Overview of Chinese Investments in the Western Aviation Industry

China has achieved a remarkable catch-up in multiple industries, such as high-speed trains, automobile and renewable energies. In some, it is emerging as a global leader (smartphones, home-use electronics, …). In contrast, the aviation industry still lags behind foreign counterparts despite the launch of ambitious national programs and significant government support.

Acquiring foreign competitors, setting up JVs with leading-edge players is an effective way to close the technological gap with the global state-of-the-art, and complements the development of national R&D programs.

What has the Chinese FDI (Foreign Direct Investment) activity been like regarding the Western aviation industry over the years? As we will see, China’s FDI in aviation consists almost exclusively of M&A. In this blogpost, I have tracked down Chinese acquisitions and summed up the main trends (see Methodology at the bottom*).

Modest Chinese M&A (comparatively)
Compared to other sectors where Chinese companies have been more aggressive, the global aviation industry has so far experienced fewer Chinese acquisitions [1][2][3]. Such acquisitions have also targeted smaller and less technology-significant companies, which could explain why concerns about Chinese acquisitions are seldom in the international press. Nothing close, for example, to the agitated acquisitions in semiconductors or smart manufacturing (ex: Aixtron, Kuka…).

This could be due to national security issues, as many aerospace companies directly cater for both civil and defence clients. The CFIUS (Committee on Foreign Investments) in the USA is known for example to have blocked several deals in the aviation industry in the past. The robust situation of the aviation sector, supported by huge order backlogs, also means that there are fewer struggling companies which would need to bail out.
On the other hand, the increasing number of orders for Airbus and Boeing have put pressure on the entire supply chain, which has been looking for capital in order to invest in production and follow the ramp-up. Western players may also be interested in connecting with Chinese companies, which could increase their potential on the Chinese aviation manufacturing landscape in the future. COMAC for example was known to favor Western suppliers which explicitly designed and/or manufactured in China through a JV to supply the C919 [4]. Nevertheless, production of civil aircrafts by Chinese manufacturers is significantly low compared to Airbus and Boeing so far, limiting the appeal of being a supplier to COMAC.

Overview of Chinese acquisitions: the facts

acquisitions timeline
Fig. 1 – timeline of the larger Chinese acquisitions of Western aviation companies (>1M turnover)*

All acquisitions below 400 million USD
As of 2018, Chinese acquisitions have been limited to small and medium sized aviation companies, all of which were worth under 400 million euros (and a strong majority under 100 million) when acquired. One of the earliest acquisitions, Austria-based FACC by AVIC’s Xi’an Aircraft Corporation in 2009, also marked the first  M&A operation implying a Western tier-one supplier to Boeing and Airbus.

Focus on General Aviation
Chinese acquisitions have mostly focused on general aviation (GA), especially in the early years, accounting for 7 in 15 operations (see Fig 1). If we include acquisitions which were excluded from Fig 1 due to their smaller size*, this number rises to 17 out of 25.

Why such a big focus on the General Aviation Industry? Although benefits in terms of product support, international marketing or industrial efficiency may be learned through general aviation companies, analysts have stated that technologies involved are usually of no interest for commercial or military aircrafts (piston engines, different certification standards, etc., see [3]).

Another reason could stem from the massive plan by the Chinese government to develop general aviation in China, an activity that is strongly underdeveloped in China due to its restricted airspace and lack of infrastructure (roughly 1500 GA aircrafts in 2016, compared to over 200 000 in the USA [5]). The 12th and 13th Five-Year Plan have set strong objectives in terms of construction of general aviation airports [6], and building up on the manufacturing side of generation aviation aircrafts could well be one of the objectives of the central government in this respect (Cirrus and Diamond are two of the biggest GA manufacturers after all).

Ultimately, another important factor for the focus on GA could be the screening process of national governments regarding acquisitions in the defense sector. Many aerospace suppliers have contracts with both commercial and military projects, and mechanisms like the CFIUS are likely to block any acquisitions straying too close to national security, thus leaving essentially only GA open to foreign acquirers. Multiple deals have been blocked in the past (such as Hawker Aircraft [3]), although it would seem that European governments are more loose regarding screening (see Northern Aerospace in 2018 [7]).

