Case Study 5 CHINA

Paulson Papers on Investment Case Study Series
Flying High and Flying Blind:

How One Chinese Buyout of a US Aviation Firm Soared While
Another Crashed
January 2017
Preface
F
or decades, bilateral investment manufacturingto identify tangible
has flowed predominantly from the opportunities, examine constraints and
United States to China. But Chinese obstacles, and ultimately fashion sensible
investments in the United States have investment models.
expanded considerably in recent years,
and this proliferation of direct investments Some of the publications in this Investment
has, in turn, sparked new debates about series look ahead. For example, our
the future of US-China economic relations. agribusiness papers examine trends in the
global food system and specific US and
Unlike bond holdings, which can be Chinese comparative advantages. They
bought or sold through a quick paper propose prospective investment models.
transaction, direct investments involve
people, plants, and other assets. They are Even as we look ahead, we also aim to
a vote of confidence in another countrys look backward, drawing lessons from
economic system since they take time past successes and failures. And that
both to establish and unwind. is the purpose of the case studies, as
distinct from the other papers in this
The Paulson Papers on Investment aim series. Some Chinese investments in
to look at the underlying economics the United States have succeeded. They
and politicsof these cross-border created or saved jobs, or have proved
investments between the United States beneficial in other ways. Other Chinese
and China. investments have failed: revenue sank,
companies shed jobs, and, in some
Many observers debate the economic, cases, businesses closed. In this sense,
political, and national security past investments offer a rich set of
implications of such investments. But lessons to learn.
the debates are, too often, generic or
take place at 100,000 feet. Investment Damien Ma, Fellow and Associate
opportunities are much discussed by Director of the Paulson Institute think
Americans and Chinese in the abstract tank, directs the case study project.
but these discussions are not always
anchored in the underlying economics For this case study of Cirrus and Hawker,
or a realistic investment case. we thank University of Chicago student
Francesca Bottorff for her research
The goal of the Paulson Papers on support. In addition, we are grateful
Investment is to dive deep into various for our Research Fellow Houze Song's
sectors, such as agribusiness or dedication to this project.
Flying High and Flying Blind

Case studies are reconstructed on the case. But they may have gaps and
basis of the public record, personal other inadequacies where the record is
interviews with participants, and incomplete, facts are murky, or players
journalistic accounts. They aim to chose not to share their views.
reflect a best reconstruction of the
Cover Photo: Reuters/China Stringer Network

Timeline
Deal 1: Cirrus Aircraft and AVIC
1984 Brothers Alan and Dale Klapmeier found Cirrus Design Corporation (known as
Cirrus Aircraft) in Baraboo, Wisconsin.
1988 The companys first model aircraft, the VK-30, makes its maiden flight.
1994 Cirrus relocates to Duluth, Minnesota.
1998 The Federal Aviation Administration certifies Cirrus SR-20 aircraft, the
companys first commercial success.
2001 Cirrus sells 58 percent of the company to private equity firm Crescent Capital, the
US arm of the First Islamic Investment Bank of Bahrain (now called Arcapita).
2007 Cirrus single-engine light personal jet, the Vision SF50, officially debuts.
2008
September The global slump in sales of piston-engine aircraft results in Cirrus cutting 8
percent of its workforcethe first in a series of layoffs that takes place over
several months.
October Cirrus cuts production from 14 to fewer than five aircrafts per week and also
shortens its work week.
2011
February China Aviation Industry General Aircraft (CAIGA), a wholly owned subsidiary
of state giant Aviation Industry Corporation of China (AVIC), buys Cirrus for
$210 million.
June The federal Committee on Foreign Investment in the United States clears the
transaction and the sale of Cirrus to AVIC is completed with little trouble.
2012 CEO Dale Klapmeier indicates that Cirrus financial position has improved and
that progress is underway to certify the Vision SF-50 personal jet.

2013
July Cirrus COO Pat Waddick indicates that continuing investment from CAIGA
will allow Cirrus to develop additional new aircraft models.
December Cirrus delivers 276 new aircraft to customers, a 10 percent increase over
sales in 2012, marking the companys best single-year performance since
2008.
2014 Cirrus successfully tests the first production model of its Vision SF50 jet.
2015 Cirrus announces plans to establish a customer delivery center in Knoxville,

Tennessee.
Deal 2: Hawker Beechcraft and Superior Aviation Beijing
1920 H.G. Hawker Engineering, the predecessor of Hawker, is established in

Great Britain.
1932 Walter and Olive Ann Beech found Beech Aircraft Corporation in Wichita,
Kansas.
1980 Beech Aircraft becomes a subsidiary of Raytheon.
1994 Hawker and Raytheon Corporate Jets merge their firms to form Raytheon
Aircraft.
2006 Raytheon sells its civilian aviation unit to a consortium of Goldman Sachs
and Onex Corporationthe new firm is renamed Hawker Beechcraft.
2010 Superior Aviation Beijing is formed in China through the purchase of

Superior Air Parts, a US aircraft parts manufacturer, with Superiors owner
Cheng Shenzong holding the majority stake.
2012
May Hawker Beechcraft files for Chapter 11 bankruptcy in US court.
July Superior Aviation enters into an exclusive negotiation with Hawker to

acquire all of Hawkers assets.

October Negotiation over Superior Aviations acquisition of Hawker Beechcraft breaks

down and the Chinese attempt to buy the US firm fails.
2013 Hawker Beechcraft ceases production and exits bankruptcy on its own under
a new name, Hawker Beechcraft Corporation.
2014 Rhode Island-based Textron Aviation ultimately buys Hawker Beechcraft.

Players
United States
Hawker Beechcraft
Kansas-based US aviation manufacturer that files for bankruptcy in 2012
but eventually exits bankruptcy independently in 2013 under the new name
Beechcraft Corporation
Cirrus Aircraft
Based in Duluth, Minnesota, a US general aviation aircraft manufacturer bought
by state-owned China Aviation Industry General Aircraft
China
Superior Aviation Beijing

Chinese aircraft manufacturer, jointly owned by Chairman Cheng Shenzong
and the Beijing municipal government through its investment and economic
development arm Beijing E-Town
Beijing E-Town
Economic development agency of the Beijing municipal government, providing
capital for high-tech manufacturing projects and industrial parks
Aviation Industry Corporation of China (AVIC)

Chinese state-owned aerospace and defense industry conglomerate with
diversified assets across sectors
China Aviation Industry General Aircraft (CAIGA)

Chinese aircraft manufacturer and AVIC subsidiary

Introduction
I
t is exceptionally difficult for any successful country ever to build a
country to create and sustain a dynamic and diversified aviation
commercially viable and competitive industry. The American aviation
civil aviation industry, and few industry includes numerous market
countries ever manage to do so. But segments, ranging from commercial
when it does happen, it generally aircraft and advanced fighters and
reflects several important traits of bombers to personal and business jets.
that particular economy: its industry Yet while the United States will likely
is at the frontiers remain peerless in
of high-tech this area for the
manufacturing; it foreseeable future,
has established a China appears to
complex ecosystem be the sole country
of supply chains with the ambition
and maintenance to replicate the
capabilities; it has US success in all
joined the club of aspects of aviation.
highly innovative
countries; and Indeed, the Chinese
it controls Photo: Flickr/Dennis Deery government
strategic technologies that have both has thrown considerable money
commercial and military applications. behind its ambition, marshaling state
resources and subsidizing state-owned
Just take Japan and Germany, for enterprises (SOEs) to support the
example. While both are clearly creation of an aviation industry that
advanced economies with sophisticated can comprehensively rival that of the
manufacturing capabilities, neither United States.
has builtor else has chosen not
to pursue the establishment ofa But ambition does not always translate
successful commercial aircraft industry. into execution. Devising industrial
Both countries do serve, however, as policies for aviation is one thing. It is
important suppliers for the American quite another, however, to actually
and European commercial aircraft realize the objective of managing a
duopoly of Boeing and Airbus. successful industry. China has rolled
out its first commercial aircraft, the
The United States, for the moment, C919, which is expected to compete
stands largely alone as the most with the Airbus 320 and Boeing 737.
Flying High and Flying Blind 1

But simply having a Chinese-made that firm was eventually acquired by

aircraft is not sufficient to be globally another American entity.
competitive. Instead, demonstrating
the ability to manage an industry of These two cases, and their distinctive
such scope and scale will be necessary outcomes, are not simply a tale of
to validate the Chinese economys different Chinese buyers, however.
technological prowess and potential. Timing was also an important factor
that determined the outcomes of these
The Chinese government wants a twin transactions. The 2008 financial
domestic aviation industry in large part crisis that swept across the global
to help meet anticipated demand. It is economy had a devastating impact on
no surprise, therefore, that all levels the global aviation industry, including
of the Chinese government, from the the US market, which accounts for
central government in Beijing to the more than half of global general
provinces and cities, have made the aviation manufacturing.
establishment of an aviation industry
a strategic priority. Chinas aviation As a result, certain aviation firms that
market is expected to see healthy weathered the financial crisis and
growth, both for the commercial emerged intact decided that this would
aviation segment and for what is called be an ideal time to buy assets on the
general aviation. cheap. For example, in 2010 an Israeli
aerospace and defense company, Elbit
Within the general aviation market, Systems, purchased M7 Aerospace,
which includes light aircraft, two the successor to Fairchild Dornier
attempted Chinese acquisitions in Aviation, for $85 million in 2010.1
the United States are the focus of this M7 and Fairchild are best known for
case study. The two cases share some their military aircraft, such as the A-10
similarities: both involved strong Chinese Thunderbolt. In contrast, numerous
government support and were pursued distressed aviation firms, such as US
with the intent of aligning with, however light business jet maker Eclipse Aviation
vaguely, Chinas broader industrial and Emivest, failed to find buyers and
policy objectives. But the cases differed ended up declaring bankruptcy.
dramatically in their outcomes.
This tendency to seek commercial
The first case, a Chinese takeover of opportunity out of a crisis was also the
Cirrus Aircraft, proceeded smoothly economic rationale that underpinned
and the firm has since become the attempted Chinese acquisitions of
more profitable. The second case, Cirrus and Hawker. Both US aviation
the attempted takeover of Hawker firms were hit hard by the 2008 crisis.
Beechcraft, failed spectacularly and From the perspective of the Chinese

investors, therefore, not only could invest in its ambitious concept of a

they opportunistically target cheaper next-generation aircraft of uncertain
assets that possessed advanced commercial viability.
technology, each acquisition could
also be justified on the grounds of Cirrus also faced less rosy market
supporting the Chinese governments dynamics. The trajectory of the US
national aviation industry strategy. general aviation market did not bode
well for the firms prospects. Qualified
Moreover, it certainly helped that the US pilots and total flight hours had
two US target firms were established been in decline for some time and
players in their respective market were projected to drop further. Taken
segments and were well-known brands. together, personal and business jets
This made it easier to entice Chinese without crew account for about 75
state support for the attempted buyout percent of general aviation usage in
because the investors could make a the United States, so the shrinking
political argument that China writ number of pilots translates into fewer
large would be acquiring a valuable total hours flown and average hours
brand. flown per aircraft. These
Chinas aviation market is expected trends can be seen
The first case in this to see healthy growth, both for the clearly in industry data.2
study deals with commercial aviation segment and for A lower utilization rate
the acquisition of what is called general aviation. of the existing fleet has
Minnesota-based meant less demand
Cirrus Aircraft by AVIC, a major for new aircraft, which signals poor
Chinese state-owned conglomerate. business prospects in the coming years
By the time Cirrus began looking for or even decades.3
a buyer, it had been losing money
for three consecutive years, so Taking these factors into
the prospect of a quick financial consideration, Cirrus did not, at face
turnaround without finding a buyer value, look like an especially attractive
appeared grim to the company's acquisition targetthat is, not if an
management. investor was focused on profits and
valuable assets in the aftermath of
What was more, the company was not the global economic downturn. But
the most disciplined at containing its AVIC was not that kind of investor;
costs. Even as sales declinedwith as an SOE, it did not need to put
the CEO himself acknowledging that profit maximization at the top of its
there was little chance to see Cirrus decision-making process. With ample
sales return to pre-crisis levels within backing of Chinas state-led financial
five yearsthe firm continued to system, and a fairly sophisticated

understanding of global mergers and while Hawker would receive the capital
acquisitions (M&A), AVIC could afford it desperately needed to stay afloat.
to make its investment decisions
based on longer term strategic But things quickly grew much more
considerations rather than on the complicated. For one, the Beijing
basis of returns alone. bureaucrats at E-Town, who initiated this
acquisition, were largely ignorant about
AVIC apparently had faith in the long- the aviation industry and its market
term viability of Cirrus jet project dynamics. As a result, E-Town sought
and, for that matter, in the Chinese and developed a murky relationship
market potential for such planes. It with Superior Aviation, a Chinese private
proved eager to close the deal and aviation firm whose founders sales skills
provided more than $100 million to and natural talent for persuasion ably
Cirrus to complete its jet project. That hooked the municipal government entity
capital enabled the successful launch into a partnership.
of Cirrus next-generation aircraft, the
Vision SF-50. And yet it soon became clear that
E-Town did not know what it was
The second case involves the attempted getting into, as Superior turned out
takeover of Hawker Beechcraft, a spin-off not to be quite what it seemed. When
of Raytheon. The acquisition target in this it came to actually negotiating a deal
case was quite different and the deal also with Hawker, E-Town was far from
had clear national security implications prepared. For example, when Hawker
for the United States. representatives sat down to weigh the
ultimate Chinese offer, they deemed it to
Like Cirrus, Hawker was on the verge be ...[suited to] a completely different
of bankruptcy and could no longer transaction,4 precipitating the collapse
service its debt. Thus in the context of negotiations. As a result, Hawker
of that time, the emergence of a ended up going through bankruptcy
deep-pocketed Chinese buyer in and discontinued its jet business, but
Beijing E-Townan investment arm eventually found another American
directly under the Beijing municipal buyer.
governmentmay have seemed like
the arrival of a savior to some at Unlike other cases in this series of
Hawker. investment papers, each of which
is devoted to a single deal, this
This was a deal that could potentially study compares and contrasts twin
benefit both parties: the Beijing deals in a similar sector. One goal of
government would acquire Hawkers this approach is to offer insights to
world-class brand and technology, both sides of prospective US/China

transactions about what works, and (PLA) connections, turned out to be

what does not when parties attempt to more adept at navigating obstacles
complete an actual transaction. on its way to acquiring a technology-
intensive US firm.
Moreover, this pair of cases is especially
striking because it involves aviation, These twin cases illustrate several
a relatively sensitive and technology- lessons:
intensive industry. The divergent
outcomes, curiously enough, tell us The Chinese governments
less about the Chinese acquirers per application of state-directed catch
se than about how each of these up industrial policies, especially
players approached the transaction and in high-tech industries such as
behaved during its negotiations. Perhaps aviation, can sometimes be wasteful,
surprisingly, after all, the successful misdirected, and untimely. This
transaction involved a large SOE that is, in part, because Beijings big
also serves the Chinese military, while push" industrial policy approach
the failure involved a private Chinese leads many inexperienced domestic
firm. players to crowd the sector, often
resulting in unregulated competition
In short, the intervention of the Chinese and irrational exuberance.
state played a role in both of the cases
outcomes. But although the attempted Deep pockets alone are insufficient
Hawker acquisition was much larger and to determine the success or failure
more complicated than the Cirrus deal, of a Chinese acquisition in the
it was neither the complexity nor the United States. It turns out that
associated national security concerns even though the Superior and
that ultimately derailed it. E-Town partnership over-bid on
price, it still did not seal the deal.
Rather, the failure in the Hawker case An equally important factor is
can be explained by a combination whether a Chinese firm gets its
of factors. These included a lack of basic due diligence process right.
understanding of the industry by For instance, Chinese firms can
the Chinese acquirer, amateurish fail in overseas M&A deals if they
negotiations, and a shoddy do not actually understand the
partnership between a Chinese scope of the M&A process and the
state entity and a private player. business being acquired, obtain
Conversely, because the Cirrus deal deep knowledge about the party
was not AVICs first foray into global on the other side of the negotiating
M&A, the more seasoned central SOE, table, and stick to timely internal
despite its People's Liberation Army communications.

