China and Hong Kong: Aerospace Industry

Maine International Trade Center June 2012

Prepared by: Rachel Moser MITC Research Assistant

Table of Contents
Introduction: China ............................................................................................................................3 Shanghai .................................................................................................................................................... 4 Guangzhou ................................................................................................................................................ 5 Beijing ........................................................................................................................................................ 6 Aerospace Industry Overview .............................................................................................................7 Shanghais Aerospace Market....................................................................................................................... 7 Domestic Production .................................................................................................................................... 9 Aerospace Product Imports ........................................................................................................................ 10 Aerospace Trade and the United States ..................................................................................................... 12 Opportunities .............................................................................................................................................. 12 Introduction: Hong Kong .................................................................................................................. 15 Aerospace Industry Overview .................................................................................................................... 16 Hong Kong International Airport ................................................................................................................ 16 Aerospace Industry Imports........................................................................................................................ 19 Opportunities .............................................................................................................................................. 21 Trade Statistics ............................................................................................................................................ 22

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China
Since the late 1970s China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role - in 2010 China became the world's largest exporter. Reforms began with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, creation of a diversified banking system, development of stock markets, rapid growth of the private sector, and opening to foreign trade and investment. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2010 stood as the second-largest economy in the world after the US, having surpassed Japan in 2001. The dollar values of China's agricultural and industrial output each exceed those of the US; China is second to the US in the value of services it produces. Still, per capita income is below the world average. Economic development has progressed further in coastal provinces than in the interior. The Chinese government is seeking to add energy production capacity from sources other than coal and oil, focusing on nuclear and alternative energy development. In 2010-11, China faced high inflation resulting largely from its credit-fueled stimulus program. Some tightening measures appear to have controlled inflation, but GDP growth consequently slowed to near 9% for 2011. The government's' 12th FiveYear Plan, adopted in March 2011, emphasizes continued economic reforms and the need to increase domestic consumption in order to make the economy less dependent on exports in the future. 1 The US is Chinas largest export partner and third import partner (see table below). Oil seeds, industrial machinery and electric machinery are among the top US commodities imported to China in 2010, followed by aircraft, vehicles and cotton. 2
Top China export and import partners Export partners %Total Import partners United States 18% Japan Hong Kong 13.8% South Korea Japan 7.6% United States South Korea 4.4% Germany Germany 4.3% Australia %Total 12.6% 9.9% 7.3% 5.3% 4.3%

Chinas Economy GDP: $11.3 trillion (2011 est.) GDP growth: 9.5% Unemployment rate: 6.5% Inflation rate: 5.4% Exports: $1.9 trillion (2011 est.) Imports: $1.7 trillion (2011 est.) Currency: renminbi yuan (RMB) per US dollar 6.445 (2010)

Economy

China demographics Population: 1.3 billion (July 2012 est.) Population growth rate: 0.5% (2012 est.)

Age structure: 0-14 years: 17.6% 15-64 years: 73.6% 65 years and over: 8.9% Median age: 35.5 years Urban population: 47% of total population (2010)

Major Cities: Shanghai: 16.6 million BEIJING (capital): 12.2 million Chongqing: 9.4 million Shenzhen: 9.0 million Guangzhou: 8.9 million
Source: CIA World Factbook

1 2

CIA World Factbook, www.cia.gov www.wisertrade.org

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Major Cities

Shanghai

Total Area: 6,340.5 km2 Total Population (2010): 23 million

Shanghai is one of the 4 autonomous municipalities and historically a commercial and financial center of China. Located at the heart of the Yangtze River Delta, Shanghai is not only the leading container port in China, but was the busiest container port in the world in 2010, handling 29.1 million TEUs in 2010, up 16.3% from 2009. In 2010, 57.3% of Shanghais GDP was attributed to services industries. The top 3 largest industries were financial services, retail and wholesale, and real estate. Shanghais heavy industries accounted for 78.4% of Chinas gross industrial output in 2010.

Shanghai is Chinas financial center. By the end of 2010, there were 910 financial institutions, including banks, insurance companies and securities companies, of which 173 were foreigninvested. The set up of the market operation head office of the Peoples Bank of China in Shanghai in 2005 has further strengthened the importance of this financial center. Shanghai is a major destination for foreign direct investment. About 300 of the worlds top 500 enterprises have invested in Shanghai, such as Delphi, GE, Mitsubishi, Itochu, Siemens and Hitachi etc. In 2010 Shanghai accounted for about 10.5% of Chinas total utilized FDI. The citys cosmopolitan character, sophisticated and affluent consumers, and highly educated and skilled labor force make it highly attractive to overseas investors. Shanghai is the largest consumer market among all mainland cities, supported by the rising income level and large inflow of tourists. Shanghai consumers are also being viewed as trend-setters for fashion and lifestyle products among the whole country. The citys retail sector is developing rapidly. Shanghais per capita disposable income of urban residents reached RMB31,838 in 2010, an increase of 10.4% from 2009. Retail sales of consumer goods grew by 17.3% to RMB607 billion in 2010. Source: Hong Kong Trade Development Council, Profiles of China Provinces, Cities and Industrial Parks: Shanghai

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Guangzhou
Total Area: 7,435 km2

Total Population (2010): 8.9 million

Guangzhou, also known as Canton, is the capital city of Guangdong Province - the largest economy in mainland China in terms of its GDP in 2009. The city was among the first batch of portal cities opened to foreign countries. Guangzhou is located in the middle of southern Guangdong, close to the South China Sea. Lying to the north of the Pearl River Delta, the city is 120 km northwest of Hong Kong and 145 km north of Macau.

