LANDERS INESTN & A MARKET SURVEY

FLANDERS INVESTMENT & TRADE MARKET SURVEY

CIVIL AVIATION AND

AEROSPACE BUSINESS

IN CHINA

CHINA'S CIVIL AVIATION AND AEROSPACE BUSINESS

October, 2014

Flanders Investment & Trade Guangzhou

2

CONTENT

1 The Civil Aviation Business.........................................................................................................3

1.1 The Aviation Manufacturing.........................................................................................3

1.1.1 The Domestic Development of Aviation Manufacturing...................................3

1.1.2 The Foreign Investment of Aviation Manufacturing.........................................6

1.2 The Aviation Transport...................................................................................................7

1.2.1 The Hardware of Aviation Transport.................................................................7

1.2.2 The Human Resources of Aviation Transport....................................................9

2 The Aerospace Business............................................................................................................10

Annex 1 List of China's Civil Aviation Industrial Enterprises in 2012 (in Chinese only)

2 European Business in China Position Paper 2013/2014 (Aerospace Working Group)

China's Civil Aviation and Aerospace Business | October, 2014 3

1 The Civil Aviation Business 1.1 The Aviation Manufacturing 1.1.1 The Domestic Development of Aviation Manufacturing

In 2012, China's civil aviation industry realized a gross output value of CNY 152.68 billion, the output value from the industrial products was CNY 37.27 billion (10% of the figure of the USA):

aircrafts,16.06 bn

parts for aircrafts,7.63 bn

parts for aeroengines,3.3 bn

maintenance of aircrafts,3.35 bn

maintenance of aeroengines,2.61 bn

airborne equipments,0.34 bn

others,3.98 bn

Total: 37.27 bn

In 2012, there were basically 132 civil aviation industrial enterprises in China (see Annex 1, List of China's Civil Aviation Industrial Enterprise in 2012, in Chinese only):

Number Description Main Business % in the Industry's Output Value

60 subsidiaries of Aviation Industry Corporation of China

(www.avic.com.cn)

manufacture of civil aircrafts and aero

engines

40.9%

7 subsidiaries of Commercial Aircraft of China, Ltd.

(www.comac.cc)

ibid

1.2%

65 others

maintenance of civil aircrafts and aero

engines

57.9%

4

Among the 132 enterprises, the top 10 in terms of the income in 2012 were:

Rank Name Income (CNY 10000)

1 Airbus (Tianjin) Final Assembly Co., Ltd. (http://www.airbus.com.cn/contact/)

1180287

2 AVIC Xi'an Aircraft Industry (Group) Co., Ltd.

693379

3 MTU Maintenance Zhuhai Co., Ltd. (http://www.mtu.de/company/mtu-worldwide/mtu-maintenance-zhuhai/)

260302

4 Guangzhou Aircraft Maintenance Engineering Co., Ltd. (http://www.gameco.com.cn/)

171903

5 Taikoo (Xiamen) Aircraft Engineering Co., Ltd. (http://www.taeco.com/)

135755

6 AVIC Xi'an Aero-Engine (Group) Ltd. (http://www.xaec.com/)

115272

7 AVIC Harbin Aircraft Industry Group Co., Ltd. (http://www.hafei.com/)

74966

8 AVIC SAC Commercial Aircraft Co., Ltd. (http://www.sacc.avic.com/)

63085

9 Weihai Guangtai Airport Equipment Co., Ltd. (http://www.guangtai.com.cn/)

60244

10 AVIC Xi'an Aircraft Industry (Group) Co., Ltd.

59391

The leading civil aircrafts made in China

Modern Ark 60 and Modern Ark 600 turboprop regional aircrafts

Airbus A320 aircrafts, by Airbus S.A.S.'s joint venture in China

Y-12 IV and Y-12 E twin-engine turboprop general aircrafts

Y-5 B single-engine piston general aircrafts

DA40 TDI light-scale general aircrafts


Straight-9 and Straight-410G 4-ton helicopters

A2C ultra-light seaplanes

C919, the first large passenger jet to be made by China, to be assembled at the end of 2014 and to take the first test flight in 2015

In 2012, China's subcontracting production for foreign companies amounted to USD 1.35 billion (35% of the figure of Japan).

(Source: 中国民用航空工业年鉴 2013)

China's Relative Imports January-July, 2014

Description Volume Amount (USD)

turbojet engines 207 units 1,193,160.00

Aircrafts 570 units 13,877,708.00

parts for aircrafts 2530 tons 1,332,411.00

aviation and aerospace technologies 19,378,433.00

(Source: http://www.customs.gov.cn/tabid/2433/InfoID/716642/frtid/49667/Default.aspx) See Annex 2, European Business in China Position Paper 2013/2014 (Aerospace Working Group). The Mid-term Development Plan of the Civil Aviation Industry (2013-2020) (can be downloaded at http://www.miit.gov.cn/n11293472/n11293832/n12843926/n13917012/15421628.html, in Chinese only) announced by China's Ministry of Industry and Information Technology sets the aims of the industry till 2020: size of the market

