Challenges Faced By Private Aviation Industry In China

Problems faced by the private aviation industry in China

The case opens against the backdrop of aviation industry in China which is strictly controlled by the government. The case study which acts as the nucleus of the paper provides a unique blend of two macroeconomic factors acting against one another which is ultimately proving disastrous for the growth of private aviation industry in the country. China hast a vast air space and second largest number of billionaires lagging just behind the United States. The country is the third largest country in the world as far as area is concerned and has an increasing consumer base. These two economic factors are capable of boosting private business jet industry in the country. However, the airspace in China is largely under the control of Chinese defence forces. The bureaucratic nature of the aviation control in the country prevented dynamic approval of flight plans supported by private jet owners. Moreover, the main airports of the nation like the Beijing Airport hindered smooth private jet operations by restricted the number of flights to two an hour. The government of China followed a stringent anti-corruption system. The government imposed heavy taxes on the importers importing private jets and also had a future strategy to impose a luxury tax on users of the private jets. These intense control and taxation measures jeopardised the growth of the Chinese private aviation industry. The scope of the study would rests on two issues which are opposing the growth of the private aviation industry in China. The first being intense government control and the second being lack of private investments. The analysis of the two issues would lead pointing out alternative solutions and recommendations for management of Airbus, the luxury jet company which is eyeing China to revive its own business.

This section would analyse the problem prevailing in the private aviation sector in China

(i) Problem identification:

An analysis of the case study shows that the private aviation industry in China faces several impediments in spite of the fact that the country has a second largest number of billionaires behind the United States. The following are the problems which the development of the private and luxury aviation is facing in China:

The Chinese Government exercises strict control over the private industry which impedes fast growth of the industry in the country in spite of the profitability which the latter can earn in the country. A leading Chinese daily, The China Daily reports that the poor administration and strict regulation of the private aviation makes it difficult for the private aviation companies gain permits to use China’s air space (Chinadaily.com.cn. 2018). The same is echoed in one of the editorials of the Diplomatic. The Government of China imposes strict control on private and in fact the Chinese economy in spite of being one the richest economies in the world is far from liberalism (The Diplomat.com. 2018). The strict control of the government is effective not only in case of foreign companies but also on the Chinese companies seeking foreign expansion. Beijing imposes limitation on foreign investment in order to prevent flowing of large amount of Chinese capital out of the economy. The government even tries to control Chinese firms operating in other other economies. As far as the private aviation industry is concerned, the leading manufacturers of private jets are headquarters in foreign countries. For example, Airbus is based in Leiden, Netherlands (Airbus.com. 2018). The Government of China imposes high taxes in goods and services imported from foreign countries (Tradecommissioner.gc.ca. 2018). The outcome of these strict government control and taxation on foreign companies including major foreign private jet manufacturing companies like Airbus are slow economic development and lowering inflow of foreign capital into the economy.

Implications of government control on foreign companies like Airbus

The second issue which the case study uncovers is discrimination against foreign companies which have impedes expansion of the latter. Deresky (2017) mentions that government of host countries often imposes high taxes on the foreign firms in order to promote their resident firms. This discrimination against foreign firms like Airbus forces them to pay high amount of taxes which would increase the expenditure of the later. The same restriction was enforced on Boeing which led to fall in the share price of the private jet maker (Forbes.com 2018).

(ii) Problem analysis and justification:

The analysis of the aforementioned problems would bring into light several findings:

The strict control of the Chinese Government would have several implications on the foreign companies particularly, Airbus and the economy as well. Stiglitz (2016) mentions that heavy tax impositions by governments of host countries result in tax expenditure of these companies, making their foreign operations unsustainable. Airbus is a Dutch private jet manufacturing company which has its operations in North America, Europe, Middle East and Asia. With the emergence of Asian markets like China as future global superpowers it has become very important for the company to expand its operations in the region. Aircraft companies manufacturing private and luxury jets predict that the demand for jets in China will surpass 6500 by 2036 (Ft.com. 2018).  This means that the Chinese market immense revenue prospect to the private aviation companies like Airbus. Airbus in order to take advantage of the emerging private jet market in China has already invested immense amount of capital in the country. The company has opened manufacturing facility in Tianjin in joint venture with Aviation Industry Corporation. The Financial Times reports that the aircraft manufacturing company has invested a colossal amount of $ 600 million in the market and is looking forward to invest further capital in the market. (Ft.com. 2018). Thus, it can be mentioned in the light of the above discussion that high tax imposition on foreign companies imposed by the Chinese Government would increase the investment cost for Airbus. Holmes, McGrattan and Prescott (2015) points out in this respect that private aviation is highly based on availability of advanced technology. This requires import for technology from technologically advanced markets like the US. This requires the management of the private aviation companies like Airbus to enjoy high level of decision making liberty in the country. However, the excess control of the government of China impedes smooth decision making which results in faulty decision making. The may result in adverse business effect on the company and the company may lose its customers to its competitors. Buettner, Overesch and Wamser (2018) oppose this claim of the previous author and points out that the foreign companies often exploit the resources of their host countries and indulge into corruptive practices in order to earn more practice. They support the control of the Government over the foreign companies like Airbus to some extent prevents the latter from indulging into corruptive practices and exploiting the resources of China. The Government of China has however taken decisions to reduce its control over foreign private aviation companies to give more decision making power to the latter (Forbes.com 2018). This decision of the Chinese Government would largely strengthen the business of Airbus in the country. The first outcome of of the relaxing of the laws controlling foreign aviation companies would be greater flexibility which Airbus would enjoy to expand its business in the country. Secondly, the reduction of legal formalities would reduce the expenditure the Dutch aviation company to comply with the complex Chinese aviation laws. Thus, more capital would be available with the company which it would invest to strengthen its business in China as well as the other South Asian markets which are showing signs of profitability. The third outcome would boosting the competitive position of Airbus, especially in the Asian market and bolstering its revenue generation. The Chinese operations of Airbus would as a result become financially more sustainable.

Discrimination against foreign companies and its effects

The foreign companies like Airbus face high level of discrimination before the Chinese Government in terms of permits, taxes as well as on legal grounds. Murphy and Willmott (2015) in this respect point out that foreign direct investments plays a very important role in boosting economic development of China. As far as private aviation sector in China is concerned, it can be pointed out that the country is largely dependent on the foreign aviation companies like Airbus to meet its requirements. Ezzamel and Xiao (2015) point out that the entry of foreign private jet manufacturers would strengthen the private aviation market in China, thus boosting its revenue generation. It would also boost the earnings of the Chinese Government in form of taxes it would earn from these foreign aviation companies. Deresky (2017) can reiterated in this case to point out that host country government often impose restrictions over foreign companies using taxation system and other mechanisms. These restrictions increases the expenditure of foreign companies which discourages from injecting further capital into the concerned host market. Cull et al. (2017) mentions in this respect that this reduction of FDI by foreign companies have negative implications on the host countries effected. The outcome of the reduction of FDI are slowing down of economic development, fall the employment generation, lowering of GDPI and tax earnings of the government. This analysis show that the issue of discrimination which the foreign companies like Airbus are subjected to by the Chinese Government would not only on the company but on China as a whole.

An analysis of the PESTLE of China shows that the country is experiencing increase in per capita income. This means that the country is the country is gaining economic strength (E in PESTLE stands for economic). This in turn means that the Chinese are experiencing increase in disposable income. The outcome of this disposable income would be more passengers opting for travel by private jet. This increase in demand would provide Airbus, which is already present in China with more markets for its luxury jets. However, the political (P in PESTLE stands for political) control which the government of China exercises over foreign companies like Airbus would prove to be impediments before the company. The strict laws (l in PESTLE) which the government imposes on the foreign companies would lead to increase in expenditure of Airbus to comply with the government policies and laws. Thus, it can be inferred that though China is a profitable market for Airbus, lack of government support would make it less sustainable owing to increasing expenditure.

PESTLE Analysis of China

The management of Airbus can consider the following to sustain its business in China and take advantage of the growing market of private aviation in the country. These alternatives need to be dissected and understood through assessing the pros and cons before adopting:

Airbus should enter into joint venture with the Government of China to strengthen its business in the country. Entering into joint venture with the government would enable the company to be entitled to some benefits like tax concessions and premises in special economic zones. The company would use these benefits it receives from the Government of China to set up more manufacturing and tertiary units, thus giving its Chinese more autonomy to operate. Thus, the company would be able to operate more operate more sustainably.

Airbus should establish a wholly owned subsidiary which should be listed on the top Chinese stock exchanges like the Shanghai Stock Exchange. This establishment of the wholly owned subsidiary would give several benefits to the company. First, the company being a listed company would be able to acquire the status of a Chinese company, thus avoiding the restrictions imposed on the foreign companies by the government. Secondly, the company would be able to sources immense amount of capital from the Chinese securities, thus making its Chinese operations financially sustainable. This would enable the company to reduce its expenditures and allow it to earn higher profits in the country.

