Business Jet Makers Eye China: An Analysis Of Opportunities, Bottlenecks And Economic Rationale

Business Jet Market of China

The global economic and commercial scenarios have undergone significant changes and dynamics over the years and much of these changes can be attributed to international phenomena of immense significance like that of Globalisation, trade and commerce liberalisation in most of the countries, industrial progresses as well as technological and infrastructural developments (Sassen 2014). Together, these factors have contributed in making the global economic scenario more integrated, inclusive and intercommunicated.

With higher integration of economies across the globe and creation of what is known as a global marketplace, increasing number of businesses from all parts of the world, can be seen to be attempting to expand their operations and presence in previously unexplored regions as well as new markets with less penetration, to increase their profitability, prosperity and sustainability as well as to gain higher share of clientele and markets (Holland 2018). This is especially true in case of the emerging or the developing economies, in the contemporary period (like those of the Asian countries namely India, China and others), which have been appearing as highly lucrative and potential markets for businesses across the world, especially for the businesses and industries having their origin in the developed countries. These businesses compete with each other with the objective of tapping the unexplored markets of these emerging economies, taking advantage of the lifestyle and the increasing income patterns of a major section of the population in these countries (Harrod and O’Brien 2012).

Keeping this into consideration, the concerned report tries to explore the recently expanding market of business jets in the emerging economy of China, thereby critically analysing and evaluating the strategies which have been adopted by the companies, in this industry, for the purpose of tapping the market, especially focussing on the strategies taken by Gulfstream, which dominates the business jet market in the concerned country (Nolan 2012). The report also tries to analyse the opportunities, bottlenecks and economic rationale working behind the strategies taken by the concerned firm as well as the other businesses in this domain in the concerned country. For studying the same, the concerned report refers to the article named, Business Jet Makers Eye China, by Mike W. Peng.

To understand the strategies adopted by Gulfstream as well as other companies in the business jet market of China, it is of immense importance to explore the market dynamics in the concerned market in the country, in the recent period. The business jet market, across the world, has been increasing impressively over the years, with the increase in the demand for personal commutes, increase in the level of income of certain sections of people as well as with the change in the lifestyle of population across the globe, particularly in the developed and some emerging economies (Nolan 2012). China, in this context, can be seen to be appearing as one of the lucrative markets for business jet companies as can be seen from the following figure:

Figure 1: Leading countries across the world with highest number of business jets (2017)

Reasons behind increased opportunities in the Business Jet market of China

(Source: Statista.com 2018)

As is evident from the above figure, the highest number of business jets can be seen to be present in the United States of America (20978 units by 2017), followed by Brazil and Mexico. However, as can be seen from the above figure, several emerging economies can also be seen to be ranking amongst the leading countries in this context and China is one of the primary ones among them (Niosi and Zhao 2013). However, the number of business jets in China, in the contemporary period, can be seen to be considerably low than those of the of the developed countries like United States, Canada and other. The number of business jets in the concerned country currently can be seen to be nearly 497 (Budd 2013). However, the market for business jets in China can be seen to be appearing as a lucrative one, in the contemporary period, as can be shown with the help of the following figure, highlighting the fleet breakdown in China, with respect to the size of the aircrafts:

Figure 2: Flight Breakdown by aircraft size in China

(Source: Asianskygroup.com 2018)

The reasons behind the same are discussed in the following section.

There are several economic, commercial and policy related reason behind the increasing opportunities for the business jet companies to infiltrate the market of the emerging economy of China, the primary ones of which being as follows:

Increased economic growth and prosperity-The primary and the most crucial reason behind the increased opportunities and expansion in the business jet market of the concerned country, can be attributed to the increased economic growth and productivity in the country over the years, which can be seen from the following figure:

Figure 3: Increase in GDP of China over the years

(Source: Tradingeconomics.com 2018)

The above figure highlights the dynamics in the Gross Domestic Product of the country, over the years, which can be seen to be consistently increasing for the concerned country over the last two decades (Jarreau and Poncet 2012). The GDP of the country, showing the total value of the final goods and services produced within the geographical boundaries of the same, within a specified period of time, indicates towards the productivity scenario of the concerned country and is a major indicator of the economic growth of the same. In this context, the GDP of China can be seen to be increasing impressively, which highlights the robust economic growth of the same over the years. This in turn is expected to increase the income level, economic well-being, demand patterns and lifestyles of a major share of the population of the country, thereby asserting towards the presence of opportunities for the companies in the business jet market, in the recent periods (Lewis 2013).

