China’s Commercial Aerospace Market Is the Place to Be, But It Simply Isn’t That Simple

shanghai modern buildings skyline with airplane in sunrise
Overseas aircraft manufacturers and MROs face hurdles entering the Chinese market

China is currently the second largest domestic aviation market in the world, in addition to being the fastest growing market with a year over year 9.5% passenger traffic growth rate. China is expected to take over the number one spot in the near future and presumably lead civil aircraft sales for the next 20 years. Boeing has forecasted that China will need to add an additional 6,800 aircraft to its commercial fleet in order to handle the increasing demand. This has led to aircraft manufacturers like Boeing and Airbus to jockey into position, while maintenance repair and overhaul (MROs) are entering the market at various speeds. Although China is where those in the aerospace industry want to be, it is not a simple process to enter or operate in this market.

Min Liu, an eight-year professional in the aerospace industry currently working in Shanghai, states, “There are many complexities any foreign business will encounter when planning to operate in China. It can take several years for a business to begin operations.”

Liu works in aftermarket customer service for a leading foreign OEM for aircraft parts manufacturing and MRO. He has spent the last several years learning the complexities of the Chinese market while building relationships with those in the industry. He expects many of the same trends we see now to continue over the next five years and build upon the past five-year trends, including double digit growth in passenger numbers and doubling of aircraft deliveries.

While these promising figures would delight anyone in the aerospace industry, Liu highlights two major areas that a foreign company must prepare for in order to make a successful effort here:

  1. Any foreign business must understand Guanxi (关系) and work to build Guanxi with the government and domestic Chinese businesses.
  2. Understand the Chinese government’s “Made in China 2025” plan and be prepared to design an operations strategy to comply with the government’s requirements.

In regard to the first point, Guanxi is defined as the basic dynamic in personalized networks of influence. It can be described as the relationships individuals cultivate with other individuals, and serves as a common mantra in Chinese society. Guanxi is ingrained in Chinese business principles, and the process of building it is expected of foreign leaders who conduct business in the country.

Building Guanxi with a Chinese business is not something that can be completed over a few short days or weeks. It typically takes months and even years at times. It’s a complicated process that can include relationship building methods from basic dinner meetings to providing favors or information. While this practice has been linked to corruption in the past, under President Xi’s leadership, corruption has decreased. The main point foreign businesses should focus on is that they will need to understand the concept, as well as, plan how and with whom they must build Guanxi with in China. It is the unwritten rule in China’s governmental policy which requires foreign businesses to partner with domestic companies in order to operate within the country.

The second note to consider is the government’s Made in China 2025 plan. The Chinese government has embarked on an economic plan to help the economy grow and propel Chinese manufacturing to lead globally. Within the details of this plan are many goals set forth by the government that complicate matters for those looking to operate in China – certain regulations especially affect the aerospace industry.

China’s goal is for all foreign businesses that operate and manufacture products in China to source all parts of the operation via Chinese companies. For example, if an aircraft part is manufactured in China, all the smaller components of the unit must be manufactured and sourced via Chinese companies. The economic plan states that 100 percent of all parts should be sourced via Chinese companies by 2025. The ultimate goal is to slide Chinese manufacturers into the Top 10 globally by 2035 and Top 5 by 2045.  Great news for China—not great news for foreign businesses (like those in the aerospace industry) looking to expand into the country.

China’s new requirements affect:

  • Proprietary information integrity – In order to conduct business with a Chinese supplier, a great deal of information on products and business operations are required to be shared. The line between how much and what types of information complicates business.
  • Sourcing quality and reliability – Searching for and qualifying new suppliers for partnership is a challenging process. After that is completed, the reliability of quality and timely deliveries are additional areas of risk.
  • Ever-changing regulation and government complexity – China is notorious for its ever-shifting policies for foreign businesses. Regulations and requirements can change quickly and sometimes without notice.
  • Joint venture cultural challenges – In order to meet the requirements of China’s plan, companies need to build relationships with established Chinese companies. Business culture and practices between US and Chinese companies differs greatly. To work efficiently and to the best of each companies’ abilities, the merging and understanding of cultures is essential.

Such issues must be considered and addressed by any foreign company seeking to enter the Chinese market. To best prepare for these obstacles, it is recommended to complete a thorough market research analysis prior to initiating the entrance process. An additional recommendation is to create market entry and operations plans by enlisting the help of experts in the industry or geographical region that can assist in the process.

Although this burgeoning aerospace market is not easy to enter, there are billions of dollars waiting to be made in the next few years. China is a complex business environment; research, preparation and time must be paid to enter the market. Bearing that in mind, worthwhile opportunities in the aerospace industry exist for those willing to put forth the resources and do their due diligence to enter.

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