March 31, 2023

DealBook: China’s Focus on Aerospace Raises Security Questions

An Airbus A320 jetliner at the company's facility in Tianjin, China.Sim Chi Yin for The New York TimesAn Airbus A320 jetliner at the company’s facility in Tianjin, China.

TIANJIN, China — When Airbus executives arrived here seven years ago scouting for a location to assemble passenger jets, the broad, flat expanse next to Tianjin Binhai International Airport was a grassy field.

Now, Airbus, the European aerospace giant, has 20 large buildings and is churning out four A320 jetliners a month for mostly Chinese state-controlled carriers. The company also has two new neighbors — a sprawling rocket factory and a helicopter manufacturing complex — both producing for the Chinese military.

The rapid expansion of civilian and military aerospace manufacturing in Tianjin reflects China’s broader ambitions.

As Beijing’s leaders try to find new ways to invest $3 trillion of foreign reserves, the country has been aggressively expanding in industries with strong economic potential. The Chinese government and state-owned companies have already made a major push into financial services and natural resources, acquiring stakes in Morgan Stanley and Blackstone and buying oil and gas fields around the world.

Aerospace represents the latest frontier for China, which is eyeing parts manufacturers, materials producers, leasing businesses, cargo airlines and airport operators. The country now rivals the United States as a market for civilian airliners, which China hopes to start supplying from domestic production. And the new leadership named at the Party Congress in November has publicly emphasized long-range missiles and other aerospace programs in its push for military modernization.

If Boeing’s difficulties with its recently grounded aircraft, the Dreamliner, weigh on the industry, it could create opportunity. Chinese companies, which have plenty of capital, have been welcomed by some American companies as a way to create jobs. Wall Street has been eager, too, at a time when other merger activity has been weak.

Washington is trying to figure out what to do about China’s deal-making broadly. “Many of these transactions raise important security issues for our country,” said Michael R. Wessel, a member of the U.S.-China Economic and Security Review Commission, which was created by Congress to monitor the bilateral relationship. “China’s interest in promoting these investments isn’t necessarily consistent with our own interests, and it’s appropriate to thoroughly examine the transactions.”

In aerospace, the Chinese deal-makers have deep ties to the military, raising additional issues for American regulators. The main contractor for the country’s air force, the state-owned China Aviation Industry Corporation, known as Avic, has set up a private equity fund to purchase companies with so-called dual-use technology that has civilian and military applications, with the goal of investing up to $3 billion. In 2010, Avic acquired the overseas licensing rights for small aircraft made by Epic Aircraft of Bend, Ore., using lightweight yet strong carbon-fiber composites — the same material used for high-performance fighter jets.

Provincial and local government agencies in Shaanxi province, a hub of Chinese military aircraft testing and production, have set up another, similar-sized fund for acquisitions. Last month, a consortium of Chinese investors, including the Shaanxi fund, struck a $4.23 billion deal with the American International Group to buy 80 percent of the International Lease Finance Corporation, which owns the world’s second-largest passenger jet fleet.

“There has always been an obvious cross-fertilization of ideas, expertise and money between the civilian and military,” said Martin Craigs, a longtime aerospace executive in Asia who is now the chairman of the Aerospace Forum Asia, a nonprofit group in Hong Kong. He added that Chinese companies had been actively hiring senior American and European aerospace engineers, so national security concerns could be circumvented by hiring the right people.

The push into aerospace coincides with growing worries in the West and across Asia about China’s increasingly assertive territorial claims, including the dispatch of Chinese warships to waters long patrolled by Japan, the Philippines and Vietnam.

Coincidentally, hours after the A.I.G. deal was announced, two Chinese navy destroyers and two frigates showed up in disputed waters patrolled by Japan. China and Japan have stepped up public criticisms of each other since. And the Obama administration has begun a strategic “pivot,” shifting military forces from the Mideast back to the western Pacific, a move that Chinese officials have criticized as an attempt to contain their country.

Such confrontations in the region are drawing attention to China’s deal-making ambitions.

In October, a $1.79 billion bid by a business linked to Beijing’s municipal government to acquire the corporate jet and propeller plane operations of bankrupt Hawker Beechcraft in Wichita, Kan., fell apart over national security concerns in Washington. Executives found it hard to disentangle the civilian operations from the company’s military contracting business.

But many aerospace experts predict that Chinese investors and companies will find ways to appease American regulators. “There will be concerns undoubtedly and generally quite valid, but the commercial imperatives are such that people will find a way around them,” said Peter Harbison, the chairman of CAPA-Center for Aviation, a global aerospace consulting firm.

The sale of A.I.G.’s leasing business is expected to face scrutiny by the Committee on Foreign Investment in the United States, the government panel that reviews the national security implications of deals involving foreign buyers.

The group’s customers include many of the largest carriers in the United States, and the federal government has long counted on being able to use civilian passenger jets to transport troops overseas during a national emergency. When Saddam Hussein sent the Iraqi army into Kuwait in 1990, the Defense Department relied on the emergency mobilization of civilian jetliners to ferry 60 percent of the soldiers sent to and from the Mideast during the first Persian Gulf war and a quarter of the cargo, according to a RAND study.

Henri Courpron, the chief executive of A.I.G.’s International Lease Finance Corporation, said that he did not believe the United States should be concerned that the acquisition would prevent civilian aircraft from being available in a future crisis. Only 8 percent of the company’s aircraft are currently leased to American air carriers, and most of these are narrow-body aircraft that lack the range to ferry troops across oceans.