The civil aircrafts made in China will realize a turnover of CNY 100 billion. civil passenger aircraft

The ARJ21-700 turbofan regional aircraft will be mass-manufactured. Capable for mass-manufacturing of the 50-seat Modern Ark 60 and 70-seat Modern

Ark 700 turboprop regional aircrafts. Capable for mass-manufacturing of the single-aisle 150-seat C919 mainline aircraft. Start to develop double-aisle mainline aircrafts.

general aviation Develop aviation emergency rescue equipment’s, big fire-fighting and water rescue

aircrafts. Develop medium-sized multi-function helicopters. Develop large-sized helicopters via

international cooperation. Upgrade the existing business jets. Develop premium business jets with inter-

continental flight capacity, via international cooperation. aero-engines

6

Mass-manufacturing of medium-powered turbo shaft engines (by 2015). Mainly finish the design of the engine for big passenger aircrafts.

Upgrade the existing and promising engines (by 2015). Develop small engines.

aviation equipment’s, systems and relative manufactures Develop airborne systems, aviation equipment’s and systems, airborne computer

software and hardware, aviation materials (especially carbon-fibre composites, high-quality aluminium-lithium alloy, high-strength and high-tenacity steel, etc.), basic components, etc.

geographical allocation The manufacturing of civil transport aircrafts is based in Shanghai City, Shaanxi

Province, Tianjin City. The manufacturing of general aircrafts, business jets, and special aircrafts is based in

Harbin City, Shijiazhuang City, Zhuhai City, Chengdu City and Jingmen City. The manufacturing of helicopters is based in Jingdezhen City, Harbin City and Tianjin

City. 1.1.2 The Foreign Investment of Aviation Manufacture

Leading Foreign Investment by Chinese Aviation Industrial Enterprises

Investor Project Location Year

AVIC Xi'an Aircraft Industry (Group) Co., Ltd.

acquisition of FACC AG (www.facc.com), a manufacturer of aviation structural and interior decoration components

Austria 2009

Superior Aviation Beijing Co., Ltd. (www.sabj.cn)

acquisition of Superior Air Parts, Inc., a manufacturer of piston aero-engines

USA 2009

Donica Aviation Engineering Co., Ltd. (www.donica.cn)

set-up of overseas companies for service, trading, software integration

USA, UK 2010

Jr-Tech (Guangzhou) Co., Ltd. (www.jr-tech.com.cn)

set-up of a trading and service company

USA 2010

China Aviation Industry General Aircraft Co., Ltd. (www.caiga.cn)

acquisition of Cirrus Design Corporation, a manufacturer of general aircrafts

USA 2011

AVIC International Holding Co., Ltd. (www.avic-intl.cn)

acquisition of Teledyne Continental Motors Co., a manufacturer of piston aero-engines

USA 2011

Sichuan Haite High-tech Co., Ltd. (www.schtgx.com)

set-up of an aviation security training company

Singapore 2012

AVIC International Holding Co., Ltd. (www.avic-intl.cn)

acquisition of Thielert Aircraft Engines GmbH, a manufacturer of piston aero-engines

Germany 2013

China Aviation Supplies Holding Company (www.casc.com.cn)

set-up of its European company for trading and service

France 2013

Jiangsu A-Star Aviation Industry Co., Ltd. (www.jsa-star.com)

set-up of its overseas company for trading

USA 2013


Ningbo Great Group Co., Ltd. (www.ngtb.cn)

taking share of a manufacturer of air cargo containers

USA 2013

Ma Bian Black Horse Mining Co. acquisition of Lisa Airplanes SA (www.lisa-airplanes.com), a manufacturer of light sport aircrafts

France 2014

Zall Co. (www.zallcn.org) acquisition of a manufacturer of aircrafts and parts

USA 2014

In 2012, 7 Chinese aviation industrial enterprises totally made outbound investment of CNY 1.78 billion, including CNY 1.74 billion in Austria by AVIC Xi'an Aircraft Industry (Group) Co., Ltd.

1.2 The Aviation Transport 1.2.1 The Hardware of Aviation Transport

Passenger Volume of China's Civil Aviation Transport, 2013

China Southern Airlines,92 m

Air China,89 m

China Eastern Airlines,79 m

Hainan Airlines,51 m

Other Airlines,43 m

Total: 354 m Cargo & Mailing Volume of China's Civil Aviation Transport, 2013

China Southern Airlines,1.276 m tons

Air China,1.56 m tons

China Eastern Airlines,1.409 m tons

Hainan Airlines,0.652 m tons

Other Airlines,0.715 m tons

Total: 5.612 m tons (Source: http://www.caac.gov.cn/I1/)

At the end of 2013, in China there were: 46 airlines (including 7 only for cargo transport), the 2 charts below show the leading 4 airlines 189 permitted general aviation operation companies 2145 aircrafts for passenger and cargo transport (204 were newly added in 2013)

