China Aircraft Engine Industry Assessment

1. China Aircraft Engine Industry Assessment A Comprehensive Analysis of Technology, Research & Development, and Manufacturing in China’s Aircraft Engine Value Chain January 2012 Redacted - Work in Progress

2. Executive Summary Chinese Engines May Not Meet Operators Reliability Expectations • China will become the second largest market for aircraft and aircraft engine deliveries over the next 20 years • The COMAC C919 was created to compete with Airbus and Boeing in the 150+ pax single-aisle market • AVIC Commercial Aircraft Engine Co. (ACAE) will push to develop its own commercially-viable, certified, high-bypass turbofan engine • Most critical challenges are not necessarily gaps in manufacturing technology, but rather the Chinese industry’s ability to master these core competencies: • Integration of large panels of suppliers and their components • After-sales service level meeting airlines’ expectations • With Western engine OEMs reaching Delays and Cancellations (D&C) reliability rates exceeding 99.98% on their most mature programs, the key question for China’s engine manufacturing industry is firmly planted on reliability. • This report dissects the Chinese engine industry module-by-module and traces the full value chain from research and development to raw materials to design/manufacturing/production to after-sales support. If you have limited time, please skip to Slide xx for Porter’s Five Forces Analysis and Technology Performance Evaluation © 2011, Avia-Tek. All Rights Reserved January 2012 Redacted - Work in Progress

3. Executive Summary Is Now the Time to Enter Into the Chinese Aircraft Engine Market? • Besides the development of new engines, the capabilities of Chinese companies to manufacture engine components will continue to improve in order to satisfy the demand from • local programs • license-built engines • international subcontracting • These trends will bring about many opportunities for international companies to participate in the market by either sales or sourcing. • On the other hand, the industry will increasingly feel pressures from • appreciating currency • lack of skilled management • Some of these challenges are unavoidable, while others would require massive changes in management practices, company cultures, government policies and innovation to be overcome. • The first step to successfully navigating the Chinese aircraft engine market is a firm understanding of the current industry situation both technically and strategically. Is the risk worth the reward? IP Protection Export Control Government Policies Growth Market Opportunity Lower-Cost Sourcing If you have limited time, please skip to Slide xx for Porter’s Five Forces Analysis and Technology Performance Evaluation © 2011, Avia-Tek. All Rights Reserved January 2012 Redacted - Work in Progress

4. © 2011, Avia-Tek. All Rights Reserved January 2012 Redacted - Work in Progress

5. Manufacturing & Design Capabilities – Fan Blades Main R&D Focus Is on Titanium Wide Chord Hollow Fan Blades • Superplastic forming and diffusion bonding (SPF/DB) became practically applicable 10 years ago. • Technical demonstrators of the first SPF/DB hollow fan blades started in the early 1990s, though xxxxxxxxxxxxxxx have been seen so far.1 • SPF/DB research & development is mainly carried out by Shenyang 606 Institute and BAMTRI. • There is almost XXXXXXXXXXXXXX composite fan blades, XXXXXXXXXXXXXX are expected in the near future. However, the Y-9 turboprop transport aircraft utilizes xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx six-blade propeller. 2 • Adoption of Carbon Fiber Composite (CFC) fan blades in China is lagging behind significantly compared to the West. China lacks xxxxxxxxxxxxx and xxxxxxxx in design and manufacturing processes. This coupled with xxxxxxxx prevents any serious production. • Current R&D activities are focused on surface treatment and design methods, such as finite element method (FEM) simulation of wide chord fan blades. 3 • Academic publications from China have increased continuously in the last decade. Currently approximately **% of the world total are published by Chinese scientists. 4 © 2011, Avia-Tek. All Rights Reserved

6. Manufacturing & Design Capabilities – Fan Blades XXXXXXXXXXXXXXXXXXXXXXXX and Imports Are Always Available Composite • There XXXXXX carbon fiber suppliers originating from China 1 Titanium • XXXXXX titanium is the material of choice for fan blades in China. • Chinese titanium supply can meet the demand for domestic military engine fan blade manufacturing, but the quality of the sheet may xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxapplications. 2 • Chinese suppliers can produce titanium sheet for use in SPF/DB processes to Currently there is one main supplier, which serves 90% of the aerospace and defense market in China. • China is using imported equipment to manufacture and test titanium sheet for production of hollow core fan blades. For example: 3 • Hot and cold rolling mills from Japan and Germany • Vacuum creep flattener (VCF) furnaces from Germany • Surface grinding machines from Germany • Non-destructive testing (NDT) ultrasonic test beds from the USA • The xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx program is currently a bottleneck. However, investments approaching x being made in this area and the situation is likely to change in the next 3 to 5 years. 4 • Aerospace-grade titanium sheet from the US, Russia, Japan and other countries is available and widely used in China. Figure 1: VCF Furnace imported from Germany Figure 2: Hot roller imported from Japan Figure 3: Titanium sheet inspection in China © 2011, Avia-Tek. All Rights Reserved