“It’s really a nonissue — we have 900-plus aircraft in our fleet, and there are only 11 wide bodies” currently being leased to American carriers, he said in a telephone interview. He added that the carriers have control over the aircraft during the leases. Executives from the consortium buying the stake in the leasing company declined repeated requests for interviews.

Chinese suitors in the aerospace industry understand the concerns. In part, they watched the experience in the natural resources industry. The China National Offshore Oil Corporation failed in its 2005 bid to acquire Unocal after intense political opposition. After that, Chinese energy giants have been more cautious, pursuing minority stakes in the United States and limiting their outright acquisitions.

Chinese companies are taking a similar tack in aerospace, pursuing joint ventures and technical cooperation agreements alongside acquisitions. For example, Avic is working with General Electric and other American aerospace companies on the production of a civilian jetliner, the C919. Beijing envisions the narrow-body C919 as the next step toward building a domestic aerospace business that can compete with Boeing and Airbus.

Western companies and their advisers say that they are acutely aware that technology transfers could help China strengthen its military and develop more competitive civil airplanes, and are taking precautions to protect trade secrets and national security. “You transfer the part that is most easily reverse engineered, or easily dissected,” said a lawyer with detailed knowledge of these transactions.

But many in the aerospace sector are more skeptical that the West can avoid losing control of technology. “The mentality is, they’re going to find a way to get there anyway, and we may as well get there with them,” Mr. Harbison of the CAPA-Center for Aviation said.

Airbus executives say that they are being prudent. They add that there are few trade secrets about the A320 manufactured here, an aircraft that was designed in 1986. “The A320 is well known all over the world,” said Jean-Luc Charles, the general manager of Airbus’s operations here.

A tour of the main assembly area, a hangar with gray steel walls and large red cranes overhead, suggests that it may be possible to protect the technology. The seats are installed here and the aircraft painted, but the factory is largely assembling planes from kits imported from Europe. Entire fuselages, with green protective coatings, are brought by ship from Hamburg, Germany. Even the stepladders and freight elevators give weight limits in German, and the tool boxes are labeled in English, not Chinese.

Mr. Charles said that 95 percent of the parts are still imported, and that it would take many years for that amount to shrink. “One by one, we start to give them the parts,” he said. “But each subassembly is a complex project, it takes five years.”

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DealBook: Chinese Make $15 Billion Move Into Canada

12:37 p.m. | Updated

The great energy rush continues.

On Monday, Cnooc, the Chinese state-run oil giant, agreed to buy Nexen of Canada for $15 billion, as global players look to beef up their access to natural resources.

Under the terms of the deal, Cnooc will pay $27.50 a share for the Canadian oil and natural gas company. The price is 61 percent above Nexen’s closing price on Friday.

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Cnooc has also offered to buy Nexen’s preferred shares for about $25.58 each, as well as accrued dividends, pending approval by that class of investors.

Companies around the world have been scrambling to build up their holdings in so-called unconventional resources, which include the gas-rich hard rock formations that underpin today’s drilling boom. (Separately, Sinopec, another Chinese oil company, announced on Monday that it has purchased a 49 percent stake in Talisman Energy‘s holdings in the North Sea for $1.5 billion.)

Among Nexen’s properties are parts of the oil sands in Canada’s Alberta province.

Through the acquisition, Cnooc will also gain valuable footholds in oil- and gas-producing areas around the world, including western Canada, the North Sea, the Gulf of Mexico and the waters off Nigeria.

“This is an exciting opportunity for us to build on our existing joint venture relationship with Nexen in Canada, and to acquire a leading international platform in the process,” Wang Yilin, the chairman of Cnooc, said in a statement.

The Canadian industry minister and the country’s competition watchdog said on Monday that they will review the deal.

The deal is one of the biggest overseas expansion efforts by a Chinese company to date. Cnooc was behind one of the biggest efforts when it sought to buy Unocal, an American oil company, only to be blocked by national security concerns.

The unease over major Chinese companies buying up valuable assets like natural resources has since lingered, helping to dissuade many of these entities from making bids for assets. Nearly two years ago, Sinochem, a Chinese chemicals maker, considered but decided against a bid for the Potash Corporation of Saskatchewan, deciding that it could not ease nationalist concerns in Canada.

This time around, Cnooc appears to be aiming to defuse protectionist sentiment. Much of its statement describes the deal’s benefits for Canada, noting that Cnooc has already invested 2.8 billion Canadian dollars in the country.

Cnooc said it would establish Calgary as the head of its North American and Central American operations, and would retain Nexen’s existing management team. The Chinese company also said it would list its shares on the Toronto Stock Exchange and promised to support research in Alberta.

It has also sought to allay concerns in other countries, including the United States and Britain.

Under provisions of Monday’s deal, while Nexen cannot actively look for higher bids, it can consider any that other companies make on their own. Cnooc has the right to match any such proposal.

If directors of Nexen withdraw their recommendation, the company must pay Cnooc a $425 million breakup fee. But if the deal falls apart because of Chinese regulatory reasons, Cnooc must pay $425 million.

Cnooc was advised by BMO Capital Markets, Citigroup and the law firms Stikeman Elliott and Davis Polk Wardwell.

Nexen was advised by Goldman Sachs, RBC Capital Markets and the law firms Blake, Cassels Graydon and Paul, Weiss, Rifkind, Wharton Garrison. Its board was counseled by the Richard A. Shaw Professional Corporation and Burnet, Duckworth Palmer.

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