The Management of Political Risk in the Overseas Mergers ANd Acquisitions of General Aviation Aircraft Company Limited of China Xi-yu Han1Wei-li Xia1 School of Management, Northwestern PolytechnicalUniversityXi’an China (rubyhan1008@yahoo.com.cn; xiaweili@nwpu.edu.cn) 1 Abstract- In this paper, at the background of the General Aviation Aircraft Co., Ltd. of China(GAAC) mergers successfully the Cirrus Corporation of American(CCA), by analyzing political risks which existing in the overseas mergers and acquisitions(M&A), other aviation or defense companies can draw on what preventive measures the GAAC takes to avoid risks. These mature experiences as a reference help other aviation companies of China to take effective measures preventing the political risk in the process of overseas M&A. Keywords - theGAAC, overseas M&A, the political risk, preventive measures I. THE POLITICAL RISK OF OVERSEAS M&A FOR AVIATION INDUSTRY Direct foreign investment is an important way of overseas M&A. By which multinational companies can avoid under the influence of the restrictions of investment and trade barriers form the host country. Overseas M&A is helpful for multinational companies to enter and occupy the market, achieve the integration of resources among global, implement the rapid expansion of business scale and achieve economies of scale eventually. In addition, they are serviceable for multinational companies to maintain the growth of earnings and to implement the diversification.etc[1]. Therefore, overseas M & A become the main way and inevitable choice for Chinese enterprises to expand into overseas markets rapidly and to adapt to the economic globalization. Especially the outbreak of financial crisis, Chinese companies ushered a rare for overseas acquisitions, by overseas M&A a growing number of enterprise enter into the foreign market, but the successful cases are few. There are still existing risks in the process of overseas M&A. Because business strategy is at the beginning of turning form domestic to international, companies are lack of experience, strategic planning and management has not yet reached the international advanced standard. Companies have to face the shortage of information, legal risks and cultural conflicts in the process of acquisition. These negative factors lead to the fail and unsatisfactory result. Even if M&A is successful, the companies will still face the adjustment of corporate strategy, restructuring, product planning, and cultural re-plastic, labor relations, liabilities, integration of competitiveness and a series of major business issues. The research data of McKinsey ____________________ This paper is sponsored by project of Ministry of Education Humanities and Social Science Fund, the research of industrial upgrading and risk management in aviation industry based on the capital market (Grant No.09YJA630133) shows that over the past 20 years, less than 50% of the largest enterprise M&A in the world achieve the desired effect, and 67% of overseas M&A are not successful in China [2]. With the deepening of globalization of economic and the liberalization of international air transport, Chinese aviation industry is facing increasingly fierce international competition. Therefore, it is necessary for domestic aviation companies to enhance the competitiveness and take the large-scale and intensive way. Allusion to the current situation of decentralized management and less competitiveness in Chinese Airlines, overseas M&A will result in significant economies of scale. However, as a system engineering, there are all kinds of hidden risks in the process of M&A, including political risks, foreign exchange risks, operational risks, management risks and project risks. Among them, the political risk is unfamiliar to Chinese enterprises. Because of the specificity of aviation industry, the limitations of understanding and the restrictions in the aspects of policies and regulations from the host country, making the political risk is particularly prominent in the process of overseas M&A: Firstly, the particularity of industry . Aviation industry is a strategic industry playing a major leading role. It is a leader and high-tech industry in enhancing national competitiveness. It is competitiveness reflects the competitiveness of advanced manufacturing [3]. Through overseas M&A, aviation companies can promote the increasing of manufacturing capabilities and economies of scale, achieve the complementary of product structure, technology and advantage. In addition by bringing the significant economies of scale, overseas M&A improves the competitiveness in the domestic and international market, expand the market share, consolidate and strengthen its dominant position further. Because of historical reasons, the U.S. and other Western developed countries are holding a contradictory state of mind for the M & A in China: For one hand, they hope the stable development of Chinese economic, which can promote the world’s economic; for the other hand, they fear that rapid development will beyond their control and pose a threat to their national interests. Therefore, aviation companies which carrying on the overseas M&A with developed countries will have to face many complex procedures: they not only need to obtain the approvals of corporate shareholders and general regulatory, but also should through the review of high-level government agencies including the Foreign Investment Committee in the U.S. In addition, they have to face the pressure come from the media. Secondly, the particularity of the market does. What the international market which aviation industry facing is not perfectly competitive market. Paulo Krugaacan said that," Aircraft manufacturing need large A. Driving force of the business growth economies of scale, so that the world market can only accommodate a small number of producers, and there must Today, the international general aviation industry has a be only a few of aircraft manufacturing center in the very broad market prospects, the potential of development world." Currently, in the international civil aircraft market, is very enormous. In order to develop general aviation the route aircraft is dominated by Boeing and Airbus. So industry, the GAAC should make use of their own aviation industry is in the oligopoly market. In such a advantages, adhere to the concept of "only partners, not market structure, with the expansion of aviation industry of rivals", trough the worldwide cooperation in a wide range one