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Company of Chinese president’s son gets deal

Posted by Author on December 12, 2006

By CHARLES HUTZLER, Business Week, December 12, 2006-

A company headed by the Chinese president’s son has won a deal to supply airports across the country with security scanners, company and aviation officials said Tuesday, in an arrangement that highlights the clout of families from the communist elite.

Under the deal, Nuctech Co. will supply scanners that detect liquid explosives to all 147 airports in China, said the General Administration of Civil Aviation’s head of security. The scanners use X-rays to detect whether a liquid is harmless or potentially dangerous, and the aviation official said the Nuctech devices outperformed competing models.

“We searched the world over but didn’t find any more satisfactory products,” Yang Chengfeng, the aviation authority’s director general for security, said at a news conference. Afterward, executives placed bottles of wine, water and lighter fluid into the washing machine-sized device. A monitor flashed red when volatile or corrosive liquids were scanned.

The deal is a potential windfall for Nuctech, a nine-year-old government company whose president is Hu Haifeng, the son of China’s state president and Communist Party leader Hu Jintao.

The Beijing-based company and the aviation authority declined to disclose financial terms. But following the revelations in August about an alleged plot by Britain-based terrorists to blow up airplanes using smuggled liquids, the potential market for such scanners is huge, industry experts said.

“It’s vast and constantly growing,” said Peter Harbison of the Center for Asia Pacific Aviation, a research and consulting firm in Sydney, Australia. “Effectively detecting liquid explosives, it’s a bit like computer viruses. We’re constantly playing leapfrog to catch up with the latest variations.”

Nuctech stands to make tens of millions of dollars in sales in China. While all airports would be outfitted with scanners, larger airports would require more, said Yang, the aviation official. The device’s export price is $200,000 per unit, according to the company, although the government often demands steep discounts from state companies.

Beyond the bottom line, the arrangement shows the opportunities the well-connected offspring of officials are finding in an economy moving toward free markets but still heavily regulated. It’s a relationship that the communist leadership prefers to keep under wraps, especially given pronounced social discontent over growing gaps between rich and poor.

“The sons and daughters of high officials all have business ties,” said Liu Xiaobo, a Beijing-based political critic and prolific Internet essayist. “The published lists of China’s richest don’t mention these political families because they hide their wealth.”

An investigation by research groups under the party and government this year found that among China’s 3,220 richest people — those with assets over $12.5 million — more than 90 percent were from senior officials’ families, according to a report on the state-run Xinhua News Agency’s Web site.

Many leading executives with large state-run companies are drawn from the ranks of politically connected families. A son and daughter of former Premier Li Peng manage top energy companies. Former President Jiang Zemin’s son engineered several telecommunications ventures in Shanghai, his father’s power base, before taking up a government post.

Yang, the civil aviation official, said Nuctech’s technology, not the political connections of its president, was the decisive factor in winning the agency’s approval. “Of course, he has some background, but that had no effect on our decision,” Yang said in an interview. “This has to do with people’s lives, and you can’t play games with safety.”

A commercial offshoot of Tsinghua University, China’s top science and engineering school, Nuctech built a business making large scanners for shipping and trucking containers and railroad cars, taking 90 percent of the domestic market, vice president Chen Zhiqiang said.

Sales this year are projected to rise 30 percent to $20 million, with nearly two-thirds coming from overseas markets, said Liu Zhuoyuan, another vice president.

Company head Hu has a stake in Nuctech, as a member of its management team, but not directly, Liu said. The management team and another strategic investor hold 24 percent of Nuctech with another Tsinghua offshoot, Tsinghua Tongfang Co., holding 76 percent, Liu said.

With demand for airport security equipment growing, Nuctech is well-positioned to take advantage of its president’s connections in a tightly regulated market, said Harbison, the industry expert.

“It’s a rather acute place to be for the son of a high-level official,” Harbison said. “The company can expect to make a lot of money.”

original report here

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