8

1519 general aircrafts (340 were for training)

The Total Income of China's Airlines

0

100

200

300

400

500

2012 2013

CN

Y b

n

Turnover

Profit

In 2013, among the 193 certified civil airports in China, the top 6 were:

Airport Passenger Throughput Cargo and Mail Throughput

Rank Number Rank Volume (ton)

Capital Airport, Beijing City

1 183,712,355 2 1,843,681.1

Baiyun Airport, Guangzhou City

2 52,450,262 3 1,309,745.5

Pudong Airport, Shanghai City

3 47,189,849 1 22,928,527.1

Hongqiao Airport, Shanghai City

4 35,599,643 6 435,115.9

Shuangliu Airport, Chengdu City

5 33,444,618 5 501,391.2

Baoan Airport, Shenzhen City

6 32,268,457 4 913,472.1

1No.2 in the world for 4 years. 2No.3 in the world for 6 years. Locations of China's key airport expansion projects: Lukou Airport, Nanjing City Binhai Airport, Tianjin City


Baiyun Airport, Guangzhou City Wuwei Airport, Nanning City Xiantao Airport, Shenyang City Tianhe Airport, Wuhan City Taiping Airport, Harbin City Jiangbei Airport, Chongqing City Huanghua Airport, Changsha City Xinzheng Airport, Zhengzhou City Hedong Airport, Yinchuan City

(Source: http://www.caac.gov.cn/I1/, http://www.caac.gov.cn/I1/K3/201403/t20140324_62919.html)

1.2.2 The Human Resources of Aviation Transport

The total number of China's pilots for transport aviation companies can basically meet the demand. Pilot poaching happened, mainly because of the unevenness of the human resources in different airlines. The big 3 (China Southern Airlines, Air China, China Eastern Airlines) employ 60% of the pilots in China and each of them starts to train 200-300 more people every year, then the other smaller airlines sometimes have to scramble the staffs with much higher salaries, or hire foreign pilots. China's general aviation is in bigger shortage of staff; for its flight training business, 15000 general aviation pilots are needed in the coming decade while presently only 1000 can be added per year; for the whole sector, 50000 people are needed, now there are only 13000. Flight academies are therefore arising in China, from 1 to 12 already, some with private investments, some with foreign know-how from Canada, Germany, etc. The traditional academy is the Civil Aviation Flight University of China (www.cafuc.edu.cn), from which around 90% of the working Chinese pilots graduated. The leading airlines established their own flight academies. Many Chinese pilots receive training abroad due to the higher cost at home, around CNY 100,000 higher per pilot.

(Source: http://sky.news.sina.com.cn/2014-06-18/105851529_2.html, http://finance.eastmoney.com/news/1355,20131020330422970.html)

The Number of Civil Pilot in China

At the end of 2013

plane (private),1733

plane (commercial),17742

plane (airline transport),14372

plane (multi-crew),39

helicopter,1241

others,378

(Source: http://www.caac.gov.cn/I1/)

2013 2012

10

2 The Aerospace Business China's aerospace industry has been valued at over CNY 120 billion, the business related to the Beidou Navigation Satellite System may be valued at CNY 400 billion till 2020 (Source: http://www.cb.com.cn/gongsikuaixun/2013_0710/1003745_2.html). China's authority concerned is China National Space Administration (www.cnsa.gov.cn). China's aerospace industry is mainly run by 2 state-owned companies:

China Aerospace Science and Technology Corporation (www.spacechina.com)

has tens of subsidiaries and around 159400 employees

China Aerospace Science and Industry Corporation (www.casic.com.cn)

has tens of subsidiaries and around 137000 employees

China's demands for improvement of aerospace technologies, comparing with those of the advanced countries:

Launchers Need to improve the carrying capacity, the preparation time and the adaptability. Need better re launchable technology.

Space crafts Need better remote sensing satellites' observation system. Need to improve the communications satellites' platform which does not meet the

demands of modern mass-storage communications satellites. Need to extend the navigation satellites' coverage, which covers now only China and

the main part of the Asia-Pacific region. The precision of the service needs to be improved.

Need better solutions for the new technology experiment satellites. Manned space crafts

The number of manned space crafts is small. Not suitable for extraterrestrial/deep-space explorations. Not reusable. The operation cost is rising. All need to be improved.

Deep-space exploration Needs to extend the main object of the exploration which is now only the Moon, not

the main part of the solar system. Needs better technologies of self-management and intelligent control. Needs better technologies of deep-space communications and navigation Needs better nuclear reactors in space, high-power electric propulsion technologies,

etc. Needs better nuclear energy technologies. Needs better Entry, Descent and Landing technologies. So far only those for the

exploration on the Moon are being developed. Needs better payload technologies for deep-space explorations.

Aerospace guidance, navigation and control Needs better technologies for the control on the return via earth orbit, the control on

the return via moon orbit, soft landing on the Moon and other planets, etc. Now China only has docking technologies in the field of earth orbit and collision docking.


