On 3 January 2018, the Chinese firm Guangzhou Hangxin Aviation Technology acquired 100% of the shares in the Estonian-based firm Magnetic MRO for €43 million.1.“China completes its largest investment deal in Estonia” : Estonian World This was the largest Chinese-Estonian investment deal in history. The Chinese bought Magnetic MRO, an aviation maintenance, repair, and overhaul firm, in the broader strategic goal of bolstering its fledgling aviation sector and establishing a foothold in the Baltic region for the One Belt-One Road Initiative.
This has strong implications for China’s future trading relationships, as Estonia is one of the European Union’s most successful Eastern European members. Estonia provides China an opportunity to gain influence with European markets and governments. Additionally, the International Air Transport Association expects China to be the largest aviation market by 2022.2.“China to overtake U.S. as largest air travel market” : CNN Money Magnetic MRO’s experience as an established aviation firm provides Chinese firms with additional knowledge to exploit the nation’s strategic location and manufacturing might in the near future.
China’s Aviation History
The Chinese aviation sector has risen from being nearly non-existent just 30 years ago to carrying nearly 550 million passengers in its domestic market in 2017.3.“The dragons fly: Chinese aviation takes off” : The Economist In 2010, the Chinese aviation accounted for 20% of global aircraft deliveries and has grown at an average of 7.3% per year. Industry observers currently believe that the Asia-Pacific region could make up almost 31% of global demand by 2031, which places the People’s Republic in a strategic position to dominate general aviation in the region as a hub for major airlines to coordinate flights throughout Asia-Pacific and as an aviation manufacturer-supplier in the region.
Prior to the founding of the People’s Republic in 1950, there existed only three civil aviation providers in China: Civil Air Transport, a Republic of China-Pan American World Airways joint venture, and a Republic of China-Lufthansa joint venture. Following the establishment of the People’s Republic, airports and airspace were nationalized under the military arm of the Chinese Communist Party while all civil aviation was nationalized under the Civil Aviation Administration of China. During this time, civil aviation remained largely nonexistent, and aviation production largely focused on China’s military aircraft.
In 1968, China began producing its first major jet bomber, the Xian H-6, a license-built copy of the Soviet Tupolev Tu-16. The United States Department of Defense claims that the Xian H-6 has been sub-classified into the G and K variants, which can carry four anti-ship cruise missiles (ASCMs) and six nuclear-capable land attack cruise missiles (LACMs), respectively.4.“Report to Congress: Military and Security Developments Involving the People’s Republic of China 2015” : United States Department of Defense The development of passenger jets was not as successful, as the 1970 attempt to develop a commercial airliner, the Shanghai Y-10, was a commercial failure. After ten years of development, only four Y-10s were created by 1980 and had only logged 170 flight hours before being retired in 1984. Large and outdated, the Y-10 ran on gas-hungry Pratt & Whitney JT3D engines and was a generation or more behind its counterparts in the West; aviation experts today contend that the Y-10 may have been inspired by the Boeing 707, Boeing 720, or the reference sketches from the undeveloped Tupolev Tu-156. All factories designed to develop Shanghai Y-10s were repurposed to make the Shanghai Aircraft Research Institute-McDonnell Douglas joint manufactured MD-80 “Trunkliner.”5.“Classic Airliner: The Shanghai Y-10 – China’s First Commercial Airliner” : AirlineReporter
Under Deng Xiaoping’s economic and social reforms of the People’s Republic, the first joint private-public commercial civil aviation company, Shanghai Airlines, was established in 1985. In 1987, the Civil Aviation Administration of China divided civil aviation into five different state-owned airlines: Air China Limited, China Eastern Airlines Corporation Limited, China Southern Airlines Company Limited, China Northern Airlines, and China Southwest Airlines. In 1988, Hainan Airlines was established in the Special Economic Zone of Hainan and was listed as a publicly owned company in 1993, allowing foreign investors like George Soros to invest in the Chinese-owned corporation.6.“Soros injects another US$25m into Hainan Airlines” : China Daily
Since 2005, the People’s Republic has allowed foreign investment in civil aviation companies and has allowed truly private sector airlines to exist. The first privately-owned civil airline, Okay Airlines, made its first flight from Binhai International Airport in Tianjin on March 11, 2005.7.“Private airline launches 1st flight” : Chinese Embassy in India Despite airline deregulation, the Chinese government has promoted the strength of the “big three” state-owned airlines – Air China, China Southern, and China Eastern – and actual free-market competition in domestic routes throughout China has faced moderate, if any, competition between China’s airlines.8.Wang, Jiaoe, Bonilla, David, and Bannister, David. “Air deregulation in China and its impact on airline competition 1994–2012” : Journal of Transport Geography (Journal of Transport Geography, Volume 50, January 2016, Pages 12-23) Despite this, the success of China’s “big three” state-owned airlines from market liberalisation marks China as a major aviation hub for the Asia-Pacific region.
