Ready for Takeoff
While the Chinese government has invested heavily in building up its aerospace capabilities, there have also been a number of domestic trends that have contributed to this sector’s rapid growth, including the overall higher living standard and availability of disposable income. China Focus interviews aerospace expert Michael Santo, Board Member of Fiducia’s German partner h&z, on what opportunities these changes present for foreign companies operating in China.
What trends have contributed to the growth of the Chinese aerospace industry?
In the 12th Five Year Plan, the Chinese government determined the building up of a strong domestic aerospace industry as a political goal. As a result, there has been increasing government support for initiatives in this sector, showing real ambition to strengthen the aeronautic industry. Recently developed national champions such as AVIC and COMAC are the first success stories in this rapidly developing sector.
However, from a production perspective, it is still difficult for Chinese manufacturers to cover the entire supply chain, leaving room for innovative suppliers to fill the gaps. Especially when it comes to standards, for example standard 10019 (RPAS), technical know-how from foreign companies is needed to improve product quality and meet safety requirements. This provides interesting opportunities for foreign companies to enter the Chinese market.
Given China’s size, air traffic is increasingly gaining importance for Chinese travellers. With more available income locally and growing international and domestic tourism, the industry has positive growth potential. Hence, this also leads to growth in other areas: a prime example is the number of new airports in China, which has increased significantly over the past years with more to come. This provides additional opportunities for foreign companies to offer their expertise in fields such as airport surveillance, ground support, and airport infrastructure and management.
What implications does this have?
In order to ensure smooth development from the government’s perspective, the authorities must take into consideration a number of new requirements that accompany these trends. This includes the freeing of airspace from military restrictions and efficient air traffic management to ease congestion. These are still very real problems that any China traveller knows all too well.
From a company perspective, it is critical to gain a foothold at an early stage of market development since most companies only achieve ROI after longer investment periods of 10-15 years. For investing companies, it is important to recognise a long-term approach for the development of their China business. Liebherr Aerospace or MTU, for example, have chosen a good strategy for providing world-class standards and qualified people.
Do foreign companies have a technological edge over their local competitors?
Foreign companies, especially those already working in large commercial aircraft programmes of Boeing and Airbus, usually provide cutting-edge technology and are operating on a technological and process efficiency level Chinese companies cannot yet compete with. This also holds true for companies with experience in high-speed or highly delicate processes, especially for large commercial aircraft programmes. Foreign investors are likely to find opportunities by providing engines, hydraulics, and electronics, as well as engineering and training services. Obviously this is less the case for producers of standardised parts.
Is China catching up?
On the one hand, the few major global players that exist in key areas have already built up deep competencies coupled with highly cost-efficient structures. The resulting high rate of change and flexibility will be very difficult to replicate in just a few years. On the other hand, Chinese suppliers are still at an early stage in the supply chain and are just starting to grow both in terms of development and scale. To develop a full national industry, China still needs 10-20 years of persistent growth and technological input. The technologically highly sophisticated aero engine sector proves to be the area where catch up will be the most difficult.
However China has one major advantage over others: its size!
What hurdles exist for foreign companies planning to enter or expand in the Chinese aerospace market?
Due to the strategic importance of the aerospace industry, foreign investors still need a JV as a minimum requirement to enter the Chinese market. As a result, many foreign companies will not invest since they want to protect their intellectual property. In addition, their investment decisions are often restricted by their international owners and clients. Therefore, most players will continue to develop and produce overseas, unlike in other industries. If the government wants to attract new technology and innovation from abroad, they need to show more commitment towards foreign investors. On the manufacturing side, the private sector development still lags behind. The over-regulation in the aviation sector has become a bottleneck to the market and risks hampering industry growth.
What has the government done to ensure technical safety standards? Do these meet European standards?
Due to know-how transfer from the foreign countries, most standards in China are virtually identical to EU or US best practices. Key is the supervision of these standards, which depends on the enforcement by the Chinese authorities. In general the government maintains tight regulations and controls in the aerospace industry. This is clearly evident from the state’s control of the air space and air traffic management, as well as the consolidation of the industry players to only 4 for governance purposes.
In the end, consumer trust in the industry is critical; if you look at recent examples such as the Tianjin explosions, it is clear that the government will be very careful about “opening the skies”. As this process could still take some time, we can expect further delays at China’s airports.
Michael Santo is a Member of the Board at the consulting firm h&z, Fiducia’s longstanding partner in Germany. A studied industrial engineer, Michael worked in both the defence sector and in civil aviation, and gathered a wealth of knowledge and experience in the air force, as well as in management positions in the aerospace industry.