Guangzhou has a convenient transportation system. Guangzhou Baiyun International Airport handled nearly 37 million passengers and 685,867 tons of freight in 2009, ranking second and third in mainland China. Guangzhou Port, ranked the third-largest container port in China in terms of cargo traffic in 2009, handled 11.2 million TEUs in the same year. Guangzhou is also easily accessible by railways and highways, as the Beijing-Guangzhou Railway, Guangzhou-Zhuhai Railway and Guangzhou-Zhuhai Highway go through the city. In 2010, Guangzhou's GDP increased by 13% from the year before to RMB 1060.45 billion, ranking third among all the cities in mainland China and first among all the cities in Guangdong Province. The metropolis has established the automobile, electronics and petrochemical industries as its main industries. In 2010, gross industrial output from these three industries rose 23.3% to RMB 664.96 billion, accounting for 45.17% of the output from enterprises with designed size and above. Guangzhou is the third largest consumer market in China after Shanghai and Beijing. In 2009, the sales of consumer goods amounted to RMB 364.8 billion, representing an increase of 16.2% from 2008. The largest consumption goods categories were textiles, food and beverages, and automobiles. Guangzhou was the capital city of three Chinese dynasties: the South Yue, the South Han and the South Ming. It has also served as a leading trade port since the middle of the eighteenth century due to ships from foreign companies, such as the British East India Company and Dutch East India Company, frequently passing through. It maintained its position as a leading trade port till the Opium Wars in 1840, after which more ports in China were opened to foreign countries. Source: Hong Kong Trade Development Council, Profiles of China Provinces, Cities and Industrial Parks: Guangzhou

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Beijing

Total Area: 16,411 km2 Total Population (2010): 19.6 million

Beijing is the capital of China and the country's political, cultural and international exchange center. One of the four autonomous municipalities in China, along with Shanghai, Tianjin and Chongqing, Beijing enjoys economic and administrative autonomy similar to a province.

The private sector in Beijing has developed rapidly. By the end of 2010, there were about 496,000 private enterprises, an increase of 228% from 2002. The service sector accounted for 75.1% of the citys GDP in 2010. Financial services, whole-sale trade and retail trade, and information technology services were the three biggest sectors, composing 13.2%, 13.3%, and 8.6% of the GDP respectively. The real estate sector recorded exceptional growth in recent years and accounted for 7.1% of the GDP in 2010. Beijing is pushing forward the development of its modern services sectors, including the development of outsourced services, cultural and creative industries. Beijing is one of the eleven outsourcing bases in China, and is also focused on their cultural and creative industry development program. Beijings industrial production is dominated by heavy industries and large enterprises. In 2010, heavy industries accounted for 85.4% of Beijings gross industrial output and large and medium size enterprises accounted for 76.7% of the output. Major industries include telecommunications equipment, transportation equipment, chemicals, machinery, metallurgy and food making. Purchasing power is strong in Beijing. In terms of per capita disposable income of urban residents, Beijing reached RMB29,073 in 2009, up by 8.7% from 2009. Huge consumption demand from both the local residents and tourists has made Beijing one of the biggest consumer markets in China. The city has three traditional shopping districts, Wangfujing, Xidan and Qianmen, which are well-known throughout the country. Due to development in recent years, new shopping districts have developed at or outside the third ring such as the Chaoyang District and Haidian District. Attracted by the size and potential of the consumer market, new department stores and shopping complexes have mushroomed in the past few years. Retail outlets such as supermarkets, convenience stores and warehouse clubs have also developed rapidly. Discount store outlets have also entered into the market. Source: Hong Kong Trade Development Council, Profile of China Provinces, Cities and Industrial Parks: Beijing

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Aerospace Industry Overview

Over the past decade, China has become one of the worlds fastest growing markets for civil aviation. Trailing only the United States, China is the worlds second largest national air travel market.1 As Chinas involvement in international markets becomes more prominent, the demand for aircraft, aircraft parts, and adequate infrastructure will continue to rise in upcoming years. Industry forecasts expect growth In 2008, Air China and Boeing signed an agreement for the order of Boeing 777s to remain strong over the medium and 737s to be used to expand international and domestic routes. Source: http://www.boeing.com/news/releases/2008/q3/080717d1_pr.html term, averaging 7 percent over the next 20 years. Some estimates have concluded that China will require 5,000 new aircraft valued at $600 billion, approximately oneeighth of the total world demand over a 20 year period.2 Although there are a number of domestic aircraft and parts manufacturers scattered throughout China, the industry remains vastly underdeveloped in comparison to the rising demand. In order to ensure quality standards, the most highly technical and sophisticated products will continue to be imported into China until domestic products meet international standards.2 More than half of Chinas General Aviation (GA)4 aircraft are foreign made, mainly from Cessna, Hawker-Beechcraft and Boeing.3

