The Chinese aerospace manufacturing market has become a fairly hot media topic in recent years with the establishment of the Commercial Aircraft Corporation of China Ltd (COMAC), a large jet manufacturing arm, and the launch of several aircraft programmes. What does this mean exactly for Western companies?
In this article Dr Michael Tan of Taylor Wessing shares with us his observations and insights from a legal perspective. He says that with a national strategy in place China’s aerospace industry is set to take off. Part of this strategy is to encourage an influx of Western advanced technology, so foreign companies looking to get involved will find plenty of opportunities. However, Tan cautions that they will need to closely examine the legal environment and carefully weigh the risks before deciding how, or if, to get involved.
Boosted by its increased demand for defence to protect its rapidly-growing economic interests in the global arena, China’s aerospace manufacturing sector has grown at an impressive pace in recent years. What has often been overlooked is the fact that since the 1980s the Chinese aerospace industry has already gained considerable experience in the commercial aircraft field, either by participating in the global supply chain of the world’s leading aerospace firms or by pursuing its earlier jetliner programmes such as the aborted Y-10 and MD-90 projects.
Now with the announcement and launch of several new programmes, such as the ARJ-21 and C919 — both developed by COMAC — the Chinese aerospace manufacturing sector is attracting commercial attention. This time around it has more relevance to Western players since it is open to international cooperation, as can be seen from the Chinese industrial legislation and policy development in recent years.
The Industry: a national will
China’s ambition in the aerospace manufacturing sector is reflected by the various national-level planning and ministerial schemes. In the Twelfth Five-Year Planning Framework of National Economy and Social Development endorsed by the National People’s Congress in March 2011, aerospace equipment manufacturing is already mentioned as part of the high-end equipment manufacturing fields for which development shall be promoted in a leapfrog way. Under the more specific Development Plan for Strategic New Industries rolled out in July 2012, the ARJ21 and C919 programmes are explicitly mentioned.
Concrete future milestone events for the C919 programme, namely its debut flight (2015) and commercial production (2020) are also revealed. The C919 project was further mentioned as a “major key program” under the Middle and Long Term Development Plan for the Civil Aviation Industry promulgated by the Ministry of Industry and Information Technology (MIIT) on 22nd May, 2013, with a vision to secure over five per cent of domestic, new-market orders by 2020.
It is worth noting that these national plans express a general tone in favour of foreign companies becoming involved in its implementation. The MIIT plan explicitly addresses “international cooperation” as one of the measures to ensure implementation of its plan and encourages foreign suppliers to participate in related projects.
The Market: strong demand stimulated
China’s firm ambitions to expand its aerospace manufacturing industry are largely derived from its confidence in its aviation market potential. According to a forecast by the RAND Corporation, Chinese airlines are expected to purchase roughly 4,000 new jetliners over the next 20 years. The number of fixed-wing general aviation aircraft in China is expected to increase annually by 30 per cent over the next five to 10 years, resulting in more than 10,000 new aircraft by 2020.
At legislation and policy level more substance has also been added to this promising picture. The most significant public statement is the Opinion on Deepening Reform in Low Altitude Airspace Control (Opinions) jointly approved by the State Council and the Central Military Commission on 29th August, 2010. According to Opinions China is launching a scheme to further liberalise its low altitude airspace control.
The present pilot scheme is intended to cover the whole country by 2015. The new system of airspace control is a much more liberalised version and very close to that in the West, which has already been interpreted by the market as a great boost to demand for aircraft, in particular for general aviation.
Relevance to International Players: market access
In general China welcomes advanced and new technologies from the West, and this attitude is reflected in its regulations on cross-border technology trade, namely the Administrative Regulations on Technology Import and Export (TIER), last revised on 8th January, 2011. So far the list of technologies restricted and prohibited from importation contains very few items (normally out of date or highly polluting technologies) which should not create a problem for western aerospace firms planning to sell technologies to China.
A similar picture exists with respect to investment access. Most aerospace and aviation manufacturing activities are either not mentioned (which means permissible), or explicitly encouraged under the Foreign Investment Industrial Guidance Catalogue, most recently updated in 2012.
