The Taiwan government once had big expectations for the manufacture of aircraft and parts. Now the plans have been scaled back, but some opportunities still look viable.

In the early 1990s, the aerospace industry was one of the key industries earmarked as vital for Taiwan's economic development. During that period, considered to be the industry's "golden age," the Ching-kuo Indigenous Defense Fighter (IDF) --- the first fighter jet designed, developed, and manufactured by an Asian country --- was being readied for mass production. In addition, in what appeared to be confirmation of Taiwan's high potential in this field, major Western aviation companies were approaching Taiwan about possible partnerships. In 1991, McDonnell Douglas proposed a joint venture for manufacturing commercial aircraft with the Taiwan Aerospace Corp. (TAC), a private company with minority government investment, and two years later British Aerospace Plc signed an agreement with TAC to jointly produce regional jetliners. Under the Six-year National Development Plan launched in 1990, the aerospace industry was cited as one of the ten industries of greatest importance to the country's economic future.

The optimism about the industry's future was not long-lasting. The proposed international cooperation projects, contingent on the government's financial backing, collapsed when officials concluded that it would take too long to recoup the huge amount of capital investment required. TAC, once the cornerstone of the aerospace industry development program, has shrunk dramatically and changed leadership several times over the 13 years of its existence. Today its major businesses are its investment in Air Asia Co. Ltd, a Tainan-based specialist in aircraft maintenance and repair, and in the Sino Swearingen Aircraft Corp. (SSAC). Headquartered in San Antonio, Texas, SSAC was formed in 1995 to develop, build, and market SJ30 six-seat helicopters. The company is a joint venture between Swearingen Aircraft Corp. of the United States and the Sino Aerospace Investment Corp., established in 1995 with US$45 million in investment from the then Kuomintang government and several private companies, including TAC. Until today, Taiwan has invested more than US$500 million on the project and is expected to put more into it. "The company has nearly become a state enterprise of Taiwan in the United States, but has made no profit at all," says an industry source who requested to remain unnamed. "Why the investment continues is largely due to political reasons." He said development of the helicopter has been delayed indefinitely due to management problems and that Taiwan has not received the promised technology transfer that was one of the attractions of the investment.

Taiwan's aerospace industry was ranked the seventh largest in the world during the period when the IDF was under development. But R&D activity slowed almost to a stop after France began to supply Taiwan with Mirage jets and the United States agreed to sell 150 F-16 to Taiwan in 1992. "In the past, Taiwan developed the industry for national defense purposes, but now there is no such need because it is cheaper to buy [from other countries] than to make it on our own," says Chen Ching-hsiang, chairman of Tamkang University's department of aerospace engineering. He believes the industry's decline is the consequence of the change in national policies. With completion of production of 130 IDFs in January 2000, the domestic aerospace industry lost its momentum. The creator of the IDF, the Aerospace Industrial Development Corp. (AIDC) --- previously known as the Aero Industry Development Center when it was an arm of the defense ministry --- has now become little more than an OEM center for leading international companies. And at the military's Chung-shan Institute of Science and Technology, the organization responsible for the IDF's R&D, researchers' morale reportedly is very low. As a result of the shortage of job opportunities, many of the human resources developed in Taiwan have been lured away by competitors in South Korea and China. Aerospace industry production value, which was NT$10.1 billion in 1992 and climbed to NT$37.8 billion in 1998, came to NT$28.9 billion (US$858 million) last year.

"For the past ten years, the global aviation industry has undergone several major reshuffles," says Mike Lan, Secretary General of the Taiwan Aerospace Industry Association (TAIA). "The process has created a few mega companies dominating the market. Taiwan is marginalized as a consequence and is finding it more difficult to play a role on the world stage nowadays." In the civilian aircraft market, Boeing of the United States and Europe-based Airbus control the jumbo-jet business, while Canadian-owned Bombardier Aerospace, Embraer of Brazil, and Dassault of France are the key players for regional aircraft. The market for military planes is dominated by the United States and Russia. Lan adds an even more crucial factor: "There are no major projects [after the production of the IDFs] supported by the government that can help nurture the nation's aviation industry. The development of the industry requires immense capital. It is very difficult for it to grow without the government's backing."