Shanghais Aerospace Market

Shanghai serves as the hub for much of domestic China and intra-Asia cargo transportation. According to one report, this transportation network is expected to expand by 9.9 and 8.1 percent in upcoming years.5 In fact, Shanghais goal of becoming a globally important aviation hub by 2015 has become attainable because of a deal signed between the Civil Aviation Administration of China (CAAC) and the eastern Chinese municipality's government.
1 2

RAND Aerospace Report: Ready for Take-Off: Chinas Advancing Aerospace Industry (2011). PDF Link China: Country Commercial Guide 2012. PDF Link 3 General Aviation Industry of China 2012 PDF Link 4 This sector of aircraft manufacturing covers all aircraft that are not for military use or used for scheduled flights (private and commercial aircraft available for charter or cargo). U.S. Aerospace Manufacturing: Industry Overview and Prospects (2009) 5 Project 2049 Institute: Chinas Commercial Aviation Sector looks to the Future PDF Link

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This agreement aims to speed up Shanghais aviation development; efforts will be made to ensure the safety of air traffic, improve aviation services, promote research and develop a larger system of passenger aircraft. Ultimately, the two airports in Shanghai, Hongqiao and Pudong, will be able to handle 100 million passengers and 5.5 million tonnes of cargo annually.6

Pudong International Airport

The Pudong International Airport is located in eastern Shanghai. This airport has accommodated an average of over 400 aircraft movements per day. This accounts for approximately 60% of the total aircraft movements in Shanghai. Pudong serves for about 50 domestic and foreign airlines and connects with over 90 international and regional destinations as well as 60 domestic locations.7

Hongqiao International Airport

Hongqiao International Airport is located in the western outskirts of Shanghai. It was the first civilian airport operating in Shanghai more than eighty years ago. Still, Hongqiao remains to be one of the three international air transit centers in China. There are currently 91 airlines that fly from the airport to both domestic and international locations.8 Technology parks in Kunshan and throughout in the greater Shanghai area have begun advocating a role in part of the aircraft supply chain: Preliminary Development Engineering Development Detailed Design Comprehensive Testing Airworthiness Certification

6 7

http://news.xinhuanet.com/english/china/2012-04/06/c_131509540.htm http://www.chinahighlights.com/china-flights/china-airport/shanghai-pudong-airport.htm 8 http://english.51766.com/detail/article_detail.jsp?info_id=1101358425

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Domestic Production
Chinese Design China currently produces two domestically designed commercial passenger aircraft: 9

MA60-Series Turboprop
This aircraft is a 60-seat airliner manufactured by the Xian Aircraft Corporation, an Aviation Industry Corporation of China (AVIC) subsidiary. According to Chinese official statements, 52 MA60 aircraft had been produced by September 2008, and as of March 2010, more than 150 orders had supposedly been placed; these orders came from 50 foreign airlines and more than 100 from domestic airlines.

ARJ21 Regional Jet

This aircraft is a 90-seat regional jet manufactured by the Commercial Aircraft Corporation of China (COMAC) partnered with Bombardier of Canada. Over the next 20 years, COMAC hopes to build 850 ARJ21s, with production rates starting at 11 per year in 2010 and growing to 30 per year by 2015. Up and coming aircraft production in China include: The COMAC 919 will be a single-aisle 130- to 170-seat narrow-body aircraft intended to compete with the Boeing 737 and Airbus A320. The project was launched in 2009 with the goal of initial production in 2014 and sales by 2020. Ultimate production goals for the C919 are 50 aircraft per year, to meet one-third of Chinas domestic demand and 10 percent of the international market. Foreign Design

C919

A320
The Airbus A320-series aircraft is produced by Airbus Final Assembly Line China (FALC), a joint venture between Airbus and a Chinese consortium of the Tianjin Free Trade Zone and AVIC (Aviation Industry Corporation of China). In September 2008, the final assembly of the Airbus A320-series aircraft opened in Tianjin, China. By August 2010, there was a total of 20 A320s and five A319s delivered to various airlines. By the end of 2012, the expected production rate is approximately 4 aircraft per month.

