Icon’s Chinese Investment Comes Under Federal Scrutiny
The FBI and a federal interagency committee are scrutinizing Chinese investment in Icon Aircraft and its A5 light sport amphibious aircraft, amid allegations of improper transfer of technology and materials, according to documents viewed by Aviation Week’s Weekly of Business Aviation and people familiar with the matter.
The FBI is investigating potential federal violations involving acquisition of a controlling interest by Pudong District Science & Technology. The FBI declined comment saying it does not confirm nor deny the existence of investigations.
The Committee on Foreign Investment in the U.S., an interagency panel under the Treasury Department, began a review in November 2021, according to sources close to the matter. The Treasury Department did not respond to a request for comment by time of publication.
A5 Military Applications
The investigation and review come at a time the Department of Defense, under its Warfighting Lab Incentive Fund, contracted with XQT, a California-based company, for an experimental development program called Ocean Eagle aimed at converting the Icon A5 into an unmanned aerial vehicle for Navy and Marine Corps use. Phase 1 has been completed, according to a XQT official. Phase II, if funded, would leverage technology used in other converted UAVs to the A5.
Use of the A5 for military purposes, however, has been negatively impacted by Icon’s control by a Chinese entity, says Mark Gamache, XQT CEO. “That is a huge, huge negative,” Gamache says.
The Chinese government backed investor, Pudong District Science & Technology Investments PDSTI, has a controlling stake in California-based Icon. Minority shareholders, including Icon’s co-founder, a former Boeing chairman and others, filed a lawsuit in June against the majority investors for allegedly seizing control and aiming to hollow out U.S. operations to export Icon’s intellectual property, composite technology and manufacturing to China. In April, it contacted the Committee on Foreign Investment.
According to a group called Icon Recovery, made of up 35 minority investors, PDSTI ordered an A5 to be shipped to China under its control and has begun the process to license Icon’s intellectual property to PDSTI, which would give them rights to bring the technology to China without restriction.
Icon officials confirm the investigation, saying they received an inquiry from CFIUS regarding PDSTI’s investment in Icon. In November, Icon Aircraft and PDSTI submitted a formal notice to CFIUS concerning the investments made in 2017 and in 2018 in the company.
“Icon and PDSTI have fully cooperated with CFIUS, provided responses to all questions received to date and met with CFIUS to discuss the transactions,” Icon said in a statement. Icon expects the review to conclude at the end of February. In the meantime, it has not been contacted by the government in connection with any other investigation, it says.
“Icon does not believe that the PDSTI’s investment in Icon presents any national security concerns for the U.S.,” the statement says. The aircraft is unsuited for military use, and does not possess autonomous piloting, artificial intelligence or machine learning capabilities. Icon also does not manufacture, design, develop or test position, navigation and timing technology or advanced materials.
Icon Recovery disagrees with PDSTI’s intent, saying that the investor, partially backed by the Chinese government, ultimately wants to use the A5 for military purposes.
The light A5, with its small, folding wing and ability to land on land and water, is suitable for manned and unmanned operations, the minority shareholders say. The A5 incorporates NASA developed technology around spin resistance and includes other technological advances.
The A5 is designed to be transportable and could be deployed at sea, Gamache says.
In the past, People’s Republic of China and Chinese aviation companies have shown interest in the military potential of converting amphibious light sport aircraft into UAVs, Gamache, says. For example, the Shanghai UVS Intelligence System Co. has developed the U650 unmanned vehicle system by leveraging the Spanish Colyaer Freedom 100 light sport amphibian.
“However, we are aware that the Colyaer aircraft has several significant and inherent design limitations that make it unsuitable for open ocean operations,” Gamache says in a report. “The A5 platform does not have those limitations, is a superior design and uniquely suited for these type of maritime UAV missions.”
The aircraft could advance the Chinese government’s objective of sea-launched UAV’s, which could be valuable in its military operations around the South China Sea and Taiwan straits, members of Icon Recovery says.
In court documents, Icon minority shareholders allege that the Chinese investors, which hold a 60% majority interest, have taken control of the company, restricted Icon’s access to operating capital and threatened to remove Board members who do not vote in accordance with PDSTI’s wishes.
It removed David “Skip” Fleshman, a Silicon Valley-based venture capitalist, from the Board and Kirk Hawkins, Icon co-founder, as CEO. He remains on the Board. Former Boeing chairman and CEO Phil Condit resigned before he could be removed, court documents say. And Linden Blue, former Beechcraft CEO and vice chairman of General Atomics, also resigned.
“It is disturbing what is happening to Icon under the control of PDSTI as is described in the lawsuit,” Condit said in a release in June about the litigation. “If Chinese investors are masquerading as venture capital in order to gain access to U.S. technology, it violates this trust.”
According to court documents, PDSTI approached Hawkins about investing in the company and purchased $100 million in Icon shares in 2015 and became the majority shareholder in 2017. He was not aware at the time that PDSTI is partially owned by the People’s Republic of China.
Icon officials say it was Hawkins who recruited PDSTI to invest in the company when it was facing serious financial and operational issues. At the time, PDSTI saved the company. In 2017, Hawkins asked the company to make an additional investment.
With the government review, “the allegations appear to be an attempt by Kirk to enlist the support of the U.S. government to remove PDSTI as a shareholder so that he can regain control of the company,” Icon officials say of Hawkins’ motives. “This effort appears to be nothing more than an extension of his civil litigation strategy.”
“This is not about any individual interest,” he said in a Jan. 28 statement. “It is about protecting a U.S. company from nefarious investment practices by the PRC (People’s Republic of China.) This is only the tip of the iceberg, and many in the U.S. have been asleep at the wheel. We believe we’re engaged in the right fight for the right reasons—to protect U.S. national and economic interests as well as help save Icon, if possible.”