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ANALYSIS: How China investment changes fortunes of Western firms

What do a pair of seating manufacturers, four light aircraft manufacturers, an aerostructures specialist, and one of Europe's top maintenance, repair and overhaul houses have in common? They are among around a dozen Western aerospace companies that now effectively have the name of a Chinese owner over the door.

China – the biggest emerging market for commercial aviation products and services – has been busily creating its own indigenous industry over the past 20 years, attracting investment from Airbus, Boeing, Embraer and others. However, at the same time, money has been flowing the other way in arguably even greater amounts, creating a mini Chinese aerospace empire in the USA and Europe.

Earlier this decade, Chinese entities bought US GA brands Cirrus Aviation, Enstrom Helicopter, and Mooney. In the past two years, the focus has switched to Europe, with Austria's Diamond Aircraft, Gardner Aerospace of the UK, and Switzerland's SR Technics all coming under Chinese control, together with UK cabin interiors specialists Acro, AIM Altitude, and Thompson Aero Seating.

The background to each of the acquisitions differs. Most of the Western firms have been family-owned or backed by equity holders keen to exit at a profit. The Chinese investors range from private entrepreneurs to state-backed conglomerates making strategic additions to their portfolios.

Their game plans differ too. In some acquisitions, the strategy has involved replicating in China the company's successful production model, bringing assembly closer to local manufacturers and maintenance providers, while giving the business access to lower-cost labour. In other instances, investors have funded expansion at home, or appear content to let the business motor along more or less as before.

For Derby-based Gardner, mining group Shaanxi Ligeance Mineral Resources has ticked the first two boxes. Soon after its £326 million ($431 million) acquisition by SLMR in June 2017, Gardner began work on a 42,000m2 (450,000ft2) factory in Chengdu – a "cut and paste" of its UK operation. This July, funds from SLMR helped Gardner buy another UK company, Northern Aerospace, which specialises in large machined aerostructures.

REVENUE BOOST

The addition of the County Durham-based firm takes Gardner's revenues to more than $300 million, and "broadens our portfolio", with new product lines and customers, including Embraer, Gulfstream, Pilatus, and Ruag, says business development executive vice-president Nick Guttridge. The two also share Airbus as a customer, and the airframer has been "very encouraging" about the coming together of the two businesses, he says.

Together with the Chinese factory, the acquisition will also push Gardner towards its ambition of becoming a $1 billion-turnover concern by 2022. "That was always going to involve diversification by territory and into new sectors, particularly engine components and other equipment," says Guttridge. "We were never going to do it only organically."

A more recent swoop has seen a rising star of the airliner interiors market come under Chinese control. Early this year, Zhejiang Science and Technology Investment (ZTC), a manufacturer of seats for trucks and construction vehicles, acquired Acro Aircraft Seating, a decade-old start-up, for £55 million, a move the London Gatwick-based company says will "accelerate [its] access to the Chinese market".

Acro – which made its name in the retrofit market and was added recently to the Airbus buyer-furnished equipment, or line-fit, catalogue – intends to open a second production site in Shanghai next year, exploiting ZTC's "connections" to win deals with Chinese and other Asian airlines. In "due course", it plans a third assembly line in the USA.

The acquisition gave ZTC a "ready-made aircraft seat division", says Acro's senior vice-president sales, Alan McInnes, part of a management team that is staying in place. As well as providing an inroad to China, the new owner will allow Acro to invest in the necessary research and development and production to realise some of its ambitions, including a move into the widebody market, he says.

"We need a committed and long-term shareholder to provide the millions we need to invest in R&D and develop at least one new product a year for the next five years," says McInnes. "The fact that our new owner is Chinese is not important. What is important is that we now have a shareholder that recognises the potential of the aviation market."

The Shanghai factory will come at a time when demand for cabin refurbishments is growing in China, as aircraft acquired in the early years of the industry boom move onto the secondary market, says McInnes, who believes that the country's retrofit market will be "equivalent to the factory-fit market there today" within three years. "We want to be ready."

STAYING PUT

While the Chinese site will bring Acro closer to those end-customers, there is no prospect of it moving its main assembly and design centre from the UK. "It’s just not on the agenda," says McInnes. "We have made commitments to Airbus that we will remain close to Hamburg and Toulouse. The Chinese factory will provide additional capacity to meet their needs, as their single-aisle fleet in particular expands."

Another Chinese name better known in the aviation world has also been expanding its footprint in the cabin interiors market. Two years after buying Bournemouth-based premium cabin monuments specialist AIM Altitude and Northern Ireland's Thompson Aero Seating, AVIC announced at July's Farnborough air show that it is merging them into a new unit called AVIC Cabin Systems.

The division will also include a Chinese seat-maker and cabin fixtures manufacturer FACC of Austria, which AVIC has owned for almost a decade. According to Richard Bower, chief executive of AIM Altitude, the combined entity will allow the companies to merge their capabilities.

Although each business will remain independent, there will be "some co-ordination" in terms of research and development and customer marketing. "We are already working closely with Thompson Aero Seating to provide front-row monuments that integrate seamlessly with the seating," he says. The first fruit of that co-operation was unveiled at April's AIX show at Hamburg, where the two companies had a joint stand.

