Almost as a condition of entry, people who voluntarily engage in general aviation at any level have to be slightly delusional. It takes a hearty constitution to look at gracefully declining sales numbers and eroding flight activity and think, sure, I’ll just keep on going here. I mean, what the hell?
In that context, yesterday’s high-profile announcement by Continental that it’s building a new engine factory in Mobile was both interesting and shrewd. The company enticed the aviation press to attend and the announcement itself featured the usual glad handing with city politicians all duly recorded by the local press. It’s a nice Chamber of Commerce story.
I thought it shrewd because it lets a little gas out of the argument that the Chinese state-owned AVIC, which bought Continental in 2010, intended to move the company to China where they would promptly steal the highly sensitive technology of machining camshafts and promptly corner the lucrative light aircraft market, leaving us for dead as hollowed-out husks. Monday’s announcement was a sort of in-your-face we’re staying put.
Let’s put the investment in context. It totals about $70 million. About $40 million of that will be for new machinery and production systems and $30 million for a new physical building that consolidates the company’s operations—now scattered among 11 buildings—mostly under one roof. The building itself isn’t a Continental investment, but will be leased.
What we have here is normal industrial manufacturing reinvestment that all companies have to do if they hope to survive. That’s especially true of aviation manufacturers because there’s more decline than growth and not much headroom to significantly raise prices. That means survival is dictated by taking cost out of things and you do that with new machinery and systems that make it more efficient to make stuff. Henry Ford figured this out a century ago just this year and it’s been going on ever since.
In all my trips to the engine manufacturers—and that’s a lot of visits—I’ve seen this kind of routine reinvestment. Here’s a video of what Lycoming did. Continental has done similar. When I first visited the factory in the early 1990s, there were a lot of guys operating manual machine tools. Few of those are left, having been displaced by modern flexible CNC equipment.
What’s different about this round of investment is both the scale and the fact that it’s a clean-sheet, ground-up factory. As industrial investments go, $40 million is not staggeringly large; it’s coffee money for Boeing. But it’s perhaps twice or three times what we’ve seen in GA in the past on an aggressive time line that envisions a completely redesigned production flow acutely attuned to the conundrum both Continental and Lycoming face: low volume, high product mix manufacturing. This is at the ugly opposite end of both economy of scale and quality through statistical process control that depends on big numbers. Heretofore, production revisions at these factories have been incremental nibbling reinventions from the inside, but this one is tabula rasa. So if there’s a bigger deal about this story, that’s it.
As Continental’s Rhett Ross explained in a podcast I’ll post later this week, the company hopes to free up resources to develop and certify new products. That’s likely to include a new generation of electronic ignitions for gasoline engines and certified versions of the popular Titan line. I suspect others will emerge because even though the GA market is flat, new products can and do excite sales.
Ross has repeatedly said Continental recognizes the reality of the GA market and that the company believes the only way to grow is to gain market share and that’s what has animated its purchase of both the former Thielert Aircraft Engines diesel line and, more recently, the assets of Danbury Aeospace/ECI. Neither of those companies, by the way, found western investors who saw value in retooling them for a business segment that might deliver 5 percent margins instead of 25 percent margins. AVIC evidently did find value, especially in the context of the long return-on-investment timelines the Chinese seem comfortable with.
And the immediate China connection here is that Continental will establish in China a new design and development center aimed at stimulating the Asian market for airplanes. We have long since exited the dancing sugar plums phase of the Chinese aviation market. It remains an aspirational market and although the future of GA may reside in the far east, anyone who thinks China will suddenly become a bottomless pit of aircraft demand hasn’t been paying attention to the daunting economic, cultural and demographic challenges China confronts.
In this sense, Continental’s announcement is sort of a twofer. It plays right into the notion advanced by the current administration of halting the export of the U.S. jobs if not actually reshoring what’s already been lost. But it also recognizes the utterly futility of thinking the U.S. can be an insular economy that sells while the rest of the world buys. It’s just another example of how the U.S. economy is affixed to China’s as surely as a con rod is bolted to a crank journal.