Hiring experienced Western The conceptual basis for this is the

consultants does not necessarily China market play premisethat
help Chinese firms better navigate is, the Chinese investor hopes to
the negotiation process. The obtain aviation technology and
determining factor often may come research and development (R&D)
down to whether the Chinese side resources, while giving US aviation
is willing (or unwilling, as one of firms the chance to seek growth in
these twin cases will demonstrate) the China market.
to alter its prior convictions and
behaviors. Because of their sensitivity to
economic cycles, aviation firms need
So long as the outlook for Chinas to be conservative in their investment
general aviation market remains plans and financing strategies.
positive relative to the US market, Imprudent management of both can
this secular trend will drive quickly turn a firm into an attractive
Chinese firms to continue seeking asset and acquisition target for an
opportunities in the United States. investor, Chinese or otherwise.

China and the Global General Aviation Market
T
he two attempted acquisitions in aircraft and light helicopters. Turbine
this case need to be viewed within engine aircraft, by contrast, include
the context of the dynamics in the business jets and turboprop planes; they
global aviation market and developments tend to be larger in size.5
in the Chinese general aviation industry.
The United States has long dominated
General aviation is a broadly defined the global general aviation industry. Its
sector. It encompasses all aviation firms are both the largest producers
segments besides military and commercial and its buyers the most significant
aircraft. General aviation aircraft can be consumers of aircraft in this market
divided into two sub-categories based on segment. Indeed, the United States
engine type, namely piston- and turbine- is home to about two-thirds of the
based engines. Piston powered aircraft, worlds general aviation aircraft. The
for example, are usually smaller and fly at European market ranks second in terms
lower speeds; they include most personal of both general aircraft production and
Figure 1. Total Global General Aviation Aircraft Shipments
Source: General Aviation Manufacturers Association.

ownership. Taken together, the United significant regulatory barriers (see

States and Europe account for more Figure 3). It is true, for instance, that
than 90 percent of the general aviation Chinas general aviation market seems
market and production globally. to have cooled along with the economy:
in 2015, for the first time in a decade,
Because this industry has been so Chinas business jet and helicopter fleet
concentrated in the United States and saw only single-digit growth.7 But even
Europe, the global financial crisis, which though Chinas business jet fleet growth
hit these two Western markets harder is projected to slow from more than
than China, amplified the negative 20 percent to 10 percent over the next
impact on the general aviation industry decade,8 that pace will nonetheless yield
overall. Total units shipped for general a total fleet of about 1,100 business
aviation aircraft nearly halved between jets by 2025, according to the latest
2008 and 2010. In fact, even seven years Bombardier forecast. That is more than
after the financial crisis, total aircraft double Chinas current fleet size.
sales had not fully climbed out of this
slump, with only turboprop plane sales Second, even if Chinas economic
seeing a slight recovery (see Figure growth remains anemic, merely
1).6 In 2009, the value of US quarterly loosening current bottlenecks in its
non-defense aircraft orders dropped general aviation sector would likely
from $20 billion to essentially zero (see stimulate substantial growth. One
Figure 2). As a result, many US aviation of those bottlenecks is the countrys
firms experienced protracted financial infrastructure deficit. While many
distress, and some were even forced economists rightly worry about Chinas
into bankruptcy. over investment in infrastructure to
fuel growth, the country does have
China, by contrast, not only weathered important infrastructure gaps in reality.
the immediate impact of the financial
crisis better than the Western For example, although the number
economies, its general aviation market of Chinese airports has more than
was also moving in the opposite direction doubled since 1990, it is still insufficient
of the slump seen in the United States to accommodate expected passenger
and Europe. Two factors stand out when traffic and the growth of the fleet. To
considering the prospect of the Chinese put Chinas airport deficit in perspective,
general aviation industry. the United States, with a population of
roughly 315 million people, currently
First, China today boasts strong market has more than 5,000 airports. China,
potential relative to other major on the other hand, has fewer than
economies, despite the countrys 300 airports to serve its 1.4 billion
current economic slowdown and population.9

Figure 2. US Manufacturers' New Orders for Non-Defense Aircraft and Parts ($ million)
Source: US Census Bureau.
Figure 3. Growth of Chinas General Aviation Aircraft Fleet
Source: China National Bureau of Statistics.

Another bottleneck that has hampered aim to help develop homegrown

the potential growth of the general manufacturing capabilities or, if that
aviation sector is excessive regulation fails, to acquire the relevant assets and
of civilian air space. Denzil White, the technologies overseas.
CEO of Deer Jet subsidiary Hongkong
Jet, contends that there is a tangible Typically, acquiring existing
difference between US and Chinese technologies in this way accelerates
airspace regulations that can affect the catch-up process for a developing
business. In America, I can decide at 2 economy to reach the current frontier.
oclock in the afternoon that I want to This is a strategy that China has
leave at 5 oclock from Los Angeles and successfully employed with its high-
fly to New York, and its quite possible to speed rail program, for example. Like
do it. Here [in China], if you get all your the United States, China is not content
ducks in a row its [still] a minimum of being a mere consumer of aircraft;
two days.10 it also wants to become one of the
biggest global producers.
Government policy
is relevant to this Like the United States, China is not The State Council,
sector in another content being a mere consumer of effectively Chinas
way as well: the aircraft; it also wants to become one cabinet, has explicitly
Chinese government of the biggest global producers. recognized the
has been willing problems that plague
to dole out generous subsidies to the countrys general aviation
the general aviation sector to boost industry. The central government has
indigenous R&D and manufacturing summarized the challenges facing
capacity. Chinese state capital is meant the sector thusly: The scale of the
to play a role in narrowing the gap general aviation industry [in China]
with advanced economies, since China is small, infrastructure remains
lags far behind the United States and comparatively backward, reform of
Europe in this respect. the administration of low-altitude
airspace has progressed slowly, the
Considerable state support for the capability for independent R&D and
industry is no trivial matter. After all, manufacturing is inadequate, and a
the Chinese government has made the large gap exists between consumer
development of the general aviation demand and the services offered.11
industry a national priority. One result
is that it has been willing to provide In short, financing infrastructure
incentives and financing to both state- construction, including airports, is
owned and private Chinese players. relatively easy for Chinain fact,
These subsidies and other incentives the state is in the midst of an airport

building boom. But developing world- up local aviation industries or attract

class aircraft R&D and manufacturing manufacturers to set up shop.
capacity at the technological frontier is a
much tougher feat. It may take decades But it quickly became evident to many
to build a manufacturing ecosystem that Chinese firms that it would be easier
can sustain a national general aviation to simply buy foreign technology
industry in China. And that process is than to painstakingly develop it on
almost certain to be accompanied by their own. The choice to look abroad
wasted investment because of heavy for valuable assets was made even
state intervention. easier by the fact that many of these
firms had ample cash on their balance
Once Beijing made it abundantly clear sheets at a time when US aviation
that the general aviation industry was firms were struggling to stay afloat in
a strategic national priority, that signal the wake of the 2008 financial crisis.
led various levels of government and a This context, then, helps explain the
number of firms, both state and private, rationale behind the two acquisitions
to compete vigorously in the race to set examined in this case.

Barn to Market: How Cirrus Took Flight
T
he history of American innovation that was my fallback career. I studied
is replete with fables of amateur economics and majored in business
tinkerers, autodidactic inventors, with a finance emphasis.13 Alan also
and eccentric visionaries who made recounted, Im sure that separately, we
technological breakthroughs within the also wondered, are we going to get jobs
confines of a single garage. But when being bankers or do some other kind of
it comes to breakthroughs in aviation, business? But, from 1979 on, we started
it would seem that siblings make an thinking about what kind of aviation
especially good team. Like the Wright manufacturing company we would have,
brothers who developed the glider that from a realistic point of view.14
flew at Kitty Hawk, two Midwestern
brothers with another big dream created That youthful passion endured. What
the Cirrus aircraft inside a barn in rural began as an amateur hobby intensified
Wisconsin. The year was 1984. into a disciplined pursuit of their own
aircraft design. Toward
Natives of Dekalb, Like the Wright brothers who developed the end of college, the
Illinois, the brothers the glider that flew at Kitty Hawk, two two brothers began
Alan and Dale Klapmeier Midwestern brothers with another big seriously sketching out
moved with their dream created the Cirrus aircraft inside a concept for their first
family to a small farm a barn in rural Wisconsin. homemade aircraft
in Baraboo, Wisconsin prototype. By the time
in the 1970s. Their love for aviation was they graduated in 1984, the brothers had
apparent at a young agethey were already built their first prototype, the
obsessed with model airplanes and pestered VK-30, inside the family barn (see Box
their father to let them build real ones. As 1).15 This aircraft was built in collaboration
teenagers, Alan joined the Civil Air Patrol to with Alans college roommate, Jeffrey
get cheaper flying lessons while Dale learned Viken, who had trained in aeronautical
to fly a plane even before he learned how engineering and would later go on to
to drive a car. In college, each Klapmeier become a NASA engineer.
brother chose a major that complemented
his passion for aviation: physics for Alan, While the Klapmeiers had sufficient
business administration for Dale, and background knowledge and were
economics for both.12 resourceful and capable tinkerers, they
needed someone like Viken, who was
Dale later recalled, The idea was to find formally trained in building planes, to bring
something to do with airplanes. But, if their product to launch. As part of the
nothing else, I knew I could be a banker; VK-30 product development process, the

Box 1: What is the VK-30?
The VK-30 had several unique qualities that distinguished it from

other homebuilt aircraft. For one, it had a composite pusher-
propeller mounted behind the engine, with conventional wings
and tail. It would eventually become the first kit aircraft (a
common name for aircraft made by amateurs) featured on the
cover of Aviation Week & Space Technologya leading industry
publication.
The VK-30 was a four to five-seat aircraft, Alan said. Three

people could sit across the backseat. We decided to do a
pusher, because we were spending a lot of time thinking about
high performance and natural laminar flow (a concept in fluid Photo: Flickr/San Diego Air and Space Museum (Image: The VK-30)
dynamics that describes the smooth, uninterrupted flow of air over the contour of the wings, fuselage, or other
parts of an aircraft in flight). We believed that we could get increased natural laminar flow on the fuselage and higher
performance if we didnt have the propeller out front.17 Dale added that another reason for the pusher design was
that moving noisy prop and exhaust away from the cabin would make it quieter inside. Also, everything in the
cabin brings the center of gravity forward.18
Not only was the aircrafts all carbon-fiber composite construction supposed to achieve natural laminar flow over
the entire body of the plane, it was also designed to generate very low drag. To achieve this, the inventors turned
to Vikens wife Sally, who was also an aeronautical engineer, to come up with the single-slotted Fowler flap system,
which extended the surface area of the wing and increased energy to airflow as well as the lift of the plane. This
design apparently decreased drag, rendering the aircraft ideal for takeoff.19 Meanwhile, Vikens designed the wing
and propeller.
The team of four collaborated on every aspect of design and labor. In true do-it-yourself fashion, the Klapmeiers
scavenged for reusable parts from junkyards throughout Wisconsin and bought what they needed to keep costs
down. For instance, they took a control system out of a damaged Piper aircraft, converted a Cherokee nose gear into a
retractable gear, and used a Lycoming O-540 engine they salvaged from a scrapped Heron propeller. The team would
design part of a plane, assemble it using the parts the Klapmeiers had gathered, and then return to designing.
The most important legacy of the VK-30 kit plane was that it sowed the seeds for the design of Cirrus future and
commercially viable models, the SR-20 and SR-22. As a single-engine aircraft, the VK-30 was built from a relatively
obscure design and was truly homemade in every sense of that word. Disappointed by initial efforts to market
the VK-30, the Klapmeiers decided that the best way to move forward would be to stick to a more conventional
layout design and a certified production aircraft, rather than assembling a kit plane from scratch.

brothers and Viken spent countless hours But their hubris met stark reality at the
at local airports in the Wisconsin towns Oshkosh show. By the end of the week, the
of Waupun and Princeton, observing and Klapmeiers had received zero orders for the
brainstorming about their plane. Beyond VK-30 and only a few pilots had expressed
sharing the Klapmeiers passion for planes, serious interest in making a purchase.
Viken brought to the table crucial knowledge People simply werent interested in an
that helped the VK-30 achieve maximum aircraft that had not yet taken flight. New
aerodynamic efficiency. to the industry, the Klapmeiers unknown
aircraft was simply not going to cut it
The completion of the VK-30 marked the with the EAA membership. The brothers
Klapmeiers first step toward founding ended up lugging their VK-30 back to
their own aircraft company. They launched their small shop in Baraboo, disappointed
the firm immediately after college under yet undeterred.22
the name Cirrus Design Corporation,
housing it inside their Baraboo barn. In fact, the Klapmeiers were so
The company name was inspired by the enamored with their creation that they
memorable cirrus clouds they had seen on had lost focus and failed to get the
a summer drive years before, which had product ready for market. The outcome
evoked for them the magic of flying.16 of the Oshkosh airshow catapulted them
back to reality. And so they continued to
One year before the VK-30s maiden flight tinker: after some modifications to the
in 1987, the Klapmeiers debuted the aircraft wing and multiple stress tests, the VK-30
at the EAA AirVenture Oshkosh Show, an was ready for its maiden flight.
annual gathering of aviation enthusiasts and
hobbyists.20 The brothers arrived in Oshkosh Although both Dale and Alan wanted to
with what they believed to be the sleekest personally pilot the initial flight, their
and highest-performingalbeit untested mother adamantly opposed that plan.
kit plane to date. In their eyes, not only was And so Viken invited Jim Patton, a NASA
the VK-30 an immense labor of love, it also pilot, to consider manning the aircraft.
represented what they believed to be the After arriving in Baraboo to examine
future of personal aircraft. the plane, Patton was impressed but
reluctant to jump aboard a project that
Indeed, the brothers were so convinced he had not been involved with from
of the quality of their product that they the get-go. But three days later, after
didnt even bother to formally advertise studying the VK-30 and witnessing the
the VK-30 prior to its debut. And they team readily incorporate changes he
were only half-joking when they predicted recommended, Patton relented and
they would have trouble keeping the offered to pilot the plane. Based on his
crowd back from swarming their booth pilot feedback, the team continued to
and processing all the orders.21 make small tweaks after the test flight.