Needs better technologies for the astronomical body explorers. Needs better technologies for the constellation/formation flying. Needs to promote

the in-orbit use of the satellite control technologies. Needs better technologies for the carrier rockets.

Aerospace propulsion For the aerospace main power, needs bigger thrust and more advance technologies. For the solid-fuel rockets' engines, the diameter of the existing ones is only at 2m-class,

still using metallic casing, with low pressure in the combustors. These needs to be improved.

For the aspirated engines, the scramjet is under initial research only, awaiting progress. The special propulsion like Hall Thruster, nuclear propulsion, solar sail, etc., needs to

be developed. Launching, tracking and controlling

Needs better launching platform. Needs better technologies on the tracking and controlling in earth orbit. Needs better technologies on the tracking and controlling in deep-space. Needs better technologies on measurements and navigation. Needs better technologies on the security control.

Aerospace electronic information Needs better technologies on the exploration, chasing and identification of space

objects, the space payloads, the computer and micro-electronics, the electromechanically assembly, the aerospace communications, the inertial devices, etc.

Fundamental technologies Needs better aerospace materials. Needs better medical engineering technologies. Needs better aerodynamic technologies. Needs better technologies of quality and reliability control. Needs better technologies of measurement and testing.

Aerospace manufacture Needs better technologies of rapid response manufacturing and relative digital

management. Needs better precise and ultra-precise machine tools. Needs better special process technologies. Needs better thermal processing and precision form technologies. Needs better jointing technologies. Needs better surface treatment technologies. Needs better electrical interconnection technologies.

Aerospace testing Needs better technologies for the testing on strength, structural dynamics, mechanical

environment, thermal environment, magnetism, reliability, and virtual testing, etc. Utilization of aerospace technologies

Needs to expand the satellite navigation and communication service. Special aerospace technologies like gas desulfurization still needs to be imported.

(Source: Report on Advances in Space Science and Technology 2012-2013) Before 2017, China's foreign cooperation in aerospace business keeps focusing on:

Space astronomy, space physics, microgravity science, space life-science, deep-space exploration, space debris.

Use of earth observation satellites for the monitoring of the environment and inflicted damage, monitoring and forecasting of the global climate changes, monitoring of the oceans, etc.

Use of communication and broadcast satellites on broadcast and television operation, distance education, distance medical treatment, etc.

12

Technologies, terminal equipments R&D, facilities construction, special business service, etc., for satellite navigation system.

Space labs of manned aerospace, space station, space scientific research and tests. Aerospace tracking and control. Commercial launches of satellites, trade of satellites and the parts, trade of ground test

equipments of satellites, construction and service of ground tracking/control and utilization facilities of satellites, etc.

Personnel exchange and training. (Source: China's white paper China's Space Activities in 2011)

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Aerospace Working Group

European Business in China Position Paper欧盟企业在中国建议书 2013/2014


Key Recommendations 1. Deepen the Dialogue Between Chinese and European Authorities in Aviation-related Fields to Reflect the Level of Trade Between Both Sides in this Sector • Establish regular strategic-level aviation dialogue between the European Union and China. • Resume broader platforms for discussion like the EU-China Aviation Summit last held in 2005. • Consider a new programme similar to the EU-China Civil Aviation Project (EUCCAP) after it ends

in 2014.

2. Remove Market Access Barriers in the Aerospace Industry • Introduce a uniform import tax for all aircraft. • Remove joint venture requirements which deter foreign manufacturers from investing or expanding

in China. • Revise the process for airworthiness certification for manufacturing of foreign aviation products to

avoid unnecessary duplication.

3. Improve the Operational Environment for the Aviation Industry • Continue the improvement of customs regulations for the aviation industry. • Improve pilot capacity by making better use of foreign Flight Training Organisations (FTOs) and

easing medical requirements for foreign pilots working in China. • Apply the same tax incentives to domestic and international transactions between foreign original

equipment manufacturers (OEMs) and airlines.

4. Promote General Aviation (GA) • Pursue the opening of the sky below four thousand meters by developing clear guidelines and

processes for operators as well as maintenance, repair and overhaul organisations (MROs) in the GA industry.

• Create a dedicated and horizontal General Aviation Department at the Civil Aviation Administration of China (CAAC).

• Support training of pilots and technicians for both fixed and rotary-wing GA aircraft.

: The red flags denote key recommendations perceived to be clearly market access related

Introduction to the Working Group enjoy leading positions in all fields of aerospace

manufactur ing. This makes the European The European aerospace industry consists of two

aerospace industry one of the most dynamic in thousand companies that employ over 730 thousand

the world.1

people, with a turnover of almost EUR 171.5 billion in 2011. The sector is highly innovative; research and development (R&D) spending amounts to about

1 AeroSpace and Defence Industries Association of Europe, Key Facts and 15 per cent of revenues and European companies Figures 2011 (September 2012)

Section Three: Trade in Goods

107

hp

文本框

Annex 2:


Sect

ion

Thre

e: T

rade

in G

oods

The Aerospace Working Group has been an integral part of the European Chamber since the Chamber’s founding in 2000 and has now grown to include 20 European multinationals in the field of aerospace. Member companies develop and manufacture a broad range of products: civil aircraft, aero engines, helicopters, unmanned aerial vehicles, as well as space systems and equipment. It also comprises maintenance and service companies that carry out repairs, training or other activities linked to the different products.

