China’s import duties damaging market for Chinese-built foreign aircraft

Embraer is a joint-venture aircraft manufacturer where Brazil’s Embraer holds a 51% stake and the Aviation Industry Corporation of China hold a 49% stake. They started assembling ERJ 145 regional jets in northeast China in partnership with Harbin Aircraft in mid-2000. At the time the Chinese government imposed an increase in the import tax on aircraft sections from 5% to 23% in order to protect homegrown aviation companies. While the original ERJ 145 stopped production with the last plane delivered in 2011, assembly went ahead with the newer version of the ERJ 135/145 type aircraft, the Legacy 650.
However it took two years of lobbying the Chinese government to obtain permission to proceed with the assembly of this model, having previously failed to get the go-ahead for the E-190s as this was seen as being a direct competitor of the ARJ-21 regional jet manufactured by the Commercial Aircraft Corporation of China, Ltd. (COMAC). However manufacture of the Legacy 650, which has been designed specifically for the Chinese market, still struggles with what are seen as unfair import duties which currently stand at 17% for import Value Addet Tax (VAT) and 3% import duty. Unlike Embraer, Airbus has an assembly plant also in China, but it is located in what is referred to as a ‘tax free zone’ created by the government to attract overseas business.
Embraer’s China chief Guan Dongyuan said at the Beijing airshow that “Production cost of our Harbin-made business jets is 20 percent higher than those made overseas,” confirming that a good number of Chinese companies and businessmen prefer to buy business jets overseas and register them outside China because of the high taxes levied on them.
“Government has been encouraging local production, but the precondition is that you shouldn’t set the bar too high,” he added. When questioned as to whether Embraer would continue with production in China, Guan Dongyuan replied that Embraer would “let the market to make the decision.”
Embraer, who is in competition with Bombardier and others, has secured 80% of China’s regional aviation market with orders for 167 commercial jets, 130 of which have been delivered.