Modern China’s Domestic Aviation Manufacturing
China’s aviation manufacturing industry is based of the nation’s bureaus of mechanical industry; these were classified in 1951 as the Aviation Industry Bureau, Ministry of Heavy Industry and in 1963 as the No.3 Mechanical Industry Department. While the centralised manufacturing bureaucracy No.3 Mechanical Industry Department existed from 1963 to 1982, Chinese aviation manufacture developed the Shanghai Y-10, the Xian H-6, a license-built Mig-17 called the J-5, and a license-built Mig-15UTI trainer called the JJ-2. The name changed multiple times until 1993, when China’s government-owned aviation holding corporation was named the China Aviation Industry Corporation (AVIC), which controlled two smaller corporations: AVIC I and AVIC II.
AVIC I focused on larger aircraft (Xian H-6 and JH-7A),10.“British and Russian Technology for the Xian JH-7A FLOUNDER”. U.S.-China Economic and Security Review Commission combat aircraft (J-7, J-8, J-10, J-11, and JF-17), large engines, air-to-air missiles (AAMs), surface-to-air missiles (SAMs), machinery, and weapons. AVIC II focused on small aircraft and helicopters. AVIC I and II were initially unsuccessful, with 60 percent of their revenue in early years coming from automobiles, car parts, and motorcycles. Only after entering into subcontracting work for Western aircraft manufacturers did AVIC begin to see success in their aviation manufacturing industry, and by 2006 had sales worth $5.6 billion USD.11.“Bjorn’s Corner; The Chinese civil aircraft industry” : Leeham News and Comment During the AVIC I and II period, Chinese corporations gained competency in producing airplane parts and license-built aircraft.
From 1993 to 2008, Chinese aviation under AVIC I and II includes the manufacture of: an Antonov An-24 inspired turboprop aircraft called the Xian MA60,12.“Up and Close with the Xian MA60” : The Jakarta Post a copy of the de Havilland Canada DHC-6 “Twin Otter” called the Harbin Y-12, and a domestically-designed piston twin aircraft known as the Harbin Y-11.13.“Harbin Y-11/12”: Airliners While Chinese corporations have made remarkable strides in aviation production, the questionable safety record of several Chinese-made aircraft has created international reticence to approve their usage in foreign nations, for example, the Xian MA60 has not been approved by the United States Federal Aviation Administration or the European Union European Aviation Safety Agency. The reputation of poor quality that has pervaded discussions of Chinese-made aircraft provides a challenge to China’s future as a leader in domestic aviation in the coming future, a challenge that factors into a Chinese corporation’s purchase of Magnetic MRO.
In 2008, the civil aviation divisions of AVIC were transferred to the Commercial Aircraft Corporation of China (COMAC), while AVIC maintained 26.39% percent of shares in COMAC and both remain under the auspices of the Chinese government in the State-owned Assets Supervision and Administration Commission of the State Council (SASAC). The first plane produced by COMAC was a project that had begun under AVIC I, the regional jet ARJ21 Xiangfeng.
Plagued by schedule overruns and late deliveries, the ARJ21 has faced widely reported mechanical stress issues during testing that caused the plane’s wings to crack under regular aviation tests, further enforcing the perception of Chinese manufacturers as producing below-average quality products.14.“Wing cracks, other flaws delay China jet manufacture” : Reuters Originally planned to enter domestic service in 2011, the first deliveries to local airlines did not occur until 2014 after the ARJ21’s issues were fixed and international service for COMAC’s ARJ21 is still limited- neither the United States Federal Aviation Administration or the European Aviation Safety Agency have cleared it for their regions. At $30 million, the ARJ21 is significantly cheaper than its counterparts from more established airplane manufacturers, but also is much heavier, consumes more fuel, lacks the maintenance infrastructure of its counterparts, and does not have the same history of safety its competitors have.15.“Is China’s ARJ21 Just A MD-80 Copy Or Is It The Beginning Of China’s Rise In Commercial Aviation?” : AVGeekery
The newest addition to COMAC’s production line is the C919, a narrowbody twin-jet designed to compete with the Boeing 737 and Airbus A320 family. Despite 785 orders for the jet, only 20 have been from foreign customers- all from General Electric Capital Aviation Services.16.“COMAC signs C919 Aircraft Purchase Agreement and MOU with domestic and foreign customers, making total C919 orders hit 380” : The Commercial Aircraft Corporation of China Additionally, much of the C919 has been designed by foreign corporations: auxiliary power units, brakes, flight control, and navigation are from Honeywell Corporation; engines are LEAP-X from the joint American-French venture of CFM International between GE Aviation and Safran Aircraft Engines; engine housing, thrust reverser, and exhaust are from the joint American-French venture of Nexcelle between General Electric’s Middle River Aircraft Systems and Safran Nacelles.17.“High-Tech Nacelle For C919 Said To Be World’s First” : Aviation Week While a Chinese-developed engine is currently being tested, it still remains in the testing phase, leaving COMAC to rely on foreign parts for its domestic aviation manufacture.18.“China Moving Ahead With Widebody Engine” : Aviation Week & Space Technology The C919 faces some of the same issues as the earlier ARJ21 – it lacks the maintenance infrastructure of its counterparts, it does not have the same history of safety its competitors have, and it does not have international aviation authorities’ certifications.
