Chinese investment in US aircraft maker attracts FBI and national security reviews

Recreational aircraft at an Icon Aircraft manufacturing facility in Tijuana, Mexico. (Photo: Bloomberg)

The FBI and a US investment screening committee are investigating a Chinese investment in an aerospace startup following allegations of improper technology transfer to China, according to people familiar with the matter and documents reviewed by The Wall Street Journal.

A Chinese government-backed investment firm — the largest of all shareholders — is pending a nearly 47% stake in Icon Aircraft Inc., a California-based maker of small recreational amphibious planes.

A group of American shareholders has accused the Chinese company of dumping Icon and moving its technology, which the Americans say has possible military applications, to China.

The Committee on Foreign Investment in the United States, an interagency group that can recommend the president block or unwind deals on national security grounds, began its review in late November after U.S. shareholders urged it to intervene. , according to documents and people familiar with the matter.

The Federal Bureau of Investigation has also launched a separate investigation into possible criminal violations related to the agreement and the alleged transfer of technology, according to the people and one of the documents.

Cfius review underscores its increased scrutiny of investment from China amid hostile US-China relations and the two governments’ battle to dominate technologies they see as crucial to future economic competitiveness and military.

Shanghai Pudong Science and Technology Investment Co., or PDSTI, said in legal documents that its investment in Icon saved it from collapse and that licensing its technology to a Chinese company would provide needed capital.

A person close to PDSTI said US shareholders’ call for a Cfius review is “an example of how the Cfius process can be unduly weaponized against a bona fide investor.”

An attorney for Icon said its planes have no military applications and the company does not view the PDSTI investment as a national security issue.

The company is fully cooperating with Cfius and expects the panel to conclude its review by the end of February, the attorney said.

A spokeswoman for the Treasury Department, which runs Cfius, declined to comment, as did the FBI. Icon’s attorney and PDSTI representatives said they were not contacted by the FBI.

Icon, founded in 2006 by a former Air Force pilot and former Stanford University product design professor, produces a carbon fiber airplane with folding wings capable of taking off and landing on land and on the water, according to the American shareholders.

The plane is designed for recreational use, Icon’s website said. The American shareholders, in a note to Cfius reviewed by the Journal, said the plane could be modified to operate as a militarized drone.

Icon has attracted influential board members in aviation. One was Linden Blue, vice president of General Atomics, which makes the Predator drones used by the US military. Phil Condit, former CEO of Boeing Co., also joined the board and is an investor.

The group of American shareholders who have brought in Cfius include Mr. Condit, Icon co-founders Kirk Hawkins and Steen Strand, and several investment companies. Mr. Hawkins remains a member of the board.

In its memo to Cfius, the group said Icon initially didn’t seek the panel’s blessing because PDSTI’s investment started small in 2015.

The memo cites Cfius’ endorsement of a deal struck in 2011 by Chinese aviation giant China Aviation Industry Corp, known as AVIC, to buy Minnesota-based private jet maker Cirrus Industries Inc. .

By 2017, PDSTI had amassed its controlling stake in Icon, according to the group of American shareholders. Then, they said in the memo and in court filings, the Chinese company began installing board members and executives, lobbying others, and developing plans to transfer Icon’s technology to China.

The Americans filed a lawsuit against PDSTI in Delaware in June, seeking to end its alleged expropriation of Icon’s technology; PDSTI said the claims in the lawsuit are without merit. Two months later, US shareholders filed their note with Cfius, urging the panel to unwind the deal.

MM. Condit and Blue resigned from Icon’s board of directors in 2018 and 2019, respectively, to protest the management of PDSTI, according to the June lawsuit.

In his resignation letter, cited in the lawsuit, Mr. Condit said he was resigning, given “the complete disregard of my advice and guidance.”

In May 2020, David Crook, then a senior Icon executive, declined PDSTI’s offer to be the airline company’s chairman.

He wrote: “It is obvious that PDSTI’s plan for ICON is to reduce its operations to a minimum and destroy any potential for the American company until it can move it to China to serve its own interests” , according to a filing filed by plaintiffs in the Delaware suit.

Mr Crook, who is not part of the US shareholder group suing PDSTI, said he stood by that comment.

Almost a year later, in March 2021, PDSTI shipped an Icon aircraft to China, and in April the company began a process to license Icon’s intellectual property, which will give it “the right to siphon ICON technology to China without any restrictions”. the shareholders allege in their note to Cfius.

In the memo, dated Aug. 1, minority shareholders said the situation had become “specifically the type of national security situation” for which the Cfius process is intended.

“ICON’s aircraft technology, advanced materials and aerospace manufacturing capabilities should not fall into the hands of China,” the memo said. “Without quick CFIUS intervention, this could happen within months.”

Icon’s attorney said the company’s only aircraft model, called the A5, is built from off-the-shelf commercial products and is “totally unsuitable for military applications.”

The A5 “has no autonomous piloting, artificial intelligence or machine learning capabilities,” the lawyer said, adding that Icon does not manufacture, design, develop or test navigation technology. or advanced materials.

PDSTI said in documents filed in the Delaware lawsuit that while he has the ability to appoint a majority of Icon’s board of directors, he is also a minority shareholder with a 46.7% stake and n does not exercise corporate control over Icon.

PDSTI has invested “hundreds of millions of dollars” in Icon since 2015 and secured more funding from outside investors, saving Icon from collapse under previous “disastrous management”, according to the filings.