Checking The China Acquisition Score Card
As 2016 stumbles to the finish line, it will close with one dubious achievement: A record number of U.S. companies have been bought by foreign investors and leading the charge is China. According to the Committee on Foreign Investment in the U.S., just three years ago, Chinese interests acquired 43 companies. In 2015, the total was 103, according to the Rhodium Group, which tracks such things.
For 2016, China interests invested $40 billion by the first quarter alone, more than twice the total for all of 2015. This week's announcement that China’s Wanfeng Auto Holding Group bought a controlling share in Diamond Aircraft Industries in London, Ontario, makes us recall that the U.S. general aviation industry is dominated by Chinese holdings.
Let’s review: In 2010, China’s AVIC International bought Continental Motors for $186 million; Superior Airparts, a major PMA supplier, was bought later that same year by a Chinese technology group; Cirrus was bought by China’s Aviation Industry General Aircraft in 2011 for $210 million; a private investment consortium including the Meijing Group bought Mooney in 2013 for an undisclosed amount; the bankrupt Thielert Aircraft Engines was bought by Continental Motors and became Chinese-owned in 2013; in May of 2015, Continental scooped up Danbury Aerospace, the parent of Engine Components International, a major PMA house; in 2012, Glasair Aviation was bought by Fang Tieji, chairman of Hanxing Group Ltd.
This doesn’t count Chinese investment in U.S. aviation companies that aren’t admitting it, nor does it include the major joint ventures such as GE’s partnering with AVIC and Airbus’ manufacturing position in China. Diamond manufactures in China, too. Some deals have gotten away for security and regulatory reasons. China sniffed around Hawker Beechcraft, for example, but that deal collapsed. So, I’m sure, have lesser deals we haven’t heard about.
What’s one to think of all this? The first thought is this: The Chinese have drawn a bright line between what industries they think represent the future and what U.S. investors believe in. China’s economyis centrally planned and the last five-year plan, the 12th, emphasized infrastructure, including aviation. China’s Xi Jinping has been quoted as saying certain industries—technology, information systems, aviation, alternative energy—represent the high ground of the 21st century.
I don’t know about you, but I can’t think of anyone who’s saying general aviation is a high-ground industry in the U.S. It’s closer to a sunset than a green shoot. It’s different in China. Aviation at all levels there is emerging and even if it’s not growing as fast as many in the U.S. hoped it would when they developed their “China plans” a decade ago, the potential remains. Westerners working in the Chinese-acquired companies have told me the Chinese have a long view and realize that building a general aviation infrastructure will take years and billions of yuan. And if they buy it at fire sale prices from a country--that would be us-- more interested in short-term gains from credit default swaps and securitized mortgages, why wouldn’t they? To me, it’s just about that simple. I don’t have much animus for the companies that sell because I know most have tried other options to raise capital.
Even ahead of the recently concluded election, the political class has expressed some alarm at the level of Chinese investment. Once 2016’s numbers are tallied, expect to hear a sustained howl. The incoming administration has made a campaign touchpoint of both containing China and tilting toward protectionist economic and industrial policy. That means the next year four years are going to get interesting.
Recall that Cirrus shopped the company for several years before the Chinese stepped up. Western and even Middle Eastern investors were evidently looking for a bigger return than Cirrus could ever deliver. Same applies to Mooney. If the Chinese ATM hadn’t disgorged, do you think Cirrus could have completed its jet project or Mooney would have embarked on a factory remodel and the new M10 trainers? Both of those projects, I’ll point out, created jobs in the U.S., even if there’s no guarantee they’ll stay here. Also, note that Diamond says it will review its suspended D-jet program following the new investment.
We’ll now see if new U.S. economic policy can entice onshore capital to invest in industrial expansion more widely, including aviation. I’m all for limiting foreign investment in sensitive areas of the economy where it could erode key U.S. strengths and competitiveness, but if protectionist policy squeezes investment dollars, where’s the money going to come from? I doubt if the government will be investing, so that leaves commercial and private capital which, heretofore, has viewed little airplane projects as the cute money pits they often are. It’s no stretch to say Chinese investment, palatable or not, has been instrumental in keeping GA manufacturing alive in the U.S. On the commerical side, in September, Boeing said China will buy more than 6800 aircraft during the next 20 years. That's more than $1 trillion in business.
And that leads to the full-circle portion of today’s commentary. Remember the mid-1980s when we were all freaking out because the Japanese were buying U.S. real estate? It was quite the panic. Then the bubble burst and the Japanese lost their kimonos. That’s another way of saying just because certain investors see GA as a poor risk, doesn’t mean they’re wrong. The Chinese are buying airplane companies for reasons other than handsome P&Ls. Our kids will get to see if the long game pays off, if they even care enough about airplanes by then to notice.