:: July 2012 Letter ::
Remember those cartoon characters whose eyes would pop out with dollar signs at the mention of something lucrative? Someone would say “oil well” or “gold mine” and Pluto or Yosemite Sam or whoever would get irrationally excited? Sadly, irrational exuberance can be found in real life, too. In our industry, Japan once made people giddy with the thought of cash. Later, it was the Arab Gulf states. Now it’s China. “They’re from China,” the thinking goes. “They must be well-connected and have money.” After all, many believe, China is a big, monolithic entity with a lot of cash…what could possibly go wrong?
There have been a few small Chinese acquisitions and joint ventures in aviation, mostly revolving around Aviation Industries of China (AVIC) and its associate, China Aviation Industry General Aircraft (CAIGA). But every so often a less notable player enters the game, and benefits from a weird China cash halo effect. Earlier this month, Hawker Beechcraft entered into exclusive negotiations with an unusual suitor, Superior Aviation Beijing, which has offered $1.79 billion. Predictably, there have been lamentations from unions and pundits and others that this represents the selling of a US crown jewel to a feared competitor. Even non-protectionist politicians have been using “China” as a catch-all for the decline of US competitiveness. The proposed Hawker acquisition is grist for that mill. After all, the new owners are from “China,” a term I’ll use as shorthand for this mythical unified national entity.
Yet let’s recap what we know about the buyer (other than that they are from “China”). Superior Aviation Beijing is owned by Shenzong Cheng and his wife, Qin Wang. Together, they have 60% of the company. The other 40% is owned by the Beijing city government, but the extent of that municipality’s financial commitment (in general and to the Hawker transaction in particular) is completely unknown. Their assets are not at all transparent. They don’t have a website. I have never heard of them, nor have most of my peers. They have in the past six years purchased several bankrupt aerospace assets (Superior Air Parts, Brantly Helicopters) for a tiny fraction of the cash they’re offering for Hawker. Since they bought those assets, they haven’t done much with them, although their flagship, Superior Aviation, has gone from 14 employees to about 25. They have made just one public comment about this deal. Wichita Business Journal’s Emily Behlmann has an interesting piece (subscription): tinyurl.com/c5ah8ve; the AP’s Roxana Hegeman also has a good piece: tinyurl.com/87vn87d.
In short, this isn’t “China” buying Hawker. This is a small group of people who may or may not (I suspect not) have access to cash and a higher level of backing. For a precedent that distinguishes the mythical construct of “China” from the reality of “some company that happens to be from China,” look at the 2003 D'Long International Strategic Investment Group acquisition of Fairchild Dornier. Many saw this as an understandable move by “China.” They could buy a ton of intellectual property from a legacy Western company for next to nothing. Since everyone knew that “China” wanted to develop its own regional jet, this acquisition must be related to that goal. Yet what was D’Long? Turned out, it was just a group of investors with big plans and little money. Fairchild Dornier disappeared (the one equipped 728JET prototype was bought by Germany’s DLR for cabin tests). For an abstract of an article about D’Long’s d’mise, see: www.caseplace.org/d.asp?d=853
There are many other cases where the mention of China brought dollar signs to peoples’ eyes, followed by disappointment. In each case there’s been a failure to distinguish between “China” and “some entities in China”:
Airbus in Tianjin. The rationale for an A320 line in China seemed clear. “China” will build A320s. “China” will force its carriers to buy A320s. Reality: It didn’t, no more than it forced carriers to buy MD-80s built in Shanghai. Proof: Since the line agreement was signed in December 2005, Boeing has sold 449 competing 737s to Chinese airlines. I don’t know the comparable number for the A320 series, but right now about 200 are on backlog for Chinese airlines, and 89 planes have been delivered from Tianjin. In short, market shares have remained stubbornly in the 50-50 zone, except that Airbus had to help pay for an in-country production line.
Bombardier in Shenyang. Remember those agreements between BBD and AVIC/COMAC over the CSeries and ARJ21? Many saw this as some kind of emerging producers alliance (“Canada” and “China”), or at the very least a smart way of selling the CSeries in China and of getting the Chinese to build the CSeries fuselage in Shenyang. Yet five years after the first agreement, there have been zero CSeries sales to China. Worse, as Aviation Week’s Jens Flottau reported this month (tinyurl.com/7z63dmp), the fuselage production agreement seems to be going horribly wrong, and CSeries work is being “temporarily” taken out of China.
Embraer in Harbin. Press reports this month spoke of a “victory” for Embraer: they will now build Legacy 650 business jets in Harbin, presumably giving them entrée into the Chinese business aircraft market. What few mention is that this is actually a line conversion. Ten years ago, Embraer signed an agreement to build ERJ 145s (basically the same plane, in regional jet configuration) in Harbin, with the expectation that this would give them entrée into the Chinese regional aircraft market. Production at Harbin totaled an unimpressive 41 ERJ 145s.
In each of these cases, somehow “China” didn’t come through, largely because “China” doesn’t exist. China aviation is not some kind of monolith. Like any other country, China has government agencies, manufacturers, airlines and other customers, and other entities all with divergent (and sometimes clashing) interests. There’s nothing pre-ordained about its success, and it won’t take over the universe, just like Japan didn’t take over the aviation universe after many people thought it would 25 years ago.
This confusion between “China” and businesses in China is understandable. As it tries to reconcile communism and capitalism, the PRC Government likes to look like it’s running the show. State-directed five year plans and state-owned companies co-exist uneasily with the realities of the aviation market. But as a result of this semi-deliberate confusion between China’s public and private sectors, we have no idea what Superior Aviation Beijing really is. It could be “China.” Or it could be another D’Long. There’s no way of knowing.
For a superb guide to this complicated mosaic, I’d strongly recommend James Fallows’ recently published China Airborne. It’s written in Fallows’ usual engaging style, and it provides tremendously helpful economic and political context for China’s aviation scene. Yours truly makes an appearance or two, but it’s still quite worthwhile.
Teal reports this month include many relevant programs: China’s aero-flagship, the C919, Bombardier’s CSeries, and Hawker’s 800/4000. We’ve also updated the Commercial Jetliner Overview, the 747, G.222/C-27, F-4, F-5, and Dash 8. Have a great month.
Yours, ‘Til “China” Crashes Our Server,
© Richard Aboulafia 1997-2006, All rights reserved.