In China, member companies employ over f ive thousand employees in subsidiaries and more than 20 joint ventures (JVs). European firms work with the Chinese industry in all areas such as design, engineering, development, manufacturing, maintenance and training.

Roughly one out of two aircraft in China is of European origin. European engine manufacturers and Air Traffic Control (ATC) system providers also enjoy a strong position in China. European firms are also an important client to the Chinese industry, with a cumulative sourcing of close to EUR 1 billion annually, a number that is likely to increase significantly throughout the present decade.

Over ten thousand Chinese professionals have been trained by European firms through funding to Chinese

universities and direct training programs provided to the Civil Aviation Administration of China (CAAC) and other institutions. The EU has also been an active contributor through its EU-China Civil Aviation Project (EUCCAP).

Recent Developments China’s reform and opening-up policy and subsequent growth in the aviation and aerospace sectors has benefited many European companies. Moreover, China has provided European companies with partnerships that have helped strengthen their position, both internationally and in China. At the same time, recent years have seen China streamline its own aerospace industry with the goal of making it a future leader on the international stage.

Safety China possesses a good safety record in air travel. However, given the rapid growth of the Chinese air travel market, the relevant government departments

and airlines must remain vigilant to make sure that safety lapses do not occur. Over the last decade, the aerospace sector has seen a series of measures aimed at remedying the shortage of qualified personnel, and the Working Group recognises these efforts. In addition, the Working Group recommends that efforts in the development of an independent framework for aircraft incident investigation and constant improvement of training for qualified personnel needs to be continued.

Air Traffic Management (ATM) China is undergoing a modernisation of its ATM infrastructure and policies. The dialogue between the different national stakeholders that has taken place in previous years is leading to the establishment of a coherent plan that foresees a more efficient use of airspace in the future.

The complexi ty of Chinese airspace, which is fragmented and without a national integrated flow management unit, has strong similarities to that of Europe. The contributions that European companies have made to ATM modernisation in Europe and across the world are therefore very relevant to China’s need for development and optimisation of air traffic, management operations and infrastructure. In this regard, the Working Group encourages Chinese stakeholders to establish a close and continuous dialogue with European industry to ensure that China derives maximum benefit from the available European technology.

Private Sector The aerospace sector benefits significantly from the role that private companies play in providing new ideas and technologies. These companies foster innovation both on the technological and managerial side of the sector, and are a great source of value to larger organisations worldwide.

The emergence of a more structured aerospace sector in China is moving the country one step further in technological prowess. While this positively contributes to building a more structured national industry, this has resulted in high barriers to entry for small and medium-sized, privately-owned players. Furthermore, the need for a robust intellectual property rights (IPR) framework is essential for smaller players to capitalise on their innovations and the weak enforcement in China makes them less willing to invest in R&D. Creating a supply chain ‘ecosystem’ that allows for different business

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models – adapted to specialised roles – to coexist, is a sure way to improve the global effectiveness of the sector, as has been proven on the international market.

Working Group members encourage the Chinese government to enact regulations that can again foster the emergence of these smaller players and allow foreign companies to build links with them to further strengthen the sector’s capabilities.

EU-China Civil Aviation Project (EUCCAP) The EUCCAP has advanced mutual understanding between Chinese and European institutions as well as Chinese and European businesses. Since the project started in 2010, more than five hundred Chinese aviation officials and experts have received training through it. Activities include many aspects of aviation, such as: rulemaking and enforcement; accident and incident investigation; development of general aviation; key elements of airworthiness, maintenance and operations; as well as important aspects related to air traffic management (ATM) and airports. When the project ends in October 2014, the Working Group hopes that the European Commission can devise a similar programme to continue technical exchange between Europe and China.

EU-China Disagreements The Working Group has seen various contentious issues related to the aviation industry come to the fore since 2011. The EU Emissions Trading Scheme (ETS) as well as the recently issued Airworthiness Requirements for Foreign Designed Civil Aviation Products Manufactured in China2 have highlighted a need to deepen dialogue between European and Chinese policy-makers. Whereas Working Group members respect and adhere to national and international regulations, it is important that policy-makers on both sides reflect on the wider impact that such disagreements may have. With aerospace being a truly international industry, the Working Group encourages dialogue between the various stakeholders to find mutually beneficial solutions to disagreements so the aerospace industry can continue to develop smoothly.

