DANGER ZONE: CHINA’S AEROSPACE ASCENT…AVOIDING THE COMING COLLATERAL DAMAGE

RECENT EVENTS HAVE HIGHLIGHTED THE NEED FOR COMPANIES TO EXAMINE THEIR SUPPLY CHAINS AND IDENTIFY THEIR POTENTIAL WEAKNESSES.

Aerospace companies with critical relationships in China have even more reasons to consider the risks inherent in their supply chains amid the growing number of challenges caused by:

• Supply chain disruptions
• Geopolitical uncertainty
• Rapid expansion of China’s aerospace industry
• Black swan events, including massive cyber security threats

AS CHINA’S AEROSPACE SECTOR BECOMES MORE SELF-SUFFICIENT, THE SIGNIFICANT CHALLENGE TO WESTERN COMPANIES GROWS.

Chinese aerospace companies are significantly expanding their investment in research and development (R&D). Additionally, the country’s domestic passenger traffic has increased 10.5 percent annually — one of the fastest growing markets across the globe. Government leaders have signaled their intention to build out the nation’s aerospace capabilities to stand on their own as much as possible, fractioning relationships with Western companies who have tight-knit connections with their suppliers.

It’s not only commercial aviation that China has its eye on but also the whole domain of space, with likely ambitions to become a sector leader in both military and commercial endeavors. In its efforts to match and surpass other global powers, the country’s military has set about improving its space program. Launches of reusable rockets, additional satellite services and participation in the global movement to contest the space domain are just the beginning of China’s recent forays into space. Current goals aim to send a person to the moon by 2030 in competition with the U.S. and NASA.

THERE ARE TWO CRITICAL AREAS OF CONSIDERATION FOR THE AEROSPACE SECTOR WHEN EVALUATING THEIR GLOBAL SUPPLY CHAINS WITH A PARTICULAR FOCUS ON CHINA. THESE INCLUDE:

1. National Aerospace Industry: China’s C919 narrow body jet is now being delivered to domestic airlines, making it a direct competitor to Airbus’s 320 and Boeing’s 737. This rise in both state-supported investment and R&D are direct challenges to the global aerospace and defense (A&D) industry.
2. Supply Chains: China’s dominance in the industry’s supply chain — from electronic components to raw materials — is just one of the risks for international A&D companies. Geopolitical uncertainty, the country’s focus on investing in satellite technology and the difficulty companies have protecting intellectual property (IP) rights necessitates rigorous due diligence for aviation and defense companies investing in the Chinese market or relying on its supply chain capabilities.

Beyond those challenges, unexpected occurrences — Black Swan events — such as pandemics, cyber security risks or natural disasters, while they cannot be fully anticipated, should also be planned for. Notorious for their incredible difficulty to predict, Black Swan occurrences are often global in nature, as evidenced with COVID-19. An ongoing Black Swan event, the turmoil in Ukraine has been requiring companies to think differently about the supply chain, moving to a ‘multishoring’ mindset to provide plan b, c and even d options when a crisis hits. Aerospace companies would do well to run scenario planning sessions as part of the due diligence for business decisions regarding China.

Each area below demonstrates specific risks for A&D businesses, and by better understanding the potential exposure, companies can take steps to protect themselves moving forward.

However, the timeline to mitigate risks is a very long one. Setting up alternative supply chains takes great effort. If companies are not already working on ways to diversify their supply chains, it may almost be too late.

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