Manufacturing, aerostructure, composites
Strong emphasis was also put on aerostructure, including composites with FACC being one of the masterpieces of Chinese acquisitions. In contrast to general aviation M&A, acquisitions in this sector were done by different companies: Shaanxi Ligeance Mineral Resources, Shanghai Electric Group, AVIC, and China Iron and Steel Research Group. Other than AVIC,  the corporations were non-aerospace specialists, and acquisitions could therefore be considered as opportunistic.
On the other hand, in the case of AVIC, the acquisition of FACC can be seen as strategic for several reasons. Firstly composite materials are one of the keys to the competitiveness of future aircrafts as a significant leverage to reduce weight. FACC has enabled AVIC to take leaps in terms of knowledge and production, through the partnership with the AVIC domestic subsidiary Fesher Aviation Components. This was/is also a great opportunity for AVIC to put forward its composite material providers to directly supply FACC in raw material [8]. Secondly this has enabled AVIC to further enter the Western aerospace supply chain for leading-edge composite components (FACC makes winglets for the Airbus A350 for example). Ultimately, AVIC has created in 2018 a new entity, AVIC Cabin Systems, integrating acquired FACC, Thompson Aero Seats and AIM Altitude with domestic subsidiaries Jiatai and Fesher, bringing a new vertically-integrated player in the field of aircraft interiors (see my blogpost discussing this topic here).

Opportunistic or Strategic Investments?
The great variety of companies making the acquisitions (private, state-owned, aerospace and non-specialists, …) can hint towards mostly opportunistic operations. In RAND’s 2016 Chinese Investment in US Aviation, interviewed specialists described “the Chinese strategy, if there was one, as an opportunistic take-what-you-can-get approach” [3].

With the perspective of an observer in 2018, it is fair to say that this does not describe accurately the case of AVIC. As the largest stated-owned aerospace conglomerate directly under the supervision of the SASAC (State-owned Assets Superivison and Administration Commission), it is inclined to implement central government policies, which have long pushed for the establishment of a strong indigenous aerospace industry (see 13th FYP [9], Made in China 2025 [10].). Its targeted acquisitions point at a clear build-up of expertise in GA and composites, and a serious push to integrate the global supply chain as well as securing technology for its aircraft programs. Many of the acquired companies in Europe such as Aritex, FACC or Cotesa have decided to open manufacturing facilities in China and have hopped on board Chinese indigenous aircraft programs after the acquisition [14][15][16]. The Vice president of AVIC Gu Huizhong for instance shed light on Aritex’s acquisition in 2016 by saying: “The experience Aritex brings in engineering and technology will be important to fill the gaps in existing know-how in the Chinese market by improving current assembly technology and helping implement future factory concepts in China.” [15].
This international strategy is in line with the development of indigenous commercial aircrafts, and the recent consolidation of the Chinese aerospace value chain (AECC, AVIC Cabin Systems).
This is not specific to AVIC: studies have shown that Chinese investments in Western countries are overwhelmingly M&A, and rarely greenfield projects (>95% of Chinese investments in Europe in 2016 and 2017) [2][11]. Chinese capital abroad has focused repeatingly on technology-strong companies as a means to acquire technology, causing increasing protests from Western countries.

AVIC’s international technology-acquisition strategy is echoed by its JV policy on the Mainland, in the supplying of parts for Chinese indigenous aircrafts. The multiple JVs set up by AVIC with foreign players for supplying the COMAC C919 for example were characterized by “encouraged technology transfer” and a quasi-obligation to have production located in China. (see [4]). In 2018, 36% of European aerospace and aviation companies claimed they felt compelled to transfer technology in order to maintain market access”, according to the European Chamber Business Confidence Survey 2018. This was the highest rate in all investigated industries, and nearly twice the average rate (19%) [12].