2 Civil Aviation Administration of China, “Airworthiness Requirements on Foreign Designed Civil Aviation Products Manufactured in China (Provisional),” May 18 2012

Key Recommendations 1. Deepen the Dialogue Between Chinese

and European Authorities in Aviation-related Fields to Reflect the Level of Trade Between Both Sides in this Sector

Concern Continuous political dialogue is crucial to ensure healthy competition and safety in the complex and highly internationalised aviation industry. The vast scale of EU-China commercial ties in aviation and aerospace is not matched by a regulatory and political dialogue to ensure the future health of trade ties. Given the strategic importance of the aviation sector for both sides, the political dialogue must be deepened and trust has to be rebuilt.

Assessment Aviation trade between Europe and China has grown rapidly over the past decades – both in terms of trade in equipment (aircraft, engines, and components) as well as international flights between EU and China. Yet political dialogue between EU and China in this area is lacking in scope and depth, and does not match the scale of commercial ties between Chinese and European companies.

In 2005 the European Commission and CAAC successfully held an EU-China Aviation Summit, which gathered more than 250 representatives from both sides, including the European Commission Vice President responsible for transport, the Chinese Aviation Minister, and a Vice Premier of the Chinese State Council. According to the joint declaration signed by both sides, the Summit was “highly successful in bringing together all key stakeholders and in serving as a platform for identifying priority areas and ways forward in closer EU-China aviation cooperation for the future.”

Unfortunately no Aviation Summit has taken place since 2005 and political dialogue in the field of aviation has not developed as envisioned at the 2005 Summit. Disagreements over various issues have revealed a lack of maturity in EU-China aviation ties, and a lack of mutual trust has hampered efforts to expand dialogue.

Given the rapidly expanding commercial ties between EU and China in the field of aviation and aerospace, the


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Working Group urges both the EU Commission and the Chinese government to step up the bilateral dialogue in this field. As part of this process, both governments should negotiate agreements that avoid duplications of existing certification requirements and ensure that both markets remain open.

The EUCCAP is an important tool to faci l i tate cooperation, and over five hundred officials and experts have received training through the program. However, the EUCCAP will end in October, 2014, and a new program needs to be considered by EU and Chinese authorities to ensure continuity.

Recommendation • Establish regular strategic-level aviation dialogue

between the EU and China. • Resume broader platforms for discussion like the EU-

China Aviation Summit last held in 2005. • Consider a new programme similar to the EUCCAP

after it ends in 2014.

2. Remove Market Access Restrictions in the Aerospace Industry

Concern Market access remains a concern for European players in the Chinese aerospace market, including barriers to both investment and trade. This hinders their ability to contribute with advanced technology and high-tech employment opportunities, and hurts the long-term growth potential of China’s manufacturing and service capabilities in the field of aviation.

Assessment A number of regulations restrict the market access of foreign players in the Chinese aerospace market. These restrictions can be divided into import barriers and investment restrictions.

Import tax on regional aircraft The import tax on foreign aircraft sold to China – including import duty and import value-added tax (VAT) – depends on the aircraft’s maximum operating empty weight (MOEW). The tax is significantly higher for smaller aircraft (see below table).

Import tax

Aircraft category Import duty

Import VAT

Total import

tax 25,000 kg<

MOEW<=45,000 1% 4% 5.04% kg

15,000 kg< MOEW<=25,000 5% 17% 22.85%

kg

This constitutes a big obstacle for foreign producers of regional aircraft to enter the Chinese market, and can be considered a protection of the local aerospace manufacturing industry. Equal treatment of all aircraft would give Chinese airlines greater flexibility when setting up their aircraft fleet and help optimise the mix of regional jet aircraft and regional turboprops – which all have different advantages in terms of distance coverage, fuel consumption and operating costs. This would lead to an increased efficiency of China’s civil aviation industry and reduce its environmental impact.

Investment and manufacturing Selection processes for foreign companies trying to participate in Chinese aerospace programmes are overly complex, with informal obstacles and a general lack of transparency.

The Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC) joint Catalogue of Industries for Guiding Foreign Investment lists aerospace manufacturing as one of the ‘encouraged’ industries in its latest edition. Despite this, foreign players seeking to invest in manufacturing facilities in China continue to face considerable restrictions. For instance, investments in the industry continue to be closely regulated and remain geared towards the establishment of joint ventures with large national conglomerates.

In addition, the selection processes for foreign companies trying to supply to Chinese aerospace manufacturers are overly complex, with informal obstacles and a general lack of transparency. This results in foreign companies deciding against participating in many of China’s new aerospace programmes.

These issues have negative consequences to the

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Chinese industry as a whole. It not only deters foreign companies from investing in the country but also hinders the development of a private network of players common in other major aerospace nations. Increased liberalisation in investment in aerospace – both for foreign players and domestic private companies – would have a positive effect on China, raising the quality and competitiveness of its aerospace industry.

Regulatory issues On the regulatory front, new CAAC airworthiness requirements oblige foreign manufacturers to obtain CAAC airworthiness certification in order to manufacture or assemble aircraft or certain components in China. In the absence of a bilateral safety agreement between EU and China, this duplicates existing requirements for foreign manufacturers and discourages investment.

