Textron’s Cessna Aircraft believes its agreement with Aviation Industry Corporation of China (Avic) will position the company to become a dominant player in the burgeoning Chinese aviation market, says Textron chief Scott Donnelly, dismissing concerns that the technology transfer involved could come with intellectual property risks.
Cessna in late March announced two agreements that involved joint ventures to build aircraft and expand other general aviation activities in China.
Speaking to analysts during a first-quarter earnings call this week, Donnelly says Cessna is finalizing the joint venture and beginning to work on obtaining the necessary Chinese business licenses to operate in the nation.
Plans initially call for the establishment of a completion center in Chengdu for the Citation Sovereign. This would expand into production of parts and assembly of the Sovereign, and longer term, the Citation Latitude.
He estimates that delivery of the first “local” aircraft would begin in late 2013, with full activity running by 2014.
But the “highlight” of the joint venture, Donnelly acknowledges, will be the development of a new aircraft. Although details are probably a few years away, “Certainly our expectation is it will be a larger, longer-range product than anything in our portfolio.”
This would push Cessna into a new market segment – one that it walked away from when it shelved the Citation Columbus large aircraft.
While several Original Equipment Manufacturers have been vying for a foothold in the Chinese manufacturing segment, Cessna’s agreement with its Chinese counterparts has raised some questions about intellectual property protection. “The recent joint venture with Avic could have negative long-term implications for Cessna and the industry,” says Bank of America Merrill Lynch analyst Ronald J. Epstein.
Donnelly acknowledges those questions, but says intellection property protection is more of a concern with consumer goods.
“As you get into some more sophisticated technology, there are some natural protections,” he says, adding, “It’s pretty easy for us.”
The aviation industry is more comparable to the automotive market, Donnelly says, noting that companies like Volkswagen and General Motors “that went in and set up joint ventures, did local manufacturing and really had a footprint in the country are the ones that not only enjoyed the growth of that market and helped make the market, but are still the brands and products that dominate that market today.”
He acknowledges attempts at “knockoff” automobiles, but says, “the reality is they really haven’t done that well … The Chinese are very brand conscious.”
For the aircraft business, “it’s even further down that continuum,” Donnelly says. “If you are in the country and you’re finishing final assembly on Sovereigns, you’re not going to see a country suddenly pop out with a Sovereign look-alike.”
He stresses that aviation is a global business and notes the extensive development and certification process involved in bringing new aircraft to market.
“If anybody’s going to try to take our intellectual property and do a knockoff of our products, that’s going to be a very, very public thing,” he says. “It’s years and years of development and a very, very difficult certification [process]. In our industry, with our kind of products, this is not an issue to worry about.”
He also believes that cooperation and collaboration reduces the risk overall. “[You’re] much better off being in that market and participating in that market than thinking you can avoid that market and not having to worry about IP,” he says. “You’re much more susceptible to have intellectual property issues if you are not in that market.”
But Bank of America Merrill Lynch’s Epstein has his doubts. “We do not believe the certification process alone protects Cessna’s intellectual property in the Chinese market,” he says.