China Powers Up Aviation Drive With Hawker Bid 中国航空业迈向国际化

By newsdoug on July 10, 2012

China's Hawker Beechcraft bid The recent expansion by Chinese aviation firms into international airspace is powering ahead with word of 2 more global deals, including a new aircraft parts joint venture involving Air China (HKEx: 753; Shanghai: 601111) and an even more intriguing bid for bankrupt business jet maker Hawker Beechcraft by a Chinese buyer. Both of these deals are just the latest in a series of outward moves by China’s aviation industry, a largely inwardly looking group which I suspect has come under recent pressure from Beijing to become more global.

Let’s look at the Hawker Beechcraft deal first, which looks like the latest in a steady stream of bids by Chinese companies over the last few years for struggling Western rivals.

In this case, the potential buyer is a company I’ve never heard of called Superior Aviation Beijing, which is part owned by the Beijing Municipal government. (English article) Foreign media are reporting the Chinese company is in exclusive negotiations for a deal that could fetch up to $1.8 billion for Hawker, a former high-flyer in the market for smaller private jets. That market has fallen on hard times lately with the extended global downturn, forcing Hawker into bankruptcy in May.

I don’t mean to sound too cynical, but this deal looks quite similar to a growing list of other bids for struggling global firms by big Chinese names like automaker SAIC (Shanghai: 600104), TV maker TCL (Shenzhen: 000100) and most recently car maker Geely (HKEx: 175). Nearly all of the deals have proven disastrous, mostly because the Chinese buyers had little or no experience operating overseas businesses, and even less experience fixing such broken assets.

I personally can’t really understand why Chinese firms continue to show such a fascination for these deals despite the growing evidence that they almost always fail. I’m sure that part of the attraction is the potential for a bargain, as Chinese companies have shown little interest in paying big premiums for healthy companies that would be much easier to manage. But history has shown that what may look like bargains often quickly turn into nightmares involving huge losses for their Chinese buyers.

Perhaps Superior Aviation is simply interested in Hawker’s technology and would close down the company’s actual operations if its bid is successful, which would be the best way to proceed. But if it buys and actually tries to operate the US company, look for lots of headaches and culture clashes in the ensuing marriage.

Meantime, the second newly announced deal will see Air China form a joint venture with US aviation services firm GA Telesis. (company announcement) This deal looks a bit more traditional than the Hawker bid, with the new joint venture set to operate a China-based integrated spare parts supplier targeting the broader Asia market.

This newest tie-up follows an air cargo joint venture between Air China and Hong Kong’s Cathay Pacific (HKEx: 293), which formally launched last year, and a budget airline joint venture between rival carrier China Eastern (HKEx: 670; Shanghai: 600115; NYSE: CEA) and Australia’s Quantas (Sydney: QAN) announced earlier this year. (previous post) It also comes amid a more recent flurry of new global tie-ups in a wide range of aviation-related areas, including online flight booking services, aircraft manufacturing and announcement of new international routes by Chinese carriers that have for years focused on their home market. (previous post)

The sudden burst in activity leads me to suspect that leaders in Beijing have issued a directive for the nation’s aviation industry to become more global, resulting in this stream of new initiatives by state-run firms. In the end, many of these initiatives like the Hawker bid are likely to fail due to lack of strategic thinking; but some of the better conceived ones could still succeed, giving China’s industry more global exposure that it needs in its drive to become a world-class player.

Bottom line: A bid by a Chinese company for bankrupt plane maker Hawker Beechcraft is likely to fail, and is the latest bid in a recent drive by China’s aviation sector to become more global.

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