Within the next 20 years, China will need over 6,000 new airplanes, valued at USD 870b and representing 17% of worldwide demand. Chinese policy-makers have recently regarded the commercial aviation industry as an important driver of economic growth and technological development. The 12th Five-Year Plan (2011 – 2015) has demonstrated the government’s ambitions, with a quick ramp-up of the Chinese space program and strengthening of the aeronautical industry.
In contrast, the recently published EUCC position paper indicates over-regulation of the industry and burdensome approval processes as a major obstacle to industry growth. In addition, the involvement of multiple government agencies results in different understandings, inefficient work, and unnecessary costs. The government is likely to address these issues in the upcoming Five Year Plan.
Stimulating Market Development: Rise of the Middle-Class and Opening Up the Hinterland
Since 2010, the number of airports in China increased from 175 to 230, with an additional 84 airports being built or expanded in the next five years. This is a consequence of Chinese passengers’ rising need and ability to travel, resulting in the world’s highest air-traffic increase of over twice the global average. Not only will this development foster the expansion of airline transportation and general aviation, but also it will open up the more rural side of China to the rest of the country and to the world – two areas strongly encouraged by the government. Hints that this trend will be further reinforced in the upcoming 13th Five-Year Plan (2016 – 2020) contributed to reinforcing OEMs’ projections that China’s demand for aircrafts would surpass the US’ and account for 17% of global deliveries by 2033.
Demand for General Aviation, Business Jets, and Helicopters Boosted by Latest Policy Reforms
One of the main factors that consistently restrained the development of the Chinese commercial aviation industry has been the restriction of airspace allocation between commercial and military usage. Over the years, this restriction held back investment in the industry and created a great amount of pent-up demand particularly in the general aviation, business jet, and helicopter market. The recent announcement of the Chinese government to reform airspace management presents great growth opportunities in these sectors. Industry experts expect that airspace below 1,000 meters will be opened up for private use by the end of 2015 and airspace below 4,000 meters in 2020. A first indication of the impact of this change can be observed in the booming helicopter sector with a fleet size increase of 30% in 2014, expected to reach a fleet level of 800 helicopters by the end of 2015. This news is a breath of fresh air for business jet manufacturers, who have already been heavily impacted by Xi Jingping’s anti-corruption campaign, resulting in state-owned enterprise not being able to purchase business jets anymore. Now, Chinese business leaders and High Net Worth Individuals (HNWI) are expected to be driving the orders. Following this trend, Bombardier and Embraer recently invested in this emerging business line by further expanding their manufacturing operations in China.
Foreign Suppliers Cornerstone to Chinese Ambitions?
Besides the opportunities in the Chinese market created by governmental policies and accelerating demand, the Chinese aerospace industry faces great challenges: China has already extensively communicated on its intention to become a major international supplier of advanced aerospace components and to deliver the technology for a large self-developed single-aisle jet by 2017, matching international standards set by the US FAA (Federal Aviation Administration), and the EASA (European Aviation Safety Agency). However, for these programmes to be accepted abroad the industry must develop a better understanding of global requirements, stronger supplier integration, and after-market support capabilities. To address these challenges, local authorities have been providing incentives to foreign enterprises, OEMs and suppliers alike, to enter China by assigning large civil orders to them.
China has already demonstrated its capacity to attract and develop key suppliers and manufacturers providing state-of-the-art technology. By now, all of Boeing’s commercial aircrafts contain components and modules manufactured in China, while Airbus is assembling aircraft parts in Tianjin. However, in situations when China is not able to attract companies with specific know-how, state-owned enterprises such as AVIC and COMAC have been directly importing grey-matter into the country, with the ever increasing trend of hiring costly foreign experts for R&D- and technology driven roles.
A Bumpy Flight for New Entrants?
In specific sectors, it is necessary for a foreign enterprises entering the market to identify a Chinese partner to cooperate with in order to obtain the right to invest and manufacture in China. Finding the right match can be difficult and we recommend conducting proper due diligence on a partner’s background before engaging in any binding agreements.
The bureaucratic procedures required for foreign investors in China, either through a Joint-Venture or through a Wholly Owned Foreign Entity (100% Foreign owned structures), can be very tedious and complex and should be properly handled right from the start to avoid any possible liabilities. According to the Notification on Foreign Investment to China Civil Aviation, the maximum foreign investment in Chinese airlines is capped at 35%; with foreign investment in the airport or terminal operation capped at 49%.
In addition, foreign corporations should be aware that protecting their intellectual property is paramount to their success. China IP protection is possible and should be one of the first issues to consider when approaching the market. IP risk is high when it comes to protecting intangible assets, but it is manageable by adapting your strategy to local laws and practices rather than relying on how it’s being done “back-home”.
To find out more about China’s aerospace market and how to grow your business in this sector, email us at email@example.com