7. Manufacturing & Design Capabilities – Fan Blades Hollow Fan Blade Production Is About to Mature • Currently there is experimental manufacturing xxxxxxxxxxxxxxxxxx of wide chord hollow fan blades in China, but no civil use and doubtful military production. 1 • It is unknown if Chinese fighter jet engines use hollow fan blades, and if they do, since the fan diameter would be much smaller than on a high-bypass ratio (HBR) engine, the technology cannot be scaled up directly. 2 • Shenyang 606 Institute is xxxxxxxxxxxxxxxxxxxxxxxxx of hollow fan blades while they XXXXXXXXXXXXXXXXXXXXXX general, BAMTRI xxxxxxxxxx and implements the industrial and manufacturing process as a whole. • It is likely that 606 Institute-designed blades will be used in XXXXXXXX engine currently under development to power the • BAMTRI and Liming use the following SPF presses for the production of fan blades: 3 • Rhodes • XXXXXX • XXXXXX • ACB • XXXXXX • XXXXXX • ACAE chose a titanium xxxxxxxxxxxxxxxxxxxxxx blade design for the CJ1000, which likely xxxxxxxxxxxxxxxxxxxxxxxxxxx red core structure. It is expected that they will design the fan blade internally. However, due to qualification and certification issues, a foreign company might be selected for manufacturing. 4 Total number of fan blades produced = *** Figure 4: BAMTRI SPF press XXXXXXX © 2011, Avia-Tek. All Rights Reserved

8. Manufacturing & Design Capabilities – Fan Blades Chinese Fan Blades xxxxxxxxxx Years Behind Western Tech • The first hollow fan blades with honeycomb core where introduced by Rolls-Royce in 1984. Starting in the early 1990s, SPF/DB was introduced and mastered for fan blade production. 1 • Nowadays, new HBR engines from Western manufactures use wide chord CFC fan blades, the GE90 – equipped with composite fan blades – has been in service since 1995. 2 • The quality and reliability of Chinese developed and manufactured • In China, the design of the CJ1000 is still based on titanium manufactured fan blades, and will likely not be domestically produced. 4 • The fan blade technology in China is xxxxxxxxxxxxxxxxx behind current technologies. xxx xxx China xxx Honeycomb core hollow fan blades SPF/DB fan blades Composite blades West 1984 1990 1995 © 2011, Avia-Tek. All Rights Reserved

9. Research Methodology Purpose and Methodology The purpose of the Avia-Tek China Aircraft Engine Industry Assessment is to assist aerospace companies gain a better understanding of the emerging Chinese industry. To this end, the report was designed with these goals: • In-depth analysis of the Chinese aircraft engine value chain including raw materials, research and development, manufacturing capability, quality and after-market service. • Explanation of current programs and developments in the industry (civil and defense) • Overview of the Chinese legacy engine programs • In-depth evaluation of Chinese companies’ capabilities in designing, manufacturing and integrating aircraft engines and engine components • Overview of the activities of international companies in China. • Analysis and assessment of the industry including a Porter’s Five Forces analysis, PEST analysis, legal and market entry opportunities. To accomplish these goals, Avia-Tek undertook a research campaign that included primary and secondary research. Primary research consisted of on-site inspections and one-on-one interviews with industry experts, factory and institute professionals, professors, journal and publication editors, as well as suppliers along the whole value chain.Secondary research was conducted through general web searches, analysis of technical journals, database searches, general industry knowledge and the preparation of this report. As with most Avia-Tek market research, the majority of it is based in primary research. For this reason, Avia-Tek sent consultants to inspect the key industry players and their major facilities when possible. Due to the highly sensitive and secretive nature of the aerospace, and in particular the engine, industry in China, great care has been taken in the gathering of data and information and protection of the sources confidentiality. In many cases, requested information may have been deemed classified and therefore would not be pursued directly, but inferred or estimated based on adjacent indicators or data. © 2011, Avia-Tek. All Rights Reserved January 2012 Redacted - Work in Progress