* Airbus in talks to extend Tianjin assembly beyond 2016

* Factory receives parts for 100th Chinese-assembled jet

* Factory labour costs rising 8 pct a year

* Sleeping, playing cards, gambling not allowed

(REUTERS) Three years after it bet heavily on China by opening its first assembly line outside Europe, Airbus has entered talks in a bid to extend production beyond 2016, offering airlines a chance to buy a locally assembled version of a future revamped jet.

The move comes as a trade row grows between Beijing and Brussels over European Union plans to tackle carbon emissions by foreign airlines – a move Airbus says led to the suspension of long-distance jet orders worth up to $14 billion.

It also coincides with the start of work on the 100th aircraft since the assembly line opened near Beijing. Fuselage parts for the centurion jet arrived at the Tianjin factory late on Wednesday, ready to move through a four-part production line.

Airbus has backed China’s refusal to accept an EU decision to force airlines into its emissions trading scheme, which covers flights into and out of Europe. But it does not expect the row to affect assembly in the gritty port city of Tianjin.

Assembly of short-haul A320s there began in 2009 following a Sino-French pact, as Airbus seeks hundreds of sales in the fastest-growing aviation market and Beijing grows the skills needed to support its own fledging passenger aircraft industry.

Airbus owns 51 percent of the production venture with partners including China Aviation Industry Corporations (AVIC I and II) and Tianjin Free Trade Zone. A contract for a total of 284 aircraft runs until the end of the first quarter of 2016.

“We have started discussions with our partners on whether and on what terms to renew our contract,” Laurence Barron, president of Airbus China, said.

He said the two sides had agreed a date by which they must make a decision to allow long lead-time production to continue without interruption, but declined to say when this would be.

Unlike traditional outsourcing deals, Airbus says it costs more to produce an A320 in China because of the longer lead times, including a month-long sea voyage needed to bring the aircraft from Europe in sections ready for assembly.

The logic of opening the plant was to sustain Airbus sales to China, which ordered a total of 400 A319s or A320s worth over $30 billion at today’s prices in three lots following the deal.

Tianjin is the third assembly line for the best-selling 150-seat A320-family after Toulouse in France and Hamburg in Germany.

The current generation of A320-family aircraft is due to be upgraded with fuel-saving engines from 2016 in a modification that spurred record Airbus sales last year, and prompted rival Boeing to react with its own makeover of the popular 737.

Were the deal extended, the revamped “A320neo” aircraft would automatically be produced in Tianjin as well as Europe.

The world’s largest passenger jetmaker has a 48 percent market share in China versus Boeing’s 52 percent, and the nation represents 20 percent of its global deliveries.

It estimates that in the next 20 years, China will need 4,270 new passenger and cargo aircraft.

RISING LABOUR COSTS

Tianjin will barely dent overall demand, but is seen as a gamble that Airbus hopes will lead to significant new sales.

Airbus is producing three aircraft a month in Tianjin and 37 in Europe, which will rise to four and 38 respectively by the end of the year.

Barron said the Tianjin venture would break even this year.

Certain costs are kept inside Airbus, such as the financial burden of carrying inventory for an extra three months while it is prepared and shipped to Tianjin, and an allowance for shortfalls in efficiency that are inherent in early production.

Analysts say the costs still being borne inside the joint venture are likely to be the most thorny issue during the renewal talks, which could take a couple of years to complete.

Barron said Airbus would make every effort to “compress” the extra costs resulting from the elongated supply chain.

It has started by consolidating some of the work finishing off Chinese-made wing parts in Tianjin rather than sending the parts off to Europe to be completed and sent back.

The venture cannot, however, escape some of the pressures facing virtually all industrial businesses in China.

The factory’s manager Jean-Luc Charles, a Toulouse-born Airbus veteran, said labour costs were rising by 8 percent a year. Wages at the plant start at 4,000 yuan ($630) a month, around twice the average minimum pay for low-skilled workers.

Government statistics show average monthly urban wages rose by 13.3 percent between 2009 and 2010, although companies’ actual cost structures can vary considerably.

As the flow of adults into the workforce slows, China can no longer attract manufacturing with the promise that an unending pool of rural migrants will keep wages down.

After peaking above 120 in 2009, the number of costly expatriates doing the training at the plant will fall to 25 by this summer.

Airbus also hopes to keep out certain unproductive habits that labour experts consider common in Chinese workplaces.

“It is strictly forbidden to spit, smoke, consume alcoholic beverages, sleep, play cards, gamble … in the locker room,” reads a sign on the factory floor opposite a part-built jet.

SOURCE: REUTERS