Patrick Horgan, Regional Director of Northeast Asia for Rolls-Royce, outlines how the legendary British industrial technology company aims to propel a new era of Chinese development
Few in the expat business community can rival Patrick Horgan’s depth and range of experience in the Chinese market.
Since first coming to China as a volunteer in 1989, Horgan’s career has spanned business, diplomacy and cultural relations. Since 2011, he has been Regional Director of Northeast Asia for Rolls-Royce. As he tells CKGSB Knowledge in this interview, he believes China’s huge development ambitions make this an exciting time to be at the British manufacturing giant.
Q: China is expected to overtake the US as the world’s largest civil aviation market by 2022. How big an opportunity is this for Rolls-Royce?
A: It’s good news for us. In the civil aerospace market, China has come rapidly from a relatively low level. The growth through the 1990s and the last decade has been extremely strong. And yet, the total civil commercial fleet in China is about 2,800 aircraft or thereabouts, whereas in the US it’s about 7,000 aircraft. When you compare the size and demographics of these two countries, it’s easy to see that there is a lot of latent demand in China that is not yet being met.
That’s why the forecasts are very consistent: whether you look at Boeing’s numbers, or Airbus, COMAC or our own analysis, it all suggests [that China will acquire] in the region of 6,000 commercial aircraft over the next 20 years. That’s a massive opportunity for many players in China, and obviously for the international air framers and engine providers as well.
Q: How will the emergence of China’s state-owned aircraft manufacturer COMAC as a competitor to Boeing and Airbus impact Rolls-Royce?
A: COMAC is still a young company. Last year, they achieved the significant milestone of the first flight for the C919. This is a significant breakthrough: COMAC is creating civil airframes effectively from scratch. It’s a massive undertaking, so this endeavor is something that you have to watch with admiration.
There are now two aircraft. There’s the ARJ21 and the C919. The ARJ is in service; the C919 has had its first flight. But there is still some way to go before the C919 enters into commercial service. Our relationship with COMAC is focused on what comes after that, because we do not provide an engine for narrow-body aircraft at present.
Our focus and our sweet spot is very much in the wide-body twin-aisle aircraft market, as we produce some of the world’s largest and most powerful civil large aero engines. COMAC has announced its plan to develop an aircraft, namely the CR929 in that segment. So, not surprisingly, we are engaged in close discussions with COMAC around that possibility.
Q: Rolls-Royce recently signed an agreement with Chinese rail group CRRC to partner on the Belt and Road Initiative (BRI). What type of projects will this partnership involve?
A: I think that’s a very good question because when people talk about BRI it’s often quite hard to conceptualize what is actually meant.
In the case of our business, Belt and Road is fundamentally about connectivity and infrastructure along both the terrestrial and the maritime routes connecting Europe and Asia. Whether you’re talking about in the air through aviation or land and sea, these are all areas that are addressed by the products and services that Rolls-Royce provides.
So, there is a natural fit and we have concrete examples from across our businesses to demonstrate that. The example you’re referring to, the relationship with CRRC, is the railway business. We have locomotive engines provided by MTU, part of Rolls-Royce Power Systems, and those engines are an excellent fit for diesel locomotives that are already in use on CRRC-led projects in BRI countries. We’ve sold about 500 locomotive engines through CRRC into other countries’ markets.
Q: Many BRI projects are located in quite high-risk markets. How is Rolls-Royce assessing and managing those risks?
A: Clearly, there are very challenging aspects to investing in some of the countries that are covered by these Belt and Road routes, and that means that people will have to take a very responsible approach to assessing risk.
But perhaps that is also an argument for why it’s important to have some initiatives that are led beyond the project-by-project, company-by-company approach, because in some cases the projects will simply not reach fruition if they don’t have impetus from elsewhere.
Q: Many European businesses have reported that China’s business environment has become more challenging in recent years. Has this also been the case for Rolls-Royce?
A: Well, I think that, whether the circumstances are difficult or not, the market’s significance is unquestioned. It is conventionally the case for large multinationals that have a significant market in China that they may derive between 10 and 15% of their global revenue from this market. So, even in those circumstances where there are challenges, that doesn’t negate the importance of the market, and for us that is very much the case.
We are a diversified group. We’re perhaps best known for the aerospace business, but within the group we have a power systems business—that’s gas and diesel engines for multiple applications—a marine business and a civil nuclear business. And for all of those businesses, China remains a very important and growing market.
Q: Regarding the figure you mentioned about 10-15% of revenue coming from China, is that also the case for Rolls-Royce?