country, the interests of the others will be damaged[4]. to meet the demand of market better and achieve win-win In this case cited in this article, after the GAAC making a cooperation and common development. Recently the State successful acquisition with the CCA and achieving the Council, Central Military Commission issued "deepening layout of a global strategy, it must make changes to the reform of China's low-altitude airspace management existing pattern of interests in the international market of view", determine that by overall construction and reform aviation industry, and then play an impact on the aviation deepening, to develop fully and use effectively the industry of U.S. Thirdly, the restrictions of policies and resources of low-altitude airspace in the next 5 to 10 years. regulations from the host country. The government plays In order to grasp the opportunity of the reform, the GAAC an important role in overseas M&A. The attitude of proposed’ a leading development strategy" to achieve this government is reflected in the formulation of relevant goal. It began to look for resources from the global, copolicies and regulations[5]. For such strategic industry, once ordinate and use resources, changed from the simple use of the objectives of the operation of company are different their own resources to integrate and use the global from the host country's national interests, the host will use resources, and actively explored the approach of the policies of foreign trade, finance, balance of international acquisition. The M&A activity is driven just international payments exchange rate and economic basing on this strategic objective. As a leading global protectionism, even by changing legal to limit corporations manufacturer of aircraft, the CCA produced the highof transnational. Fourth, at the beginning of overseas M & performance ultra-light full composite piston aircrafts A, the understanding to the political risk is not sufficient. which are complementary products with the products of Western countries increasingly thought China as a the GAAC. Successful acquisition not only provides powerful competitor and protect themselves to limit its products with high performance and low-cost foe the development. The enterprises in China do not have deep national, but also lays a solid foundation for the GAAC to understanding in this regard, they thought naively that become a multinational company. these countries of long-running market economy will not have strong political color[6]. Playing less attention on B. Driving force of Internationalization political risks leads to the huge losses for the enterprises. In this paper, at the background of the GAAC mergers The GAAC has been working to become a leader successfully the CCA, by analyzing political risks which supplier in the products and services of international existing in the overseas M&A, other aviation or defense common aircraft, and the light piston aircraft is one of the companies can draw on what preventive measures the areas which the GAAC focus on. Because of the stable GAAC takes to avoid risks. These mature experiences as a performance, safe and reliable design, excellent reference help other aviation companies of China to take management team, excellent staff and skills, advanced effective measures preventing the political risk in the production equipment and expanding global networks and process of overseas M&A. international business in the CCA, it is favored by GAAC. The success of M&A makes the CCA to expand production further to consolidate its own leadership II. THE DYNAMIC ANALYSIS OF OVERSEAS M&A IN position in the global generic industry and to serve Chinese THE GAAC general aviation market better with quality products and The GAAC has acquired the largest manufacturer of services on the basis of maintaining of excellent piston type general aviation aircraft in the world – the performance and stability. After the acquisition, the CCA CCA. It is the first time for the Chinese aviation company will become a part of the GAAC, which will promote to acquire the aircraft machine manufacturers in developed rapidly the R&D, manufacturing, marketing and level of country. The GAAC is the core business of Aviation sales, and help the GAAC enter into the mainstream of the Industry Group. Its main models are researched, developed global market. In addition, this acquisition plays a direct and manufactured by our own. The CCA as a leading role in promoting changes from manufacturing to the global manufacturer of aircraft is the second largest whole chain. Acquiring the CCA as the first step of general-purpose aircraft manufacturing company and also implementing the international strategy, facing to the is the largest piston type general aviation aircraft distribution of Internationalization and building a manufacturers in the world. This successful acquisition multinational, lays a solid foundation for the GAAC to lays a solid foundation for the GAAC to become a open up the aircraft market in worldwide. multinational company. In the following, I will analyze the dynamic analysis of overseas M & A in the GAAC from the two aspects of the business growth and global competitive pressures[7]. III. PRECAUTIONS TO THE POLITICAL RISKS WHICH THE GAAC CARRIED ON IV. ENLIGHTENMENT OF THIS CASE Less than a month after the GAAC announced the By analyzing and summarizing the political risks and acquisition and made agreement with the CCA, the the preventive measures in this case, other aviation and acquisition was suffered a strong opposition from the U.S. defense enterprises in our country obtain the following government which intervene this activity with an excuse of Enlightenment in the process of overseas M&A: endangering the national security. After the signing of the agreement, some officials thought that selling CCA to A. Establishing an efficient and sensitive mechanisms in the Chinese means American will have to face the enormous parts of communication and coordination with national security risk. The M&A will enable Chinese to government of the host country obtain sensitive technology of aircraft manufacturing, and also make hundreds of Americans lose their jobs. Facing to It is easy for the aviation industry to meet the political risks the interference, the GAAC drew on fully the mature when they are in the process of overseas M&A because of experience of collaboration and communication with the particularly of it. In many aspects of political factors, international