Ever heard of COMAC? Not many investors have. Yet the Commercial Aircraft Corporation of China, to give it its full name, is set to become one of the world’s biggest aircraft manufacturers over the next two decades.
Today there are 14,500 aircraft in the global fleet. In 20 years time, just 3,000 of these will still be in service. But, according to Airbus, the total global fleet will have risen to 28,000. In order to fill the gap 25,000 new planes will have to be built.
Suppliers of aircraft components, large and small, are racing to get their share of this booming business.
Many of the aircraft will be assembled in China by the likes of COMAC. According to Rolls-Royce, over $1,200bn will be spent on aircraft for the Asian market in the next two decades. That’s greater than the size of the North American and European markets combined. And it is great news for the penny manufacturers who will help the Chinese build this colossal fleet.
The race to build Chinese airplanes
COMAC is a manufacturer that could become a major player over the next decade. Last week, it announced a huge order. It is to supply 100 aeroplanes to six companies including Air China, China Eastern Airlines and China Southern Airlines.
COMAC has already designed two models, no doubt incorporating the best features of existing aircraft. Its 78-105 seater ARJ21 is a rival to Bombardier’s CRJ and the Embraer 170/190. And its larger 168-190 seat C919 takes on the Airbus 320 and Boeing 737.
Its chief designer expects that around 2,500 of COMAC’s jumbo jets will be delivered over the coming 20 years. “The key is whether passengers will like our jets”, he explains. “As we have fully taken this into consideration when designing it, I’m confident we will not disappoint the market.”
But whether the passengers like the jets or not, COMAC can count on sales to China’s state-owned airlines. And this is a fact not lost on the world’s big aircraft component suppliers including Rolls-Royce, Eaton, Messier-Dowty, Goodrich and Meggitt. These are all setting up facilities in China to supply the country’s emerging aerospace industry, and following in their wake are a number of second and third tier suppliers.
But not all suppliers can follow suit. And that presents a serious opportunity for penny stock investors…
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How UK manufacturers could clean up in China
The rush to China was the main theme of a conversation I had last week with Steve McQuillan, Chief Executive of AIM-quoted engineering group Avingtrans (LON:AVG), and Mark Johnson, who runs the group’s Aerospace Division. We were at the Hinkley factory of Avingtrans’ subsidiary Sigma, where I watched the manufacture of high precision rigid pipe assemblies destined for the likes of Rolls-Royce and Eaton.
According to Johnson, there are many small-scale ‘mom and pop’ suppliers to the aerospace industry which will simply not be able to tackle the Chinese market. By contrast, Sigma has already set up a factory in China, replicating the one at Hinkley. This, McQuillan believes, gives Avingtrans many advantages.
While products can be developed using the skills and long experience of the UK team they can later be manufactured in volume at low cost in China. By switching production from one site to the other, Avingtrans can flexibly supply European and Chinese customers.
This arrangement has one extra merit that I have heard expressed by another AIM-listed manufacturer with Chinese factories, Stadium Group (LON:SDM). Its big customers are US and Europeans. They distrust the quality and reliability of Chinese-run factories and they prefer to deal with western management, while at the same time enjoying the benefits of low cost manufacturing.
Johnson thinks that many small suppliers will simply lack the wherewithal to follow it into the Chinese market. This could lead to a consolidation of the industry, with possible opportunities for Avingtrans to widen its range of products.
How to get the best of both worlds
Avingtrans is one of the many UK manufacturers enjoying strong trading. From a standing start four years ago its Sigma factory in China now has monthly sales of £100,000. Its Energy and Medical division, which supplies pressure and vacuum vessels for MRI scanners, for example, is prospering. And its range of other engineered and polished goods is enjoying the general industrial upswing.
But Avingtrans’ future will increasingly be linked to China. With expertise and manufacturing units in both Europe and Asia, McQuillan believes that Avingtrans has the best of both worlds. More importantly it seems that, as China becomes a major player in aircraft manufacture, and as the world’s aerospace suppliers hurry to the Orient, the Chinese are on board too.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
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