RAND Aerospace Report: Ready for Take-Off: Chinas Advancing Aerospace Industry (2011). PDF Link

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 ERJ-145
The Harbin Embraer Aircraft Industry Company (HEAI) is a joint venture between Embraer SA of Brazil and the Harbin Aircraft Industrial Group (HAIG) of China. The first ERJ-143, 50-seat regional jetliner, was delivered in February 2004. The venture is said to have struggle since the start due to the slow pace of orders and the frequent postponement of orders for various reasons. 9

Aerospace Industry Imports

According to the Civil Aviation Administration of China (CAAC), at the end of Chinas twelfth Five Year Plan (year 2015), China is expected to require between 10,000 and 12,000 general aviation aircraft of various types. During the next five to ten years, the number of GA aircraft that China utilizes is expected to increase by an average of 30 percent annually, and the value of the general aviation market is expected to reach more than 1 trillion Renminbi (RMB).9 The size of Chinas demand for aircraft far surpasses the countrys ability to supply these products. Recognizing that Chinas aerospace industry is not yet capable of designing and producing large commercial aircraft that are competitive with modern Airbus and Boeing products, Chinas government has allowed airlines to import such aircraft since the 1980s.9

Aircraft, Spacecraft, and Related Parts (HS Code 88)

Total Imports Imports from the U.S. % of U.S. Imports
Data Sources: Global Trade Atlas

Unit: USD thousands

2011 12,452,888 5,016,502 40

2009 9,615,616 4,593,207 48

2010 11,344,382 5,244,817 46

RAND Aerospace Report: Ready for Take-Off: Chinas Advancing Aerospace Industry (2011). PDF Link

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Key technologies and components such as engines or avionics are often manufactured in the West and imported into China for assembly. Below are two examples of the collaboration between U.S. companies in the manufacturing of Chinese aircraft: 9 ARJ21 Program US Partners Alcoa, Inc. B/E Aerospace, Inc. Eaton Corporation General Electric Goodrich Hella Aerospace Hamilton Sundstrand Honeywell International Kidde Aerospace (Hamilton Sundstrand subsidiary) MPC Products Corporation Parker Aerospace Rockwell Collins Rosemont, Inc. (Emerson subsidiary) Zodiac Air Cruisers Company C919 Program US Partners Eaton Corporation General Electric Contribution Advanced alloys for airframes, wing and fuselage stringers, floor beams, seat tracks; fasteners and miscellaneous structural components Oxygen equipment Flight-deck instrument panel and lighting controls Propulsion (engines, nacelles, and accessories) Lighting equipment EPS/high-lift/auxiliary power unit (APU) Flight control system integration and synthesis Fire protection APU, door system Fuel, hydraulic, and electrical flight controls Integrated avionics system (Proline 21) Windshield wiper and heater Emergency evacuation system Contribution Pipes for fuel and hydraulic systems Propulsion (CFM International); engine nacelle, thrust reversers (Nexcelle); avionics system core processing and display; onboard maintenance and flight data recording Exterior lighting; landing gear and engine nacelle components Electric power generation and distribution; cockpit pilot controls (side sticks, pedals, ect.) Flight control system; APU; wheels and tires, braking system; inertial reference and air data systems Fire and overheat protection systems Fuel and hydraulic systems Communication and navigation; integrated surveillance system; cabin core system

Goodrich Corporation Hamilton Sundstrand Honeywell International Kidde Aerospace (Hamilton Sundstrand subsidiary) Parker Aerospace Rockwell Collins

RAND Aerospace Report: Ready for Take-Off: Chinas Advancing Aerospace Industry (2011). PDF Link

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Aerospace Trade and the United States

There is a strong dependence on the international market for the success of U.S. aerospace manufacturers. The U.S. aerospace industry sold more than $95 billion in aerospace vehicles and equipment (including defense and space) to overseas customers in markets such as Japan, France, Germany, and the United Kingdom, and imported over $37 billion in aerospace products from abroad, providing a significant positive contribution of $57.7 billion to the U.S. trade balance in 2008.10 Japan, France, the United Kingdom, Canada, and Germany were the top five export markets for U.S. aerospace products in 2008, accounting for 36.2% of total aerospace exports worldwide.

Regional Jet Market

The regional jet market is primarily controlled by Canadas Bombardier and Brazils Embraer, the two major manufacturers of commercial aircraft in the world. Although no U.S. based firms produce regional jets, aircraft parts manufacturers still play a key role in the production. Engines, landing gear, avionics, and a wide range of other components can be exported for production in various countries. 10 U.S. aerospace exports One research group, Forecast International, projects that between 2009 and to China more than 2018 a total of 3,754 regional aircraft will be produced at an estimated cost of doubled between 2003 $115 billion. 10 and 2008, growing from $2.7 billion to $5.5 billion. General Aviation Aircraft Market The United States is an important player in the production of general aviation aircraft. For example, Kansas is considered the Air Capital of the World as it is home to business jet producers such as Cessna, Hawker Beechcraft, and Bombardiers Learjet. Wichita is the location of these companies production facilities. General aviation aircraft are in high demand in Chinese aerospace markets due to heavy intra-Asia and domestic travel. 10

Opportunities
Commercial opportunities in the civil aviation market include: 11

Final assembly and tier-one suppliers Small niche part manufacturers Airport design and construction companies General aviation aircraft

10 11

U.S. Aerospace Manufacturing: Industry Overview and Prospects (2009) China: Country Commercial Guide 2012. PDF Link

