Small-Jet Makers Flock to China As Sector Shrinks Elsewhere, Growing Market Outweighs Competitive Risks for U.S. Manufacturers.
U.S. makers of small aircraft increasingly are teaming up with Chinese companies, deciding that the need to ply the growing market outweighs the risk that their partners will become rivals.
In the last few months, business-plane makers Cessna Aircraft Co. and Hawker Beechcraft Corp. have discussed joint ventures in the country. Industry supplier Honeywell International Inc. HON signed several initial agreements last year. Non-U.S. companies are moving in, too: Brazil's Embraer SA ERJ last month said it would consider transforming a Chinese joint-venture plant for small commercial jets to turn out executive planes.
China has grown more attractive as the industry otherwise has shrunk. Honeywell in October estimated that 600 to 650 new business jets would be delivered industrywide last year, down from 732 in 2010 because of global economic weakness. Cessna, a unit of Textron Inc., TXT +0.60%expects China to become the world's No. 2 business-aircraft market, after the U.S., within roughly 15 years.
"Everyone's jockeying for position now, trying to figure out"¦'Who do I partner with? How do I get the right access?' " says Briand Greer, Asian-Pacific president of Honeywell Aerospace.
Cessna last month signed an agreement with a unit of state-controlled Aviation Industry Corp. of China to establish a joint venture in the western city of Chengdu, where Cessna plans to build midsize business jets and codevelop a larger jet. The Wichita, Kan., company also reached an agreement with AVIC, as the Chinese company is known, for broader cooperation on general aviation, a category that excludes military and commercial aircraft.
"If you have the ability to produce local content in the market, it gives you the ability to understand your customers better, to react quicker," says Cessna Chief Executive Scott Ernest.
Shawn Vick, an executive vice president at Wichita-based Hawker Beechcraft, said at a recent news briefing in Shanghai that his company had "entertained discussions with four separate entities for joint-venture activities inside China."
Labor costs also are part of China's lure. "Our competitors in Brazil or in Switzerland can charge lower labor rates than we can in the U.S. and labor is a big component of building the airplane," says Sean McGeough, Hawker Beechcraft's president for Europe, the Mideast, Africa and Asia-Pacific.
The aircraft maker, suffering from a long slump in demand for business jets and uncertainty over military spending, recently hired a turnaround specialist and bankruptcy counsel.
Honeywell, based in Morristown, N.J., reached five agreements last year with Chinese aerospace companies, including one for the development of a general-aviation cockpit. Honeywell also makes aircraft engines and other aerospace products.
China's business and general-aviation sector is in its infancy. Honeywell's Mr. Greer estimates that the country has about 1,000 business and general-aviation aircraft, compared with roughly 225,000 in the U.S.
But industry experts expect China's number to rise with the country's wealth and as Beijing relaxes aviation regulations.
Setting up joint ventures, which generally are required by Beijing for foreign companies establishing significant operations in the country, can be troublesome. Such partnerships have given a technological lift to Chinese companies in other industries, such as automobiles.
Aerospace executives say they need to keep up the pace of technological development to stay ahead of would-be Chinese rivals. "The only way you can really stay away ahead of the [intellectual-property] curve here is you continue to innovate faster than the things you're bringing to market," Mr. Greer says.
Cessna's Mr. Ernest says Volkswagen AG's VOW.XE Audi unit and General Motors Co. GM have succeeded in navigating such shoals."It's not any different from what Audi's done or what GM's done," he says, referring to his company's joint-venture plans.
The competitive threat from China also is rising as the country builds its own ability to take on global aerospace rivals. Last June, an AVIC unit acquired Minnesota-based private-aircraft maker Cirrus Industries Inc., giving the Chinese company access to a line of light propeller aircraft and a small jet under development. Outside of business and general aviation, state-owned Commercial Aircraft Corp. of China is developing a regional jet to compete with planes made by Embraer and Canada's Bombardier Inc. BBD.B.T Comac, as the Chinese company is known, also is developing a single-aisle commercial jetliner that could compete with Boeing Co.'s 737 line and the A320 family from the Airbus unit of European Aeronautic Defence & Space Co.
Despite such challenges, foreign companies still are looking at deals.
Gulfstream Aerospace Corp. President Larry Flynn says his company has "not in the least ruled out China for manufacturing capabilities." Gulfstream, a unit of General Dynamics Corp., GD currently focuses its investment in China on building up maintenance, repair and overhaul capacity.
