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.
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:
And then the non-U.S. players:
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:
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
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
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
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
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.