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Sub-Sector Best Prospects: Aircraft Parts: Manufacture and Repair Maintenance and repairs of the aerospace products imported into China become difficult to complete thoroughly due to the number of foreign products that fill the market. It is important that the Chinese aerospace industry contains efficient parts assembly, repairs, and manufacturing entities in order to keep up with international standards and ensure quality of aircraft. U.S. companies have the opportunity to filter final assembly and small niche part manufacturers into the Chinese market. Sub-Sector Best Prospects: Airports China currently has 180 civil aviation airports and plans to expand aggressively to 244 airports by 2020. The expansion will place 80 percent of Chinas population and 96 percent of its GDP within 100 kilometers of the nearest airport, greatly enhancing the potential for aviation growth. 12 Although the Chinese government announced plans to invest $64 billion to build and improve 97 airports by 2021, international companies will have the opportunity to participate in both design and infrastructure construction. Qualified companies may be approved to compete with domestic companies via a bidding process for design, consultation, surveillance, management, and construction of the designated civil airports projects.12 Sub-Sector Best Prospects: Business aviation According to 2009 projections by Bombardier, between 2009 and 2018 the Chinese market will require at least 300 business aircraft, while more optimistic projections put the figure as high as 1,000 or more. At the end of 2009, there were 50,000 business aircraft in the world, 18,000 of them in the United States alone. China only had 30 in commercial operation at that time. 12 Chinas GDP growth has continued to exceed 10% over the past three decades.13 As a result of the countrys economic escalation, the demand for intra-Asia business aviation will increase accordingly. Boeings Current Market Outlook 2010-2029 suggests that Asia-Pacific (China, India, Japan, Australia, and all of Southeast Asia) passenger traffic will grow from approximately 0.8 trillion RPK (Revenue Passenger Kilometers) to 3.4 trillion RPK, with more than one-third of that growth coming from Chinese domestic traffic. 12 Over the next 20 years, Boeing predicts that Chinese airlines will purchase 38 percent of the 10,320 aircraft, or about 3,900 new aircraft from their company: 13

12 13

RAND Aerospace Report: Ready for Take-Off: Chinas Advancing Aerospace Industry (2011). PDF Link General Aviation Industry of China 2012 PDF Link

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Boeings Current Market Outlook 2010-2029

Region
Asia Pacific North America Europe Middle East Latin America CIS Africa TOTAL

New Airplanes
10,320 7,200 7,190 2,340 2,180 960 710 30,900

New Airplane Deliveries by Region

3% 2% 7% 8% 34% Asia Pacific North America Europe Middle East 23% 23% Latin America CIS Africa

Source: Boeings Current Market Outlook 20102029

Major Airway Freighters

Air China Cargo China Cargo Airlines China Southern Airlines Great Wall Airlines Shanghai Airlines Cargo

Major Commercial Airlines

China Southern Airlines China Eastern Airlines Air China Hainan Airlines Shanghai Airlines Shenzhen Airlines Shandong Airlines Xiamen Airlines China Southwest Airlines China Northern Airlines

Source: http://www.azfreighters.com/azworld/az13603.cfm

Major Operators
Shenzhen Fedon International Transportation Best Services International Freight Ltd. Compass International Logistics

Source: http://www.chinahighlights.com/china-airline/

Source: http://www.made-in-china.com/manufacturersexporters/c5q0nolimit/Air_Freight-1.html

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Hong Kong
Hong Kong has a free market economy highly dependent on international trade and finance - the value of goods and services trade, including the sizable share of re-exports, is about four times GDP. Hong Kong's open economy left it exposed to the global economic slowdown that began in 2008. Although increasing integration with China, through trade, tourism, and financial links, helped it to make an initial recovery more quickly than many observers anticipated, it again faces a possible slowdown as exports to the Euro zone and US slump. The mainland has long been Hong Kong's largest trading partner, accounting for about half of Hong Kong's exports by value. Hong Kong's natural resources are limited, and food and raw materials must be imported. Hong Kong has also established itself as the premier stock market for Chinese firms seeking to list abroad. In 2011 mainland Chinese companies constituted about 43% of the firms listed on the Hong Kong Stock Exchange and accounted for about 56% of the Exchange's market capitalization. During the past decade, as Hong Kong's manufacturing industry moved to the mainland, its service industry has grown rapidly. Growth slowed to 5% in 2011. Credit expansion and tight housing supply conditions caused Hong Kong property prices to rise rapidly in 2010 and inflation to rise 5.3% in 2011. Lower and middle income segments of the population are increasingly unable to afford adequate housing. Hong Kong continues to link its currency closely to the US dollar, maintaining an arrangement established in 1983. 3 The United States is Hong Kongs second largest export partner and fifth import partner (see table below). Pearls, electric machinery and industrial machinery are among the top US commodities imported to Hong Kong in 2010, followed by optical instruments, edible fruits/nuts and plastic. 4
Top Hong Kong export and import partners 2011 Export partners %Total Import partners China 48.5% China United States 7.6% Japan Japan 6.4% Singapore Taiwan 4.6% Taiwan Singapore 4.4% United States
5

Hong Kongs Economy

GDP: $353.7 billion (2011 est.) GDP growth: 6.0% Unemployment rate: 3.3% Inflation rate: 5.0% Exports: $451.6 billion (2011 est.) Imports: $493.2 billion (2011 est.) Currency: Hong Kong Dollars (HKD) per US dollar 7.79 (2011) Education expenditures: 4.5% of GDP (2009)

Economy

Hong Kong demographics Population: 7,153,519 (July 2012 est.) Population growth rate: 0.421% (2012 est.)

