Trans-Pacific Aerospace Inches Closer to Approval - Analyst Blog

Ken Nagy, CFA

Trans-Pacific Aerospace Inches Closer to Approval

Trans-Pacific Aerospace Company (TPAC) intends to monetize its proprietary technology.  TPAC and its joint venture partners intend to manufacture aerospace quality standard spherical bearings, rod ends and bushings (bearings) in China. Growth in China is two-fold: First the number of planes in China is expected to jump from 1,256 today to 4,330 over the next 20 years.  With 3,000 spherical bearings on each plane the market is substantial. Second the offsets or obligations that original equipment manufacturers (OEMs) such as Boeing and Airbus owe China are approximately $16 billion. There are currently no manufacturers of spherical bearings in China.


The Approval Process


The qualification process for approval by the United States Navy can be obtained in two ways.

• The firm can submit parts to the Navy and they will do all of the tests.

The advantage of this is that you only have testing done one time. The disadvantage is that right now they are really busy and wouldn't be able to start until October 1, 2011, with a completion date of December 31, 2011. The other disadvantage is that if you have negative results you must start over.

• The second method is to have an independent lab (ITL) run the tests.

What that means is that when ITL is done, they will prepare a test report and submit it to the Navy. The Navy will then take that test report and do testing to verify the results obtained by ITL.  By going this route the Navy can still start on October 1, but the verification testing only takes between 2 and 4 weeks, so qualification may come by November 1, 2011 saving the firm 2 months. The other advantage is that you know the results before you submit parts to the Navy and in this case they can get all of the testing done and receive qualification before November 1. TPAC opted for this path.  ITL has completed all testing and all bearings passed well under the maximum allowable limits.  New test bearings and the ITL test report are in the hands of the Navy.

Once approved, the Guangzhou facility would be placed on the Society of Automotive Engineers (SAE) Qualified Producers List, allowing all Chinese and international airframe manufacturers, sub-tier suppliers, MRO facilities, airlines and distributors to purchase parts produced there. The Guangzhou facility, located in close proximity to Hong Kong and Guangzhou would be the first facility in China qualified for the production of SAE-AS81820, SAE-AS81934 and SAE-As81935 spherical bearings, bushings and rod end bearings, components used extensively in commercial aircraft.


Business Model
TPAC, with its China domestic partner, Godfrey (Guangzhou) Bearing Company, has established a manufac¬turing facility in the Scientific and Technology Center in Guangzhou, China to manufacture aerospace quality standard spherical bearings, rod ends and bushings (collectively, “Bearings”). The venture represents the first and only manufacturer of SAE-certified Bearings in China, and has al-ready received approval from central, provincial and local government entities. Boeing has pledged full technical support; which is key, since 59% of China's collective fleet is comprised of Boeing aircraft.

TPAC has been engaged in ongoing dialogue with Aviation Industries of China (AVIC) to form a joint venture with AVIC for the manufacture and distribution of Bearings. To that end, TPAC and AVIC have signed a non-binding letter of intent to form a joint venture. TPAC has also engaged in ongoing dialogue with several of the largest bearing manu¬facturers in China as potential joint venture or supply chain partners. TPAC has determined that it is in the best interests of the Company to enter into a formal joint venture agreement with a Chinese JV partner only after the Guangzhou facility has been qualified by the US Navy for the manufacture and sale of Bearings. TPAC sent personnel to China in the first quarter of 2011 to manufacture Bearings for US Navy qualifica¬tion and believes that it will receive qualification approval by the US Navy on or about November 1, 2011.

The partner will supply the manufacturing labor, machinery/equipment and raw materials when full operations commence. TPAC and Godfrey (Guangzhou) will supply the manufacturing facility, manufacturing know-how, blueprints for approximately 1,500 parts, and a proprietary liner that is integral to the finished product.  Additionally, should TPAC/Godfrey elect to form a joint venture with AVIC, AVIC would supply domestic marketing of the product, negotiations with Boeing and Airbus for international sales (AVIC presently is a major supplier of products to Boeing and Airbus, and has well-established relationships with Boeing and Airbus for the sale of products.)

TPAC's plan is to sell its bearings to OEM's directly, through AVIC and through a series of established sales representatives. For sales to its aftermarket customers it will use an established third party distributor network in addition to AVIC. The firm expects the bearings will be sold on the basis of high quality, competitive cost, short lead times, compliance with and surpassing of product application and SAE specifications, and sourcing from production facilities qualified by the U.S. Navy.  Presently, AVIC purchases approximately $100 million of these Bearings annually and pays an import duty on the Bearings of approximately 24%.  AVIC has estimated that the joint venture could enjoy sales of $20 million from China during the first year of full operations.

COMAC
China is in the process of developing a 180+ seat commercial aircraft designed along the lines of the Airbus A-320 or Boeing 737.  This aircraft, designated the COMAC C-919 is scheduled for first flight in 2014 with the first deliveries to customers being scheduled for 2016.  COMAC presently has in excess of 100 orders for the aircraft, with customers including General Electric.  The C-919 uses a similar volume of Bearings to those used on Boeing 737and Airbus A-320 aircraft.  COMAC has mandated that ultimately all parts used on the C-919 be manufactured in China and with the assistance of AVIC is presently acquiring companies and technology to comply with that mandate.  TPAC anticipates that it will be the primary supplier of Bearings for the C-919 and has had discussions with AVIC related to specific bearing designs for the aircraft.

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