Ken Nagy, CFA
Growth and Offsets in China
Trans-Pacific Aerospace Company (TPAC) intends to monetize its proprietary technology. TPAC and its joint venture partners intend to manufacture aerospace quality standard spherical bearings, rod ends and bushings (bearings) in China. Growth in China is two-fold: First the number of planes in China is expected to jump from 1,256 today to 4,330 over the next 20 years. With 3,000 spherical bearings on each plane the market is substantial. Second the offsets or obligations that original equipment manufacturers (OEMs) such as Boeing and Airbus owe China are approximately $ 16 billion. There are currently no manufacturers of spherical bearings in China.
China continues to transform much of its population and economy from poverty to a middle class environment. The urban population has doubled from 302 million in 1990 to 622 million in 2009 and is projected to approach one billion by 2025. There were 40 large cities that had more than one million residents in 2000. That number tripled to 122 in 2008. The Economist In¬telligence Unit (EIU) forecasts that there will be more than 200 large cities by 2025. Rapid urbanization calls for an integrated modern transpor¬tation system, and China’s government has responded with intense investment in infrastructure.
According to *ChinaView.com, China built six new airports in 2009, bringing the total number to 166 as of last December. The six new airports are Tuofeng airport in Yunnan Province, Batang airport in Qinghai Province, Lindu airport and Saertu airport in Heilongjiang Province as well as Shadi airport in Guangdong Province. The country's civil aviation industry invested roughly 60 billion yuan (8.82 billion U.S. dollars) in fixed assets in 2009.
*China View uses information from the Civil Aviation Administration of China
Beyond just the impressive growth of China and its infrastructure, there is the issue of offsets. Offsets are typically IOUs which original equipment manufacturers (OEMs) such as Airbus and Boeing owe after the aircraft is delivered. The OEMs are currently $ 16 billion upside down; this means they are required to buy back aviation goods amounting to 35% of each aircraft’s purchase price. With regard to new aircraft, OEMs are projected to pur¬chase a minimum of $ 64.5 million worth of bearings, rod ends and bushings for the 129 new aircraft scheduled for delivery to China in 2013 at the rate of $ 500,000 per aircraft. Looking beyond new aircraft, airlines and MROs should col-lectively purchase a minimum of $ 65.1 million in replacement parts for the current Chinese fleet at the rate of $ 50,000 per aircraft as part of regularly scheduled, routine maintenance.
In addition to the need for Bearings related to China aircraft, Bearings are a commodity typically in high demand and short supply. With only six competitors in the entire industry, the attitude among the competitors is that delivery will be based on the schedule of the Bearing manufacturer, not based on the needs of the customer. Consequently, lead times for Bearings are often 52 weeks or longer with slips in delivery from the originally scheduled delivery date being all too common. Delays in Bearing deliveries have resulted in delivery or scheduling delays for such high profile projects including the Joint Strike Fighter and the Boeing 787 Dreamliner. Boeing has tasked its Technology group with finding new Bearing manufacturers and the need for new manufacturers has been a common theme at recent Airframe Control Bearing Group meetings.
There have been no new manufacturers of Bearings since the late 1970’s. The TPAC/Guangzhou facility will be the first new manufacturer in more than 30 years. Because of the high demand for the products, TPAC believes that not only will it be able to sell products to Boeing and Airbus for aircraft earmarked for China, but also for other aircraft being manufactured by Boeing and Airbus for other customers throughout the world, thus opening up the opportunity to compete for the $ 1.1 billion in annual sales for all Bearings. In addition to the SAE self lubricating Bearings to be produced at the TPAC/Guangzhou facility, TPAC/Guangzhou also intends to produce another line of bearings specifically designed for use by Boeing, Airbus, Embraer, Goodrich Landing Gear, Honeywell and many other sub-tier contractors. These bearings are similar to the SAE Bearings and TPAC possesses the knowledge and technology to develop and produce these parts, opening up a $ 1 billion annual market to TPAC. TPAC intends to enter this market immediately following the qualification of its Guangzhou facility for the production of SAE self lubricating bearings. Boeing has offered full support to TPAC to assist it in developing these product lines.
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