Age structure: 0-14 years: 11.6% 15-64 years: 74.8% 65 years and over: 13.5% Median age: 43.4 years Urban population: 100% of total population (2010)
Source: CIA World Factbook

%Total 45.1% 8.5% 6.8% 6.4% 5.6%

3 4

CIA World Factbook, www.cia.gov www.wisertrade.org 5 http://www.tid.gov.hk/english/trade_relations/mainland/trade.html

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Aerospace Industry Overview

Air cargo plays a critical role in the economy of Hong Kong, where one of the largest and most efficient cargo transporters operates. The airport in Hong Kong recently surpassed Memphis to become the top cargo airport by tonnage, with Shanghai Pudong airport coming in third.6 In the Asia Pacific region, air cargo growth will total 6.3 percent per year during the next 20 Officials from Hong Kong Air Cargo Terminals Ltd. have praised the Hong years. Not only will cargo transportation grow Kong governments conditional approval of a third runway at Hong Kong in the upcoming decades, but commercial and International Airport. Source: http://www.aircargoworld.com/Air-Cargobusiness aviation will continue to increase. News/2012/03/hactl-endorses-third-runway-at-hkia/225851 Currently, Hong Kong is an international air traffic hub with 100 airlines operating extensive flight connections to 160 destinations worldwide.7 The Hong Kong International Airport provides a link in trade relationships between western countries and China as it is a central point of transportation in the Asia Pacific region. Among major Asia Pacific cities, Hong Kong has the fastest growing business aviation terminal in Asia, owing to its dedicated facilities for immigration and security. 8 Entrance into the Hong Kong aerospace market would also be valuable for access to Chinas aerospace industry. For example, high-value goods manufactured in southern China are shipped out of Hong Kong with reliable, transparent, and secure trade and logistics systems. 7 The confidence in Hong Kongs aerial transportation provides further incentive for investment.

Hong Kong International Airport (HKIA)

In 2011 HKIA handled 53.9 million passengers, 3.9 million tons of air cargo, and 333,760 total air traffic movements, already at about 98 percent of capacity. In order to adjust to the expansion of air traffic, the Hong Kong Airport Authority is proposing to build a third runway.8 Currently, HKIA is equipped with 2 terminals and 2 runways and has approximately 85 scheduled airlines serving Hong Kong. It operates about 5,600 scheduled flights weekly between Hong Kong and 150 cities worldwide, of which 40 are mainland China cities.8

6 7

http://www.boeing.com/commercial/cmo/asia-pacific.html Hong Kong: Country Commercial Guide 2012. PDF Link 8 US Commercial Service: Hong Kong and Macau: Aviation. PDF Link

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Based on the economic forecast and market environment, the International Air Transport Association (IATA) Consulting estimates that by 2030:9 Passenger throughput will reach 97 million, growing at a compound annual growth rate (CAGR) of 3.2%

Cargo volume will reach 8.9 million tonnes, increasing by a CAGR of 4.2% (2010: 4.1 million)

HKIA Demand Forecast 20 years. http://www.hkairport2030.com/en/masterplan/demand_hkia.html

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 Air traffic movements (also known as flight movements) are estimated to reach 602,000 with a CAGR of 3.2% (2010: 306,500)

These graphs provide evidence of the Hong Kong International Airports exponential growth in the future. Based upon these projections, it is clear that HKIA will uphold its position as the busiest cargo and passenger air traffic port in the world. Being the only airport in the area, the future of HKIA is vital to the aerospace industry and the connections it has to the rest of the Asia Pacific market.

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Ten Busiest Airports in 2010 by International Freight Throughput (millions of tons)

Source: AAHK sourcing Airports Council International

Ten Busiest Airports in 2010 by International Traffic Throughput (millions of passengers)

Source: AAHK sourcing Airports Council International

Aerospace Industry Imports

Hong Kong relies entirely on imports of aircraft, aircraft engines, and aviation equipment to meet its needs, as there are no aircraft, engine, equipment or components manufacturers in Hong Kong. 10
10

Hong Kong: Country Commercial Guide 2012. PDF Link

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There are fewer than ten major aircraft components and parts distributors and trading companies in Hong Kong. Most of these distributors also sell to the MRO (Maintenance, Repair and Overhaul) market and airlines in China and other Asian countries. U.S. aviation industry manufacturers should consider working with Hong Kong based distributors to access markets in China and Asia.10 Complete civilian aircrafts and aircraft parts are the second fastest growing imports from the United States, falling behind unmanufactured tobacco.