What is the impact on jobs and on the local industry?
Based on feedback available in open-source literature and press releases, impact on employment in the US and Europe has mostly been positive.  In most cases, the Chinese acquisition has triggered investment, expansion of manufacturing capabilities, and boosted employment.  In some cases it enabled a welcome inflow of capital that would not have been possible with other investors. A case in point is German company Cotesa, whose CEO Jörg Hüsken said to the Handsblatt: “The problem […] was that no European investor wanted to put the necessary funds into the company, and China’s Advanced Technology & Materials was a good match. The Chinese understand us. For the first time, we have a strategic investor with a long-term outlook.” [22].

Below are some of the aforementioned companies which have seen a positive impact of their acquisition:

  • FACC: strong investments, expansion of the production line, relieving of products lines through the set-up of Chinese counterpart Fesher, deeper partnerships for the supplying Chinese aircrafts, consolidation (see my blogpost discussing this topic here) [16]
  • Continental Motors: commitment to maintaining headquarters in Alabama, increased investment, large investments in new state-of-the-art facilities in 2018 [17], opportunities to equip GA in China, founding of “Continental Motors Beijing” in 2014 [18][20]
  • Thielert: saved from bankrupcy, commitment to have jobs and  headquarters, consolidation with other GA entities of AVIC into a new group (“Continental Motors Group Ltd”) offering both diesel and gasoline piston engines on a global scale. [19][20]
  • Thompson/AIM Altitude: beneficial consolidation within a larger group (AVIC Cabin Systems) to counter recent mergers (Safran – Zodiac Aerospace, Rockwell Collins – B/E Aerospace). See my blogpost discussing this topic here.
  • Aritex: increased investment (announced), creation of a technology center for automation, increase of opportunities in China, strengthening of Aritex China subsidiary. [21]
  • Cotesa: opportunities to on-board Chinese programs (COMAC), expansion of facilities, plans for a factory in China. [22]
  • Gardner Aerospace/Northern Aerospace: increased opportunities in China, set-up of a manufacturing base in Chengdu to serve the China and the Asia-Pacific region. [23][24]

It should be noted that the benefits of Chinese acquisitions have almost always triggered at the same time the creation of production facilities in China (as to provide for the Chinese market, rather than for delocalization purposes).
Overall, Chinese M&A have so far been seen in a positive light by acquired companies, boosting investment and employment. This has not always been the case for Chinese investments abroad, making Chinese M&A in Western aviation all the more remarkable. [25][26][27][28]

Is the impact of Chinese investment in Western aviation positive? Yes, Chinese acquisitions have been encouraging in terms of employment and industrial development, -so far-. China’s M&A in the aviation sector is also a very small fraction of the sums invested in other sectors (see [1][2]).

But one can’t help remembering how hasty German and Japanese technology transfers in the early 2000s triggered the birth of the Chinese giant in the high-speed rail CRRC, in merely 15 years (yes I know, the aviation and HSR industries are different…). Or observing how the Chinese, understandably, are injecting 150 billion US$ in developing semiconductors to achieve total independance in this industry. In May 2018, Richard Aboulafia qualified China’s policies as “a grab for aerospace IP” in Aviation Week [29]. Combine this and the quantitative objectives given to indigenous aircrafts domestic sales (see Made in China 2025 [3][10]), one can’t help wondering if seeing China’s investment in an optimistic light is not a little short-sighted. Many as once said by famous former Premier Zhou Enlai, “It is too early to tell”.

*Methodology: the data in this blogpost around Chinese acquisitions in the Western aviation is partly based on previous work on the matter, notably [3] for the US and [1][2][12] for Europe. More recent acquisitions not covered by the former reports are based on an active monitoring of the aviation press. Any acquisition below 1M USD or in the sector of aviation operations (airlines and MRO) was intentionally left-out, considering their lower relevance to aerospace IP.