These improvements and changes headquarters from Baraboo to a

made a big difference. By the next 30,000-square-foot R&D facility in Duluth,
annual Oshkosh show in 1988, the more Minnesota. The opening of this new facility
seasonedand chastenedKlapmeiers was partially supported by the Minnesota
sold the first few VK-30 kits.23 These state government in the form of loan and
became the production prototype upon tax incentives.25 Inside this new facility, the
which all subsequent kits were based Klapmeiers commenced work on what
and received some attention from would become Cirrus flagship product.
industry media.
The brothers had internalized an
A Strategic Pivot important lesson: marketing would be
critical if they were ever to drum up
In the early 1990s, however, sales of the interest and curiosity about a prospective
VK-30 flagged just as it was undergoing new product. They still vividly recalled
the Federal Aviation Administration showing up at the EAA airshow in 1987
(FAA) certification process. By the time with an unknown product, no advertising,
the Klapmeiers discontinued production and no buzz. This time, by contrast,
of the plane in the mid-1990s, only once product development of the SR-20
roughly a dozen had been built.24 Selling was underway, Cirrus released a new
a niche homemade kit plane would not marketing campaign called Hangar X.
make a scrappy startup commercially The companys advertisement displayed
viable. So the brothers realized they a secretive facility with nothing but a dim
needed to pursue a new strategic light and a slightly cracked door, leaving
direction and began exploring building viewers guessing what might be brewing
more conventional, FAA-certified planes. behind the door.26
At this point, the brothers got down to In March 1995, Cirrus first SR-20
work on separate designs. Alan began prototype made its maiden flight. Like
making sketches for what would become the VK-30, it could seat five passengers,
the ST-50 four-seat turboprop aircraft, but the similarities ended there. The
the design of which was commissioned VK-30 was a single-engine amateur kit
by Israeli aviation manufacturer plane, while the SR-20 was a piston-
IsrAviation. Dale, meanwhile, tinkered engine, composite monoplane. This
with the concept of a model that would made it a state-of-the-art, technically
later evolve into one of Cirrus most advanced aircraft, designed to be
popular products, the SR-20. aerodynamically efficient.
But before fully delving into their new The SR-20 boasted glass computer-
SR-20 project, the Klapmeiers made the monitored light displays (rather than
decision in 1994 to move the company round analog dials), all-composite

Box 2: The CAPS System
The Klapmeiers began to seriously consider aviation safety

once their personal life circumstances changed. According
to Alan, Dales son was born in 1988, and my daughter
was born in 1989, so we were both starting to think more
about safety. This changed both our attitudes. Our earliest
thoughts were, Its all about performance. Then, it was, Its
all about ease of operation, and finally, How do you make
flying safer and easier at the same time?28
As a result, Cirrus developed a distinctive reputation for

safety in the personal aircraft market, a function primarily of Photo: @Cirrus Aircraft (Image: Parachute system in action)
its inventive and effective CAPS system. Cirrus was the first manufacturer to receive FAA certification for producing
an aircraft with a ballistic parachute system and remains the only company to implement the device as standard
equipment on all of its models.29
Testing of CAPS began in 1997, and Dale has recalled the painstaking experimentation process: To control the
load, we needed the parachute to open quickly with the plane at a slow speed, and to open slowly with the plane
at a high speed. It had to be able to open in a spin, straight and level, in a dive and with very little weight or very
high weight, this huge range of requirements went into the design, and it became very difficult to meet all of
those requirements.30
After 38 failed experiments, the Klapmeiers finally figured out how to make the parachute work properly on
a Cirrus plane. According to Cirrus, In the event of an in-flight emergency, pulling the red CAPS handle on
the ceiling inside the cockpit deploys a solid-fuel rocket out a hatch that covers the concealed compartment
where the parachute is stored. As the rocket carries the parachute rearward from the back of the airplane, the
embedded CAPS airplane harness straps release from the fuselage. Within seconds, the 65 diameter canopy will
unfurl, controlling the aircraft rate of descent. The final landing is absorbed by the specialized landing gear, a roll
cage and Cirrus Energy Absorbing Technology (CEAT) seats.31
construction (rather than aluminum), the SR-20 was a vastly superior aircraft. Its
flat-panel avionics and side-yoke innovations both pushed the envelope for
flight controls, and included a truly pilot comfort and made the plane a standard
innovative safety system, the Cirrus within the general aviation industry.
Airframe Parachute System (CAPS),
that could enable the entire plane The SR-20 received its FAA certification in
to descend safely in the event of an 1998, one of the first of its kind to do so in
emergency (see Box 2). In a nutshell, this category of aircraft for several years.

The first customer delivery was made in July not enough to bring the brothers to
1999, and Cirrus received 320 orders for the the promised land of high-volume
plane in the first year alone.27 To this day, manufacturing. To reach that goal, they
the SR-20 is used for civil utility purposes, needed venture capital investment, an
primarily by private individuals and industry that wasnt nearly as developed
companies, as well as by the United States in the early 2000s as it is today. That
Air Force Academy for flying instruction. was one reason that prompted the
Klapmeiers to search for capital abroad.
The Good Years
Crescent Capital stood out to the
Cirrus began the decade of the 2000s Klapmeiers for its seemingly genuine
on a high note. Riding momentum from interest in developing a long-term
the successful debut of the SR-20, the partnership. With the new investment,
Klapmeiers began in 2001 to design a Cirrus paid off its debts and obtained
faster and more powerful successor, the the growth capital it needed to scale
SR-22. In August 2001, they sold a 58 up manufacturing.34 Funding proved
percent controlling necessary for the
stake in the company Selling more than half of the company company to continue
for $100 million was a game-changer for the strategic developing and building
to Bahrain-based direction of both Cirrus and its founders. new aircraft from the
holding firm Crescent ground up, a lengthy and
Capital (now called Arcapita), making the costly process that required steady cash
Klapmeiers minority stakeholders in their flow for years.
own firm. At that price, Crescent likely
32
valued Cirrus at roughly $170 million. No longer encumbered with their financial
burdens, the Klapmeiers could now
Selling more than half of the company devote their full energies to designing and
was a game-changer for the strategic developing the SR-22 model. The SR-22
direction of both Cirrus and its founders. ultimately became a souped-up version of
Taking equity from their homes and the SR-20, an evolution of the design but
tapping the bank accounts of family and with a larger wing, higher fuel capacity,
friends helped the Klapmeiers through and a more powerful engine. In addition,
their early years, but these were limited the SR-22 was outfitted with a more
sources of funding, not nearly enough advanced electronics system that made
to continue growing a capital-intensive the plane easier to operate.
airplane manufacturing company.
In 2003, the SR-22 became the best-selling
Although Alan had already raised $70 four-seat fixed-wing aircraft in the world,
million from various investors prior to out-performing even Cessna.35 Cirrus had
the Bahrain sale,33 that sum still was over 600 employees by then, which swelled

to more than 1,000 just two years The plane the brothers had in mind would
later.36 The firm was rapidly expanding focus more on the user experience,
and adding significant headcount. In including ease of operation and comfort,
2006, Cirrus delivered 721 aircraft and rather than simply dazzle customers with
celebrated the 3,000th Cirrus airplane advanced technologies and push the limits
rolling off the production line, just seven of speed. Basically, what Cirrus aimed to
years after making the first delivery. The offer was a plane that would be quieter,
same year, not only did the company a bit faster, and more comfortable than
release 35 special edition SR-22 models, the companys existing planesa Toyota
it also debuted the design of a light, Camry rather than a Maserati.
single-engine, low-wing, seven-seat
personal jetthe Vision SF50.37 Drawing According to Dale, their approach to
from the initial capital raised, Cirrus built building the aircraft also proved to be a bit
a 250,000-square-foot manufacturing different. He said at the time, Instead of
plant in Duluth that was able to deliver taking the corporate airplane and making
15 airplanes to its customers per week. it smaller, were going to build the airplane
that our customers want. Its just going to
The idea to develop a flagship personal jet be powered with jet engines instead of
product had been brewing in the general a propeller.39 The Vision SF50 would be
aviation industry since the early 2000s. marketed as offering greater flexibility and
But from the outset, the Klapmeiers were more lifestyle pursuits for the owner than
not certain about the market viability of other aircraft but would also be an upgrade
such a product. The majority of small and for pilots who had flown the SR line and
medium-sized jets were used for business other high-performance light aircraft.40
or charters, so it was unclear whether there
would be enough demand for a personal In short, the SF50 would essentially be
jet targeted primarily for leisure. positioned as the iPhone 7 of the Cirrus
product line, not a leap but a hop with
Still, the brothers never quite gave up on a focus on the user experience. And like
the idea and eventually decided it would be Apple, the Klapmeiers and their team had
a promising investment. They envisioned become seasoned in the art of product
a product that would differentiate itself marketing. They wrapped the new
from alternatives in the market. Weve product in mystery to gin up widespread
believed for a long time that the market interest and curiosity among potential
would grow, and that personal jets would buyers. As a teaser, in the days leading
be available, Alan said at the time. We up to the debut, reservation holders
believe personal jets will be very different received jigsaw puzzle pieces of the
than small business jets. Thats down the planes configuration in the mail. We can
road, but we do look forward to getting confirm it has a windshield and wings,
into that market.38 Alan joked.41

Turbulence and Descent
W
hen it unveiled the Vision lease for the new manufacturing
SF50 jet on June 28, 2007, plant, reports emerged that Cirrus was
Cirrus had reached a cruising considering going public in an effort to
altitude of sorts. Once just a Wisconsin raise more capital or else seek a new
barn startup, Cirrus was now recognized major investor. Rumors swirled that
as a serious competitor in its class of Arcapita (formerly Crescent Capital),
personal aircraft. By December 2007, might want to divest its majority
the company had secured a long-sought- holding in Cirrus.
after lease at an airport in Duluth for a
new 189,000-square-foot building for Company executives downplayed
manufacturing the new jet.42 Under the those suggestions. Since day one,
terms of the 25-year lease with the city, we knew that Arcapita would develop
the company agreed to create 200 full- an exit strategy at some point,
time jobs over seven years.43 spokesperson Kate Dougherty told
industry media. But Arcapita is not
But the sense of euphoria quickly looking to pull out of this company
evaporated. Even before signing the any time soon.44 Still, the notion that
Figure 4. Cirrus Aircraft Shipments
Source: General Aviation Statistical Data Book, 2015.

Arcapita might be considering an exit six improved slightly in 2009, its sales
years into its investment hung in the air. plummeted by more than half. As a
result, between August and November
Market trends did not bode well for of 2009, the company laid off an
Cirrus prospects at this point, either. additional 100 workers.
By September 2007, Cirrus was feeling
a significant pinch to its bottom line These are challenging days for
from the global slump in aircraft sales Cirrus, but the decision made is
(see Figure 4). The single-engine in the best interest of the entire
aircraft market segment had been hit company. Our outlook is still positive.
hard by the recession. Total shipments We are making forward progress
dropped 21 percent between 2007 within the industry, said the firms
and 2008, and Cirrus shipments were Vice President of Marketing Todd
even below the industry average. Simmons at the time.46 And yet
simply reducing headcount did not
In response to a rapid deterioration lead to the turnaround that Cirrus
of performance and outlook, Cirrus management hoped for. By 2010,
laid off 100 workers, or 8 percent of the companys production volume
its workforce, dropped to 264 from
and furloughed Part of their challenge was to figure out how 721 planes in 2007,
another 500. By to resolve conflicts between the founders and while its workforce
the end of 2008, management, thus overcoming the classic shrank by 60 percent
several hundred founders dilemma. from a peak of 1,500
had been laid over the same period.
off and 20 percent of the furloughed The situation was apparently dire
employees had their period extended. enough for Cirrus to take legal action
That's what all this cutting and in 2010 to prevent a former supplier,
streamlining is aboutweve got to L-3 Communications, from spreading
weather the storm, said a company rumors that it was heading for
spokesperson. 45
bankruptcy.47
By mid-2009, however, it appeared Overcoming the Founders Dilemma

that Cirrus might have turned a corner.
It took 50 employees out of furlough In fact, Cirrus did not face imminent
and ramped up production from bankruptcy. But management still
fewer than five aircraft per week at realized that a major change was
the height of the recession to eight needed. Part of their challenge
aircraft. But these moves proved to be was to figure out how to resolve
premature. Although Cirrus market conflicts between the founders and
share in the single-engine category management, thus overcoming the

classic founders dilemma to focus remarked that he had reached the

on company performance rather than acceptance phase49 of the end of his
chasing the founders visions. relationship with the company he had
helped to build. Some speculated that
The focus turned to one of the one of the reasons Alan was forced
brothers Alan. He loved airplanes out was because as a visionary who
and adorned his home with pictures wanted to jumpstart work on the
and models of airplanes. He had been personal jet project, he had clashed
tirelessly designing and developing with the majority owner over what the
products despite difficult economic company needed to do to stay afloat.50
conditions and resistance from
management. But it appears from the Management proceeded to tap Brent
record that the majority of management Wouters, the companys president and
at the time came to the belief that chief operating officer since February
what Cirrus needed now were more 2008,51 as the new chief executive
managers, not inventors per se. officer in August 2009. Recruited by
Arcapita, Wouters had joined Cirrus
To resolve this conflict, management in 2002 as executive vice president
took the dramatic action of literally and chief financial officer. But unlike
forcing one of the founders out of the Alan, Wouters didnt love planes52
company. Alans contract as chairman and referred to Cirrus aircraft as our
of the board was not renewed when product rather than as airplanes.53
it expired later that month, although Wouters was a management
he stayed at the firm for a few months consultant, albeit one who worked
before completely exiting later that at an aviation company, and seemed
year. In the meantime, Dale remained determined to keep down the payroll
at Cirrus, where he became chairman and help the company endure tough
of the board, as well as serving as times. He was also notably close to the
executive vice president of product owner, Arcapita, which had hoped for
strategy.48 a quick payout from its $100 million
investment and by 2008, had started
In a last-ditch effort to hold on to looking to sell.54
some portion of the company he
had co-founded, Alan attempted to With Wouters now in charge, he
put together an investment group believed the company needed to do
that would acquire Cirrus fledgling whatever it took to lower its fixed
jet development program. But when operating costs so that it could get by
management spurned those efforts, on reduced sales, including laying off
Alan decided that his time at Cirrus more people. He sent a clear message
was up. When he was voted out, Alan about the major changes afoot. A

change began in December, and in many with prodding from the majority
respects, we're an entirely different owner whose overriding concern was
organizationWe're much more focused return on its initial investment, that
on day-to-day performance and moving he had exhausted various options
to the next level.55 that would salvage the company in
the wake of the financial crisis. There
And yet several months into Wouters were mounting indications that Cirrus
tenure as CEO, it did not look as needed new capital infusion merely
if a turnaround was in the offing. to survive, but Arcapita was no longer
The changes he had been hired to willing to provide it. As a result,
implement were not taking shape as Wouters quietly began scouting new
quickly as expected. Wouters realized, potential buyers.