Aviation (AIR, APG, AVS) Market in Hong Kong

Total Market Size Total Local Production Total Exports Total Imports Imports from U.S. Exchange Rate: 1 USD
Notes:

2010 587,528 0 235,239 822,767 580,194 7.8

2011 1,732,877 0 331,076 2,063,953 1,471,215 7.8

2012 (estimated) 1,452,000 0 347,629 1,800,000 1,300,000 7.8

2013 (estimated) 1,535,000 0 365,000 1,900,000 1,400,000 7.8

1. Unit: USD thousands. 2. Total Market Size = (Total Local Production + Total Imports) (Total Exports) 3. Data Sources: Total Local Production: Hong Kong Census and Statistics Department. Industry Source Total Exports: Hong Kong Census and Statistics Department Total Imports: Hong Kong Census and Statistics Department Imports from U.S.: Hong Kong Census and Statistics Department Source: Hong Kong: Country Commercial Guide 2012

10

Hong Kong: Country Commercial Guide 2012. PDF Link

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Opportunities

Sub-sector Best Prospects: 11 Business jets and related services Training for air traffic controllers and maintenance personnel Consumable aircraft parts and expendable items Air traffic control related simulators and systems Airport planning and consultancy for Macau airport Forming partnership, joint venture or M&A with U.S. companies that hold PMA license Sub-Sector Best Prospects: Maintenance Repair and Overhaul (MRO) The growth of the MRO field is attributed to the increase of air traffic, the emergence of low-cost airlines, and new maintenance contracts signed between HAECO (Hong Kong Aircraft Engineering Company Limited) and major airlines in recent years. Through joint venture partnerships, HAECO has expanded into different cities in China and overseas. U.S. aircraft parts and engine suppliers should note these partnership arrangements.11 Sub-Sector Best Prospects: Business Aviation Fueled by an increasing number of high net-worth individuals and business magnates in Hong Kong and China in the last decade, the business aviation market also saw a remarkable annual growth rate of more than 20% in 2007. Asia Pacific is a new frontier with exceptional growth in private jet usage in the region. Among major Asia Pacific cities, Hong Kong has the fastest growing business aviation terminal in Asia. A third business jet hangar is under construction at Hong Kong International Airport to cater to growing demand. 11

Major Commercial Airlines

Cathay Pacific Airways Ltd Hong Kong Dragon Airlines Ltd Hong Kong Airlines Hong Kong Express

Major Airway Freighters

Air Hong Kong Limited Business Jets

Major Operators

Hong Kongs Key Suppliers: MetroJet Aircraft Boeing, Airbus, Gulfstream, Bombardier, Embraer Asia Jet Partners Ltd Jet Aviation Business Jets (HK) Ltd Engine Rolls Royce, General Electric, Pratt & Whitney Air Traffic Control Equipment Lockheed Martin, Indra, Park Air Systems, Raytheon, Selex, Sensis Corporation, Telephonics, Thales

11

US Commercial Service: Hong Kong and Macau: Aviation. PDF Link

21 | Aerospace Industry

Trade Statistics

US Exports to the World -Aircraft, Spacecraft, and Parts Thereof (HS Code 88)

Rank

Code

Description TOTAL Japan France United Kingdom China United Arab Emirates Canada Brazil Germany Korea, Republic Of Singapore Hong Kong Saudi Arabia Australia Ireland Turkey

ANNUAL 2010

ANNUAL 2011

APR 2011 YTD

APR 2012 YTD

%20102011 9.85 -5.12 -1.39 17.46 10.92 103.9 0.99 21.07 5.68 6.34 2.06 77.06 -44.62 21.66 -15.72 27.85

%20112012 24.99 110.29 9.63 28.35 98.5 314.33 -15.65 3.85 -3.32 114.94 -0.57 102.69 467.24 48.68 -24.16 -48.8

1 JPN 2 FRA 3 GBR 4 CHN 5 ARE 6 7 8 9 10 11 12 13 14 15 CAN BRA DEU KOR SGP HKG SAU AUS IRL TUR

79,687,160,232.00 87,532,455,897.00 25,896,567,097.00 32,367,496,660.00 5,110,522,894.00 4,849,119,375.00 1,397,028,175.00 2,937,795,339.00 7,216,678,451.00 7,116,668,154.00 2,439,892,102.00 2,674,814,259.00 5,769,807,738.00 6,777,357,163.00 2,011,116,588.00 2,581,348,672.00 5,762,912,930.00 1,779,655,969.00 5,547,460,458.00 4,469,940,854.00 5,369,332,074.00 2,430,810,796.00 3,806,537,160.00 1,404,367,001.00 910,291,752.00 1,625,486,300.00 1,714,838,077.00 2,234,616,997.00 6,392,286,573.00 3,628,700,959.00 5,602,328,788.00 5,411,765,888.00 5,674,397,251.00 2,585,000,174.00 3,884,861,661.00 2,486,624,200.00 504,138,325.00 1,977,617,991.00 1,445,264,740.00 2,856,914,205.00 1,201,089,592.00 438,651,435.00 2,055,288,231.00 1,574,484,308.00 1,660,184,470.00 613,234,581.00 1,266,734,883.00 490,178,754.00 149,888,330.00 499,254,110.00 842,295,408.00 1,205,156,186.00 2,384,159,021.00 1,817,459,954.00 1,733,604,468.00 1,635,047,190.00 1,605,099,516.00 1,318,079,993.00 1,259,566,489.00 993,551,223.00 850,223,772.00 742,279,387.00 638,756,961.00 617,076,848.00