AIM Altitude's acquisition by AVIC "changed our business", insists Bower. "Now, for the first time, we are owned by a strategic shareholder with a long-term vision. The shape of the business will change." However, he agrees with McInnes that this is unlikely to involve moving production to China. "Cabin interiors are not the products to do that, they are highly bespoke and high value. It's not a commodity industry," he says.

Perhaps the most significant Chinese acquisition of the past 12 months has been the sale of a majority stake in Diamond Aircraft of Austria – a business that includes a sister company in Canada and the Austro engine manufacturer – to Wanfeng Aviation by founder Christian Dries. Dries described Diamond – a small business that he bought in the early 1990s and turned into one of the world's biggest producers of training aircraft – as "my life’s work".

New chief executive Frank Zhang says Wanfeng did not "buy Diamond simply as an investment opportunity" but because it could develop the company into "the leading brand and producer of fixed-wing light aircraft in the general and business aviation market, but also in the fields of special mission".

Interestingly, Diamond’s strategy under Dries had been for the past few years to move steadily into the higher-margin special missions market, and away from the more price-sensitive flying school sector. Israel's Aeronautics, for instance, uses Diamond's DA42 platform as the platform for its Dominator unmanned surveillance air vehicle. At the Farnborough air show, Diamond debuted the latest version of its aerobatic trainer, the Dart 550.

Having a Chinese company owning a manufacturer of aircraft marketed to military customers has not met with any objections from the Austrian or Canadian governments, insists Wanfeng. "Since the takeover, we have not experienced one single situation reflecting to the new ownership and can say that there is no impact on any business of Diamond," it says. All research and development activities will remain in Austria.

US AMBITIONS

Earlier this decade, Chinese investors made a move for two US GA names: piston aircraft manufacturer Mooney, and helicopter firm Enstrom. Since coming under the ownership of Meijing Group in 2013, Texas-based Mooney, which had been in bankruptcy protection since 2008, has been working on a second aircraft design, called the M10, and has discussed adding a production line in China's Henan province. However, since July 2017, the company has not provided any updates on the project.

Chongqing Helicopter Investment bought Michigan-based Enstrom Helicopter, a manufacturer of two piston models, the F28F and 280FX, and the turbine-powered 480B, in late 2012, with the intention of helping it push into the Asian market with fresh capital. At the time, president Jerry Mullins described it as a "major step in moving Enstrom to a new level". The company expanded its production site in 2014 and is developing a fourth model – the TH180 trainer – with certification expected next year.

However, the biggest prize in the GA world has arguably been Cirrus, which was acquired by AVIC subsidiary CAIGA in 2011. Since then, the Minnesota-based company has seen its fortunes soar. Last year marked the fourth in succession that Cirrus delivered more than 300 SR Series aircraft. It has built a training centre in Tennessee and added 300 staff. In 2016, its Vision Jet, the only single-engined personal jet on the market, was certificated, and earlier this year the aircraft won the prestigious Collier Trophy.

CAIGA’s takeover of Cirrus was controversial. Already the world's biggest manufacturer of piston aircraft, many opposed an icon of US aviation coming under Chinese control, although attempts to block the takeover foundered. Cirrus's success since 2011 appears to have endorsed then president Brent Wouters’ dismissal of "anti-Chinese sentiment" and promise that the purchase was a "terrific opportunity for Cirrus to grow around the world and strengthen its balance sheet".

Back in Europe, SR Technics has gone through several owners since being spun off from former flag-carrier Swissair in the 1990s. In 2016, sole shareholder Mubadala – the Abu Dhabi sovereign investment house – sold an 80% stake to China's HNA Group, a conglomerate that owns Hainan Airlines. The Chinese company has promised to support the long-term strategy of the MRO provider, which has included opening lower-cost facilities in Serbia, Malaysia and Malta.

China's interests have even extended to supersonic jet developments. In April, an online travel agency, Ctrip, took a stake in Boom, one of several start-ups planning passenger aircraft capable of supersonic flight and which has won order commitments from Virgin Group and Japan Airlines. Ctrip predicts high demand for "the travel of tomorrow" in the Chinese market. The tie-up will see the Chinese company secure up to 15 seats on one of Boom's first commercial flights.

Chinese money has helped small and mid-sized European and US aviation companies realise aspirations that would have been unrealistic had they had to seek capital from private investors or banks in the West. The industry's record of failed projects has made financiers very wary, and even companies with a strong track record of bringing aircraft to market have struggled to raise funds for expansion, more so since the 2008 financial crash.

Chinese investors are not philanthropists offering a sentimental helping hand to cash-strapped aerospace brands. China's aerospace infrastructure lags far behind its demand for aviation products, and acquiring established businesses overseas is one way of importing that know-how into the domestic industry. The beneficiaries of this largesse are not complaining. Guttridge sums up what SLMR's takeover has meant for the once-ailing company:

"We would never have dreamed of giving ourselves a target of going from $200 million turnover to $1 billion in five years under a different ownership. We would have had no chance of expanding into a market that will represent 20% of the demand for all passenger aircraft in the next 20 years," he says. "It has opened a huge door for us. It has moved us into a whole new era."

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