Chinas AVIC Makes a Deal
I
n late 2010, Dale reportedly let it project and were mostly commercial in
slip to a well-known aviation media nature. For one, the Cirrus brand was
outlet that China Aviation Industry already well-known in China, because
General Aircraft (CAIGA), the general it had been selling SR-20 and SR-22
aviation arm of state-owned aerospace planes to Chinese customers since the
and defense giant Aviation Industry early 2000s. The company had racked
Corporation of China (AVIC), had visited up a solid sales record, reflecting
Cirrus to explore a potential sale.56 healthy Chinese market demand for its
product.
It was apparent that the Vision SF50 jet
development program was becoming In addition, AVIC had already acquired
expensive. By 2010, Cirrus said it had Cirrus Alabama-based engine supplier
spent $60 million on the project and Continental Motors in 2010, so buying
expected that Cirrus outright
another $140 would be another
million would be strategic decision to
needed. That was generate synergies
no trivial amount and push toward
of capital for a firm more vertical
with revenue of just integration. AVIC
$200 million that had clearly thought
had been losing about this potential
money for three buy and its interest
years.57 did not emerge out
Photo: Flickr/Tech. Sgt. Erik Gudmundson of the blue.
Although the revelation of Chinese
investor interest was a surprise to How Much Was Cirrus Worth?
many, AVIC was in fact no stranger
to Cirrus products. The Chinese Since Cirrus is a privately held
government-backed conglomerate had company, its difficult to determine its
expressed strong interest in the SF-50 proper valuation at a given point (see
jet project from its inception and had Figure 5). But because the companys
even flirted with the idea of becoming revenue primarily came from selling
involved in R&D for the jet. 58
its two models, the SR-22 and SR-20,
its revenue can at least be estimated
But by 2010, AVICs interests in Cirrus on the basis of how many planes it
extended well beyond a single aircraft had sold.

Figure 5. Cirrus Market Share
Source: General Aviation Statistical Data Book, 2015.
In 2007, Cirrus sold 710 planes122 and 2012. In a 2011 interview, Cirrus
SR-20s and 588 SR-22sat an average Executive Vice President Todd Simmons
price of about $500,000 (prices differ, told the media [Cirrus] posted its third
depending on configurations and consecutive loss, although the loss was
specifications). This translates into smaller than the previous two years.60
estimated revenue of about $350 Since Cirrus market share in the
million that year, which is consistent single-engine category had been stable
with estimates found in unofficial during the past decade, the valuation
sources.59 By 2012, Cirrus had sold only of Cirrus existing business would
about one-third the number of planes largely be determined by the function
compared to 200748 SR-20s and 207 of the projected potential growth of its
SR-22s, including 102 of the pricier SR- aircraft market segment.
22T modelsimplying annual revenue
of roughly $150 million. What is much less straightforward is
how AVIC would have valued Cirrus new
Profit figures for Cirrus are not personal jet business line, which at the
available. But based on the estimates time of the deal was still in development
above, the companys revenue dropped and came with an unproven market for
nearly 60 percent between 2007 the product. That uncertainty about

market potential, combined with the It is worth noting, too, that CAIGAs easy
large capital expenditures required to access to long-term financing made
support the venture, especially with buying Cirrus a light lift. Its parent,
Cirrus losing money, surely did not argue AVIC, is one of the most powerful and
for a bullish valuation. strategic central SOEs. So unlike other
global aviation firms, CAIGA was scarcely
Yet from the perspective of AVICs affected by the capital market squeeze
subsidiary, CAIGA, Cirrus value may in the aftermath of the financial crisis.
have been higher than what was on The companys soft budget constraint
paper. That was (and remains) because within Chinas political system meant
of the potential to scale up Cirrus that CAIGA could afford to be less
production to meet growing demand preoccupied with short-term returns on
in the Chinese general aviation market. investment, when compared to a US or
With anticipated deregulation of other international investor that needs
airspacelargely controlled by the to worry about near-term performance
Chinese militaryand other aviation- and cash-flow management.
related reforms underway, there was
good reason for CAIGA executives Chinese Surprise: A Drama-Free
to believe that the Chinese general Acquisition
aviation market could outperform
markets elsewhere, which would For two years, the Cirrus negotiation with
enhance Cirrus future sales as it CAIGA remained secret, and the precise
expanded its networks in China. details and specific terms are still not
a matter of public record. Cirrus was a
Even assuming relatively slower privately held company, while CAIGA was
economic growth, the release of pent- a central SOE with longstanding military
up demand as a result of regulatory ties. Neither party had an obligation
reforms in the Chinese aviation sector to divulge details, and publicity during
likely gave an investor like CAIGA negotiations would have surely raised
sufficient cause to be more bullish on eyebrows and political hackles.
the prospects of the Cirrus acquisition,
notwithstanding its sales, financial, and But Cirrus also kept mum on whether it
other problems. In fact, CAIGAs US was merely looking for capital infusion
President Zhang Xuming reinforced that to complete its long-delayed personal
sentiment in a public statement, One jet program or seeking a full-fledged
day, he said, the boom in China's auto sale of the company. When asked
industry will be replicated in the aviation about a potential sale at the time, Dale
sector and [so having] US assets will hedged his response: Wed prefer
make AVIC better equipped when that an investment and thats what were
[time] comes.61 trying to findbut there may come

a time when we have to look at the Foreign Investment in the United States
alternativesincluding a sale.62 He did (CFIUS) review process. In his letter,
alleviate observer concerns, however, Cravaack expressed concern about the
with assurances of not moving the pending sale and urged CFIUS to use
company and jobs out of the United extreme caution when dealing with
States in the event of a sale.63 the China Aviation Industry General
Aircraft Companys bid to purchase Cirrus
As late as three months before the Industries Incorporated [the parent
deal was actually announced, Dale company of Cirrus Aircraft]My main
still argued, Its way too early to goal is to ensure the high-skilled jobs at
suggest that we have a deal.64 And Cirrus stay in Minnesota, instead of being
when the transaction was publicly shipped overseas to one of our main
announced in Duluth on February 28, competitors in the global market. On top
2011, the parties attempted to mitigate of that, I have serious concerns with the
widespread local and national concern transfer of advanced aircraft technology
about the implications of a Chinese from Cirrus to a company that is
acquisition of a US essentially owned and
aircraft manufacturer, Wouters argued that the sale of operated by a Chinese
including for both jobs the company did not mean that the government-run
and national security. airplanes would be built in China, in part defense contractor.65
because that would be more expensive.
But the Cirrus deal But Cravaacks letter
surprised on the upside. For all the didnt persuade a longtime Minnesota
ways that such a deal could have antagonist, former Rep. Jim Oberstar
been complicated politically, not least (D-MN), who helped bring Cirrus to
because of the identity of the Chinese Duluth and had been upset by Cravaack
buyer, including as a supplier to the for the 8th district Congressional seat
Chinese military, and national security in the 2010 election. Oberstar, who
and technology transfer concerns, the had held the seat for 26 years, publicly
acquisition actually turned out to be offered a counterargument. The deal,
relatively smooth sailing. It received only he said, was "an all-around strong, good
a muted response in Washington, DC. development. We have nothing to fear
from an investment such as this by the
In March 2011, Rep. Chip Cravaack Chinese.66
(R-MN), Vice Chair of the House
Transportation and Infrastructure Cirrus also pushed back. Wouters, who
Aviation Subcommittee and a former was leading the Cirrus sale, countered
Northwest Airlines pilot, sent a letter that Cravaacks letter was "completely
to then-Treasury Secretary Timothy wrong on the facts." Wouters argued
Geithner, who chairs the Committee on that the sale of the company did not

mean that the airplanes would be built over high-tech exports to China as part
in China, in part because that would of a raft of measures and sanctions
be more expensive. He estimated that undertaken after the Tiananmen Square
moving production to China would add crackdown.
an additional $35,000 to each airplane
sold, and that would not be cost- According to Zhang, the president of
effective.67 AVICs US division, the company laid
low for a period thereafter, "We didn't
Cravaacks national security concern expand our business for years [in] that
was strongly voiced but, ultimately, did political atmosphere."68 As a result,
little to affect the eventual outcome of Zhang and his small team kept a low
the transaction. CFIUS unconditionally profile and limited its activities in the
approved the dealapparently US market until assets became available
requiring no additional mitigation after the financial crisis. In the year prior
actionsand the $210 million purchase to the Cirrus deal, however, AVIC grew
was completed in June 2011. activeit acquired two American firms,
both in the aviation industry and both
This relatively unfettered review process approved by CFIUS.69
likely owed something to the fact that
this was not AVICs first acquisition Cirrus' Post-Acquisition Performance
in the United States and it was more
familiar with the process. Despite the The AVIC acquisition of Cirrus turned
fact that it is a central SOE in a strategic out to be an example of a Chinese
sector, AVIC has, in fact, navigated the M&A success since it grew the target
regulatory and legal landscape in the companys business, employment, R&D
United States better than most other budget, and physical assets. Since 2014,
Chinese SOEs. Cirrus annual new aircraft deliveries
have exceeded 300 units.70 Public
It has certainly helped that AVIC has records reveal that Cirrus exported more
operated in the US market for 30 years, than 150 planes to China during 2014-
having established a US office in 1987 2015, accounting for a quarter of the
and attempted its first US acquisition companys entire production over the
as early as 1989. That initial effort same period.71 According to Ian Bentley,
was ultimately rejected by CFIUS in Cirrus managing director for emerging
February 1990. The deal involved the markets, Year-on-year deliveries are
attempted buyout of Seattle-based expected to grow for the next few years
Mamco Manufacturing Inc., a metal parts as Cirrus backlog in China is growing.72
supplier to Boeing. Part of the reason
for the failure was that at the time, the Moreover, as post-acquisition production
US government had tightened control recovered, Cirrus increased its US labor

force by more than 10 percent and added exceeded the capacity of Cirrus
a 40,000-square-foot assembly plant domestic Duluth operations. The net
in Duluth.73 A new owner with deep result, he figured, would be that Cirrus
pockets certainly made the financing of needed to explore the possibility of
Cirrus new projects easier. For instance, manufacturing some products in China
CAIGA has provided $100 million for the to meet the rising demand in that
development of the Vision SF50, including market.76 This is a classic case of being
building a $10 million, 60,000-square-foot closer to your customer base to better
facility for production of the aircraft.74 serve it.
Yet the current state of the relationship Ultimately, the aviation sector, including
between Cirrus and CAIGA is not in the United States, displayed many
well understood. In an interview, a characteristics of the post-financial crisis
director of international affairs at search for assets by Chinese investors,
Cirrus remarked that the relationship who scoured the globe looking for
between the two companies is still opportunities. Cirrus acquisition took
evolving and that the development place within that context.
of Chinas general aviation market,
despite the bullish predictions, remains Yet not all investments in the general
uncertain.75 He did add, however, that aviation sector fared equally well.
much like other aircraft companies, To the contrary, finding an attractive
Cirrus had investigated exploring parts asset does not mean that an investor
production and supplier sourcing in will necessarily close the deal. At
China, an option it had been looking about the same time Cirrus finalized
into for several years. That suggests that its sale to AVIC, another legendary US
the company could begin producing in aviation firmHawkerwas also on
China, not just exporting to China from the verge of bankruptcy. It too was
the United States, in the future. desperately in search of new capital
to stay afloat. Hawker also turned its
This had been Dales belief in 2013. eyes to the prospect of Chinese capital.
He argued that the liberalization of But ultimately, Hawkers dealings with
Chinese airspace to private aircraft its Chinese investors turned out very
would lead to market demand that differently.

Hawker Beechcraft: How an American Aviation Giant Lost Momentum
H
awker Beechcraft was formed of the equipment in the British Royal Air
through the merger of two Force combined.77
legendary aircraft manufacturers:
Great Britains Hawker Siddeley Aviation But the storied firm later came under
and Americas Beechcraft. A short government ownership. In 1977, Britains
detour into the companies respective Aircraft and Shipbuilding Industries Act
corporate histories is useful, in part to nationalized Hawker Siddeleys aviation
understand how the British firm ended assets, which and became part of the
up in American hands. British Aircraft Corporation. In 1993,
British Aircraft sold
Hawker dates to its business jets
1920, when it was line, which was
known as H.G. comprised largely of
Hawker Engineering. the former Hawker
Founded by Siddeley Aviation,
aviation engineer to Raytheon,
and test pilot the US industrial
Harry Hawker and conglomerate and
three colleagues, major defense
the company contractor.
Photo: @Beechcraft (Image: Bonanza-G36)
had its roots in
the bankruptcy of Sopwith Aviation The US giant hoped this deal could
Company, the firm from which Hawker cement its efforts to expand its civilian
purchased its initial assets. In 1935, business and thereby offset a decline
Hawker merged with Armstrong in its military business, which had
Siddeley, an engine producer, to form been affected by defense budget cuts
Hawker Siddeley Aircraft. with the end of the Cold War.78 But
in addition to business diversification
Since its inception, Hawker has motives, Raytheon also hoped to cut
produced both military and civilian costs by moving Hawkers production
planes. But in its early years, it to the United States, integrating it
was best known as a maker of the with Raytheons existing aviation
legendary fighter plane that played manufacturing segment.
an indispensable role in World War II.
During the Battle of Britain, Hawkers As with all such plans to relocate
Hurricane fighters shot down more production after a foreign acquisition,
German Luftwaffe planes than the rest this move proved controversial, in large

part because it would spell the end of advantage of co-locating the two firms
business jet manufacturing in Britain.79 in Wichita. By 1994, then, Raytheon
Nonetheless, Raytheon executed had completed the merger, renaming
the plan and managed to move all of the new firm Raytheon Aircraft,
Hawkers production to Wichita, Kansas. while maintaining the Hawker and
Beechcraft brands to demonstrate
Locating Hawker in Kansas made sense. a historical lineage to the renowned
In 1980, Raytheon purchased another Hawker and Beechcraft firms.
Wichita-based aviation firm, Beechcraft,
which was the worlds top general Judged by business metrics, Raytheon
aviation aircraft producer at the time. Aircraft performed decently. Its sales
Beechcraft dates to 1932, when it was of business jets and turboprop planes
established by the couple Walter and grew steadily and it introduced several
Olive Ann Beech in Wichita. Walter new models, including the ambitious
worked in sales at Curtiss-Wright, a Hawker 4000 business jet. That model
major US aircraft producer. But as an was intended to be the flagship of the
aviation enthusiast and pilot, he just Hawker line and to set the standard
did not like the fact that his job kept for quality, performance, and value in
him away from aviation production. the super-midsize class of aircraft.83
Ultimately, he quit his job and founded
Beechcraft with his wife.80 But Raytheon had long struggled to
build stronger linkages between its
The Beechs dream was to define commercial aircraft business and its
the highest standard in aircraft core defense business lines. Eventually,
performance. Indeed, Beechcraft came Raytheon acknowledged that Raytheon
to produce many classic aircraft models, Aircraft was not really complementary
like the Bonanza. The Bonanza came to its core business and, in any event,
to be known for its reliability, comfort, was proving tough to integrate
and a proven airframe. First introduced smoothly.84
in 1947, the Beechcraft Bonanza is still
in production, making it the longest In July 2006, Raytheon finally
continuously produced aircraft in US announced that it would consider
history.81 After Walter passed away in selling its Raytheon Aircraft division
1950, Olive Ann assumed leadership of to focus on its core military and
the family business and presided over a technology lines.85 That decision was
period of impressive growth.82 made at a time when US military
spending had begun to boom again
When it combined its recently amid the first Gulf War, even as the
acquired asset with Beechcraft, civilian aircraft market remained
Raytheon saw synergies, including the lackluster.