22 | Aerospace Industry

Maine Exports to the World -Aircraft, Spacecraft, and Parts Thereof (HS Code 88)
Rank Code Description TOTAL Singapore Japan Korea, Republic Of Switzerland Germany Canada Macao China New Zealand Poland Philippines Kenya India Peru Hong Kong Papua New Guinea ANNUAL 2010 103,690,732.00 17,720,869.00 5,034,211.00 15,065,980.00 1,014,437.00 25,330,593.00 3,991,451.00 3,779,500.00 8,529,325.00 6,137,512.00 0 221,250.00 119,500.00 65,000.00 19,273.00 10,035.00 7,000.00 ANNUAL 2011 267,720,800.00 64,394,665.00 29,050,959.00 42,960,995.00 9,450,239.00 22,359,450.00 9,446,703.00 8,913,604.00 6,526,396.00 12,415,660.00 2,529,687.00 0 0 0 0 0 0 APR 2011 YTD 77,262,877.00 19,378,594.00 7,149,446.00 9,358,317.00 1,157,136.00 4,509,835.00 3,109,324.00 2,978,272.00 1,763,516.00 4,533,489.00 0 0 0 0 0 0 0 APR 2012 YTD 66,144,203.00 14,557,420.00 11,399,812.00 9,782,121.00 7,918,484.00 5,053,406.00 4,209,979.00 2,377,338.00 1,938,138.00 1,463,049.00 1,450,601.00 0 0 0 0 0 0 %2010- 2011 158.19 263.38 477.07 185.15 831.57 -11.73 136.67 135.84 -23.48 102.29 0.inf -100 -100 -100 -100 -100 -100 %2011- 2012 -14.39 -24.88 59.45 4.53 584.32 12.05 35.4 -20.18 9.9 -67.73 0.inf 0.nan 0.nan 0.nan 0.nan 0.nan 0.nan

1 SGP 2 JPN 3 KOR 4 5 6 7 8 9 10 60 61 62 63 64 65 CHE DEU CAN MAC CHN NZL POL PHL KEN IND PER HKG PNG

23 | Aerospace Industry

US Exports to Hong Kong -Aircraft, Spacecraft, and Parts Thereof (HS Code 88)
Rank Code Description TOTAL SELECTED COMMODITIES Civilian Aircraft, Engines, And Parts Parts Of Balloons Etc, Aircraft, Spacecraft Etc Aircraft Launch Gear; DeckArrest; Gr Fl Train; Pt Balloons & Dirigibles; Gliders Etc Parachutes (Including Dirigible Parachutes) Rotoch Aircraft, Powered; Spacecraft & Launch Vehicles ANNUAL 2010 1,404,367,001.00 1,400,454,003.00 1,611,152.00 2,162,101.00 45,500.00 94,245.00 0 ANNUAL 2011 2,486,624,200.00 2,473,469,410.00 11,304,614.00 1,799,427.00 3,267.00 47,482.00 0 APR 2011 YTD APR 2012 YTD %20102011 77.06 76.62 601.65 -16.77 -92.82 -49.62 0.nan %20112012 102.69 102.9 429.61 -92.55 94.89 -89.33 0.nan

490,178,754.00 993,551,223.00 488,351,782.00 990,879,916.00 484,112.00 1,302,111.00 3,267.00 37,482.00 0 2,563,919.00 97,021.00 6,367.00 4,000.00 0

1 2 3 4 5 6

8800 8803 8805 8801 8804 8802

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US Exports to China -Aircraft, Spacecraft, and Parts Thereof (HS Code 88)
Rank Code Description TOTAL SELECTED COMMODITIES Civilian Aircraft, Engines, And Parts Parts Of Balloons Etc, Aircraft, Spacecraft Etc Parachutes (Including Dirigible Parachutes) Rotoch Balloons & Dirigibles; Gliders Etc Aircraft Launch Gear; DeckArrest; Gr Fl Train; Pt Aircraft, Powered; Spacecraft & Launch Vehicles ANNUAL 2010 5,762,912,930.00 5,754,983,412.00 4,588,827.00 205,532.00 5,051.00 3,130,108.00 0 ANNUAL 2011 6,392,286,573.00 6,382,378,228.00 8,692,700.00 129,288.00 70,011.00 1,016,346.00 0 APR 2011 YTD APR 2012 YTD %2010- 2011 10.92 10.9 89.43 -37.1 1,286.08 -67.53 0.nan %2011- 2012 98.5 98.95 -47.15 108.13 0.inf -97.94 0.nan

1,201,089,592.00 2,384,159,021.00 1,197,568,390.00 2,382,549,915.00 2,710,794.00 54,527.00 0 755,881.00 0 1,432,564.00 113,487.00 47,514.00 15,541.00 0

1 2 3 4 5 6

8800 8803 8804 8801 8805 8802

25 | Aerospace Industry