Recommendation • Introduce a uniform import tax for all aircraft. • Remove JV requirements which deter foreign

manufacturers from investing or expanding in China. • Revise the process for airworthiness certification for

manufacturing of foreign aviation products to avoid unnecessary duplication.

3. Improve the Operational Environment for the Aviation Industry

Concern Domestic and foreign players in China’s aviation industry – including airlines, OEMs, and suppliers of repair services – face operational constraints such as restrictive customs regulations and a lack of qualified pilots and technicians.

Assessment China’s aviation industry has been growing at a double digit speed over the past decades and its airlines now operate nearly two thousand aircraft that transported approximately 300 million passengers in 2012. This puts considerable pressure on the ecosystem of component suppliers and repair companies to support and ensure the safety of China’s aircraft fleet.

The Working Group’s recommendations concerning the operational environment have been divided into three parts: customs regulations, pilot training, and the import tax regime.

Customs regulations To ensure the competitiveness of China’s airlines, the country’s large and rapidly growing civil aircraft fleet will require a world-class ecosystem of component suppliers and repair organisations with operations near the customer. The operational efficiency of these companies is to a large degree dependent on customs and tax regulations. The Aerospace Working Group has since 2012 been engaged in a dialogue with the General Administration of Customs (GAC) on a number of topics concerning the aviation industry. This dialogue has improved mutual understanding and has led to a number of improvements, although a number of areas require further discussions. Below are five practical recommendations on how customs regulations can be improved to the benefit of the Chinese aviation industry.

1) Allow for 'deliver first, declare later' for qualified aviation organisations and companies

Considering the special nature of the aviat ion industry, with high safety requirements, large capital investments and critical time pressure, the Working Group recommends GAC to authorise organisations who have high qualification in the aviation industry and a good customs record to perform ‘deliver first, declare later’ for materials in case of urgent requests, e.g. for grounded aircraft. This procedure could help improve the punctuality of passenger air transport in China. The recommended qualifications for ‘deliver first, declare later’ are suggested below:

• Good reputation at customs, e.g. A class or AA class company.

• Approved by major aviation authorities, e.g. CAAC, the US Federal Aviation Administration or the European Aviation Safety Agency, as well as recommended by industry associations.

• Implementing enterprise resource planning (ERP) systems.

• Regular and non-regular audits performed jointly by both customs and aviation authorities.

• Other requirements which are recommended by GAC.

2) Allow the situation that the after repair parts may have the same part number (P/N) but different serial number (S/N) compared with the original ones

In some cases, unserviceable parts cannot be repaired, or a functional upgrade is needed before they can be reinstalled. In this scenario, the S/N is updated for the after repair part. These additional costs for update are


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claimed in the repair invoice and duties are paid by importer accordingly. The Working Group suggests that China Customs expand the definition of import and export repair to allow the situation that the after repair parts may have the same P/N but different S/N compared with the original ones.

3) Allow for exchange of parts, including exchange from bonded warehouses

Standard exchange refers to the practice of providing a serviceable part to a customer while returning the corresponding non-serviceable part to the supplier for repair. Compared with the traditional repair business, exchanging through a bonded warehouse reduces the lead time in repair and transportation, thereby improving the operation efficiency of airlines. However, this practice is not feasible under current regulations. The Working Group proposes the below exchange process, with corresponding customs procedures:

a) Returning an unserviceable part to the bonded warehouse (BWH hereinafter) from domestic customer

• Suggested customs procedure: allow returning the goods from within Mainland China to BWH and then declare this as export by customer and declare as inbound by BWH.

b) Sending a serviceable identical part to the customer from BWH

• Suggested customs procedure: allow exchanging of same parts with same or interchangeable P/N but different S/N; declare as outbound by BWH and declare as import by customer, customs duty paid by customer based on the invoice value.

c) Dispatching unserviceable parts to either overseas or domestic repair centres for repair

• Suggested customs procedure: allow declaring outbound/export repair by BWH for repair overseas; or declaring outbound by BWH and declaring repair import by domestic repair centre for repair in China.

d) Importing identical parts for storage in BWH • Suggested customs procedure: allow the returning part

to be the identical part with same or interchangeable P/N but different S/N; declare inbound by BWH for part returning from overseas; or declare repair export by domestic repair export centre and declare inbound

by BWH for repair return from China.

4) Allow for loan/lease of parts and tools from BWH Loan or lease of parts and tools is increasingly common in the aviation industry (as opposed to selling parts to airlines). Some bonded warehouses in China already provide this service to Chinese airlines. However, there are still no operational guidelines from government authorities for this type of business, including the qualification scrutiny process,declaration and duty payment procedures etc.

5) Allow aviation parts to be stored indefinitely compared to the current two years

The Provisions of the Customs of the People’s Republic of China on Bonded Warehouses and Cargos Stored Therein (GAC Order No. 105) states that parts in public BWHs cannot be stored for more than two years without movement (Chapter IV, Article 24). Until now a special authorisation by Customs has allowed exception to this requirement on an annual basis, but this is subject to approval by local customs offices and differences in implementation creates uncertainty.