For this reason, in December 2006, With the firm already mired in debt,
Raytheon decided to sell its aircraft Hawker posted a significantly weaker
division to Goldman Sachs Capital performance than its competitors in
Partners and Onex Corporation for $3.3 the sector.
billion, and the firm was once again
renamed with the historically resonant Of Hawkers three business lines
Hawker Beechcraft moniker. Since business jets, turboprops, and piston-
Raytheon Aircrafts earned net income powered personal planesthe first
was $181 million in 2006, the $3.3 two product categories contributed
billion purchasing price was about 18 the majority of the firms revenue.
times its 2006 profit, implying that by Yet the companys business jet
late 2006, the acquirers still saw the shipments took a nosedive during the
company as having financial crisis and
growth potential.86 significantly under-
performed when
Like most buyouts, compared to the
the purchase of sector average (see
Raytheon Aircraft Figure 6).
was financed by
debt that the new Part of the
company needed reason was due
to repay. This to the series of
meant that the new unexpected supply
Hawker Beechcraft Photo: Flickr/Jens Dahlin and regulatory
company was already more than $2 disruptions. For instance, Hawkers
billion in debt just as soon as it was flagship product, the Hawker 4000,
formed.87 With hindsight, two years developed a software related supply
before the financial crisis, 2006 was a disruption in 2011 and the firm was
terrible time to incur so much debt. In not allowed to sell the product in the
fact, the burden of servicing its debt European market until late 2011 because
eventually bankrupted Hawker. of delayed certification by the European
Aviation Safety Agency.88 In addition,
The Financial Crisis Roils Hawker after 2010, the fear of a possible Hawker
bankruptcy led to numerous cancelled
Like Cirrus, Hawker Beechcraft was orders for its planes.89
not immune to the global financial
crisis that spread across the globe in By 2011, two years after the worst
2008. The economic volatility that of the crisis had subsided, Hawkers
ensued so severely damaged Hawker outstanding debt totaled $2.14 billion,
that it simply was not able to recover. with the firm losing another $600

Figure 6. Hawker Beechcraft Business Jet Sales Decline
Source: General Aviation Data Book, 2015.
million the same year.90 The firm new CEO (former CEO Bill Boisture was
subsequently slowed development moved into the role of chairman).
of its new Hawker 200 jet model and
announced that it would seek relief Although Miller made a spirited
through a $182 million revolving line effort to overcome Hawkers financial
of credit, in light of continued poor challenges and avoid having to file
economic conditions and subpar sales for Chapter 11, company prospects
performance. remained dim. In an April 2012 report
to the US Securities and Exchange
A default seemed inevitable because Commission, Hawker management
Hawker was on the precipice of noted that additional financing would
violating the terms of its principal loan be needed due to recurring negative
agreement, which stipulated that cash cash flows and operational losses
flow must grow. Some suggested that totaling more than $1 billion. These
lenders cut the company some slack came on top of the $2.3 billion in debt
before calling the loan. Yet none of this and multiple missed interest payments.
prevented bankruptcy rumors from Ultimately, Hawker filed a Chapter
bursting into the public by March 2012, 11 petition on May 3, 2012 at the US
shortly after a corporate turnaround Bankruptcy Court for the Southern
expert, Steve Miller, was named the District of New York.

At this point, the company had two Beijing-based entity, Superior

practical choices: (1) to pursue a Aviation, approached Hawker to
separate debt-to-equity transaction; or express its interest in acquiring all of
(2) to conduct sale of most of Hawker's Hawkers assets for $1.79 billion. This
assets to a third-party. Importantly, was the only formal offer Hawker had
Hawker intended to discontinue its jet received to date.
business as part of the sale to a third
party if it could not relinquish that Superiors proposed post-acquisition
division. plan ostensibly offered the most
continuity for Hawkers existing
In hindsight, it seems clear that business, allowing the firm to
Hawker pursued both of these exit preserve jobs and product lines, and
strategies simultaneously as a hedge. to fulfill its existing commitments
According to Hawkers team, there to customers. As part of its pitch,
had already been an agreement with Superior vowed that, if the deal went
creditors for debt-equity swaps while through, it would buy all of Hawkers
Hawker was searching for a buyer. 91 assetswith the exception of its
Rhode Island-based Textron (also defense segmentand keep Hawkers
Cessna Aircraft's parent company) existing operations in Kansas while
had long expressed interest in injecting capital into the company.
Hawker, even after the Chinese
investors bid for the company With no competing bids in sight, this
was made public (see more details Chinese offer was attractive at face
below). 92 All of these factors suggest value. So Hawkers legal team decided
that Hawker always had a potential to enter into negotiations. But who
Plan B, even as it looked for global exactly was Superior Aviation, and
buyers, including the Chinese. how did the mysterious businessman
behind it have the capital to invest
It didnt take long for an interested nearly $2 billion into an American
buyer to emerge. Soon after Hawker aviation firm?
filed for bankruptcy, a little known

Superior Aviation and Its Mysterious Chinese Owner
B
eijing Superior Aviation was just prior experience in the sector requires a
two years old when it entered very large leap. Hawker was not Chengs
negotiations to acquire Hawker. first aviation investment play, however.
Superior is 60-percent owned by a His initial effort was more modest.
Chinese businessman Cheng Shenzong,93
who hails from Chinas Shandong Cheng Helicopters into a Boondoggle
province on the northeast coast. By
the time Cheng decided to enter the In 2006, Cheng decided to take over US-
aviation market, he had decades of based piston helicopter maker Brantly.
experience in wholesale trade, and had This firm had been previously owned by
dabbled in real estate investment but the Beijing Foreign Enterprise Human
not a sector like commercial aircraft.94 Resources Service (FESCO), a local
SOE in Beijing. FESCO acquired Brantly
Chengs profile is not atypical for many in 1994 from its previous owner, a
private businessmen in China. But Japanese-American businessman named
because he was an unknown quantity James T. Kimura.96 Cheng managed to
in the global aviation acquire the Brantly
industry when he bid He was a complete stranger, popping asset for free, though
to acquire Hawker, up suddenly on the scene to buy a precisely how he did so
it caught many by legendary US brand. remains murky.97
surprise, including even
those within Chengs own local Chinese One possible explanation is that Brantly
business community. He was a complete was virtually a junk asset at the time
stranger, popping up suddenly on the Cheng acquired it. Its helicopters had
scene to buy a legendary US brand. been developed in the 1950s and had
not sold well for decades. Since 1999,
What little can be pieced together about for example, Brantly sold a total of
Chengs background includes stories just 12 helicopters.98 By the end of
from his childhood friends that describe 2015, the entire Asia-Pacific region
him as having a youthful interest in had just four Brantly helicopters in
aviation and model airplanes. He is said service, accounting for less than 0.1
to have been able to tell the model and percent of the regional market share.99
make of various airplanes as they flew China itself currently has only two
overhead, according to public sources. 95
Brantly helicopters, not the hallmark
A childhood hobby is one thing, but of a product in high demand. One
making a substantial strategic investment senior Chinese aviation executive
in a major aviation company with no described Brantlys technology as out

of date, noting that the firm had little At the same time, Chengs home
demand for its choppers.100 province Shandong wanted to align its
own priorities with those in the 11th
Technology had much to do with FYP. After acquiring Brantly, Cheng
the helicopters lack of appeal. The set up two facilities in Shandong to
aging Brantlys all used inferior piston make helicopters, based on the Brantly
engines, which, while making them model. Local municipal governments in
some of the cheapest helicopters in Shandong provided Cheng with free land
service in the Asia-Pacific region,101 and tax rebates, as well as offering to
also meant a customer would have to construct the plant and allowing him to
tolerate limitations on speed and a use the facility for three years. The first
low service ceiling when compared to of these factories, Haili Helicopter, was
turbine-based helicopters. located in Qingdao, a major industrial
and coastal city in Shandong, best
But these factors probably did not known in the United States for its beer.
matter much to Cheng. He had no The second factory, Weifang Tianxiang
prior experience in aviation and had Aviation Manufacturing, was located in
run businesses in entirely unrelated the city of Weifang, the hometown of
sectors, so his investment strategy Chinese kite making.
for Brantly was probably strongly
informed by the priorities set in Indeed, the Shandong government
Chinas 11th Five-Year Plan (FYP, seemed rather pleased with Chengs
2006-2010). That plan made general factories. After all, when it issued
aviation a national strategic high-tech its provincial plan for developing an
sector and prioritized establishing aviation industry in 2010, it listed
a domestic manufacturing capacity both of his helicopter companies as
for general aviation planes and flagship aviation manufacturers that
helicopters.102 would enjoy all types of provincial
support and subsidies (a total of five
The timing of Chengs first aviation Shandong companies qualified for this
venture is important. It came on the distinction).104
heels of the 11th FYP launch in March
2006. In a 2009 interview, Cheng Whats more, since Brantly was still
acknowledged that his confidence registered in the Unite States, its
in the aviation market came mostly two helicopter factories qualified
from the fact that the 11th FYP had for additional benefits because they
prioritized the development of the could technically claim to be examples
general aviation industry.103 In that of foreign investment. In addition,
context, Cheng saw an opportunity, since helicopter manufacturing
however vaguely. was listed under the encouraged

category in China's Catalogue Guiding Indeed, it was not long before it became
Foreign Investment in Industry (at that clear why FESCO had been willing to
time, the definitive list of industries forfeit the Brantly assets to Cheng
that were either encouraged, for virtually nothing. In early 2012,
restricted, or prohibited from foreign three years after the Haili plant began
investment), Chengs helicopter production, the factory inexplicably
manufacturing plants were entitled to stopped operating as demand for its
incentives from the Chinese central helicopters did not materialize. Officials
government too.105 managing the industrial park in which
the factory was located had no idea
By May 2009, Chengs Haili factory in whether the company had even sold
Qingdao produced its first helicopter, a single helicopter since launching
the B2-B,106 while the Weifang factory production.108
focused on the
development of Troubles quickly
an unmanned accumulated
version of the B2-B for this fledgling
called the V750, helicopter maker. In
which referred to 2014, Qingdao Haixi
the helicopters City Investment, a
maximum takeoff Qingdao municipal
weight of 750 SOE that had
kilograms (1,650 provided Cheng
pounds). The with the free plant
development of Photo: Flickr/Alan Stoddard for three years,
V750 took several years, with the first brought a lawsuit against Haili for
test flight in 2011.107 damages associated with its refusal
to return the facility on time.109 The
These factories were designed to Chinese courts ultimately did not
have an annual production capacity issue a legal opinion on this issue, as
of 80 light helicopters. However, the original agreement between Haixi
China as a whole only bought about and Haili indicated any dispute should
100 helicopters per year and Chinese be settled through arbitration. Still,
domestic manufacturers accounted for the court documents provided some
less than 3 percent of the countrys revealing details about Hailis business,
helicopter market. Since Brantly for example by indicating that it was on
models were anything but state-of- the verge of collapse by mid-2012.110
the-art, Cheng was rather naively Various media reports from the time
optimistic and confident about his also corroborated the details of the
helicopter business from the get-go. court document.111

Reports in September 2012, for The price tag for Superior was relatively
instance, noted that Haili had already modest for this kind of asset, yet
been closed for seven months (since it still constituted real money, and
the Chinese New Year the previous money that Cheng did not have at the
February), with no signs of resuming time. As a result, Cheng was forced to
production. borrow more than $9 million, using
his helicopter factories as collateral.
Two other lawsuits filed against Haili He later admitted that he had even
indicated that it had been borrowing borrowed his relatives assets to use
money to pay its employees. And as collateral to buy Superior.114 Chengs
Chengs personal equity in Superiors inexperience with foreign acquisitions
parent company, Beijing Supeiyouru was one of the reasons he had to
(Superior rendered in phonetic borrow so much: he had to pay hefty
Chinese), is currently frozen by the legal and due diligence fees to the tune
Shandong Jinan court, citing a failure to of $4 million.115
repay loans.112
According to Cheng, the reason he
Chengs Weifang plant did not fare any purchased Superior was that he
better. Two creditors, one of them a thought it could eventually help him
local SOE, had filed a similar lawsuit build engines, with which he hoped
because of Weifangs failure to repay to outfit his helicopters. He was not
loans, and as of this writing, the lawsuit necessarily wrong in thinking that the
is ongoing. As a result, the local court in ability to build high quality engines
Weifang also froze the factorys assets would be indispensable if he aimed
of 24.9 million yuan ($3.5 million).113 to manufacture his own airplanes
and helicopters down the line. Cheng
Cheng Somehow Lands in the Good later gushed publicly that the day the
Graces of Beijing E-Town bankruptcy court awarded Superior to
him, he was too excited to sleep.116
The failure of the Brantly venture did
not deter a determined Cheng, however. But Chengs excitement belied the
In September 2009, while his helicopter fact that, unlike the seasoned and
business was unraveling, Cheng had experienced AVIC that acquired Cirrus,
also bought a second US aviation asset, he was fundamentally a novice when
Superior Airparts, from its bankrupt it came to the aviation industry (see
German parent company Thielert for previous section on Cirrus). To many
$7 million. As its namesake implies, outside observers, Superiors business
Superior was a supplier of aviation was focused primarily on engine
piston engine replacement parts. maintenance and repair, and the firm did
not actually produce engine parts. This

begged the question of just how Cheng in aligning with national industrial
could try to leverage Superior to realize policy to support the development of
his objective of making aircraft engines. a domestic general aviation industry.
Much as Shandong had championed Much about Chengs discussions with

Chengs efforts with Brantly, he found Beijing authorities remains unclear,
new champions in the Beijing municipal but he was supremely confident that
government, some of whom apparently Superior would become integral to the
shared his vision, however muddled it capitals aviation-related plans. Thus,
may have been. Beijing Supeiyourui was established
in July 2010, with an investment of
In early 2010, Beijings then-Vice 80 million yuan ($11.5 million) from
Mayor Gou Zhongwen, who was in E-Town International Capital, an
charge of industrial policy for the arm of the Beijing government that
Beijing government, personally invited manages billions to invest in strategic
Cheng to move his Superior aviation priorities and other local development
engine company, which was then efforts. Cheng pledged an additional
held under Chengs Weifang entity in 120 million yuan ($17 million) of
Shandong, to Beijing. The vice mayor both cash and in-kind investment
bluntly told Cheng that he would be into the company, and eventually he
able to help him with his business became the controlling shareholder
in exchange for Chengs help with of Superior. Cheng was appointed
Beijings efforts to develop its general Chairman of Superior Beijing, while
aviation industry.117 As one of the most senior executives from E-Town were
powerful municipalities in China and made Vice Chairman and Chairman of
the seat of the central government, the Supervisory Board, respectively.118
Beijing clearly wanted to lead the way

