China's Turn to Learn Old Lessons

[BizQA]

China Eastern Airlines and Pratt & Whitney engine overhaul joint venture problems

A quick search of the internet shows that the referenced joint venture was launched several years ago in Shanghai, the home base of China Eastern Airlines, and focused on the repair of CFM56 engines. The aftermarket business seems to be where the profits are in the engine business. Now that the joint venture facility is built as you indicated, there would seem to be significant opportunity for China Eastern Airlines and Pratt & Whitney. You said that the China Eastern President Ma Xulun was "determined to renege on the joint venture contract." What does this mean?

 

[Soaringdragon]

Corruption in Aircraft & Other Purchases at China Eastern Airlines

China is trying hard to reduce corruption. They recognize that they must do this to remain a strong business competitor in the long run. The fact that one perpetrator was arrested (albeit the junior member of the dirty duo) is an excellent step by the Chinese government - now the senior member, China Eastern Airlines President Ma Xulun, should be removed as well.

In China's form of governace, the state maintains possession of the country's assets, in ideal terms, for the good of all the people. State owned enterprises (SOEs) use the country's assets (capital, land, raw materials, etc) to achieve business results. The leaders of major SOEs have responsibility to use the assets for the greater good, not to sell the assets and put the proceeds in their own pocket - this would be stealing from the state and its people. China Eastern Airlines, one of the big three airlines in China, started as a SOE and, today, a major ownership share is still maintained by the Chinese government. The China Eastern President is still responsible for using the state assets wisely and for the greater good. Buying inferior products or more expensive equipment than needed so he can put a supplier's bribe in his own pocket is stealing from the state and is a crime.

Corruption is widespread in China today. The only entities powerful enough to implement the step-change that is needed to reduce corruption are the Chinese government and the Party. When leaders of big SOEs and companies in which the state has a major ownership share are corrupt, when they abuse the procurement system and when they steal from the state, as is the case in the cited China Eastern Airlines corruption in aviation purchases, the Chinese government has a right to make an example of the high level perpetrators so all know that this type of abuse will not be accepted.

 

[Soaringdragon]

China Eastern Airlines and Pratt & Whitney engine overhaul joint venture problems

As part of the joint venture contract between the two subject companies, as is typical, China Eastern Airlines is required to send their CFM56 engines to the joint venture for repair and, of course, to pay for the repair services performed. China Eastern Airlines President Ma Xulun does not want to send China Eastern engines to the joint venture despite the contract; he is in arrears on payments for services performed; and he does not want to pay. He is reportedly looking for ways to terminate the contract all together.

Obviously, unilateral cancellation of a joint venture contract after the venture partner has made its investments and worked in good faith to create a world-class operation is a violation of accepted international business practices, not to mention contract law. This unreasonable action is apparantly being driven by President Ma Xulun's personal vindetta. Responsible parties in the airline in the Shanghai and China central governments hopefully will intervene. Of course, Pratt & Whitney and its parent, United Technologies Corporation, must stand firm, continue fulfilling their obligations in the joint venture and seek support from the right parties to prevent an injustice.