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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