Increasing number of billionaires and elites in the country-Along with the increase in the overall GDP of the country another economic trend can be observed in the country over the years, which is that of increased skewedness in income distribution among the population of the country. This can be seen with the help of the following figure, showing the income inequality among the top 10% and the bottom 40% of the population of the country:

Figure 4: Increasing income inequality in China over the years

(Source: Rba.gov.au 2018)

This in turn, has resulted in accumulation of immense wealth in the hands of a handful of people in the country, with immense power, wealth and purchasing capacities (Lewis 2013). This, in turn, has resulted in the increase in the number of billionaires in the country, especially in the last few years, as can be seen from the following figure:

Figure 5: Increase in the number of billionaires in different countries across the globe

(Source: Businessinsider.in 2018)

As the above figure shows, the number of billionaires in China, which used to be 350 in 2007, increased to 470 in 2012 and further to as high as 1,040 by 2017, the growth rate of the same being higher than that of the United States itself. This in turn, is also one of the contributing factors in the increasing demand as well as opportunities in the business jet market of the country.

Opening scopes for private and international companies- The government of China, in the recent period, has implemented several policies with the objective of reducing corruptions in the dominating public sectors in the countries. In this situation, the anti-corruption campaign started by the government, has led to the reduction of the market share of the large state-owned enterprises in the country from 15% to 5%, which in turn has increased the scopes of the private and foreign multinational firms in this business, to enter the market of the country (Jennings 2018).

Liberal Policies- The government of the country has also begun to liberalise their protectionist policies to some extent in the business jet market of the country. In their latest Five-Year Plan, the government of China has targeted to develop non-airline aviation and also have instructed the militaries to give up some of their spaces and holdings in order to make provisions for the business jets. This in turn, makes it lucrative for the companies in this domain to infiltrate in the market.

All these aspects can be expected to be driving the demand for the business jets in the country upwards in the contemporary period. This in turn seems to increase the opportunities for the companies, especially that of Gulfstream and others in the market, which can be shown with the help of the economic concept of demand and supply, as can be shown from the following figure:

Figure 6: Increase in demand for business jets in China

(Source: As created by the author)

The increase in demand is expected to increase the price of business jets, which in turn is expected to increase the business opportunities and profitability of the firms including Gulfstream in the concerned market (Iossa and Martimort 2015).

Along with the presence of considerable opportunities in the private jet market in China, there also remains several hurdles in the concerned markets, which may appear as bottlenecks for the firms venturing in the concerned market. Some of the primary ones of these bottlenecks can be seen to be as follows:

Strict tariff regulations-The government of China can be seen to be imposing stringent tax and tariff policies in several import markets, of which luxury goods like that of business jets are eminent ones. The buyers of business jets in the country, have to pay cumbersome taxes and import tariffs and duties which increases their costs of buying business jets considerably (Hall and Lieberman 2012). Moreover, the government also intends to impose a luxury tax on these commodities, which is expected to increase the costs of the same to a considerable extent, which can be a potential threat for the property of the companies venturing in this market. The effects of imposition of tariff and import duty can reduce both demand and supply for the same, as can be shown in the following figure:

Figure 7: Effects of imposition of import quota

(Source: As created by the author)

1. Strong hold of military-The skies of the country are officially controlled by the military of the country with their own flight routines and plans. This in turn makes the process of receiving permission for flights, flight plans and operations a highly cumbersome and time-taking process, the costs of which have to be endured by the business jet companies venturing in this market. The airport in Beijing also has only two take-off slots for business jets per hour (Dobson 2017).
2. Competition in the business jet market-The market for business jets, in the country is an oligopoly, with the primary competitors being Gulfstream, Cessna, Beech Hawker and Dassault Falcon. In the recent period, Boeing, Embraer and Airbus can also be seen to be entering the market, especially in the large jet markets.

Keeping these into consideration, the market and economic strategies of one of the major companies in this domain, the Gulfstream, are critically evaluated and explained in the following section of the report.