This can create a major supply chain blockage for Chinese airlines as some parts need to be stored outside China and then imported on demand, for significant extra costs and potential delays. Allowing parts to be stored for more than two years (without movement) in public BWHs can improve on time delivery and performance of Chinese airlines, as shown by international best practice.

The Working Group therefore recommends GAC to provide written positions on this to ensure consistency in implementation by local customs. The Working Group further recommends that bonded parts are allowed to move freely within bonded facilities.

Pilot training China currently lacks qualified pilots. This restricts air transport development and may jeopardise safety with pilots flying at their maximum capacity. One reason behind the lack of pilots is that medical examination requirements for pilots in China are exceedingly strict and not in line with international practice. This restricts the number of pilots, leads to higher costs and capacity issues. In particular, many highly-qualified captains flying in Europe cannot pass this examination, restricting China from having access to world-class

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pilots. Medical examination requirements for pilots should be harmonised with international best practices. Furthermore, Chinese flight training organisation (FTO) capacity is lacking, and the quality of their practical training is impacted by the control of the airspace by the military. Very few foreign FTOs are approved by the Chinese government, which further aggravates the problem.

Import tax refunds on spare parts Chinese airl ines can apply for a refund of their international purchasing import tax and value-added tax (VAT) when buying equipment, spare parts or components for repair from international OEMs. The import tax and VAT refund policy for spare parts only applies to international transactions that are denominated in a foreign currency. In effect, this means that Chinese airlines are encouraged to purchase parts from abroad rather than locally.

This policy was meant to encourage Chinese airlines to internationalise, but now only serves to distort competition and discourage international OEMs from investing in China. This ultimately inhibits the development of China’s aerospace supply chain, and may damage the long-term development of China’s aviation industry. With a unified tax policy, foreign OEMs would be more inclined to invest in China by setting up local operations and support services for Chinese airlines.

Recommendation • Continue the improvement of customs regulations for

the aviation industry. • Improve pilot capacity by making better use of foreign

FTOs and easing medical requirements for foreign pilots working in China.

• Apply the same tax incentives to domestic and international transactions between foreign OEMs and airlines.

4. Promote General Aviation

Concern China’s general aviation (GA) industry has enormous growth potential, and the Chinese government targets a 19 per cent growth of the GA industry in the period 2011-2020.3 Yet GA is facing considerable obstacles to further growth, both in terms of regulation, infrastructure,

3 State Council, July 8, 2012, Opinions on Promoting Civil Aviation Development, available at http://www.gov.cn/zwgk/2012-07/12/content_2181497.htm

and personnel.

Assessment In order to promote GA growth China must make big changes to its flight infrastructure and airspace management, as well as measures to increase the number of qualified personnel.

Measures to promote GA should include a streamlining of flight-plan filing, clarifying jurisdiction and rules to control planes in flight, creating standards and best practices to increase transparency, as well as allowing managers and maintenance, repair, and overhaul companies (MROs) to set up shop to service the growing fleet. Many of these changes must be done simultaneously for them to have any meaningful effect.

General aviation companies in China have difficulties recruit ing quali f ied pi lots and technicians, and finding qualified personnel is sometimes even more complicated than buying the aircraft itself. This lack of personnel could bring about serious consequences to the development of the GA industry in China. This may also affect operational safety, as the safety of GA aircraft cannot be guaranteed without qualified personnel.

In 2012, CAAC and the Ministry of Finance jointly released measures to help develop the GA sector and simplify import procedures. This is an encouraging sign and the Working Group hopes that these measures will be implemented across the country. But the structure of CAAC is not optimised for GA development, since the responsibility of GA is shared between multiple departments.

Recommendation • Pursue the opening of the sky below four thousand

meters by developing clear guidelines and processes for operators as well as MROs in the GA industry.

• Create a dedicated and horizontal GA Department at the CAAC.

• Support training of pilots and technicians for both fixed and rotary-wing GA aircraft.


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http://www.gov.cn/zwgk/2012-07/12/content_2181497.htm


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Abbreviations ATC Air traffic control ATM Air traffic management BWH Bonded warehouse CAAC Civil Aviation Administration of China EASA European Aviation Safety Agency ETS Emissions Trading Scheme ERP Enterprise Resource Planning EUCCAP EU-China Civil Aviation Project FAA Federal Aviation Administration FTO Flight training organisation GA General aviation GAC General Administration of Customs JV Joint venture MOEW Maximum operating empty weight MOFCOM Ministry of Commerce MRO Maintenance, repair, and overhaul NDRC National Development and Reform Commission OEM Original equipment manufacturer P/N Part number R&D Research and Development SME Small- and medium-sized enterprise S/N Serial number VAT Value-added tax

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LANDERS INESTN & A MARKET SURVEY

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