SW CHINA AEROSPACE COMPANIES CLAIM U.S. EXPORT RESTRICTIONS

C O N F I D E N T I A L SECTION 01 OF 02 CHENGDU 000190

SIPDIS

COMMERCE FOR BUREAU OF INDUSTRY AND SECURITY
STATE FOR EAP/CM, ISN/EEC

E.O. 12958: DECL: 9/15/2019
TAGS: PARM EAIR EIND ETTC CH
SUBJECT: SW CHINA AEROSPACE COMPANIES CLAIM U.S. EXPORT RESTRICTIONS
HAMPERING INDUSTRY

CHENGDU 00000190 001.2 OF 002


CLASSIFIED BY: David E. Brown, Consul General, U.S. Consulate
General Chengdu.
REASON: 1.4 (d)

1. (C) Introduction and Summary: Following up on issues raised
by American business leaders during the Ambassador's August 28
meeting with members of the American Chamber of Commerce
(AmCham) Southwest China, Consul General met separately with
Lienjing Chen, Director of Manufacturing and Sourcing for Pratt
& Whitney's (P&W) China-based operations, and Don Benton,
General Manager of Timken (Chengdu) Aerospace and Precision
Products. Reiterating points made to the Ambassador, P&W's Chen
complained that U.S. restrictions on the export to China of
machinery that can already be legally sourced from Europe,
Japan, or domestically in China puts U.S. firms at a huge
competitive disadvantage -- a point also echoed by Benton. This
cable provides background that may be useful for U.S. members of
the Export Controls Working Group of the U.S.-China Joint
Commission on Commerce and Trade (JCCT),as they prepare for the
October 28-29 JCCT meeting in Hangzhou. End Introduction and
Summary.



Expanding Presence, But Hamstrung By U.S. Export Controls

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2. (C) Chen said that P&W plans to increase investment in its
China operations by a total of USD 85 million and will soon be
relocating its Chengdu manufacturing facility to a new location
in the city's Western High-Tech Zone. P&W is classified as a
"Tier I" foreign company by Chinese authorities, and the Chengdu
government expects it will be an "anchor" in the High-Tech Zone,
along with Intel Corporation. P&W will also be increasing its
ownership stake in the joint venture from the current 78.3
percent to as much as 90 percent. (Its minority shareholders
are Chengdu Engine Group Company (CEGC) and Aviation Industry
Corporation of China II (AVIC II)) All of the more than 500
types of components produced in Chengdu are exported to the U.S.
for assembly, he added. P&W sees great potential for increasing
exports of aircraft parts to China -- for example only 6.5
percent of the content in China's new regional jet, the ARJ 21,
is made by Chinese companies.




3. (C) More advanced machine tools, including 5-axis milling
machines, cutting lasers, and high-temperature coating
equipment, would help the Chinese aviation industry develop,
Chen argued. U.S. Department of Commerce export regulations,
however, prevent U.S. companies from selling this equipment to
China, even though European and Japanese companies already sell
these tools to Chinese companies, he asserted. As many as 10
Chinese companies also produce similar equipment, Chen stated,
asserting that U.S. machine tool manufacturers were
unnecessarily losing sales because of export restrictions.
(Note: Asked about domestic competition, Benton said in Timken's
case domestic Chinese bearing manufactures cannot yet produce
anything competitive with Timken's products. End Note.)




4. (C) The so-called "China Rule" causes significant additional
burdens for U.S. aerospace companies operating in China, who
need to have lawyers conduct China-specific reviews to ensure
they are in compliance with U.S. export laws, Chen continued.
He would like to see the rules simplified, so that a greater
range of equipment could be exported to China, and the burden on
P&W legal staff reduced. Chen asserted that most, if not all,
U.S. aerospace companies operating in China would like to see
these regulations changed, and referred to a "white paper" on
the topic produced by the American Chamber of Commerce in
Beijing earlier this year.




5. (C) In Timken's case, Benton complained of a USG decision
that he claims barred Timken from participating in a joint
venture project between Eurocopter and China's Chang He Aircraft
Industry Group (CHAIG) in Jingdezhen due to export control
concerns. Timken and its two primary competitors, SKF from
Sweden and FAG from Germany, control 80 percent of the aerospace
bearings market, he said. Timken would have supplied bearings
for the gearbox and transmission of the helicopter in question,
but SKF and FAG are supplying them instead, since their
governments do not restrict this activity. (Note: CG asked
Benton for details on the venture, the technology involved, and
which branch of the USG made the determination. Benton was

CHENGDU 00000190 002.2 OF 002


unable to provide the information at the time, but promised
follow-up. Post has so far heard nothing further. End Note.)



The Lure of the Chinese Market, If You Can Get In On It

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6. (C) Pratt and Whitney: While P&W's sales in China have been
flat this year, Chen said, he remains optimistic about the
potential for growth. P&W is seeking to expand its business by
supplying components for a domestically-produced Chinese
aircraft, the C919, that may compete with the Boeing 737 and
Airbus A320. The domestic Chinese content of the C919, which is
expected to be completed in 2016, may reach only 12 percent, and
P&W hopes to win the bid to supply its new Geared Turbo Fan
engine for use in the aircraft. Chen said that this greener
engine has a 12 percent increase in fuel efficiency and a 50
percent noise reduction over previous engine designs.




7. (C) Timken: In the area of helicopters, the 2008 Sichuan
earthquake provided a "wake-up call" to the government in that
it did not have enough helicopters for transport and rescue,
Benton said. China's current fleet is extremely small, Benton
said, and "If Timken can't get in on [this market], we'll lose.
It's the whole reason we came here." Despite claims of advances
by China's domestic aerospace industry, Chinese companies at
this point build only airframes for civil aircraft, he added.
Essential systems and components, including engines, avionics,
and landing gear, all must be imported or provided by foreign
firms. Whether with help from U.S. companies or from foreign
firms, Benton cautioned, China will build these new aircraft.



Comment: U.S. Export Controls Benefit European Competitors?

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8. (C) Comment: While Post is in no position to judge the
validity of arguments for relaxation of restrictions put forward
by P&W and Timken representatives, their comments do reflect
broad concerns voiced to post by the U.S. business community
about what they perceive as an overly cautious U.S. export
control regime, and one that has at times disadvantaged U.S.
firms to the benefit of primarily European competitors.
BROWN