As the China-Russia Commercial Aircraft International Corporation – a joint venture between COMAC and Russia’s United Aircraft Corporation – plans to build a wide-body twinjet to challenge the Boeing-Airbus duopoly, these same issues will appear unless China’s civil aviation infrastructure changes. This is part of why a Chinese corporation purchased all of Magnetic MRO’s shares.
Purchasing of Magnetic MRO, Made in China 2025, and Implications
Purchasing Magnetic MRO is one step in China’s development of a global civil aviation infrastructure to promote COMAC as an international aircraft supplier and promote the Chinese domestic economy. The purchase of maintenance, repair, and overhaul (MRO) companies across the world allows China to create a hub-and-spoke international aviation infrastructure for parts and repair. Given Chinese experience with manufacturing aircraft parts from the AVIC I and II period, Chinese parts for aircraft would be readily available under the new network of international aviation infrastructure. The new cheaper prices and availability will cause shifts in the airline market, not replacing more established American, French, German, or British companies, but challenging their market positions as dominant aircraft part providers.
By controlling various firms throughout other countries, Chinese corporations have an established international base of parts and maintenance, while simultaneously allowing state-owned corporations of the People’s Republic to exert economic influence on the aviation and general economic markets of foreign nations. In 2016, Chinese firms purchased the German Kuka corporation, German Broetj Automation corporation, the Canadian company Valiant TMS, and Spain’s Aritex Cading, S.A. These corporations are the manufacturers of tools used in civil aviation manufacture and maintenance throughout the world, and the purchase of these corporations by Chinese firms allow them to have the technical expertise and experience that the four firms have developed over time.20.“China’s ARJ21 should scare Boeing and Airbus” : Jon Ostrower
Estonia is a member of the important Baltic States region that the One Belt-One Road initiative is attempting to run through, which drives Chinese interest in obtaining economic influence within the region. Magnetic MRO can further play a part in China’s search for economic and institutional influence through delivering aircraft maintenance and parts to the essential European aviation market. Magnetic MRO is a maintenance, repair, and overhaul company that holds certifications from the European Aviation Safety Agency to maintain Boeing and Airbus aircraft, which furthers information transfer from established corporations to Chinese corporations. Magnetic MRO is one spoke in a larger hub-and-spoke international aviation infrastructure that China is trying to develop to challenge the market dominance of Western aviation companies.
The Chinese State Council released a plan in 2015 to modernise China’s manufacturing sector, “Made in China 2025”. Under Made in China 2025, the Chinese state hopes to raise core component manufacture to 40% in 2020 and 75% in 2025, modernise key industries, focus on innovation, and prioritise automation.21.“Critical Questions: Made in China 2025” : Center for Strategic and International Studies (CSIS, 2015) By purchasing companies that have experience in automated manufacturing, China can advance its own domestic firms’ abilities and reach the 40% and 75% core component goals. The purchase of Magnetic MRO and other manufacturing/maintenance corporations helps China reach these goals without having to catch up in R&D with the industrial processes used by more established corporations.
The manufacturing successes China hopes to achieve by completing Made in China 2025 and the growth of its domestic aircraft industries puts China in a strategically advantageous position to capitalize on global aviation markets. Asia-Pacific is on track to becoming an important aviation market by 2020 and China hopes to be able to exploit on the growing influence they have- politically and economically- throughout the world by that time. However, intellectual property rights (IPR) remain an issue, and the history of reticence for foreign companies to establish presence in China due to IPR violations still remains a challenge.
COMAC’s aircraft are a generation or more behind their more established counterparts, and whether China can grow into becoming a major manufacturer that can challenge the Boeing-Airbus duopoly still remains to be seen. Even then, the steps that Chinese corporations have made toward becoming an international force in the aviation community has immediate impacts that can be used as tools of economic force and negotiation. The purchase of Magnetic MRO and associated industries have strengthened the international position of the Chinese state, allows China to be a major regional power in aviation markets in the coming decade, and plays into China’s One Belt-One Road negotiations.