Saturday, September 19, 2009

China Finds Growth in Leninist Tack to Aerospace - System Lacks Transparency, Say Experts



China Finds Growth in Leninist Tack to Aerospace
System Lacks Transparency, Say Experts


Perhaps the most unexpected aspect of the initial results of this year’s Fast Track 50 survey results was the meteoric growth of Chinese commercial/defense companies over the past five years.

The companies were not included on the final list of 50 because wholly state owned or state-controlled companies are excluded from the list. But had they been included, five would have more than made the cut:

· Long March Launch Vehicle Technology develops and manufactures civil aeronautics and carrier rocket equipment. Its 2006 revenue was $160.5 million, and it has registered a five-year compound annual growth rate of 23 percent.

It also produces and sells computer software and hardware, electronic measurement and automatic control, communications products, recording equipment, satellite navigation and satellite application products, satellite TV receivers, wires and cables.

· Sichuan Chengfa Aero-Science & Technology is involved in research, development, manufacturing, maintenance and sale of aircraft engines and gas turbines. Its 2006 revenue figure was $68.9 million, and five-year growth was also 23 percent.

Major products include turbine blades, central air conditioning centrifugal compressor shells and V-pneumatic drafting systems. Based in Chengdu, Sichuan province, its clients include General Electric, Pratt & Whitney and Rolls-Royce.

· Xi’an Aircraft International Corp. (XAIC), based in Xian, manufactures and markets structural parts and components. Products include stabilizing boards, horizontal stabilizers and front access doors. Revenue for 2006 was $228.1 million and five-year growth was 15 percent.

· Hafei Aviation Industry is involved in the development, design, research, manufacture and sale of aviation products and components. Its 2006 revenue figure was $251.7 million and five-year growth was 45 percent. Major products include helicopters and general aviation aircraft.

· Tianjin Benefo Tejing Electric makes hydraulic equipment and components, precious metal products and electric appliances. It generated $103.2 million in revenue in 2006 and has enjoyed a five-year growth of 45 percent.

Unlike Russian commercial/defense companies, these Chinese firms are being traded on world capital markets.

Larry Wortzel, commissioner of the U.S.-China Economic and Security Review Commission, argues that the investment options for the West have to be balanced against unknown issues regarding true market value, partly because these companies are state-controlled and not completely autonomous.

“The economy is government-controlled, and ... these key aerospace, defense and space-launch markets are among those very carefully managed by the State Council and the SASAC,” the State-owned Assets Supervision and Administration Commission of the State Council of the People’s Republic of China, Wortzel said.

“So we really don’t know how these companies might perform in a true market situation,” he said. “But we do know that the state is in a position to direct specific work their way, give them tax breaks and other incentives, and insist they partner with other industries, state-owned or not.

“Also, China’s foreign direct investment is high, and the state often directs where a company may invest its venture capital or may establish a partnership,” he said. “All of this brings in better management techniques, better quality control, improved manufacturing processes, and upgrades industry in general.”

“Also, [their] management is appointed by the State Council or SASAC,” Wortzel said. “This makes investment in China’s capital markets attractive for big stock investors, and it makes FDI [foreign direct investment] or partnership attractive.

As far as the global market, “I don’t think they are that competitive now,” he said. “China does not get huge orders for civil or military aircraft, but their space-launch services may be very competitive.”

Spilling Military Secrets?

Investment and commercialization are the catch words in the new China even though Beijing is still a Leninist, one-party dictatorship. Its citizens might eat at McDonald’s and wear Levi’s blue jeans, but its military busily plans to invade democratic Taiwan and seize the Spratly Islands for potentially nonexistent oil.

This contradiction prompts many to ask whether Western investment in Chinese state-run companies that have strong military manufacturing capabilities endangers U.S. military power in the Asia-Pacific region. Do investment and manufacturing contracts with aerospace giants like Boeing and Sikorsky enhance China’s military?

Richard Bitzinger, senior fellow at the Institute of Defence and Strategic Studies of Singapore’s S. Rajaratnam School of International Studies, said there is a danger in educating Chinese manufacturers on how to make a better aircraft.

“The biggest danger area I see is how much the know-how [in terms of machinery, manufacturing techniques, management] from these subsidiaries seeps into their parent companies, which are engaged in defense production,” he said. “Of course, this has been a concern since the late 1970s, when Chinese aerospace companies first began manufacturing components ... for Boeing and McDonnell Douglas.

“The hard part is determining how this know-how may diffuse to the military side of manufacturing, and how critical it is to Chinese defense industrial development,” he said. “The firewalls between commercial subsidiaries and their defense counterparts may be very high or nonexistent, depending on the company we’re looking at.”

In July, Sikorsky Aircraft announced the selection of Changhe Aircraft Industries Corp. (CHAIG) to supply S-76 helicopter airframes. The agreement is the second to result from a memorandum of understanding signed last year by Sikorsky and China Aviation Industry Corp. II, CHAIG’s parent company.

CHAIG builds the Z-8 and Z-11 helicopters for China’s military. Sikorsky makes the UH-60 Black Hawk helicopter for the U.S. military. The question remains, is Sikorsky teaching CHAIG new tricks?

This is not the first contract Sikorsky has signed with CHAIG. It had a previous agreement to make parts for the S-92 chopper.

A Sikorsky official denies its arrangement with CHAIG is improving the Chinese military.

“The contracts we have with Changhe specify that it is a subcontractor for certain commercial products and can sell these products only to Sikorsky,” Paul Jackson, a Sikorsky spokesman, said. “There are no provisions for future military applications.

“The future helicopter we intend to produce with Changhe likewise will be a commercial aircraft, intended for the domestic market,” he said. “This aircraft will be modeled on the smaller Schweizer platform, not the S-76 or S-92.

“Sikorsky conducts foreign military business in full compliance with U.S. government regulations,” Jackson said. “That means we do military business where and how the U.S. government says we can.”

Thomas Kane, lecturer at the University of Hull, in England, and author of the book, “Chinese Grand Strategy and Maritime Power,” warns of greater dangers.

“There are two obvious danger areas: technology transfer and funding a rival,” he said. “At a more subtle level, contractual agreements between Chinese and Western defense firms help the Chinese intelligence services learn ... about how things get done in the American military industrial complex. Such agreements also make it easier for the Chinese intelligence services to get cash and people into the U.S. for other purposes.

“All this is also true in reverse, of course, but I suspect the Chinese intelligence services will find operating in the West safer and easier than their CIA counterparts will find operating in China,” he said.

“The biggest policy problem for the U.S. may be finding a way to regulate what American investors and corporate executives do in China that is politically acceptable in Washington and minimally harmful to Sino-American relations in other areas,” Kane added.

The listing of these companies on the world’s stock markets puts pressure on Beijing to improve quality control and management.

“Being traded on capital markets will likely influence how they grow and develop,” Bitzinger said. “Being exposed to global market trends means they will have to act much more as real companies and not state-owned enterprises, paying more attention to things like quality control, cost efficiencies, customer requirements.

“The fact that these companies are basically involved in relatively benign commercial work could make them quite attractive to foreign investors,” he said. “All, of course, have one foot in the country’s state-owned defense industry, but since most are set up as stand-alone stock companies, it shouldn’t be a problem. The question for investors is, do they make a profit, are they efficiently run, etc.”