As discussed above, the business jet market of China is primarily oligopolistic market, the company leading the market in China is Gulfstream and the same has alone sold more than 100 business jets in the country till now. Gulfstream Aerospace Corporation, having its origin in the United States of America is one of the leaders in this market across the globe as can be seen from the following figure:

Figure 8: Global market share of different companies in the aspects of business jet deliveries (2017)

(Source: Statista.com 2018)

The concerned company, as discussed, operates in an oligopolistic market of business jets in China, where there are few other considerably strong competitors, the primary ones being as follows:

• Beech Hawker
• Cessna
• Bombardier
• Boeing
• Airbus
• Embraer

In general, an oligopoly market is characterised by few sellers having considerable market power, market share and clientele. Each of the sellers in such type of market have differentiated products and their decisions are also based on the decisions of their rivals. However, in the concerned market, there are not many numbers of buyers as that of conventional oligopoly markets. The level of competition, thus, is substantially high in the business jet market of the country.

In general, there are two different ways in which the firms in an oligopoly market compete or interact with each other to gain increased clientele, market power and dominance. These options are of that of price war and non-price war and these two options are also available to Gulfstream in the concerned scenario (AVIATION and LEFRAK 2015). However, the strategy taken by the concerned company to increase its presence and dominance in the business jet market of China, can be seen to be much more aligned to the latter one than that of the former one. The components of the strategic framework of the concerned company are discussed as follows:

• In the business jet market of China, Gulfstream can be seen to be adopting the policy of personalisation and customization of their products in accordance to the needs, demands and preferences of the customers.
• Knowing that the targeted customers in the market are less in number and are mostly elite class, the company has implemented the strategy of knowing the attributes, preferences and even the cultural patterns of the customers.
• Known for its sensitivity to the cultural attributes of the customers and for acknowledging the same, in China also the company can be seen to be implementing these aspects in their operational framework. This can be seen from several instances in the operational framework of Gulfstream (AVIATION and LEFRAK 2015).

For example, the company has renamed the model G250 (launched in 2008) to G280. This has been done by the company, primarily to respect the cultural aspects of Chinese population, as in many areas and certain Chinese culture, the number “250” is considered to be useless or stupid. By removing the same the company aimed to increase its goodwill in the market (Atwal and Bryson 2017).

The non-price war strategy taken by the concerned company, where the company has concentrated in developing and customising the products as per the needs of the customers. This strategic framework has several positive sides as well as a few limitations which can be seen to be discussed as follows:

Strengths of the strategic framework of Gulfstream in China 

The strategy can be appreciated in the ground that opting for the other alternative, that is the price war in oligopolistic market could have led to unfavourable outcome for the company itself as can be shown with the help of the following figure:

Figure 9: Kinked demand curve in price war in oligopolistic market

(Source: Fudenberg and Tirole 2013)

In the presence of price war in an oligopolistic market, leads to a situation where the firms compete by lowering the prices of their products, thereby making the products more attractive to the customers. However, prolonged price war lead to fall in the profits of all the firms involved in it, thereby making it difficult for the firms to sustain in the long run.

However, engaging in non-price competition, like those of competing on the basis of product and service quality, desirability and relevance to the concerned customers, can help the companies to compete efficiently as each of the companies are expected to develop loyal client base, on the basis of the attributes of their products or services (Cubbin 2013). The effects of the same can be seen to be as follows:

Figure 10: Effects of non-price war in oligopolistic market

(Source: As created by the author)

As the above figure highlights, in the presence of non-price competition in an oligopolistic market, due to the presence of few sellers and loyal client base for each of the companies, each of the company, in the equilibrium condition, has the potential to earn economic profit.

This can be seen to be the case for the concerned company, Gulfstream in the business jet market of China as the same can be seen to be putting in market-oriented and pro-customer efforts instead of indulging in price competition with their rivals (Cubbin 2013). The positive impacts of the same can be seen from the fact that the company has received immense positive response from the potential customers in China and has also signed a deal of 60 plane with the Minsheng Financial Leasing.

Although the strategies adopted by Gulfstream, in China, have considerable potential, however, only emphasizing on personalisation and cultural aspects may not have long term effects, if the company does not focus in improving their cost efficiencies and increase the varieties of the services, to increase the sustainability of their business in the expanding and increasingly competitive market of business jet in China in the coming years (Dunne et al. 2013).

