This article is the first installment of a two part series on participation in China’s aerospace sector. This installment addresses the legal issues in China, the next installment will address the US regulatory issues.

As the aerospace sector has struggled in other regions during 2009, China sees sunny skies for its growing aerospace industry. The two principal players in the aerospace industry in China today are Aviation Industry Corporation of China (AVIC) and Commercial Aircraft Corporation of China (COMAC). The AVIC, which is the largest aviation company in China, is principally engaged in the development and production of military and commercial aircraft and components. In 2008 the Government of China approved the formation of COMAC to design and produce commercial aircraft with the goal of reducing China’s dependency on foreign-produced aircraft and to compete with Boeing and Airbus in the world’s markets.

COMAC has begun production of its ARJ21, a regional aircraft with seating capacity of 70 that has been designed and built with foreign assistance and has already been certified by the Civil Aviation Authority of China for domestic commercial use. According to recent press reports, COMAC has already received more than 200 orders from domestic and international carriers for ARJ21s.

COMAC has also commenced the design of its C919, a jumbo jet with seating capacity of more than 300 people. Lacking experience in the production of large commercial aircraft, China has invited other companies to participate in the design and manufacture of components and systems. For some components (e.g., engines and landing gear), COMAC will contract directly with foreign suppliers. For others, a China-foreign joint venture is preferred (e.g., cockpit panel components and systems, and electrical power distribution components and systems) or required (e.g., hydraulic and fuel systems).

The establishment of a China-foreign joint venture in the aerospace industry in China, particularly one involving a state-owned enterprise, will likely present the following issues:

  • Government approvals – Each non-PRC investment in the PRC including a joint venture, will be subject to government approval at some level.
  • Foreign ownership – Typically the PRC partner will be expected to hold more than 50 percent of the equity of the joint venture entity, presenting challenges if the foreign investor wishes to have management control. This often results in intense negotiation regarding the management personnel to be appointed by each party and the scope and limits on the authority of each.
  • Non-compete – The scope of a non-compete agreement typically becomes a difficult negotiation issue as the PRC partner wishes to enter the global market, conflicting with the common desire of the foreign investor to limit the China-based partner to China and far from its established markets in Europe and North America.
  • Transfer of equity interest – PRC law requires the approval of the joint partner for any transfer of equity interest to a third party. Any such transfer is subject to the approval of Ministry of Commerce (MOFCOM) and registration with the Administration of Industry and Commerce (AIC). If the PRC joint venture partner wishes to transfer, it also is subject to approval by SASAC in addition to MOFCOM and AIC. Such requirements may present challenges for the foreign investor, who typically desires to include put and call options (and sometimes tag-along rights) in such a contract.
  • Antibribery – Because the customer in China is typically a state-owned enterprise, it is essential to include FCPA and PRC antibribery compliance provisions in the contract.
  • Dispute Resolution – In most contracts with PRC state-owned enterprises, the forum and rules for resolution of disputes is the subject of considerable negotiation. In our experience, the most common resolution is the Hong Kong International Arbitration Centre.