An Awkward Dance: Superior and Hawker Unexpectedly Part Ways
Things Were Going Well Perella Weinberg Partners LP, and
A
its restructuring advisor, Alvarez &
fter an initial back and forth, Marsal, to determine the amount
Superior and Hawker agreed it would cost Hawker to be in
to enter into an exclusive bankruptcy for three months longer
negotiation for the Chinese party to than it otherwise would. They arrived
purchase all of Hawkers assets. And on at an estimate of $50 million, a figure
July 17, 2012, a US Bankruptcy Court in determined in part by the fact that
New York officially authorized Hawker Hawkers business jet division was
to commence a 90-day exclusivity losing money daily. Hawker actually
negotiation with Superior.119 As a wanted to shut down this entire
precondition, however, Hawkers business line, but Superior, citing a
legal representation demanded that strong interest in the business jets,
Superior pay for insisted it be kept
the right to its open and agreed
exclusivity, in part to pay the amount
because Hawker to postpone
itself would have discontinuation of
to incur costs the division.
to sustain its
jet business on The result was a
each day that the provision in the
company was agreement that
not formally in read, If the parties
bankruptcy. Photo: Flickr/Dmitry Terekhov consummated the
Proposed Transaction, the $50 million
Hawker's negotiation team put it payment would be credited against
this way: If you want to have an the purchase price If the Proposed
opportunity to buy the company and Transaction was terminated after
you want us to put other aspects of the October 19, 2012, the Refund Amount
bankruptcy case on hold for 90 days shall be deemed to be zero.121
while you do your due diligence and get
your act together, youre going to have Although the two sides didnt haggle
to pay us for that.120 over the dollar amount, there was
nonetheless some dispute over
Hawker's legal representatives worked precisely how Superior would pay the
with the company's financial advisor, $50 million. Hawker's team described

this process as being comical at Hawkers team, the $1.79 billion was
times.122 Superior first offered a a very robust and attractive number,
verbal promise, which Hawkers deal and the creditors would have loved for
team roundly rejected. Superior Superior to have been able to get a bid
then proposed holding the deposit together.124
in a Chinese bank in Beijing, which
Hawkers team also rejected. What Until Hawker Got Blindsided
about a Chinese bank in the United
States? Thats still a no from Hawker. But then it all went south. In late
Finally, Superior agreed to deposit September 2012, Hawker's attorneys
the $50 million in an American bank, flew to Beijing with the intent to flesh
physically located in the United States, out final points of the deal and get
once it became clear that Hawkers Superior to sign on the dotted line.
team would not budge on its terms. Prior to the trip, the team had been
negotiating for months with Locke Lord
Despite these tussles, Superiors LLP, the law firm representing Superior.
willingness to pay the $50 million was According to Hawkers attorneys, the
viewed as a positive sign by Hawkers two legal teams had agreed on a very
team. They judged Superior, for all the detailed asset purchase agreement that
haggling, to be a party with which they was effectively final by the time of
could negotiate. According to one of these pivotal meetings in Beijing.
Hawkers representatives, We were
shocked when they came forth and But when Hawkers team walked into
offered the $50 million in the first place. the final round of meetings in Beijing,
[This] was, for all intents and purposes, they sensed something had gone
a nonrefundable deposit, because its awry. For one thing, Cheng was not
not like they had any competition that present, even though he had shown
compelled them to do so. No other up at all previous meetings alongside
economic actor would have gone through his American advisors. Instead, an
and paid the $50 million. To us, that unknown woman sat across the
indicated a certain degree of commitment table and introduced herself as a
to going through with the transaction.123 representative of the Beijing municipal
government. According to Hawkers
From July to September 2012, both attorneys, this individuals specific
sides entered vigorous negotiations role was never made clear, but she
that resulted in a tentative 200- conducted herself in an authoritative,
page contract. Most important, the matter-of-fact manner and delivered a
acquisition price was set at $1.79 message in the tone and body language
billion, a high valuation that pleased of someone who was used to getting
both Hawker and its creditors. For what they want.125

At this point of the negotiation, such brand new set of terms and conditions
surprises are not welcomed. Although under which Superior would acquire
Hawkers team knew little about Hawker. According to a Hawker
the chairman of Superior, at least representative, this simple document
they had been dealing with Cheng was for an entirely different transaction,
consistently throughout the entire completely divorced from reality and
process. Now, they sat opposite a new analysis.127 The deal thus unraveled.
counterpart, a complete stranger who
just mysteriously assumed Chengs role Many such transactions are kept under
in the negotiation. What they could wraps during negotiations, and some
deduce was that she worked for the degree of opacity and information
Beijing municipal government and was asymmetry is common in cross-border
presumably connected to E-Town, which acquisitions. Still, what transpired
had financially backed Cheng. But that during those final meetings was not
was about all. Indeed, Hawkers team typical, even with a Chinese party.
was not aware of any E-Town or Beijing Hawkers advisors were dumbfounded
government representatives who had by the fact that Superiors team thought
participated in prior meetings. it could acquire a complex airplane
manufacturing business using something
The cues from the other than a real
Beijing officials body Still, what transpired during those contract. And they were
language signaled to final meetings was not typical, further flummoxed by
Hawkers team that the even with a Chinese party. the lack of sophistication
deal had taken a wrong that characterized the
turn. And their suspicions turned out
126
switch-up at such an advanced stage of
to be right. At one of the final meetings, the negotiations.
Superiors teamled by the new Beijing
government representativerejected The Beijing government representative
the carefully deliberated, 200-plus was apparently caught by surprise when
page contract that the two sides had she saw the Hawker partys reaction.
discussed for months. At this point, One of Hawkers legal advisors recalled
Superior was nearing the end of its 90- that she apparently thought they would
day period for conducting due diligence. negotiate based on the one-pager.
The government representative [who
The Beijing meetings were intended assumed the chairmans role] handed
to deliver a final, signed deal. Instead, out something that was easily stapled,
the new lead negotiator blindsided the advisor recalled. We were shocked
the Hawker team and handed out by how they trashed the product of
a single-page document titled Key months of negotiationa 200-page
Governing Principles. This laid out a contract. So we just got up and left.128

Epilogue: Hawker Finds a New Buyer in arguing that Superior did not hold a
Textron claim for a refund under the terms of the
Exclusivity Agreement and the Refund
On October 18, 2012, Hawker Beechcraft Agreement. On September 19, 2013,
formally announced that the parties just before the hearing on Superiors
could not reach an agreement: It [the request, the Chinese companys new
firm] is no longer pursuing a transaction legal counsel Morris, Manning &
with Superior Aviation Beijing Co., Ltd.129 Martin, also withdrew, citing a material
Although the negotiation agreement had disagreement with Superior about the
stipulated that Superior was not eligible subject matter of the representation.132
for any refund if it sent its termination
notice after October 19, Superior still The Chinese firm thus had great difficulty
sent such a notice five days later on retaining legal counsel. According to
October 23, demanding a refund of its $50 Superior, this was because of language
million with accrued interest. This would and cultural barriers, as well as time
subsequently be fought in the courts. zone differences.133 As a result, Superior
repeatedly asked for a postponement
In March 2013, Superior filed four of the hearing. Hawker opposed the
identical requests for a refund in the adjournment, arguing that Superior was
same bankruptcy court in New York, having trouble hiring and keeping US
claiming that the $50 million played a counsel because its position [is] frivolous
positive role in preserving [Hawkers] jets and risked sanctions.134
business, which is part of the Debtors
estate, and therefore benefit [sic] the The New York court agreed to the initial
Debtors estate, entitling the Chinese 30-day adjournment request, but denied
entity to a refund.130 the subsequent 90-day adjournment
request. Thus, after the initial
It is worth noting that Locke Lord, adjournment period ended on October
Superiors legal adviser throughout 25, Judge Stuart M. Bernstein issued
the negotiations, did not sign this his opinion and ruled against Superiors
Termination Notice and withdrew claims, noting that it had terminated
as counsel for Superior before the the transaction after the October 19,
scheduled hearing on the refund, saying 2012 deadline that was stipulated in the
that it had disagreement with their agreement.
client.131 This was the first sign that
Superiors case might not be as legitimate According to Bernstein, the dispute
as it claimed. was not complex, and its resolution
depended on reading two letter
As expected, Hawker responded by agreements totaling less than ten
filing an objection on August 15, 2013, pages of text[Superior Aviation] is not

entitled to a refund under the clear and assuming its current name of just
unambiguous terms of the Exclusivity Beechcraft.
Agreement and the Refund Agreement,
and hence, it has no claim.135 According to Hawkers team, industrial
conglomerate Textron (also Cessna's
Since Superior lost the case, in parent company and the owner of Bell
retrospect, Hawkers insistence that Helicopter) had long expressed interest
the $50 million be deposited in a US in Hawker, and that interest continued
bank may have made a difference. If even after Superior's bid was made
the money had been deposited in a public. Like Hawker, Textron had aviation
Chinese bank, it is not entirely clear operations in Wichita, so a merger could
how this dispute would have been generate significant cost savings and
ultimately resolved. synergies.
The $50 million from Superior could In December 2013, after the completion
not save Hawker, however. When the of the Hawker Beechcraft restructuring,
team returned from Beijing in October Textron agreed to acquire Beechcraft for
2012, they immediately reached out $1.4 billion, bringing it under the wing
to their creditors, who approved of a diversified aviation manufacturer.137
Hawkers bankruptcy exit plan in late When the deal ultimately closed on
January 2013.136 March 14, 2014, Textron acquired
Beechcraft for an aggregate cash
Under the Joint Plan of Reorganization, payment of $1.5 billion, slightly higher
pre-petition secured bank debt, than the agreed upon price because it
unsecured bond debt, and general included a repayment at closing of a
unsecured claims would be canceled portion of Beechcrafts working capital
and holders of such claims would credit facility.
receive equity in the reorganized
company. Hawker ceased production As of January 3, 2015, Textron
of its business jets to focus on smaller Beechcrafts net asset was valued at
propeller aircraft for private use, $1.5 billion, including goodwill (the
defense applications, and special value of intangible assets) of $228
missions such as search-and-rescue. million.138 A large part of the goodwill
It also began trying to sell assets was related to expected savings
including its Hawker business jet unit and efficiencies from combining the
and even the Hawker brand, eventually operations of Cessna and Hawker.

Why the Superior-Hawker Deal Failed
T
hree factors combined to end buyers market that should not have
the Superior bid for Hawker: necessitated over-bidding.
Finally, although Hawkers business

(1) Overbidding jet division might have had strategic
value to Superior or E-Town, the
Superiors bid of $1.79 billion was market value of that business line
high. Even after Hawkers bottom was probably negative by around
line improved substantially, as its 2012. After all, Hawker was inclined
sales of turboprop planes rose by 50 to shut it down, having failed to sell
percent in 2013, the companys fair it. This suggests another discount on
market value was only about $1.4 Hawkers true market value.
billion, according
to Textrons (2) Bidder
estimate. 139 Overconfidence
Therefore, and Information
Superiors Asymmetry
valuation of
Hawker back in Superior and
2012 should have E-Town probably
been significantly overestimated
less than what their leverage in
Textron eventually the negotiations,
bought it for in Photo: Flickr/Josef P. Willems
which may explain
early 2015. the Chinese sides
genuine surprise when Hawker
At the same time, Superior was less walked away from the deal. One
than 1 percent the size of Hawker explanation may be that E-Town
and had almost no jet manufacturing believed its offer was the only formal
capacity. Yet the Chinese acquirer bid one that Hawker had received, not
a higher price than Textron, a much realizing that the US firm always had
larger firm that also owned Cessna a back-up plan that its creditors were
and would enjoy substantial cost willing to accept. In short, it was
savings and synergies. Moreover, at not very costly for Hawker to spurn
the time Superior faced no competing the deal. Having missed this fact,
bids, meaning that the play for Superior and E-Town badly misjudged
Hawker was made in the context of a Hawkers bottom line and leverage.

(3) Principal-Agent Problems Put differently, the agent in this

transaction (Cheng) was not financing
Despite the fact that Superior led most the deal yet he had been leading the
of the negotiations, it appears that charge on negotiations, while the
the fate of the deal may ultimately principal (E-Town) that was actually
have been in the hands of the Beijing putting up the money had been largely
municipal government. Chengs firm left in the dark for the duration of the
was simply too small and too capital negotiations. Such an arrangement
deficient to be able to write the $50 resulted in a classic principal-agent
million deposit check, much less afford problem.
the $1.79 billion deal. In 2011, Cheng
used two-thirds of his stock in Superior Superior was clearly motivated by its
as collateral to borrow 60 million yuan own interest (chasing Chengs ambition
($9.5 million) for to build an aviation
an undetermined business), yet cared
Chengs disappearing act did not last
purpose. This implies little about the cost
long, nor did the collapse of the Hawker
that the net worth (acquisition price)
deal prevent him from pursuing other
of Superior was aviation ventures. because it was to be
perhaps $20 million, incurred by the Beijing
at most. As one government. When the
Chinese aviation observer put it, no Beijing government finally realized this,
one believes Superior has the ability it was too late to salvage the deal.
to finance this deal; it is the [Chinese]
state that is pushing this deal from Mysterious Cheng Reemerges
behind the scenes.
In the end, Chengs disappearing act did
Still, according to Hawkers negotiation not last long, nor did the collapse of the
team no E-Town representative Hawker deal prevent him from pursuing
participated in the entire negotiation other aviation ventures. In October
except the last meeting and 2014, Cheng popped up again to sign a
previously, Superior ha[d] not memorandum of understanding (MOU)
expressed any unhappiness about the with the Shunyi government, a district
deal, including about the price.140 The in Beijing, to build a business jet airport
fact that E-Town ultimately wanted to and an aviation town with planned
jettison the existing agreementand investment of $3.2 billion.141
to do so at the last minute while Cheng
disappeared from the negotiation This idea initially seemed to thrill the
tablesuggested that E-Town was not Shunyi district government. Not only
content with the previous negotiations is the Beijing Capital International
and wanted to assume control. Airport, one of the worlds largest

and busiest, located in the district, Little can be gleaned about Chengs
the Shunyi government also has background from public records. And
long wanted to have its own general even less is known about the activities
aviation industry. After the MOU was of his helicopter manufacturer. But it
signed with Superior, a Shunyi vice does appear that Chengs factory has
mayor began convening working groups manufactured a drone version of the
to coordinate initial planning for the V750 helicopter (noted earlier in this
Superior Aviation Town, according to case study) that could have military
public sources.142 This aviation town is applications. The drone is allegedly to
supposed to be completed by 2017 but, be outfitted with anti-tank missiles,
as of this writing, land use records do according to one report. Of some
not indicate any such ongoing project interest is the fact that one of the
in Beijing.143 developers of the V750, China National
Aero-Technology Import and Export
If nothing else, Cheng is certainly Corporation, is a key player in the design
persistent, and his aviation businesses of PLA fighters and bombers, as well
seem to have more lives than a cat. as missile and air defense systems in
For instance, although his helicopter China.145
business has so often seemed to be
just one breath away from death, Perhaps it is because of the new boost
Chengs apparent networking in military business that Chengs
and salesmanship have somehow helicopter venture has had a sudden
resuscitated it. The facts are not turn of fortune: both the Qingdao
entirely clear, but public reports and Weifang factories are reportedly
suggest that since 2015, Cheng once again actively hiring.146 Cheng
has become linked to Xu Zengping, has also scoped out aviation business
another mysterious businessman opportunities in other parts of China.
who supposedly helped the Chinese Business registration records and
military purchase the Varyag media reports suggest that he has
aircraft carrier from Ukraine. Xu contemplated potential investments in
has apparently acted as the legal at least Ningxia and Liaoning provinces,
representative of Chengs helicopter including yet another business jet
firm, even owning 10 percent of it.144 airport and an aviation engine factory.147

