High hurdles for China's commercial aviation ambitions

* Competition likely from Russia, Japan and Canada

* Analyst concerns about technical challenges

* WTO ruling may limit Chinese investment

By Don Durfee and Joanne Chiu

HONG KONG, Sept 10 (Reuters) - As Boeing (BA.N) and Airbus (EAD.PA) grapple with problems from global recession to manufacturing glitches, a longer-term worry looms: China's ambition to compete in the aerospace business.

Beijing has declared its goal to manufacture large passenger jets with more than 150 seats and freighters capable of handling over 100 tonnes of cargo, with the explicit aim of taking on Boeing and Airbus.

To underline China's progress, government-backed Commercial Aircraft Corporation of China (COMAC) unveiled a model of its C919 aircraft at the Asian Aerospace Expo in Hong Kong this week.

The plane will carry at least 150 passengers and is due to fly in 2014.

"In the long run, COMAC aims to become one of the big three in the world to compete with Boeing and Airbus," said Chen Jin, general manager of COMAC's sales and marketing department.

But China may have a long way to go.

Among other challenges, said analysts, the country's aerospace companies face stiff competition and a host of technical barriers. And that's not to mention time and cost.

"China has the ambition and the financial resources to take on this project, but this will be longer and potentially more expensive than delivering the Olympics," said Martin Craigs, president of Aerospace Forum Asia, an industry association.

READY FOR TAKEOFF?

China, like other countries, is keenly interested in aviation, in part because of the large impact airplane exports can have on a nation's balance of trade.

Russia, Japan and Canada are among others building their civil aviation industries. That means more competition.

Russia's Irkuk (IRKT.MM) used the Paris Air Show in June to announce its plan to build 1,000 MC-21 passenger jets. It aims to tap a market that closely matches that eyed by COMAC. Even the schedules -- 2014 for the first flight and 2016 for delivery -- are the same.

To date, COMAC has sold few planes overseas. It has more than 210 orders for its ARJ21 regional jet, but these are mostly from domestic customers. The only foreign buyer is General Electric's (GE.N) aircraft leasing arm, which has ordered 5 jets.

There are no booked orders for the C919, and some in the industry doubt the plane will be attractive to buyers.

"When airlines buy a plane, they will look at the future value of the aircraft and the manufacturer's past record," said one industry source, who declined to be named because of the sensitivity of the issue.

"It's not just competitive pricing alone that would persuade international customers to buy a China-made C919."

Operating costs are a central factor.

An airplane's price tag represents less than 5 percent of its lifetime costs, said Craigs. Keeping those costs low requires highly specialized skills that are difficult to obtain.

"Building an aircraft and making it fly is basically quite easy, but making its operating costs the same or better than [Boeing's and Airbus's planes] is a big challenge," he said.

COMAC also needs to make major breakthroughs in engine technologies and advanced composite materials, state-owned CCTV has. [ID:nHKG100609]

Finally, China may find that last week's WTO ruling on a Boeing-Airbus dispute over state subsidies limits its ability to pour money into the sector.

The decision, which found that loans from European governments to Airbus were unfair, could set a precedent that will apply to China.

"It is our aspiration that this decision will give very clear guidance to other parties that want to build large commercial airplanes," Ted Austell, Boeing's vice president for government operations, told reporters last month.

BARGAINING POWER

China holds one trump card, however -- a massive domestic market that is expected to create demand for 3,700 airliners over the next 20 years, according to Boeing.

At the Aerospace Expo, a Boeing executive said the company expects China will become its biggest customer in a decade.

"In a market where manufacturers are desperate to sell, you can drive bargains in terms of bringing onshore component manufacturing and assembly," said Peter Harbison, chairman of the Centre for Asia Pacific Aviation.

"In some respects, Airbus and Boeing are willingly mortgaging their future."

Indeed, China has secured several major investments from Western aerospace companies, including an Airbus-Xian Aircraft International (000768.SZ) joint venture to manufacture wings and composite parts, and another between EMBRAER (EMBR3.SA) and subsidiaries of China Aviation Industry Corp to produce the ERJ145 plane.

Asked whether COMAC can become one of the top three aircraft makers, Robert Laird, a Boeing senior vice president, seemed unconcerned.

"Thirty years ago, people were asking the same question about Airbus, so you never know. But you also have to mention all of those who have gone out of the business, such as Lockheed, McDonnell Douglas and Grumman." (Additional reporting by Alison Leung; Editing by Ian Geoghegan)