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Thu, Mar 10, 2011

China and General Aviation - What is going on here?

What Do Chinese Deals Mean For GA In The U.S.

Special To ANN By Rich Belzer

Until recently, it was understood within most aviation companies that the U.S. market for GA aircraft represented between 50% and 65% of the worldwide market. In 2004 when I departed the computer industry and joined The Lancair Company, the thinking was probably closer to 65%. In fact, our vice president of engineering could not understand why we wanted to waste our time in Europe. It was Cirrus, with its vast worldwide expansion that demonstrated that you could generate 50% of revenue or better from outside the U.S. market.

After all, we not only have the most pilot-friendly skies in the world but the most disposable income, allowing pilots to indulge their fantasies of aircraft ownership. I very much remember the exciting day back in April, 2000, when I purchased our A36 Bonanza. How great that was for me and our family and we flew that airplane all over the country from our home in Minnestota - from New York City to Bryce Canyon to San Diego.

With all that GA business here in the U.S., you would think that the GA industry would lead the world. With that in mind, here is my list of U.S. GA company ownership:

Company Parent Company Country
Cessna Aircraft Textron   U.S.
Cirrus Aircraft   Arcapita   Bahrain
Gulfstream Aerospace General Dynamics U.S.
Hawker Beechcraft    U.S
LearJet  Bombardier Canada
Piper Aircraft   Imprimis   Brunei





And then the non-U.S. players:

Bombardier      Canada
Daher-Socata France 
Dassault Falcon France
Diamond Aircraft Austria
Pilatus Aircraft     Switzerland





That represents 38% of these companies U.S.-owned. But in looking at the lower end of the market (propeller aircraft), it gets even worse:

Cessna Aircraft      U.S.
Cirrus Aircraft Offshore
Diamond Aircraft  Offshore
Hawker Beechcraft U.S.
Piper Aircraft  Offshore
Pilatus Aircraft Offshore
Piper Aircraft  Offshore




That's 29% U.S. owned. So with the lion's share of the GA market here in the U.S., the predominance of GA aircraft are either manufactured offshore or built in the U.S. by companies which are offshore owned. Why has this happened?

From the perspective of someone who spent over 30 years in high tech, I believe that the simplest answer is that the general aviation paradigm is a bad fit for the U.S. investment community which is looking for more reasonable investments and quicker turnaround. To start from scratch, certify an aircraft and get it into production is a three-to-four year project requiring from $100 to $120 million, for a light aircraft. To take that company, assuming sales go well, to an exit strategy based upon strong earnings is a six-to-eight year proposition. For the U.S. venture community, that's too much money, too much time and too much risk. So, for the most part, we Americans buy GA products that are either made outside the country or made here by companies that are owned outside the country.

Into this scene steps little-known but huge AVIC - Aviation Industry Corporation of China - the largest aviation company in the world with sales in the vicinity of $1 trillion. AVIC, owned in its entirety by the Chinese Government, is itself the owner of 20 publicly traded companies and builds virtually everything that flies for its owner and largest customer, from missiles to helicopters to fighter jets. It also happens to be the owner of CAIGA (China Aviation Industry General Aircraft Co., Ltd.), the company which recently signed a purchase agreement to acquire Cirrus Aircraft, arguably the most successful GA company of the past decade.

In addition, in mid-December AVIC announced that it had signed a purchase agreement to acquire Teledyne Continental Motors (TCM), a leader in the design and manufacture of piston aircraft engines, for $209 million. TCM, incidentally, is the sole supplier of aircraft engines for the Cirrus SR20 and SR22.

What does all this mean?  In 2005, I attended an aviation conference in the central-China city of Xian. As of that time, there were only a handful of GA aircraft in China, poor radar coverage and airports (with a few exceptions) at only the very largest Chinese cities. But it was clear from the talks I heard at this conference that aviation in China was about to undergo a revolution and that it was going to happen fast. Airport construction was about to boom; ADS-B was being implemented nationwide; flight training was being brought back home from other countries like Australia and the U.S. It was also clear that, over time, Chinese skies would be opened up considerably to flight by GA aircraft.

AVIC, which had for the most part ignored GA, began to gain interest as they realized that the need within China alone could be in the thousands of aircraft over a ten-year period. Considering their ability in manufacturing, it certainly made sense for AVIC to have a look at ways to meet the demand by getting into the GA business themselves. Thinking big, they went ahead and built a brand new airplane manufacturing facility in Zhuhai, near to Macau in southern China, and established it as the headquarters of its new GA subsidiary, CAIGA.

It should also be noted that for its first major aircraft acquisition AVIC picked the most successful company that manufactures only composite aircraft. Experienced in composites from its supplier relationship with Boeing, AVIC well understands the strength-to-weight advantages of both fiberglass and carbon fiber over aluminum. Given the fact that they showed little interest in competing with Imprimis for the acquisition of Piper, AVIC's direction in GA is clear.

So by mid-year when both the TCM and Cirrus deals will close, AVIC will be a player of considerable strength in the GA market, not just for China but worldwide. This leaves us with two unanswered questions:  "What will happen to the manufacture of the SR20 and SR22?" and "What will AVIC do next?"

As far as manufacturing is concerned, Cirrus has already demonstrated that there is a considerable market in the U.S. and Europe for SR20s and SR22s, having delivered 710 of these aircraft in 2007, very few of which went to South America and Asia. So try to imagine having to fly this quantity of small piston airplanes from Zhuhai to the U.S. and Europe. Think that makes any sense?

On the other hand, shipping composite parts prior to bonding is realistic as they could be nested in containers and sent from Zhuhai to Duluth at a reasonable cost. If you figure in the likely savings inherent in  manufacturing these parts in China, even including the cost of shipment Cirrus would probably lower their parts cost by at least 20% to 30%. That makes a great deal of sense.

So I surmise that a factory in Duluth for bonding, assembly and obtaining Airworthiness Certificates will make sense over the long term and, given their layoffs over the past couple of years, Cirrus will probably end up employing more people in the U.S. than they do today. As far as aircraft for the Chinese market is concerned, I would assume that they will be manufactured in their entirety in Zhuhai.

In regard to the second question, I would assume that AVIC is not done. There are just too many needs in the Chinese GA market and most of those needs are related to aircraft that burn Jet-A. China does have a refinery that produces 100LL and although this fuel does find its way to several training airports, it is difficult to image that aircraft which consume 100LL will be used for travel across the country. So I would look for AVIC to head in the direction of new composite turboprops and jets, one of which they will get as a product in development from Cirrus. If they do pursue this direction, any new aircraft they develop in this category are likely to be competing for business only with aluminum aircraft. This factor, combined with low manufacturing costs, could make AVIC a stiff competitor for a variety of companies in the higher end of the market, say $2 million and up.

My conclusion is that these first two deals may only be the tip of the iceberg. Demand in China combined with an aggressive AVIC could create a very powerful force in GA. We have seen the economic power of China in many areas over the past 20 years and it would be crazy to assume that AVIC will stop after absorbing TCM and Cirrus. Everyone in the GA business better sit up and take notice at what I believe is a major event in our industry.




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