companies, especially the ways they used to the power of government from the host country has an avoid the risk and communicate with the host country, the obvious influence. For the one hand, the resistance from GAAC took effective preventive measures by reference to the government will directly lead to the failure of M&A. In avoid risks occurring. June 2005, when the China National Offshore Oil On the one hand, the GAAC made a timely Corporation acquired Unocal Corporation(CNOOC), the communication with the U.S. government. The two sides members of Congress required the department of the carried on a rational negotiation between each other. treasury to review the role of Chinese government strictly Firstly, the GAAC clarify to the U.S. that the smooth in this acquisition as the excuses of "energy threat", progress of the acquisition will help the two sides utilize "national security" and "deep-sea technology to master the their own strengths fully, overall and make use of the core" and so on. The high-level U.S. politicians also made resources better, promote the two sides to change from some handicaps to the CNOOC as the excuses of "energy simply using their own resources to integrating and using security" and "economic security", which lead to the the global resources finally. In terms of both companies, it failure of the M&A [8]. For the other hand, by analyzing of is an activity purpose for achieving a win-win and the successful case in many foreign airlines, we can common development. Secondly, with regard to the conclude that the government plays an important role in worrying about technology transfer and unemployment of guiding and promoting the success of the M&A. The employees, the GAAC and the spokesman of CCA made a behavior of German Aerospace Corporations, Aerospace timely response respectively: the GAAC stated that after Matra France, and Aerospace Spain Corporations is the success of acquisition, the main production of the CCA belonging to the behavior of market, but they are closely is still in the U.S. and the existing management team will connective with the attitudes of government. In the be remain, therefore there will be not have a phenomenon acquisition of European airline, the relevant national that hundreds of American lose their jobs; the spokesman government's attitude is to encourage, guided and promote, of the CCA indicated that the technology which is worried which lead to the success of acquisition. Therefore, the by the U.S., because of the possibility of transfer has been companies should pay more attention to the attitudes of the widely used in China, and it do not have any relationship host government in the process of overseas M&A, and with national defense. Because the production certification draw on the mature experience of the GAAC fully. When and quality control of the aircraft are all in the U.S., it will they perceived resistance from the host government, they take a high cost to transfer them aboard, the cost will should take a rational negotiations, communication and increase $35,000 for each one. Therefore, taking into coordination with the host government timely, clarify to account the factor of cost, the production will not be them that the evils if the failure take place and make an transferred. Thirdly, the GAAC clarified to the U.S. that if explanation on what they confused in order to eliminate the M&A fails, both of the companies will face to serious concerns of the host government. At the same time, damage, even many companies which are in the same aviation enterprises can seek to the protection from interest chain with the CCA will face negative influence by diplomacy and public opinion by the Chinese government that, and thus damp down the U.S. economy. and the media. By which, pressure to the U.S. government On the other hand, in order to ensure the smooth and ensure the smooth progress of M&A activity. progress of the M&A, at the same time of making B. Establishing a comprehensive system of risk management negotiation and communication with the U.S., the GAAC mechanism to enhance the level assessment of political carried on timely feedback to convey the information risk containing the political risks to Chinese government, by diplomatic channels pressured to U.S. Public opinion play Overseas M&A of aviation industry is a long and arduous a guiding role in the social mood of a country. By making project. Obtaining the control power of the target company full use of public opinion’s effect, the GAAC is just the completion of trading, which is far from to the propagandized vehemently in the aspects of catalytic role end of the behavior of the M&A. Completing the to the U.S. economy, increasing to the opportunities of integration of financial, human resources, technology, employment and contributions to the community by doing culture and other aspects are need to go through a long the GAAC pressure to the government. period. The period of capital payback is more than 5 to 10 years. Therefore, we should not only to analyze the assessment of political stability recently, but also to predict it in the future. The prediction of the process has a great of difficulty. Before the GAAC carried on the acquisition, they collected a full investigation and analysis of data in the aspects of the direct foreign investment, the level of economic development and balance of payments situation, political stability, the relationship between the goals of investment and economic development and so on. Then they analyzed and evaluated the relevant data concluding the sort of national political risks which are published by "The European monetary" magazine. The GAAC not only made an assessment to the level of macro risks, but also studied the micro risks, such as the risks which are caused by the extreme specificity of aviation industry[9]. The GAAC nipped the potential risks in the bud as much as possible by a comprehensive assessment of political risks. Therefore, before the M&A, the aviation enterprises need to establish systems of risk management mechanisms, in addition to make the assessment of political risks from the macro and micro aspects and to avoid the risks and carry on effective prevention timely. ACKNOWLEDGMENT This paper is sponsored by project of Ministry of Education Humanities and Social Science Fund, the research of industrial upgrading and risk management in aviation industry based on the capital market Grant No.09YJA630133. 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