Conclusion
U
nlike greenfield and other types to scoop up valuable US assets. It is easy
of strategic investments, M&A to see how acquiring Cirrus and Hawker
deals are relatively straightforward made commercial sense from a Chinese
because they typically involve just two demand perspective. But those assets
primary parties, the seller and the buyer, also made political sense in the Chinese
and the key obstacle is to identify and context because they would have aligned
settle on an agreeable price. The two the firms with Chinas sprawling industrial
attempted acquisitions in this case both policy that gave overwhelming support
began with what appeared to be a sound and priority to the aviation industry.
commercial rationale but, along the way,
one of them went off the rails while the Chinas national general aviation
other sailed through with few hiccups. industry policy aims to build 50
industrial zones specializing in various
The divergence in outcomes of these aviation projects, with general
twin cases has less to do with market aviation expected to be a $150 billion
dynamics or the industry by 2020.148
assets themselves While China is not the only country that This strategic focus
but, instead, was employs industrial policy in this way, its will unambiguously
primarily a result heavily state-backed industrial policy induce both the
of the two Chinese can yield mixed results, depending on central and many local
buyers distinct how it is conducted and deployed. governments to double
approaches to down on their support
negotiationsand the dramatic for general aviation and compete
difference in their respective with each other for investment and
understandings of the businesses they overseas acquisitions.
sought to buy.
Such a strategy may not succeed. But
Both AVIC and Superior Aviation rightly while China is not the only country that
recognized the potential of Chinas employs industrial policy in this way, its
general aviation market and the deficit heavily state-backed industrial policy can
in the countrys domestic capacity to yield mixed results, depending on how it is
manufacture complex and technologically conducted and deployed.
sophisticated aircraft. When the global
financial crisis essentially crippled the US In AVICs case, while the firm is an
general aviation industry, both Chinese important cog in Chinas aviation
firms also realized that they were in a industrial policy, the state giant also
buyers market and were well positioned happens to have a solid grasp of the

global aviation business. Its leaders goals are not technical experts in the
understood how acquiring a firm like sectors they are supposed to oversee.
Cirrus made commercial sense and For instance, when E-Town became
could help facilitate the diffusion of involved with the Hawker bid, its main
new technology in the Chinese market. preoccupation was to build general
This was not AVICs first acquisition, aviation capabilities in Beijing but the
so the Chinese SOE also understood group had little knowledge or expertise
the need to keep the American of the aviation business.
management intact and allow the US
company to continue expanding and As if to reinforce this point, E-Town
developing new products. Cirrus solid somehow delegated a nearly $2 billion
post-acquisition performance in the negotiation to a man who probably
China market is some testament to knew even less about the aviation
AVICs decades of experience in the industry than E-Town. Nor did Chengs
aviation business. previous failures and his various
connections seem to raise red flags
But some of the features inherent in for the Beijing government. Whatever
Chinese industrial policy were also internal recriminations took place after
responsible for Superiors utterly the Hawker deal folded is unknown. But
disastrous outcome. For one thing, the it is likely that the botched negotiations
moral hazard issue was on prominent cost E-Town at least $50 million.
display in the Hawker case. Superiors
Cheng appeared able to exploit the Beijing The aviation industry is sensitive to
governments loose purse strings and economic cycles. This means that
eagerness to build an aviation industry, aviation firms tend to be conservative
and he did so to great effect. Cheng with their financing and try to set
essentially succeeded in convincing realistic targets for expansion and R&D
the Beijing government to bear a spending. But that was not exactly the
disproportionate share of the downside case with these two US firms. Just before
cost if the deal failed. In other words, the onslaught of the financial crisis,
Cheng was hardly gambling with his own Cirrus began developing an entirely new
money while the Beijing governments product that required R&D investment.
willingness to spend yielded to Superior For its part, Hawker borrowed heavily.
a soft budget constraint. That meant In both instances, these imprudent
Superior could agree to a $50 million strategies turned out to be very costly
deposit without blinking an eye. during the subsequent downturn.
Most Chinese bureaucrats who are The Chinese aviation industry dodged a
tasked with managing government crisis after 2008 and actually benefitted
funds to achieve industrial policy from the downturn in the global aviation

market. Yet that may not be the case they could meet some harsh realities
next time. In another 5 to 10 years, as when the next recession hits.
the Chinese aviation market matures
and the pent-up demand is largely met, Ironically, despite all the baggage it
industry growth will invariably slow carried in terms of being a Chinese
down. At that point, another economic defense contractor, AVIC, the state-
recession could prove very challenging owned defense and aerospace
for Chinese aviation firms to weather, conglomerate, executed its Cirrus
particularly given their suboptimal acquisition almost seamlessly.
management, extensive bureaucracy,
and regulations that beset the industry. Instead, it was the private Chinese
company backed by a local government
Consequently, the Chinese government financing arm, chasing pipe dreams like
and domestic aviation firms would do antique helicopters and jet engines,
well to absorb some of the lessons that left a trail of failure. Ultimately,
from US aviation firms misfortunes knowledge, expertise, and industry
during the post-2008 crisis. Otherwise, experience matter greatly.

Endnotes
1
Cohen, Tova, Elbit Systems Buys M7 Aerospace for $85 Mln, Reuters, December 15, 2010, http://www.
reuters.com/article/elbitsystems-idUSLDE6BE0A720101215.
2
2015 General Aviation Statistical Databook & 2016 Industry Outlook, General Aviation Manufacturers
Association, https://www.gama.aero/files/GAMA_2015_Databook_LoRes%20updated%203-29-2016.pdf.
3
Ibid.
4
Interview.
5
6
Ibid.
7
Asia Pacific Region Helicopters Fleet Report Year End 2015, Asian Sky, http://asianskygroup.com/attach-
ment/news/ASG%20Business%20Jet%20Fleet%20Report%202015%20EN.pdf.
8
Bombardier Business Aircraft 2016-2025 Market Forecast, Bombardier, http://ir.bombardier.com/var/
data/gallery/document/85/38/92/64/14/Bombardier-Business-Aircraft-2016-2025-Market-Forecast-en.pdf.
9
10
Horton, Chris, Chinas Aviation Market Is Taking Hold, New York Times, May 24, 2016, http://cn.ny-
times.com/business/20160524/c24iht-rav-china/dual/.
11
The Guiding Opinions on Promoting Development of the General Aviation Industry (Guo Ban Fa [2016]
No. 38), State Council, http://www.gov.cn/zhengce/content/2016-05/17/content_5074120.htm. Engilsh
translation: "State Council Issues Guideline to Boost General Aviation Industry," Jiamu Sun, Lexology, June
21 2016, http://www.lexology.com/library/detail.aspx?g=ff496e47-a9f9-40f9-a719-60440f4771f6.
Gustafson, David, The Klapmeier BrothersHomebuilts to Factory Builts, aircraftspruce.com, http://

12
www.aircraftspruce.com/pdf/KlapmeierBrothers.pdf.
13
Cirrus Designs Alan And Dale Klapmeier: Dumb Enough To Start And Smart Enough To Finish, Airport
Journals, January 1, 2007, http://airportjournals.com/cirrus-designs-alan-and-dale-klapmeier-dumb-
enough-to-start-and-smart-enough-to-finish/.

14
Ibid.
15
Reference for Business, Cirrus Design Corporation Company Profile, Information, Business Descrip-
tion, History, Background Information on Cirrus Design Corporation, http://www.referenceforbusiness.
com/history2/97/Cirrus-Design-Corporation.html.
16
Ibid.
17
Cirrus Designs Alan and Dale Klapmeier: Dumb Enough to Start and Smart Enough to Finish, Airport
Journals, http://airportjournals.com/cirrus-designs-alan-and-dale-klapmeier-dumb-enough-to-start-and-
smart-enough-to-finish/.
18
Ibid.
19
Cutler, Colin, How The 4 Types of Aircraft Flaps Work, March 1, 2016, http://www.boldmethod.com/
learn-to-fly/aircraft-systems/4-types-of-flaps/.
20
21
Fallows, James, China Airborne (New York: Random House, Inc., 2012), 140.
Gustafson, David, The Klapmeier BrothersHomebuilts to Factory Builts, aircraftspruce.com, http://

22
www.aircraftspruce.com/pdf/KlapmeierBrothers.pdf.
23
Ibid.
24
Rare Airplanes in Flight, Flying, August 26, 2013, http://www.flyingmag.com/aircraft/rare-air-
planes-flight?page=0,7.
25
Cirrus To Be Acquired by Chinese Firm, Star Tribune, February 28, 2011,http://www.startribune.com/
cirrus-to-be-acquired-by-chinese-firm/117076333/.
26
Ibid.
27
Fallows, James, Turn Left at Cloud 109, New York Times Magazine, November 21, 1999, http://www.
nytimes.com/1999/11/21/magazine/turn-left-at-cloud-109.html?pagewanted=all&src=pm.

28
29
Getting Cirrus About Aircraft Parachutes, Business Aircraft Jet Center, March 2013, http://www.busi-
nessaircraftcenter.com/articles/small-aircraft-safety-crash-prevention-danbury-airport-art0313.htm.
30
31
Cirrus website, http://cirrusaircraft.com/innovation/airframe-parachute/.
32
Finding the Right Funding The Klapmeier Brothers Key Move, Startup Nation, March 14, 2010,
https://startupnation.com/start-your-business/fund-your-business/find-funding/finding-the-right-funding-
the-klapmeier-brothers-key-move/.
33
Fallows, James, "Turn Left at Cloud 109," New York Times Magazine, November 21, 1999, http://www.
nytimes.com/1999/11/21/magazine/turn-left-at-cloud-109.html?pagewanted=all&src=pm&_r=0.
34
Finding the Right Funding The Klapmeier Brothers Key Move, Startup Nation, March 14, 2010,
https://startupnation.com/start-your-business/fund-your-business/find-funding/finding-the-right-funding-
the-klapmeier-brothers-key-move/.
35
Touzeau, Mike, Brothers Achieve Childhood Dream to Take On Cessna, Green Valley News, May 5,
2004, http://www.gvnews.com/archives/brothers-achieve-childhood-dream-to-take-on-cessna/article_
abbf1b6d-cd89-5f52-a572-7f25ad3e840e.html?mode=jqm.
36
Kelleher, Bob, Cirrus Design Looks West, Minnesota Public Radio, June 7, 2005, http://news.minneso-
ta.publicradio.org/features/2005/06/07_kelleherb_cirrus/.
37
Cirrus company PDF accessed at https://web.archive.org/web/20130405171143/http://www.cirrusde-
sign.com/static/pricesheets/press/Press%20backgrounder.pdf.
38
39
Ibid.

40
Pew, Glenn, Cirrus The-Jet Flies, July 3, AVweb, July 3, 2008, http://www.avweb.com/avwebflash/
news/Cirrus_TheJet_First_Flight_198239-1.html.
41
Niles, Russ, Cirrus The Jet Image Emerges, AVweb, April 19, 2007, http://www.avweb.com/news/snf/
SunNFun2007_CirrusThe-Jet_JigsawPuzzle_195000-1.html.
42
Saini, Meredith, "Cirrus Secures Jet Plant Space," AVweb, December 30, 2007, http://www.avweb.com/
avwebflash/news/CirrusDesign_TheJet_Plant_DuluthMinnesota_196855-1.html.
43
Ibid.
44
Ibid.
45
Cirrus Design Announces 10 Layoffs in GF, Grand Forks Herald, January 8, 2009, http://www.grandfork-
sherald.com/content/business-news-cirrus-design-announces-10-layoffs-gf.
46
Niles, Russ, More Cuts at Cirrus, Hawker Beech, Maybe Cessna, AVweb, August 27, 2009, http://www.
avweb.com/avwebflash/news/MoreLayoffsAtCirrusHawkerBeech_201064-1.html.
47
Marsh, Alton K., Cirrus Faces Expensive Lawsuits, AOPA, June 18, 2009, https://www.aopa.org/news-
and-media/all-news/2009/june/18/cirrus-faces-expensive-lawsuits.
48
Niles, Russ, "Klapmeier Out As Cirrus Chairman," AVweb, August 1, 2009, http://www.avweb.com/news/
airventure/EAAAirVenture2009_Klapmeier_Cirrus_200911-1.html.
49
Ibid.
50
Campbell, Jim, No Deed Ever Goes Unpunished: Taking On the Cirrus Fiasco, Part 1, Aero-News
Network, October 7, 2011, http://www.aero-news.net/index.cfm?do=main.textpost&ID=5751ECF1-73EF-
4A3E-AF5A-CBE60022DEC3.
51
Cirrus Design Announces Brent Wouters as President, COO, Aviation Pros, March 3, 2008, http://www.
aviationpros.com/press_release/10405255/cirrus-design-announces-brent-wouters-as-president-coo.
52
Fallows, James, China Airborne (New York: Random House, Inc., 2012), 140.
53
Ibid.
54
Ibid.

Creator and Former CEO of Cirrus Leaves Company, Duluth News Tribune, August 23, 2009, http://
55
www.duluthnewstribune.com/content/creator-and-former-ceo-cirrus-leaves-company.
56
Ibid.
Feyder, Susan, "Cirrus Taps Co-founder Klapmeier as Its CEO," Star Tribune, September 19, 2011, http://
57
www.startribune.com/cirrus-taps-co-founder-klapmeier-as-its-ceo/130123628/.
58
Ibid.
59
Brent Wouters profile, https://www.linkedin.com/in/brentwouters; Brent Wouterswebsite,
http://104.131.122.231/case-study/cirrus-aircraft/.
Feyder, Susan, "Cirrus Taps Co-founder Klapmeier as Its CEO," Star Tribune, September 19, 2011, http://
60
www.startribune.com/cirrus-taps-co-founder-klapmeier-as-its-ceo/130123628/.
61
Jun, Wang, "AVIC Seeking Growth Beyond Aerospace Sector," China Daily, August 31, 2012, http://usa.
chinadaily.com.cn/epaper/2012-08/31/content_15724474.htm.
62
Ibid.
63
Ibid.
64
Cirrus Denies Reports of Sale to China, Aero-News Network, November 29, 2010, http://www.ae-
ro-news.net/index.cfm?do=main.textpost&id=c2284e73-9f42-4a09-ae1d-957bcea11bad.
65
"Congressman Cravaack Urges Caution in Cirrus Deal With China," Aero News Network, March 28, 2011,
http://www.aero-news.net/index.cfm?do=main.textpost&id=86EF52EE-7A6D-4AC9-AE84-A34B91A34E32.
66
Cirrus to be acquired by Chinese firm, Star Tribune, February 28, 2011, http://www.startribune.com/
cirrus-to-be-acquired-by-chinese-firm/117076333/.
67
Ibid.
68
Jun, Wang, "AVIC Seeking Growth Beyond Aerospace Sector," China Daily, August 31, 2012, http://usa.
chinadaily.com.cn/epaper/2012-08/31/content_15724474.htm.
69
Ibid.

