Profile of Top Aeronautics Producers in Austria

UNCLAS SECTION 01 OF 03 VIENNA 000180 SIPDIS, SENSITIVE E.O. 12958: N/A TAGS: EAIR EIND ETTC TSPL AU SUBJECT: Profile of Top Aeronautics Producers in Austria REF: A) 2009 Vienna 1287 B) 2009 Vienna 1382 VIENNA 00000180 001.4 OF 003 Sensitive but Unclassified - Protect Accordingly. ¶1. (U) SUMMARY: This cable profiles four leading-edge aeronautics companies in Austria -- FACC, Diamond, Schiebel and Frequentis -- to illustrate how this export-driven industry has adapted to the dramatic aviation slowdown. Austrian firms have increasingly turned to foreign partnerships and investment (including by Chinese companies) to gain access to protected markets and to obtain the capital necessary to finance survival and expansion. This globalization will likely improve prospects for U.S. partnerships but continues to raise technology control issues. END SUMMARY. ¶2. (U) Given its small domestic market, Austria's aeronautics industry has always been heavily dependent on exports. High-tech industrial producers in Austria such as Pankl (high-performance transmissions),BRP Rotax (piston engines),and Isovolta (laminates) have long had distribution partners and/or subsidiaries in Europe and North America for logistical and marketing reasons. In the past few years, the industry has begun using foreign partnerships to acquire capital and overcome local-content regulations in regions such as China, the Middle East, and the United States. Four companies that epitomize this trend: FACC - - - ¶3. (SBU) In December 2009, the Chinese Xi'an Aircraft Industry Company (XAC) bought 91.25% of the shares of FACC (formerly Fischer Advanced Composite Components),a leading producer of high-tech composite systems for Airbus, Boeing, Bombardier, and Pratt & Whitney (Ref A). Industry expert Franz Hrachowitz told Emboffs that an industry trend towards fewer (but larger) suppliers had forced FACC into expansion mode -- and to expand, FACC needed the capital provided by the Chinese deal. Because the components produced by FACC for Boeing and Airbus are subject to U.S. and EU rules on technology transfer, FACC and XAC had to establish a "firewall" in order finalize the takeover: reportedly this firewall consists of a new Austrian holding company (Aerospace Innovation Investment GmbH) which stands between the FACC staff and its XAC owners. He noted, however, that company insiders are still concerned about potential export control issues. In an earlier 2009 deal, FACC agreed to build a composite manufacturing facility in Abu Dhabi in partnership with the Mubadala Development Company. According to Hrachowitz, some Mubadala representatives are unhappy dealing with Chinese partners rather than FACC. FACC will transfer to Abu Dhabi the manufacturing of some spoilers and flap track fairings for A330/340/380 for Middle Eastern customers. DIAMOND AIRCRAFT - - - - - - - - - ¶4. (SBU) Headquartered in Wiener Neustadt, Diamond claims to be the market leader in building small twin-engine aircraft, with a complete line of 2-5 seaters. Recently the company has started building highly efficient diesel aircraft engines (extending range, particular since Diamond's planes don't need specialized aviation fuel). While Diamond's planes are primarily sold for training and recreation purposes, they are starting to be used in civilian surveillance. In the last two years, the firm has sold planes to academies in China (50),Saudi Arabia (20),India (16),the U.S. (10),and Thailand (6); press reports in early January said Diamond had won a large order in Russia. To enter the Chinese market (where foreign investment in aviation is tightly controlled),Diamond partnered with Shandong Bin AO Aircraft Industries in 2006, building a plant outside Beijing to assemble up to 1000 aircraft per year. (COMMENT: Perhaps not coincidentally, Diamond did a major upgrade of its cyber-security in 2005/2006, aimed at preventing industrial espionage. END COMMENT) Despite solid sales, industry observers say Diamond is currently losing money due to the high R&D costs for its new small jet and diesel engines, and relies on military sales (reportedly 30% of revenue) to stay afloat. NOTE: Diamond has had a troubled compliance history with regard to U.S. export control regulations: in November 2008, two Diamond aircraft were confiscated by U.S. Customs in Bangor/Maine for carrying non-licensed infrared cameras en route to delivery in Venezuela (Ref B). SCHIEBEL INDUSTRIES - - - - - - - - - - ¶5. (SBU) As the sole manufacturer of high-quality unmanned surveillance helicopters ("Camcopters"),Schiebel has a unique segment of the UAV market. While most of its sales have been to military users, Schiebel is planning to expand its sales into civilian applications such as pipeline surveillance, border control and traffic management. We were told that Schiebel has found marketing the Camcopter worldwide to be an expensive and unwieldy VIENNA 00000180 002.4 OF 003 process, and as a result is seeking more capital investment. Schiebel signed a teaming agreement with Boeing in August 2009 to promote its Camcopter