Duluth's Cirrus Aircraft, after several years of strong growth, is headed for an initial public offering on the Stock Exchange of Hong Kong.
The IPO venue may seem surprising, but not when you consider the company's atypical ownership: the Chinese government.
The state-owned Chinese company that took control of Cirrus in 2011 has presided over a period of stability, including the successful launch of a new jet business.
However, the company, aerospace giant AVIC, is on a U.S. government investment sanctions list aimed at companies linked to China's military. Two AVIC-controlled companies related to Cirrus are on a separate U.S. export control list due to their Chinese military association.
Heightened tensions between China and the U.S. have so far had "minimal" impact on Cirrus, the company noted in its IPO filing. Still, it said an "escalation in geopolitical tension ... could lead to a material adverse effect on our business."
It's questionable whether a Chinese buyout of Cirrus would even be approved nowadays given the increasingly tense relations between the United States and China, analysts said.
"If a similar deal was brought [forward] today, there would be a lot more political barriers," Charlie Vest, associate director at Rhodium Group, a New York-based research and company. "These are very different times in the relationship between the U.S. and China and the political dynamics of Chinese investments in the U.S. have changed."
AVIC would ultimately still control Cirrus after the IPO, which aims to sell up to 20% of the company and raise roughly $200 million to $400 million.
However, Zean Nielsen, the company's CEO, said Cirrus is operationally independent of its shareholders. He called Chinese government ownership "just one of those things that just is. It doesn't really change how I run the company."
"My job is to take care of customers and employees the best I know how," he said.
Cirrus readily complies with federal rules on Chinese investment in the U.S., he said. "All the things we need to disclose, we happily do."
Cirrus sales take off
Cirrus has been on a hot streak since Nielsen, a former Tesla executive, became CEO in 2019.
The company's revenue grew from $586 million in 2020 to $894 million last year, while its profits more than doubled, according to its June IPO filing. Cirrus has a backlog of over 1,400 aircraft, which will keep its Duluth manufacturing plant busy.
Cirrus' success has been good for Duluth. It's one of the city's largest employers with 1,588 workers — the majority in manufacturing and engineering.
This month, the company expects to complete a new $20 million innovation center at its Duluth International Airport campus, freeing up about 75,000 square feet for manufacturing.
Proceeds from the IPO will be used to further bolster manufacturing; expand Cirrus' growing services business; and invest in new technology, including more automation.
"We will continue to make flying a Cirrus easier and easier," Nielsen said.
Cirrus is the leading U.S. maker of single-engine piston planes, and its SF Vision jet — launched in 2016 — has been a hit. The company has delivered 475 jets, including 90 in 2022, its best production year yet. Jets account for about 30 % of Cirrus' sales.
"They are playing to a niche where no one else plays," said Brian Foley, an aviation analyst. Cirrus essentially created a market for a single-engine jet. It's slower than a twin-engine jet, but its price point is considerably lower.
The Cirrus jet goes for about $3.25 million, while the next cheapest jet in the market is a twin-engine Embraer model priced at $5 million, analysts say.
Chinese investment critical to growth
AVIC's ultimate ownership was crucial in developing the jet, which had been on the drawing board since the 2000s.
"Without them, the SF50 probably wouldn't have happened," said Bruce McClelland, an aviation analyst at the Teal Group. "Chinese investment got [Cirrus] over the hump to launch the aircraft."
Indeed, Chinese investment rescued Cirrus. The aviation industry tanked after the 2008 global financial meltdown and Cirrus was in deep trouble.
"They simply ran out of money, and that is how China came into play," said Richard Aboulafia, an aviation analyst.
AVIC's general aviation subsidiary paid $210 million for Cirrus and got the blessing of the U.S. Treasury Department's committee on foreign investment, which reviews deals for national security concerns.
But in recent years, sentiment against Chinese investment in the United States has risen. Take the recent fate of a $700 million corn mill planned for Grand Forks, N.D.
The mill proposed by Fufeng Group, a privately owned Chinese company, at first won state and local government support, hailed as an economic plum.
But some local citizens began protesting the mill, including its Chinese ownership. In January, the U.S. Air Force weighed in, calling the project a national security threat; the mill would have been 12 miles from the Grand Forks Air Force Base. The Fufeng deal soon died.
Ironically, Cirrus has a plant in Grand Forks that is only about 17 miles from the Grand Forks Air Force Base. It employs 494 people and makes components that are assembled into airplanes in Duluth.
And Cirrus' main owner AVIC — unlike Fufeng — has been on the U.S. government's growing Chinese Military Industrial Complex (CMIC) blacklist since 2020.
AVIC's structure allows U.S. investment
AVIC is a sprawling aerospace concern that supplies China's military, and some of its myriad subsidiaries have publicly traded stock. U.S. investors are restricted from investing in securities of companies on the CMIC list.
But the investment restriction applies specifically to AVIC subsidiaries that are also on the CMIC list. The AVIC subsidiary that owns Cirrus — China General Aviation Industry General Aircraft (CAIGA) — isn't on the list.
In other words, U.S. investors could buy Cirrus stock, the IPO filing said.
AVIC owns 70% of CAIGA; the other 30% is held by three state-owned Chinese investment companies.
Three other subsidiaries of CAIGA have been among Cirrus' top five customers for the past few years, and two of them — AG Huanan and AG Zhejiang — have been on the U.S. "military end user" (MEU) list since 2020, meaning they are subject to export controls.
The list applies to military-connected companies in Russia, China, Venezuela and Burma.
The three related companies accounted for less than 7% of Cirrus' sales during each of the last three years. Cirrus sells aircraft kits for a version of its SR20 plane to AG Huanan. It's developing a small prop plane — the AG100 — with AG Zhejiang for the China market. The plane is aimed at training green pilots.
Cirrus has the proper U.S. export clearances for both of its Chinese customers on the MEU list, the company said in its IPO filing.
The AG100 agreement with AG Zhejiang allows Cirrus to market a similar plane called the SR10 in the United States. But Cirrus doesn't have the incentive to do so right now, Nielsen said. Cirrus' prop planes are already used for training.
China, on the other hand, has only a tiny civil aviation industry. Its airspace is restricted.
The AG100 would be used by flight schools and is aimed at training commercial pilots, Nielsen said, and it's not intended for military use.
Still, the AG 100 could conceivably be used for basic military training. After all, the U.S. Air Force uses Cirrus prop planes for training.
"If you are starting from the ground up — training military pilots — you do it in planes like this," said aviation industry analyst McClelland.
However, analysts say it's generally hard to see military uses for Cirrus' products.
Cirrus is far from the only U.S. aviation business that caught China's eye.
Indeed, Aboulafia noted that before U.S.-Chinese tensions rose, several prominent U.S. aerospace companies entered joint ventures with Chinese companies — including with AVIC.
"They probably wouldn't be approved today, but no one wants to kill them now," Aboulafia said.