Airbus can collaborate with Chinese officials so as to ascertain their greater say in the management. The Chinese air is under military control which should be educated about the greater prospects it can through the expansion of Airbus into China. Chinese often restrict foreign products and service with greater tax measures so as to save its own domestic economy. However, if China has equal say it can become partners and ease the privatisation process (Bräutigam and Tang 2014). It should also take greater advice which will encourage the privatisation. This can be done through frequent meetings, presentation and meetings with the aviation ministry of China.

The company can be included in the Chinese special economic zones like that of Shenzhen city in Guangdong province. These will enable the Airbus to enjoy certain benefits of the like easy taxation measures, greater autonomy in the operations and inculcating a business policy according to the needs, lesser government interference in the major decisions of the company (Wang 2013). This will ease the management process and bring ease in the business process.

Conclusion

A VRIO (value, rarity, imitability and organisation) analysis the alternative strategies which Airbus can take to expand shows that the strategies would add value to the company. This is because by acquiring properties in SEZ will enable the company to avail taxation reliefs from the Chinese Government which would boost its profits. Similarly, entering into joint venture to expand in China would enable the premium jet manufacturer to gain greater control over the Chinese luxury aviation market. This would enable to minimise threats of new entrants to the Chinese aviation industry (Porter’s model). The company can open more manufacturing facilities in the country and manufacture highly advanced jets which would make it difficult for newly entering premium jet firm imitate the jets manufactured by Airbus. The company by strengthening its Chinese subsidiary would be able to gain more control over the Chinese market. The company can use this organisational strength to expand its control over the supply chain of Chinese aviation industry. This would allow Airbus gain more power as a buyer of the Chinese aviation supply chain. Thus, this VRIO analysis of the alternatives in congruence with Porter five forces would enable Airbus to gain more control over the Chinese luxury aviation industry where it is present and aims to gain deeper penetration.

1. Airbus should deploy a strategic expansion which should ensure equally benefits to the parent country. China is facing slowdown yet the country has a mammoth manufacturing output and highest population in the world.
2. Airbus needs to undertake the international marketing actively in China. The company needs to assess the potential benefits store in for China which will ensure greater mobility for the country. This will restore the consistent GDP growth which is witnessing a lacklustre growth. Amidst the increasing globalization, mobility through private expansion in China will add economic prosperity.
3. The cross cultural barriers hampering the business can be better met by the running successful campaign, collaborate with market experts in the foreign country so as to cut the cross cultural barrier which is impeding the expansion process. Airbus should popularize the idea in China and collaborate with the local government and people and other pressure groups to influence the government.
4. Collaboration with the government officials to adopt a friendly taxation policy in order to facilitate the transition of the investment accruing to the mutual needs of both the parties.
5. China has a vibrant plan of one belt one road initiative and building the old silk maritime route which will open immense opportunity in terms of mobility, connectivity and communication (Swaine 2015). Airbus should use this opportunity as a bargaining chip to initiate privatization into Chinese air.
6. Airbus should negotiate to come into terms with the government and encourage participation of the government in the overall process. The Chinese restrictions can be transformed into a potential outcome if a well-informed steps and taken and Chinese officials are involved in the overall process.
7. Diplomatic engagement and enhancing the bilateral relations where the issues between the parties are solved diplomatically can be better way out. Like the Gulfstream which played a minor gimmick to change the name of the airplane G250 to G280. Similar initiative can be adopted by the company for greater acceptance of the company.
8. The company should initially gauge and critically assess the demands of the Chinese officials and then make its business policy accordingly(Liu and Dunford 2016). This will ensure long term sustainability of the company in a foreign nation which is necessary in foreign direct investment.

The following is the implementation plan which Airbus can take to establish its business in China more strongly:

Steps	Implementation particulars	Expected time(months)
1	Airbus management holds meeting with all the top officials	2
2	Form strategies	1
3	Meets the Government officials of Government of China	6
4	Obtains permits to establish a wholly owned subsidiary to be incorporated in China	12
5	Lists the subsidiary on Shanghai Stock Exchange	24
6	Transfers controls of Chinese operations to the Chinese subsidiary	24

Conclusion

On analysing the whole issue of the case study it can be concluded that China has huge potential in the aviation and other complimentary factors like huge population greatly contribute to the passenger count in the aviation industry. This immense potential needs be explored through effective collaboration and with greater diplomatic engagement. The government officials need to better inform through presentations in the business summits. China’s special economic zones further has immense benefits which the company can tap while expending simultaneously. China has been a major proponent of mobility, connectivity and communication in the eve of globalization. With its aspiring initiatives like belt road initiative which improves land connectivity, privatization of Airbus into China will enhance better air connectivity. The whole process will have benefits store for the stakeholders and propel the economic prosperity of the stakeholders and country.

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