to the ARJ21 as the E-190 is bigger. But it is widely believed that the Chinese government has so far not accepted Embraer’s proposal to produce E-190s at Harbin to protect potential sales of the ARJ21.

Sales of the ARJ21-700, which is slated to enter service later this year, have been slow despite political pressure to order indigenous aircraft. The planned stretched ARJ21-900 is closer in size to the E-190 but it is unclear if the ARJ21-900 programme, which is supported by Embraer rival Bombardier, will go ahead. The ARJ21 and E-190 have never really competed outside of China and even in China local carriers widely put the two aircraft in different categories.

Embraer has been eagerly awaiting a decision from the Chinese government on the proposed E-190 line for more than a year. It initially gave the Chinese government a deadline of the third quarter of 2010, factoring in the time it will take to prepare a new production line and hoping to avoid a gap in production between the ERJ-145 and E-190. But the government simply never approved the proposal, although it also never formally rejected it.

Harbin could absorb existing E-190 orders

The issue is now finally expected to come to a head as it will be brought up by new Brazilian president Dilma Rousseff during her visit next week to Beijing. If Harbin Embraer finally gets the go-ahead it will face a gap of at least a few months between the production of the last ERJ-145 and first E-190 as it will take time to spool up for the new aircraft. But Embraer and AVIC will not need to secure new orders for the project as some of Embraer’s existing Chinese E-190 orders could simply be converted to orders for Harbin-assembled aircraft. Chinese customers would likely not object as they would be able to avoid paying an import tax, although this tax is still a small fraction of the tax which is assessed on smaller regional aircraft.

If the proposal is formally rejected or a decision is simply not announced during Rousseff’s visit next week, Harbin Embraer will have to begin the process of shutting its aircraft production capabilities The ERJ-145 line at Harbin has not been a widespread success, only producing a slow trickle of aircraft and at times stopping production altogether. Only about 40 ERJ-145s have been delivered by Harbin Embraer since the first aircraft was completed in 2004.

The E-190, however, offers a much better potential business case. The E-190 is considered an ideal aircraft for the fast-growing Chinese market, allowing airlines to serve thin routes with more frequency. China now has a lack of aircraft in the 100-seat category. As a result many domestic routes are served with low frequency A320 or 737 operations.

The Harbin Embraer factory could also potentially be reused to produce business jets. Embraer has looked at the business case of building executives jets at Harbin since it opened the plant. But there is still not enough demand for business jets in China to support an entire production line. While at some point Harbin Embraer may build business jets and commercial aircraft side by side as Embraer does in Brazil, a viable commercial aircraft programme is likely needed to keep the joint venture open.

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