It should be noted, however, that in addition to those areas that are listed under the general ‘encouraged’ status (e.g. manufacturing and maintenance of ground equipment and aircraft components), encouragement in some fields comes with limitations. For example, Chinese participation (i.e. a joint venture (JV)) is required in designing, manufacturing and maintenance of general purpose aircrafts, helicopters (<3 tons), aircraft engines and components, auxiliary power systems and airborne equipment. Chinese majority is further required in designing, manufacturing and maintenance of trunk-line, regional jets, big helicopters (≥3 tons), ground/water effect aircrafts, drones and aerostat.
As with the car industry, the Chinese Government plans to bring in advanced foreign technology and expertise to help grow the core field of this industry, but at the same time wants a clear Chinese hallmark on it. Although no explicit ‘local content’ ratio is mentioned so far under publicly available rules, foreign investors may need to anticipate similar requirements in certain fields when they enter this market.
The Other Side of the Coin: typical issues
It goes without saying that international players must always bear in mind the peculiarities and risks in this promising future market due to the fact that it is still heavily influenced by governmental policies and the related industrial legal framework which is in the process of development. Based on my experience, typical legal pitfalls can arise in the following areas which only serve as a few examples:
- Administrative interference: a major feature of the Chinese jurisdiction is the intensive involvement of administrative authorities in business transactions. The same applies in the aerospace manufacturing sector. For a foreign company to supply technologies to its Chinese customer, the related contract is required to be filed with the Chinese authority (i.e. technology importation). As far as an investment deal is concerned, both the project itself and the establishment of the investment vehicle, such as a JV, will require approval from the Chinese authorities. In the case of a large-scale investment deal approvals at central level in Beijing may be triggered which can be time consuming and complicated.
- Intellectual property rights (IPR): this is always a hot issue for deals with China in the high-tech field. When a foreign company tries to build up its patent protection in China, it may potentially face more hurdles than a Chinese company, even though in reality the statutory criteria for review are the same. Foreign companies may often find it hard to pursue its Chinese competitor since it is difficult in practical terms to prove a know-how infringement case. More importantly some popular protective arrangements in favour of the technology supplier will not be feasible in China, due to compulsory requirements under TIER.
- State-owned customer: like years ago in the railway sector and the telecommunications sector, foreign companies will often find their Chinese counterpart in a comparably strong position and to be very demanding, particularly when many of them are well budgeted State-owned companies taking up the political task to acquire Western advanced technologies. State funding further triggers public tendering requirements which can result in considerable pressures on the foreign supplier side in a competitive situation. The typical stereotype of State-owned companies, and sometimes their lack of experience in tricky technical areas, can make the maze of negotiation — and sometimes even the implementation of a signed deal — very complicated and time consuming.
- Chinese certification: although the Civil Aviation Administration of China (CAAC) has formulated many rules in the certification field, which to some extent follow the Federal Aviation Authority (FAA) model, the lack of commercial aircraft manufacturing experience in China indicates that there is a long learning curve ahead.For foreign companies, this would potentially mean the burden of additional work and an increased period of time before a foreign supplier can get its products certified in China. In reality, the CAAC tend to ask for too much detail, which may not be necessary and gives rise to IPR concerns. In particular for European companies, a bilateral airworthiness certification arrangement with China facilitating their entering the Chinese market seems doubtful when this topic is connected with the sensitive topic of emissions trading schemes (ETS).
Because a national strategy exists to build up the industry with abundant financial aid from the State, there is no doubt that the Chinese aerospace manufacturing sector will remain prosperous in the coming years, especially when the Western world is still struggling with weak demand as a result of the recent economic turbulence. For international players in this sector there are plenty of opportunities in this market, as has already been seen in many other sectors of China’s fast growing economy.
The good thing is that after accession to the World Trade Organisation (WTO) China is more used to a ‘rule of law’ approach under which such opportunities and the role of foreign players are more clearly defined. Any international players wanting to embrace these opportunities will need to take the legal picture into their analysis before starting their adventure in this challenging market.
Taylor Wessing is an international law firm with 22 offices around the globe. Dr Michael Tan is Senior Counsel (Chinese partner) in Shanghai with experience in supporting multinational corporations in China, particularly in the corporate and commercial fields. He has an industrial focus on aerospace, aviation, TMT and other technology-driven sectors. Contact Michael at email@example.com.