Joint Venture AVIC GE Civil Avionics System Co., Ltd.

The Joint Venture: AVIC GE Civil Avionics System Co., Ltd.

In 2011, U.S. based GE Aviation and Chinese AVIC GE Civil Avionics System Co., Ltd., both big players in the aviation industry, announced the signing of an agreement to form a 50/50 joint venture company. It was formally established in 2012 and the joint venture is still active.

There have been relations between the Chinese aviation industry and GE Aviation since the mid-1980s. The establishment of this GE-AVIC joint venture extended this relationship from engines into commercial avionics.

The aim of the AVIC and GE joint venture company is to develop and market integrated, open architecture avionics systems to the global commercial aerospace industry for new aircraft platforms. This system can serve as the central information system and backbone of the airplane’s networks and electronics and host the airplane’s avionics, maintenance and utility functions.

The U.S. shareholder: GE Aviation

The U.S. shareholder is GE Aviation, which is a provider of jet engines, components, and integrated systems for commercial and military aircraft. GE Aviation is part of the General Electric (GE) conglomerate, which is one of the world’s largest corporations. In 2020, GE ranked among the Fortune 500 as the 33rd largest firm in the United States by gross revenue. In 2021, the company announced it would divide into three public companies, which will focus on aerospace, healthcare, and energy.

GE Aviation is among the top aircraft engine suppliers and offers engines for most commercial aircraft. It manufactures engines under its own umbrella, but also partners with other manufacturers, such as the French company Safran Aircraft Engines. Together they have established CFM International, which is the world’s leading supplier of aircraft engines. As of 2019, CFM International holds 39% of the world’s commercial aircraft engine market share. GE Aviation itself holds a further 16%.

The Chinese shareholder is AVIC Civil Avionics Co., Ltd., a State-Owned Enterprise. It was founded in 2010 when Aviation Industry Corporation of China (AVIC) and the Shanghai Municipal People’s Government signed a “Framework Agreement for Joint Investment and Development of Civil Aircraft Avionics Industry Cooperation”. The company was incorporated in Shanghai on January 16, 2011, with a total registered capital of 4.5 billion yuan.

Thus, AVIC Civil Avionics is a subsidiary of AVIC, one of the 10 key military-industrial conglomerates. Conglomerates in China consist of the 97 central enterprises directly supervised by the State-owned Assets Supervision and Administration Commission (SASAC) of the State Council. They are central to driving forward China’s command economy in key industries such as energy, aviation, finance, telecommunications, and transportation. Ten of these conglomerates, including AVIC, form the backbone of the Chinese national defence industry and are directly invested in China’s National Military-Civil Fusion Industry Investment Fund. This fund in turn constitutes the engine room of China’s military-industrial complex – allowing resources, knowledge, and equipment to flow fluidly from enterprises to the country’s defence industry.

AVIC has 100-plus subsidiaries and 450,000-plus employees. The Beijing-based conglomerate is one of the biggest military contractors in the world, with revenue of 461.8 billion yuan ($68.5 billion) last year, according to data compiled by Bloomberg. AVIC is active in commercial and transport aviation, but mostly in production and R&D of military aviation, such as bombers, radar aircraft, unmanned aerial vehicles (UAVs). Through its many subsidiaries, it manufactures some of China’s leading fighter aircraft such as the J-10, J-11, and J-20. According to SCMP, AVIC has a monopoly on military aircraft manufacturing and maintenance. AVIC is thus “of high strategic importance to China’s national defence and acts as the backbone of the country’s military and civilian aviation manufacturing industry”, according to Fitch Ratings.

The U.S. is aware of the potential risks this poses. In 2017, the U.S.-China Economic and Security Review Commission – which advises the U.S. Congress – commissioned a report to look into how the Chinese government was growing its aviation manufacturing business and the resulting military implications. “AVIC … has undoubtedly been the most prolific investor in U.S. aviation,” said the report, compiled by the Rand Corporation, an American think tank.

In December 2020, seven of AVIC’s subsidiaries were added to the U.S. Commerce Department’s list of Chinese companies with alleged military ties. This makes them subject to a licensing requirement for certain sensitive items that are described in U.S. export control regulations. AVIC was also placed on the U.S. Department of Defence’s list of civil entities with ties to the Chinese military in June 2020, meaning it is subject to a U.S. investment ban.

Aerospace products are valuable exports for the U.S. economy and integral to its national security. Many aviation products fall under U.S. export-control restrictions. China’s investment in U.S. aviation companies is also subject to review and approval by the Committee on Foreign Investment in the United States. The committee is an inter-agency group of the U.S. government that reviews the national security implications of foreign investments in American companies or operations.

However, joint ventures are not screened by such export control policies, nor by investment screening policies, making it necessary to research the implications of such JVs. It demonstrates that it is still possible for U.S. companies to do business with China, even in sensitive, and strategic sectors. These joint venture entities can be viewed as a mechanism that circumvents the regulations in place.

The aviation sector is clearly linked to Made in China 2025 (MiC 2025). MiC 2025 is an initiative which sets to modernize China’s industrial capability, and was launched by Prime Minister Li Keqiang in 2015. This 10-year strategy focuses on intelligent manufacturing in 10 strategic sectors, one of which is aviation. It aims to secure China’s position as a global powerhouse in these high-tech industries. The plan involves replacing China’s reliance on foreign technology imports with its own innovations and creating Chinese companies that can compete both domestically and globally.

Besides its relevance for China’s Made in China 2025 policy, it is also linked to China’s Military-Civil Fusion (MCF) policy. MCF is the CCP’s strategy to develop the People’s Liberation Army (PLA) into a “world class military” by 2049. Under MCF, the CCP is systematically reorganizing the Chinese science and technology enterprise to ensure that new innovations simultaneously advance economic and military development. Xi Jinping personally oversees the strategy’s implementation. He chairs the CCP’s Central Military Commission and the Central Commission for Military-Civil Fusion Development.

The ten military-industrial conglomerates, including AVIC, are directly invested in China’s National Military-Civil Fusion Industry Investment Fund. Furthermore, aviation is mentioned as one of the technologies being targeted under MCF. The PRC specifically aims to exploit the ‘dual-use’ nature of many of these technologies, meaning they have both military and civilian applications.

The CCP is not just implementing this MCF strategy through its own research and development efforts, but also by acquiring technologies from abroad. AVIC’s strategy is in line with this. Since 2008, AVIC has spent at least $3.3 billion acquiring at least 20 aerospace, automotive and engineering companies, primarily in the U.S. and Europe, according to the U.S.-China Economic and Security Review Commission in 2019.

The policy of military civilian fusion in which AVIC participates ensures the strengthening of civilian technologies which in turn contribute to the consolidation of China’s military industry, this could jeopardise the U.S.’s international competitiveness and result in technology transfer and utilisation by the Chinese defence industry. The U.S. is aware of the risks, and AVIC is subject to a licensing requirement for certain sensitive items that are described in U.S. export control regulations, as well as being subject to a U.S. investment ban. However, Joint Ventures such as this one circumvents these regulations, making it possible to still do business with them.