A: Our group revenue in 2017 was £15.1 billion ($21.4 billion). Twelve percent of that revenue was generated from Greater China, and I would absolutely expect that to continue to be the case in the years ahead.
Q: Many of your key business segments are also a main focus of China’s Made in China 2025 strategy. How do you expect this policy to affect your operations in China?
A: Made in China 2025 is an industrial development strategy. It is natural and reasonable that all countries, particularly countries with bold development goals, should seek to have an ambitious industrial development strategy.
It is true that within that, there are areas highlighted that are exactly related to our areas of business, and you can take different attitudes to that. You can take an attitude that says, ‘This looks like it is posing some kind of a competitive threat.’ On the other hand, you can say, ‘If China is directing its energy, its talent, its resources toward building capabilities and building a market in these segments, then that also implies opportunity for us.’ And I think, of course, it is a combination of both of those things.
The reality is that there is always competition in the business world. We deal with that by being good at what we do, by constantly innovating. We invest £1.3 billion ($1.8 billion) annually in research and development. Whether or not there is an increased competitive threat emerging from domestic Chinese companies, we are well prepared to meet that threat.
Q: How effective do you think Made in China 2025 will be in terms of helping Chinese companies in key industries become globally competitive?
A: The industrial development strategy is aspirational, and there are clear priorities. For sure, China has abundant capability to try and address those areas. In reality, it would be strange if China was not successful in some areas and perhaps less successful in others.
I think the key thing here is to what extent market mechanisms will be at play. The issue that I hope will not occur is a repetition of some of the problems of the past, where if you have a state-mandated, state-directed approach to industrial development, you risk channeling a very large quantity of precious resources into areas where you don’t necessarily have a viable, sustainable payback over time.
But I think it would be rash to second-guess. I think that there will be some areas where, without doubt, the Made in China 2025 strategy will deliver for China.
Q: As one of the UK’s most high-profile companies, to what extent has Brexit impacted your business? And how do you expect it to affect UK-China relations more generally in the future?
A: The relationship between the UK and China was important before Brexit and it’s important after. And, if anything (of course, depending on how the final Brexit scenario plays out) the relationship with China is likely to become even more important over time. So, I don’t think that Brexit is felt here as keenly as it is in some other parts of the world. After all, the issue seems somewhat remote when viewed from China.
It’s also important to note that we are a multinational; we have large operations in the rest of Europe as well. So, while the UK-China relationship is significant and important for us in terms of the dynamics of our business, it’s not the key consideration. China is a large unitary market and the importance of the European Union remains key.
Q: What role does China play in Rolls-Royce’s global supply chain?
A: Actually, we started supply chain work in China very early on, going right back to the 1970s. It has grown particularly in recent years: we now do about $200-300 million annually in aerospace supply chain activity in China and we expect that to increase to approximately $500 million by about 2020.
I think what’s really interesting and satisfying to see is the extent to which Chinese suppliers have been developing capability. Now, they are among the best suppliers that we have globally in terms of quality and delivery.
We also have a joint venture in aerospace supply chain that’s been running for more than 20 years. The colleague who is now the general manager of that joint venture joined more than 17 years ago as the company’s very first machinist. It’s great when you see that kind of story.
Q: How is Rolls-Royce adapting to trends such as Industry 4.0 and the increasing prevalence of digital technology?
A: This clearly is an area of great significance for any industrial technology company. For a long time, we have been investing in acquiring digital capabilities. It’s consistent with what we have tried to do throughout our history: actually pioneering these new kinds of initiatives.
Before people really started using the terminology around big data, Rolls-Royce was already doing big data: the gathering of digital information about the performance of our engines. Engine health monitoring, as it’s called, is something that we’ve been doing for over 20 years now.
Gathering huge volumes of data has led to great advances in very concrete terms—advances in our predictive maintenance and the analytical capabilities to anticipate things that could go wrong with the performance of the engine. Similarly, because of these advances, we were also able to massively cut down the time and cost required for visual inspection of engines and help customers minimize disruptions to the operation of their fleets.
Q: What’s next for Rolls-Royce in China?
A: Last year we established a new joint venture for our Power Systems business, and we will see the first engine coming out of that joint venture in April this year. That’s MTU’s highly successful Series 4000, a state-of-the-art diesel engine primarily for the Chinese off-highway market, in particular for power generation and oil & gas applications.
The other significant milestone in 2018 for us is the entry into service in China of the Airbus A350 aircraft with Rolls-Royce’s Trent XWB engines. This is the world’s most efficient gas-turbine civil large aero engine. It’s a great plane with a great engine. If you fly, you’ll notice how quiet it is. So, I’m really looking forward to seeing the A350 flying in China for our Chinese airline customers.