 

References:
[1] Reaching New Heights, an update on Chinese investment into Europe, Baker & McKenzie, CICC, Rhodium Group, 2015
[2]EU-China FDI: working towards reciprocity in investment relations, Rhodium Group, Mercator Institute for China Studies (Merics), 2018
[3]China Investment is U.S. Aviation, Rand Corporation, 2017
[4] Ready for Takeoff: China’s Advancing Aerospace Industry, RAND Corporation, 2011
[5]China-Aviation, export.gov US Department of International Trade, 2017, https://www.export.gov/article?id=China-Aviation
[6]CAAC Specifies Five Main Tasks in the 13th Five-year Plan for Civil Aviation Development, 2017, http://www.caac.gov.cn/en/XWZX/201702/t20170203_42314.html
[7] Airbus strategic supplier Gardner Aerospace announces acquisition of Northern Aerospace, Gardner Aerospace, 2018, http://www.gardner-aerospace.com/airbus-strategic-supplier-gardner-aerospace-announces-acquisition-of-northern-aerospace/
[8]FACC’s Visit to ACC, AVIC ACC, 2017, http://www.acc.avic.com/EN/contents/53/822.html
[9] The 13th Five-Year Plan (2016-2020), For The Economic and Social Development of the PRC, National Development and Reform Commission http://en.ndrc.gov.cn/newsrelease/201612/P020161207645765233498.pdf
[10] Made in China 2025, The Making of a High-Tech Superpower and Consequences for Industrial Countries, Mercator Institute for China Studies (Merics), December 2016
[11] Chinese FDI in Europe in 2017, Mercator Institute for China Studies (Merics), April 2018
[12] China at the Gates: A New Power Audit of EU-China Relations, François Godement, Abigaël Vasselier, European Council on Foreign Relations, 2018
[13] European Business in China, Business Confidence Survey 2018, European Chamber & Roland Berger, 2018
[14] https://global.handelsblatt.com/companies/chinese-take-away-another-german-firm-cotesa-eventually-923678
[15] AVIC Press Release, April 29th 2016, AVIC International concludes the acquisition of Aritex to become market leader worldwide for automatic assembly systems, http://www.airframer.com/news_story.html?release=33443
[16] FACC development
[17] https://www.usnews.com/news/best-states/alabama/articles/2018-08-06/continental-motors-embarks-on-75-million-alabama-project
[18] http://aviationweek.com/business-aviation/continental-motors-earns-china-certifications
[19] http://www.caac.gov.cn/en/XWZX/201702/t20170203_42314.htmlhttps://www.flyer.co.uk/thielert-sold-to-chinese-owners-of-continental/
[20] https://www.marketscreener.com/THIELERT-AG-469868/news/Thielert-AVIC-International-Announces-the-Founding-of-the-Continental-Motors-Group-and-Expands-Ope-18241876/
[21] http://www.airframer.com/news_story.html?release=33443
[22] https://global.handelsblatt.com/companies/chinese-take-away-another-german-firm-cotesa-eventually-923678
[23] https://www.aero-mag.com/gardner-aerospace-announces-acquisition-of-northern-aerospace/
[24] https://www.flightglobal.com/news/articles/paris-chinese-owned-gardner-looks-at-aerostructures-438306/
[25] The Globe: How China Reset Its Global Acquisition Agenda, Harvard Business Review, April 2011 https://hbr.org/2011/04/the-globe-how-china-reset-its-global-acquisition-agenda
[26] Broken Record, Reuters Breaking Views, February 17th 2017, https://www.breakingviews.com/considered-view/chinas-new-ma-players-haunted-by-past-failures/
[27] Chinese companies’ weak record on foreign deals, The Economist, June 8th 2017, https://www.economist.com/business/2017/06/08/chinese-companies-weak-record-on-foreign-deals
[28] Berlin to probe Chinese deal for German aerospace group Cotesa, January 4th 2018, https://www.ft.com/content/21bb3e4a-f133-11e7-ac08-07c3086a2625
[29] Opinion: China’s Misguided Grab for Aerospace IP, Richard Aboulafia, May 2nd 2018, http://aviationweek.com/commercial-aviation/opinion-china-s-misguided-grab-aerospace-ip

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