Analyst: Two-Pronged Strategy To Develop Chinese Civil
For almost a year now, China has been snapping up US
general-aviation companies. Should this be a cause for worry?
Is it even harmful to our industry? Is it economically
subversive? Or mere coincidence? GA analyst Brian Foley
(pictured) contends the answer is none of the above; that
China's actions represent an expected or at least expectable
According to Foley, this apparent wave of acquisitions started
innocuously in April, 2010 with the $4.3 million purchase of Epic
Air, a small (and bankrupt) general-aviation airplane company by
China Aviation Industry General Aircraft (CAIGA or AVIC). Eight
months later, in December, an AVIC subsidiary said it would buy
small-aircraft piston engine maker Teledyne Continental Motors for
$186 million. And just last month, CAIGA announced its agreement to
buy all of Cirrus Industries Inc., a much admired but cash-strapped
producer of light aircraft using the Teledyne engines, for an
"What we're seeing is a two-pronged strategy," Foley explained.
"First, the Chinese government is developing civil aviation as a
national priority. Second, these are deals that make good
economic and business sense. China is fortunate to have abundant
cash from massive exports at precisely the time when general
aviation is at the bottom of its market cycle, making it a logical
buy. Moreover, China has leveraged its investment by shrewdly
targeting companies with low 12-month trailing revenue streams
which make them even more of a bargain."
"In buying up established companies, China gets the management
know-how, brand, distribution and technology in days -- not
decades. And it is not just a general aviation phenomenon - think
Lenovo, China's leading PC manufacturer, buying IBM's PC division.
It's also a good solution for investees like Cirrus, for example,
who struggled even to pay the rent."
As for future acquisitions, China is trying to complete the
purchase of bankrupt corporate jet maker Emivest Aerospace for a
reported $19 million (Emivest produced a small business jet called
the SJ30, a 1980's design with only a handful in worldwide
operation). While Emivest is not an 'established' company in the
sense of Teledyne or Cirrus, Foley finds this deal quite sensible
for another reason. "If China pursued the larger, stabler or more
diverse aerospace manufacturers it would invariably run into
regulatory headaches because most of those companies have military
programs." Foley believes jet engines and helicopters are
other likely aspirations, "but only at the right price."
Foley points out that none of China's acquisitions thus far have
been particularly sizable in the overall scheme of things, nor do
they have a large footprint in the overall US aerospace business.
Cirrus, for example, is regarded as a stellar product family but
accounted for just $148 million of the total $19.7 billion in
general-aviation fixed-wing airplane deliveries for 2010, which is
less than one percent. Certainly any of the aviation companies
recently bid on by China could have been had at a reasonable cost
to any investor with the inclination and money. But it seems
there were no other serious bidders.
"Perhaps the West is risk-averse on general aviation because of
previous bets that didn't work out well," Foley noted. "That's
certainly understandable, but it's playing now to patient China's