The Aviation Industry Corporation of China (Avic) is at the forefront of China’s plan to become more technologically self-reliant and a key supplier for a commercial aircraft that Beijing is trying to bring to market. But it has also been caught in the crossfire as relations between Beijing and Washington have deteriorated in recent years. In December 2020, seven of its subsidiaries landed on the US Commerce Department’s list of Chinese companies with alleged military ties . As such, they are subject to a licensing requirement for certain sensitive items that are described in US export control regulations. The state-owned military aerospace contractor was also placed on the US Department of Defence’s list of civil entities with ties to the Chinese military in June 2020, meaning it is subject to a US investment ban. Here’s a deeper look at the company and why it has found itself in Washington’s crosshairs. What is Avic? Headquartered in Beijing, Avic is an aviation and defence company controlled by the State-owned Assets Supervision and Administration Commission (Sasac), the powerful agency that oversees China’s state sector, including some of the world’s biggest companies in industries such as steel, energy, shipping, telecoms, defence and aerospace. Avic was established in 2008 after China consolidated and restructured the China Aviation Industry Corporation I (Avic Ι) and the China Aviation Industry Corporation ΙΙ (Avic ΙΙ). Avic 1 had specialised in making large planes such as bombers and fighter jets, while Avic 2 was responsible for producing smaller aircraft and helicopters. Avic has more than 100 subsidiaries, 23 listed companies and over 450,000 employees – more than America’s Boeing and Europe’s Airbus combined. The firm makes products for military use as well as for the civil aviation market. And through its many subsidiaries, it manufactures some of China’s leading fighter aircraft such as the J-10, J-11, and J-20. The company is a major supplier of components for China’s small regional jet ARJ-21 and C919, a narrow body medium-haul aircraft. It also exports products abroad, including its regional turboprop MA60 series, Y12s and the AC series helicopters. How important is Avic to China’s aviation industry? Avic plays a dominant role in research and development, operations, manufacturing and financing in China’s aviation industry. It has a monopoly on military aircraft manufacturing and maintenance, and is the third-largest shareholder of Commercial Aircraft Corporation of China (Comac), the manufacturer of C919 jet , which is designed to compete with the Boeing 737 and Airbus A320. Avic is “of high strategic importance to China’s national defence and acts as the backbone of the country’s military and civilian aviation manufacturing industry”, according to Fitch Ratings, which offers ratings for Avic International, whose majority owner is Avic. Scott Kennedy, a senior adviser at the Centre for Strategic and International Studies (CSIS), said while Avic only holds around 12.35 per cent share in Comac, it has an “outsize influence on Comac’s operations”. “Much of Comac’s original leadership, employees, facilities, and technology came from Avic,” said Kennedy, who conducted a two-year study on the company that was published in December last year. “It has continued to draw on talent and technology from Avic and other organizations from within China’s aerospace sector.” How is the US-China relationship affecting Avic? For many years, Avic and its subsidiaries have been buying overseas aviation-related assets and technology, and the company has a number of joint ventures with foreign firms, including with GE Aviation in avionics and Honeywell Aerospace in flight control systems. However, Avic’s overseas ventures have begun raising alarm bells in Washington in recent years as relations between the two countries have sharply deteriorated. There are a growing number of questions about whether Beijing’s strategy of “military-civil fusion” – a policy that aims to use civil technology to strengthen its military capacity and development – could compromise American global competitiveness, result in technology transfers and be used by the Chinese military. In 2017, the US-China Economic and Security Review Commission – which advises the US Congress – commissioned a report to look into how the Chinese government was growing its aviation manufacturing business and the resulting military implications. “Avic … has undoubtedly been the most prolific investor in US aviation,” said the report, compiled by the Rand Corporation, an American think tank. Aerospace products are valuable exports for the US economy and integral to its national security. Many aviation products fall under US export-control restrictions. China’s investment in US aviation companies is also subject to review and approval by the Committee on Foreign Investment in the United States. The committee is an inter-agency group of the US government that reviews the national security implications of foreign investments in American companies or operations. What is the outlook for Avic? China has been investing heavily to advance its aviation manufacturing capability and such investment is likely to continue. Chinese President Xi Jinping in 2018 urged the nation’s state firms to “strive to achieve the goal of building an aviation power”, as the world’s second largest economy increasingly places more resources and investment in hi-tech industries. Xi’s dual circulation strategy also promotes home-grown innovation, aiming to reduce China’s dependence on overseas markets and technology in its long-term development, a shift brought on by a deepening rift with the US. Liu Daxiang, deputy director of the science and technology committee at Avic, said in December last year that aviation technology had accelerated this century, competition was getting “more fierce”, and that China had to rely on its ability to innovate. “The established countries in aviation have become more strict with us when it comes to technology access,” he said in a video seminar organised by the Chinese Society of Aeronautics and Astronautics. “In the past, we have leveraged market access in exchange for technology – I don’t think it works [for aviation].” Kennedy of CSIS estimated that the C919 has received somewhere between US$49 billion and $72.1 billion of state-related support, more than double the US$22 billion the World Trade Organization determined Airbus had received over many years from the European Union. The C919 is expected to win airworthiness certification by the end of the year after more than a decade of development. Without mentioning foreign hostility to the Chinese aviation industry, Avic said in its working report for 2021 it would “accelerate the deployment of the dual circulation strategy and lead and guide the [aviation] industry and focus on problems restricting the development”. The company highlighted the lack of innovation ability, supply chain co-ordination and the development of civil aircraft technology and products as its major “shortcomings” in China Aviation News , a publication it owns. “There are shortcomings in the development of civil aircraft technology, products, and industries,” Avic said. “The ability to integrate market resources to promote business development is weak and lacks the ability to comprehensively respond to the impact of internal and external risks.” Want to know more? Each week, South China Morning Post journalist Finbarr Bermingham wraps up the latest economic data from China, delves deep into the ongoing US-China trade and tech war, and examines China’s changing economic relationship with Europe, Africa and the Indo-Pacific in the China Geopolitics podcast. And in every episode of the Inside China podcast, we take a deep dive into a specific topic, mixing independent reporting and exclusive interviews to bring you unique insights into an emerging potential superpower. Now, we are featuring regular updates on the coronavirus pandemic from across the country.