in the North American market: Camcopter production will remain for now in Austria (Wiener Neustadt) but Schiebel is opening a joint support hub with Boeing and will set up a U.S. assembly facility if sales warrant it. In 2007, Schiebel partnered with UAE's UAV Research and Technology Center to win a major contract. The jointly owned Abu Dhabi production facility has produced about 60 helicopters so far for the UAE military (NOTE: the UAE apparently capped foreign investment at 49%). FREQUENTIS - - - - - - ¶6. (SBU) Frequentis is the world's leading manufacturer of air traffic communication systems. Unlike the other three firms in the business, Frequentis has not teamed with a foreign partner to open a production facility, but rather has created wholly owned subsidiaries in the U.S., Australia, Canada, Romania, Singapore, Slovakia and the UK. Interestingly, Frequentis has confined software development largely to Vienna and nearby Bratislava, because, according to airport-aviation expert, Wolfgang Gallistl, Frequentis' technological advantage lies largely in software rather than hardware. An exception to Frequentis' centralized control is its U.S. subsidiary: because of 'buy America' requirements, Frequentis had to structure 'Frequentis USA' to do its own designing, manufacturing, and life cycle support. In 2004, the U.S. Defense Department's security regulations led Frequentis to set up 'Frequentis Defense' under a special security agreement in order to win military and homeland security contracts. Frequentis' only foreign joint venture 'GroupEAD' was formed with the Spanish and German national air control entities AENA and DFS in order to win EUROCONTROL contracts. Recently Frequentis has worked with Cisco to increase system interoperability and has sought to expand into rail, maritime, and emergency/security communications systems. The Homebodies - - - - - - - - ¶7. (SBU) By contrast, Austrian aeronautic metal producers have made relatively few foreign partnerships. AMAG Metall produces high quality, rolled aluminum while Boehler Schmiedetechnik produces highly stressed and forged steel and titanium components for airplane manufacturers such as Boeing, Airbus, Bombardier, Lockheed Martin, Embraer, Fokker and Cessna. WFL Millturn Technologies (a spin-off from Voest Alpine) specializes in making precision milled aeronautical components. An exception is MCE Stahl/Maschinenbau, a multinational steel producer headquartered in Linz. German firm Deutsche Beteiligungs became sole owner of MCE Stahl in 2008, and MCE has since moved some production to Germany (for instance, MCE recently won a EUR 70 million contract to help build Airbus 350 XWB fuselages, with work to be performed in Germany). A Strong Research Base - - - - - - - - - - - - ¶8. (U) Austria's aeronautics industry has grown from sales of about EUR 50 million in 1990 to EUR 800 million in 2008 due in part to the industry's own internal investment of 12% of revenues. The industry gives little credit to government investment in R&D even though the GoA likes to boast of its "Take Off" program (see www.bmvit.gv.at/innovation/downloads/takeoff. pdf ). However industry does say government-supported research centers have helped Austria maintain its technological edge. In order of importance, they are: - The Advanced Materials and Aerospace Technology Division (www.advanced-materials.at) of the Austrian Institute of Technology in Seibersdorf studies advanced composites and alloy development for aviation applications, but much of its work is aimed at space applications. - The FH Joanneum Research Center (http://www.fh-joanneum.at),based at the University of Graz, has an aviation R&D program which studies air traffic control technologies, navigation, flight data analysis and aviation psychology. - The Polymer Competence Center (www.pccl.at) in Leoben focuses on advances in plastics engineering. - The Light Metal Competence Center (www.LKR.at) in Ranshofen researches light aluminum and magnesium alloys for vehicle lightweight construction. Surviving the Downturn - - - - - - - - - - - - ¶9. (U) Gallistl predicts more rough years for the aeronautics industry (not just in Austria) -- with Europe-wide general aviation sales down 30%, and commercial aviation off 8-10% in passenger terms, and down 25% in revenue terms. Gallistl also foresees a shakeout among European aeronautics suppliers as quality and financial concerns drive major companies to gain more "vertical control" of their business. VIENNA 00000180 003.4 OF 003 COMMENT: Too Close For Comfort? - - - - - - - - - - - - - - - - ¶10. (SBU) Austria's most established aeronautics firms appear strong enough to weather the downtown while the shakier rising stars such as Diamond and Schiebel have recently gained entry into promising markets (China and the U.S. respectively) via foreign partnerships. However, the hunger for capital and market access may cause some aeronautic companies to get "too close for comfort" to technology-hungry foreign partners, leading to technology loss -- and potentially legal issues of technology control/compliance. END COMMENT. EACHO