GE ‘all in’ on aviation deal with China

By Howard Schneider, Tuesday, August 23, 8:55 AM

GRAND RAPIDS, Mich. — At a General Electric flight simulator here, the visibility has been set at near zero to mimic thick rain and clouds. But a video console near the pilot shows a vivid picture of nearby mountains precise enough to allow a plane to take off or land despite the conditions.

The system is one of several highly valuable next-generation technologies that GE has developed — and that the company has passed along to China as part of a joint venture with the state-owned Aviation Industry Corporation of China (AVIC).

Access to the world’s second-largest economy is critical for nearly any global company. Yet this often comes at a cost: the transfer of the very technologies that leading business officials — including GE chief executive Jeffrey Immelt, who heads an Obama administration panel on U.S. jobs and competitiveness — cite as essential to the United States’ economic future. The “synthetic vision” system, for example, could be worth millions of dollars to airlines, which could significantly reduce costs from weather-related delays.

GE, like other companies, must weigh which technologies should be brought to joint ventures with China and how to protect them from being stolen or misused. These decisions face virtually any executive trying to develop a presence in the country — from the most sophisticated technology firms, which worry about software piracy, to old-line industrial equipment makers, which have seen knockoffs of their products pop up soon after making deals with Chinese partners.

Under the agreement with AVIC, GE avionics will be on board a new Chinese commercial airliner that is likely to become a rival to aircraft produced by U.S.-based Boeing and Europe’s Airbus. The potential competition with Boeing, coming at a time when the United States is fighting to maintain its own manufacturing base, has stirred some American criticism.

But GE executives say they have had no second thoughts. China’s airplane market is booming, and the deal was too important to pass up, they said, even at the cost of sharing the avionics technology.

“We are all in and we don’t want it back,” said Lorraine Bolsinger, chief executive of GE Aviation Systems. She said new airplanes don’t come along that often, and that the chance to be part of developing a major new aircraft is not to be missed — even if most of the jobs will be in Shanghai or elsewhere in China.

“We don’t sell bananas,” she said in an interview here. “We can’t afford to take a decade off.”

But American business leaders wonder privately whether companies such as GE are at risk of giving up long-term strategic advantages when they agree to technology-transfer deals for shorter-term gain.

GE executives maintain that is not the case. They say that they negotiated robust protections in their contract with AVIC. The 50-50 joint venture, for example, has strict limits on employing Chinese nationals who have a military or intelligence background. A board committee that monitors compliance with the joint venture agreement is effectively under GE’s control and can, in a dispute, overrule the full board, Bolsinger said.

Said John Rice, GE’s Hong Kong-based vice president: “We are not naïve about it. Is there risk? Sure. But there is risk in any country.”

Studies by the U.S. Chamber of Commerce have criticized what the organization calls an intricate network of Chinese state policies meant to acquire as much technical capacity as possible from abroad in hopes of advancing China beyond being a source of cheap labor.

Demographics are making it urgent for authorities to develop their own higher-value products and technologies. China’s population is peaking, wages are rising and the pool of younger workers is in decline.

At the same time, China is hard to ignore. Hundreds of new planes are expected to be purchased in coming years by Chinese airlines and foreign firms operating in the country, and the Chinese government has put the power of its state-owned enterprises behind developing commercial aircraft to compete for that business.

GE’s joint venture with AVIC will employ about 300 engineers, software designers and others in the United States. If all goes as planned, it could boost GE’s fortunes in the avionics field, where it now ranks fourth behind market leaders such as Honeywell.

The number of jobs to be created in China would be much higher. GE executives say it is difficult to imagine otherwise. The “colonial” model — of multinationals making products in the developed world and selling them to the developing world — is long outdated, they argue.

The Obama administration, seeking to create jobs at home, has put a priority on boosting U.S. exports. The White House has tapped corporate leaders such as Immelt and Boeing chief executive James McNerney to help develop a strategy.

According to a statistical model used by the Commerce Department, U.S. exports to China last year supported more than half a million jobs. But that was dwarfed by imports from China, and the resulting $273 billion trade deficit represented a significant drain on U.S. employment.

American critics of China argue that it remains a state-controlled economy that takes advantage of its trading partners. These critics cite China’s managed exchange rate, which they say keeps Chinese exports artificially cheap in dollars and American goods expensive, as well as the use of government power and subsidies to support Chinese industries.

Immelt himself, in private comments in Rome that famously became public, questioned China’s sincerity in developing a truly open economy.

GE has been doing business in China for decades and the experience has been as varied as the kind of products involved. On some fronts, the company is fighting to protect its technology, while on others it is battling to get its American-made goods past Chinese import restrictions. Yet there are also what the firm considers unqualified successes, such as joint ventures with the Chinese in medical equipment. And the company is even looking to transfer some Chinese technology — involving high-speed rail — back to the United States.

That landscape is far more complex than when Rice first visited China in the late 1980s looking for local production of mechanical timers and other simple components used in home appliances being assembled in the United States. Since then, countries such as China, India and Brazil have pushed to develop their capacity for the making advanced equipment.

“Thirty years ago, it was easy for global companies to fly into some place and sell a jet engine or a gas turbine, leave, ship in the product, get paid and export the profits to shareholders in some other place,” Rice said. “What China and many countries figured out is that is not a path to long-term prosperity. . . . The old days are not working anymore in any country.”