Conclusion 

From the above discussion it can be seen that the business jet market in China has been expanding in the contemporary period, much of which can be attributed to the overall economic growth of the country and to the increasing accumulation of wealth in the hands of the elite class, especially the industrial tycoons and other influential people. The market for business jets, however, is an oligopolistic one, with some big companies operating in the market, of which Gulfstream is one of the primary leaders, capturing a lion’s share in the business jet market. Primary reasons behind the increasing share and dominance of the Gulfstream, in the business jet market of the country, can be attributed to the robust and intelligent strategic framework of the same, by virtue of which the company can be seen to be engaging in non-price competition, by making their products more acceptable to the potential customers in the concerned country. However, given the expanding, lucrative and increasingly competitive nature of the business, the concerned company also needs to focus on their cost efficiencies, business diversities as well as in attracting more clientele in the concerned country in the coming years

References 

Asianskygroup.com 2018. ANALYSIS: Chinese business jet market continues to bloom. [online] Asianskygroup.com. Available at: https://www.asianskygroup.com/attachment/news/41/ASG-ANALYSIS_CHINESE_BUSINESS_JET_MARKET_CONTINUES_TO_BLOOM.pdf.pdf [Accessed 14 Oct. 2018].

Atwal, G. and Bryson, D., 2017. The Super-Rich. In Luxury Brands in China and India (pp. 75-99). Palgrave Macmillan, London.

AVIATION, L. and LEFRAK, L.M.H., 2015 Gulfstream G650.

Budd, L., 2013. Aeromobile elites: Private business aviation and the global economy. In Elite Mobilities (pp. 90-110). Routledge.

Businessinsider.in 2018. China gets a new billionaire every 5 days. [online] Business Insider. Available at: https://www.businessinsider.in/China-gets-a-new-billionaire-every-5-days/articleshow/54838428.cms [Accessed 14 Oct. 2018].

Cubbin, J., 2013. Market structure and performance: the empirical research. Taylor & Francis.

Dobson, A., 2017. A History of International Civil Aviation: From Its Origins Through Transformative Evolution. Routledge.

Dunne, T., Klimek, S.D., Roberts, M.J. and Xu, D.Y., 2013. Entry, exit, and the determinants of market structure. The RAND Journal of Economics, 44(3), pp.462-487.

Fudenberg, D. and Tirole, J., 2013. Dynamic models of oligopoly. Routledge.

Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage Learning.

Harrod, J. and O’Brien, R. eds., 2012. Global unions?: theory and strategies of organized labour in the global political economy. Routledge.

Holland, J.H., 2018. The global economy as an adaptive process. In The economy as an evolving complex system (pp. 117-124). CRC Press.

Iossa, E. and Martimort, D., 2015. The simple microeconomics of public?private partnerships. Journal of Public Economic Theory, 17(1), pp.4-48.

Jarreau, J. and Poncet, S., 2012. Export sophistication and economic growth: Evidence from China. Journal of development Economics, 97(2), pp.281-292.

Jennings, R. 2018. Why China Might Be Opening Up Its Skies To The Private Aviation Industry. [online] Forbes. Available at: https://www.forbes.com/sites/ralphjennings/2018/04/19/first-private-cars-caused-congestion-in-china-are-private-planes-next/ [Accessed 14 Oct. 2018].

Lewis, W.A., 2013. Theory of economic growth. Routledge.

Niosi, J. and Zhao, J.Y., 2013. China’s catching up in aerospace. International Journal of Technology and Globalisation, 7(1-2), pp.80-91.

Nolan, P., 2012. China and the global economy. In Charting China’s Future (pp. 55-64). Routledge.

Nolan, P., 2012. Is China buying the world?. Challenge, 55(2), pp.108-118.

Rba.gov.au 2018. Chinese Household Income, Consumption and Savings | Bulletin – September Quarter 2016. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/publications/bulletin/2016/sep/4.html [Accessed 14 Oct. 2018].

Sassen, S., 2014. Expulsions: Brutality and complexity in the global economy. Harvard University Press.

Statista.com 2018. Business aircraft market – fleet size by country 2017 | Statistic. [online] Statista. Available at: https://www.statista.com/statistics/767643/business-aircraft-fleet-size-leading-countries/ [Accessed 14 Oct. 2018].

Statista.com 2018. Global business jet fleet – deliveries by manufacturer 2017 | Statistic. [online] Statista. Available at: https://www.statista.com/statistics/679172/business-jets-delivered-global-aircraft-fleet-by-manufacturer/ [Accessed 14 Oct. 2018].

Tradingeconomics.com 2018. China GDP | 1960-2018 | Data | Chart | Calendar | Forecast | News. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/china/gdp [Accessed 14 Oct. 2018].