70
"Cirrus Aircraft Delivers Strong 2015 Performance as Vision Jet Accelerates Towards First Customer Deliv-
ery," Cirrus Aircraft, February 10, 2016, http://cirrusaircraft.com/2015-update/.
71
GDAT Company (a Chinese aircraft dealer) website, http://www.gdaeroindustry.com/news/118.html.
72
Lynch, Kerry, "Cirrus Lands Deals from China for 68 Aircraft," AIN online, April 14, 2015, http://www.
ainonline.com/aviation-news/business-aviation/2015-04-14/cirrus-lands-deals-china-68-aircraft.
73
"Progress MN: Cirrus Aircraft," Finance & Commerce, April 10, 2015, http://finance-commerce.
com/2015/04/progress-mn-cirrus-aircraft/.
74
Renalls, Candace, "Duluth-Made Cirrus Light Jet Will Be First of Its Kind To Market," Pioneer Press, Octo-
ber 28, 2015, http://www.twincities.com/2015/02/15/duluth-made-cirrus-light-jet-will-be-first-of-its-kind-
to-market/.
75
Interview.
76
Niles, Russ, Cirrus Looks Beyond Vision Jet, AVweb, July 29, 2013, http://www.avweb.com/avwebflash/
news/Cirrus-Looks-Beyond-Vision-Jet-220257-1.html.
77
Bywater, Michael, "Our Forgotten Freedom Fighter: Why the Unsung Hurricane Is the True Ace of the
Battle of Britain," Independent, July 8, 2010, http://www.independent.co.uk/news/uk/this-britain/our-for-
gotten-freedom-fighter-why-the-unsung-hurricane-is-the-true-ace-of-the-battle-of-britain-2022105.html.
78
"Raytheon Merging 2 Aircraft Units," New York Times, September 16, 1994, http://www.nytimes.
com/1994/09/16/business/company-news-raytheon-merging-2-aircraft-units.html.
79
Company Histories, Raytheon Aircraft, http://www.company-histories.com/Raytheon-Aircraft-Hold-
ings-Inc-Company-History.html.
Wilson, Ron, Kansas Profile Now Thats Rural: Walter and Olive Ann Beech, January 13, 2016, https://
80
www.ksre.k-state.edu/news/news-stories/2016-news-releases/january/ksprofile-beech011316.html.
81
"Beechcraft Bonanza G36," Flying Magazine, December 16, 2013, http://www.flyingmag.com/photo-gal-
lery/photos/beechcraft-bonanza-g36.
Wilson, Ron, Kansas Profile Now Thats Rural: Walter and Olive Ann Beech, January 13, 2016, https://
82
www.ksre.k-state.edu/news/news-stories/2016-news-releases/january/ksprofile-beech011316.html.

83
Raytheon 2006 10-k, http://investor.raytheon.com/phoenix.zhtml?c=84193&p=irol-sec&secCat01TF.6_
rs=21&secCat01TF.6_rc=10&control_searchbox=&control_year=0&control_selectgroup=1.
84
Ibid.
85
"Three Bids Expected for Raytheon Unit," Associated Press, December 8, 2006, accessed at http://www.
nytimes.com/2006/12/08/business/08raytheon.html?_r=0.
86
Raytheon 2006 10-k, http://investor.raytheon.com/phoenix.zhtml?c=84193&p=irol-sec&secCat01TF.6_
rs=21&secCat01TF.6_rc=10&control_searchbox=&control_year=0&control_selectgroup=1.
87
Hawker Beechcraft Acquisition Company, 2007 10-K, https://www.sec.gov/Archives/edgar/
data/1396426/000119312508041624/d10k.htm#toc.
88
Hawker Beechcraft Acquisition Company, 2011 10-K, https://www.sec.gov/Archives/edgar/
data/1396426/000119312512162736/d281720d10k.htm#tx281720_2.
89
Ibid.
90
Pew, Glenn, "Bankruptcy For Hawker Beechcraft," AVweb, May 3, 2012, http://www.avweb.com/avweb-
flash/news/hawker_beechcraft_bankruptcy_restructuring_wichita_court_debt_layoff_206639-1.html.
91
Interview.
92
Associated Press. "Textron CEO Says Hawker Beechcraft Bid Possible," July 19, 2012, http://archive.bos-
ton.com/business/articles/2012/07/19/textron_ceo_says_hawker_beechcraft_bid_possible/.
National Enterprise Credit Information Publicity System, company page for Beijing Superior Aviation(
93
), http://www.gsxt.gov.cn/corp-query-homepage.html.
94
"Haili Helicopter Discontinued Production," 21st Century Business Herald, July 19, 2012, http://news.
carnoc.com/list/228/228712.html.
95
"Superior's Filed Attempt To Acquire Hawker," Time Weekly, November 8, 2012, http://www.time-week-
ly.com/story/2012-11-08/127747.html.
96
Brantly International, http://broom02.revolvy.com/main/index.php?s=Brantly%20International.
97
"How Serious is Helicopter King's Latest Acquisition," Tencent Finance, July 21, 2012, http://finance.
qq.com/zt2012/zsfj/.

98
99
Asia Pacific Region Helicopters Fleet Report Year End 2015, Asian Sky, http://asianskygroup.com/at-
tachment/news/ASG%20Business%20Jet%20Fleet%20Report%202015%20EN.pdf.
"'Acquisition Lunatic Cheng Shenzong: Layman or Speculator," 21st Century Business Herald, July 19,
100
2012, http://finance.ifeng.com/news/people/20120719/6783115.shtml.
101
Asia Pacific Region Helicopters Fleet Report Year End 2015, Asian Sky, http://www.asianskygroup.com/
attachment/news/ASG%20Asia%20Pacific%20Civil%20Helicopter%20Fleet%20Report%20Year%20End%20
2015%20EN.pdf.
PRC State Council, 11th Five-Year Plan, http://www.gov.cn/node_11140/2006-03/18/content_230087.

102
htm.
103
"Qingdao to Build Helicopter Export Industrial Park," Qingdao News, October 28, 2009, http://news.
104
Directives on Accelerating the Development of Shandong Aviation Industry, Shandong Economic and
Trade Committee, May 8, 2009, http://www.sdeic.gov.cn/articles/ch00222/200905/1306305036716358.
shtml.
105
"Catalogue Guiding Foreign Investment in Industry," PRC National Development and Reform Commis-
sion, http://www.ndrc.gov.cn/zcfb/zcfbl/201503/W020150402620481787669.pdf.
106
"Haili Helicopter Discontinued Production," 21st Century Business Herald, July 19, 2012, http://news.
107
Baosen, Liu, China's Largest Unmanned Helicopter Conducted Its First Test Flight, Xinhua, May 7, 2011,
http://news.xinhuanet.com/tech/2011-05/07/c_121389868.htm.
108
"Close-Up on Superior, NetEase, July 16, 2012, http://money.163.com/special/view226/.
Chinese court document "Qingdao Haixi V.S. Qingdao Haili," accessed at http://wenshu.court.gov.cn/
109
content/content?DocID=3bd9515f-8b01-489d-a83c-c2eb453da6a2&KeyWord=%E9%9D%92%E5%B2%9B%
E6%B5%B7%E5%88%A9.
110
Ibid.

111
"Superior's Failed Attempt To Acquire Hawker," Time Weekly, November 8, 2012, http://www.
time-weekly.com/story/2012-11-08/127747.html; "Close-Up on Superior," NetEase, July 16, 2012, http://
money.163.com/special/view226/.
112
National Enterprise Credit Information Publicity System, company page for Beijing Supeiyourui (
), under Legal Dispute (), http://www.gsxt.gov.cn/corp-que-
ry-homepage.html.
113
"Legal Enforcement Action Regarding Borrowing Dispute Between Weifang Gongli and Weifang
Tianxiang," http://wenshu.court.gov.cn/content/content?DocID=05271169-e843-4799-8871-0b2fa81d
80b5&KeyWord=%E6%BD%8D%E5%9D%8A%E5%A4%A9%E7%BF%94%E8%88%AA%E7%A9%BA; "Legal
Enforcement Action Regarding Borrowing Dispute Between Weifang Jinda and Weifang Tianxiang," http://
wenshu.court.gov.cn/content/content?DocID=c9541fd3-495a-4baf-a336-66e9ad3fb707&KeyWord=%E6%
BD%8D%E5%9D%8A%E5%A4%A9%E7%BF%94%E8%88%AA%E7%A9%BA%E5%B7%A5%E4%B8%9A%E6%9
C%89%E9%99%90%E5%85%AC%E5%8F%B8.
114
time-weekly.com/story/2012-11-08/127675.html.
115
"Close-Up on Superior," NetEase, July 16, 2012, http://money.163.com/special/view226/.
116
time-weekly.com/story/2012-11-08/127675.html.
117
"Close-Up on Superior," NetEase, July 16, 2012, http://money.163.com/special/view226/.
National Enterprise Credit Information Publicity System, company page for Beijing Superior Aviation (
118
Hawker Beechcraft Receives Court Approval to Enter into Exclusive Negotiations with Superior
119
Aviation, Hawker Beechcraft, July 17, 2012, http://www.beechcraft.com/restructuring/Default.

aspx?item=13.
120
Interview.
Memorandum Decision Denying Request for Continuance and Expunging Administrative Claims,
121
United States Bankruptcy Court Southern District of New York, October 25, 2013, http://www.nysb.
uscourts.gov/sites/default/files/opinions/227989_1639_opinion.pdf.
122
Ibid.

123
Interview.
124
Ibid.
125
Ibid.
126
Ibid.
127
Ibid.
128
Ibid.
Hawker Beechcraft Announces Intent to Emerge from Chapter 11 as Standalone Company, Hawker
129
Beechcraft, October 18, 2012, http://www.beechcraft.com/restructuring/Default.aspx?item=16.
Memorandum Decision Denying Request for Continuance and Expunging Administrative Claims, Unit-
130
ed States Bankruptcy Court Southern District of New York, October 25, 2013, http://www.nysb.uscourts.
gov/sites/default/files/opinions/227989_1639_opinion.pdf.
131
Ibid.
132
Ibid.
133
Ibid.
134
Ibid.
135
Ibid.
Moore, Jim, Hawker Beechcraft Creditors Approve Bankruptcy Plan, AOPA, January 30, 2013, https://www.
136
aopa.org/news-and-media/all-news/2013/january/30/hawker-beechcraft-creditors-approve-bankruptcy-plan.
Ostrower, Jon, and John Kell, Textron in $1.4 Billion Deal to Acquire Beechcraft, Wall Street Journal,
137
December 26, 2013, http://www.wsj.com/articles/SB10001424052702303345104579283043706553808.
Textron 2014 Annual Report, http://d1lge852tjjqow.cloudfront.net/CIK-0000217346/4ad17cd9-407c-

138
4317-ac23-03271f7fe9ab.pdf?noexit=true.
139
Ibid.

140
Interview.
141
Laboda, Amy, "Groundbreaking Near for Superior Aviation Town," AinOnline, February 9, 2015, http://
www.ainonline.com/aviation-news/business-aviation/2015-02-09/groundbreaking-near-superior-avia-
tion-town.
142
"Facilitating Construction of New Business Jet Airport," Shunyi Municipal Government, August 22, 2014,
http://www.shyjw.gov.cn/NewsView.aspx?NewsID=2968.
143
Beijing Municipal Bureau of Land and Resources, http://www.bjgtj.gov.cn/col/col3489/index.html.
National Enterprise Credit Information Publicity System, company page for Qingdao Haili (
144
Houpt, Daniel, "Civilian UAV Production as a Window to the PLAs Unmanned Fleet," Jamestown
145
Foundation, February 21, 2012, http://www.jamestown.org/single/?tx_ttnews%5Btt_news%5D=39030#.

V40rErgrJhE.
146
Chinese employment website, https://company.liepin.com/comp_243993/; http://sou.zhaopin.com/
jobs/companysearch.ashx?CompID=CC200505112.
147
Company website, http://www.ctuc.com.cn/news.asp; "Superior Group Visited Helan County
for General Aviation Investment," Xinhua, March 31, 2015, http://www.nx.xinhuanet.com/2015-
03/31/c_1114825306.htm.
The Guiding Opinions on Promoting Development of the General Aviation Industry (Guo Ban Fa [2016]
148
No. 38), State Council, http://www.gov.cn/zhengce/content/2016-05/17/content_5074120.htm.

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Paulson Papers on Investment Case Study Series

Flying High and Flying Blind:

Flying High and Flying Blind

Cover Photo: Reuters/China Stringer Network

Flying High and Flying Blind

Deal 1: Cirrus Aircraft and AVIC

1994 Cirrus relocates to Duluth, Minnesota.

Flying High and Flying Blind

2015 Cirrus announces plans to establish a customer delivery center in Knoxville,

Deal 2: Hawker Beechcraft and Superior Aviation Beijing

1920 H.G. Hawker Engineering, the predecessor of Hawker, is established in

1980 Beech Aircraft becomes a subsidiary of Raytheon.

2010 Superior Aviation Beijing is formed in China through the purchase of

May Hawker Beechcraft files for Chapter 11 bankruptcy in US court.

July Superior Aviation enters into an exclusive negotiation with Hawker to

Flying High and Flying Blind

October Negotiation over Superior Aviations acquisition of Hawker Beechcraft breaks

2014 Rhode Island-based Textron Aviation ultimately buys Hawker Beechcraft.

Flying High and Flying Blind

Superior Aviation Beijing

Aviation Industry Corporation of China (AVIC)

China Aviation Industry General Aircraft (CAIGA)

Flying High and Flying Blind

Flying High and Flying Blind 1

But simply having a Chinese-made that firm was eventually acquired by

Flying High and Flying Blind 2

investors, therefore, not only could invest in its ambitious concept of a

Flying High and Flying Blind 3

Flying High and Flying Blind 4

transactions about what works, and (PLA) connections, turned out to be

Flying High and Flying Blind 5

Hiring experienced Western The conceptual basis for this is the

Flying High and Flying Blind 6

China and the Global General Aviation Market

Figure 1. Total Global General Aviation Aircraft Shipments

Source: General Aviation Manufacturers Association.

Flying High and Flying Blind 7

ownership. Taken together, the United significant regulatory barriers (see

Flying High and Flying Blind 8

Source: US Census Bureau.

Figure 3. Growth of Chinas General Aviation Aircraft Fleet

Source: China National Bureau of Statistics.

Flying High and Flying Blind 9

Another bottleneck that has hampered aim to help develop homegrown

Flying High and Flying Blind 10

building boom. But developing world- up local aviation industries or attract

Flying High and Flying Blind 11

Barn to Market: How Cirrus Took Flight

Flying High and Flying Blind 12

Box 1: What is the VK-30?

The VK-30 had several unique qualities that distinguished it from

The VK-30 was a four to five-seat aircraft, Alan said. Three

Flying High and Flying Blind 13

Flying High and Flying Blind 14

These improvements and changes headquarters from Baraboo to a

Flying High and Flying Blind 15

Box 2: The CAPS System

The Klapmeiers began to seriously consider aviation safety

As a result, Cirrus developed a distinctive reputation for

Flying High and Flying Blind 16

Flying High and Flying Blind 17

Flying High and Flying Blind 18

Turbulence and Descent

Figure 4. Cirrus Aircraft Shipments