Although the government has gradually shifted its focus to industries offering a faster economic return, industry experts continue to argue that development of aerospace manufacturing is too crucial to be neglected. "It is the most important industry for keeping a country's autonomy in national defense," says David Chu, director of the Committee for Aviation and Space Industry Development (CASID) under the Ministry of Economic Affairs. It also brings strategic advantages for economic development, he notes, helping to upgrade technological and industrial capabilities in such key areas as materials, electronics, and electrical and mechanical engineering.

What are Taiwan's advantages?
Although the industry appears to be flagging, many believe it has the potential to grow if the government makes better use of Taiwan's advantages, particularly strong human resources and high-quality manufacturing techniques. "Comparing with most countries in the region, Taiwan has the best techniques, well-trained hi-tech manpower [inherited from the IDF period], and abundant capital," says Chu. Aside from China, Taiwan was the first Asian country to establish a university-level aeronautical engineering department, dating back as early as 1967 when the Chung Cheng Institute of Technology was started. Today at least four universities maintain aerospace engineering departments, turning out well-qualified graduates. Strategic location is another advantage. According to TAIA, the amount of air traffic within Asian countries is expected to exceed that of any other region in the world over the next 20 years.

With average flight time to 24 major Asian cities of only 2.5 hours, Taipei is considered to be an excellent location for an Asia Pacific aviation hub. "The best place to develop the aerospace industry is at the center of air transportation," Chu says, adding that Taiwan's prospects in this regard would be enhanced if direct cross-Strait air links were established, so that "Taiwan could act as a transfer point for flights to China." An additional strongpoint is Taiwan's long experience in manufacturing for the international market. The characteristics that made Taiwan a major player in traditional industries ¡V including the ability to manage the quality production of limited quantities of a large variety of items ¡V match the needs of the aerospace industry. Production of a jumbo jet requires several million components and parts. Taiwan is well-suited to that of operation," says Chu. "Taiwan is like a one-stop shop. We can provide a little of everything you need."

Strategy for development
The best approach to develop the industry, it is generally agreed, is that instead of aiming to produce finished aircraft, Taiwan should concentrate on providing maintenance services and production of components and parts. First of all, the market for aircraft manufacturing is already saturated and is dominated by a few large companies. In addition, says Gus Sorenson, vice president of Lockheed Martin Global, Inc., Taiwan, "there are political barriers, for not too many countries would run the risk of upsetting China to buy a 'Made in Taiwan' aircraft." Such concern does not carry over to the market in parts and components. In any case, production of components and parts has always been the main niche for Taiwan's aerospace industry. Most of the TAIA members -- 46 companies when the association was founded in 1994, with an increase to 80 by last year -- are makers of parts and components. Many of them have started to build a substantial reputation in the international market. At an air show held in Hamburg, Germany in April, Topkey Technology Co. received large orders from Japan and Germany for its fire-proof air seats, whereas Air France and Germany's Lufthansa have shown interest in the cargo-loading device made by Taiwan Flying Industrial Co. Top Union Globaltek Inc., a maker of LED reading lamps, is negotiating technical cooperation with Boeing and Airbus, and Turkish Airlines and Finnish Airlines have expressed interest in the fire-proof blankets made by Super Textile Corp. Production of interior equipment such as air seats, dining carts, lighting, and entertainment systems are related to Taiwan's existing plastics, electronics, mechanical, and textile industries. But "the profits from supplying the aerospace industry are at least 10 times that of traditional industries," says Mike Lan of TAIA "It's a highly value-added field." Other, more technically-advanced, products from Taiwan include engine parts and avionics systems.

A vital pre-condition to become an aerospace supplier is to obtain international certification (either from the U.S. Federal Aviation Administration or from a leading manufacturer), and the number of companies and products that have gained certification is a critical index to rate the strength of a country's aerospace industry. In 1991, only two companies in Taiwan had been certified; the number climbed to 116 last year. Regarding individual products, the 209 items certified in 1992 had grown to 628 last year.

Maintenance, repair and overhaul
"Manufacturers make one dollar from building an aircraft, but three dollars from fixing it." As that bit of industry conventional wisdom points out, the demand for repair and maintenance is immense because it lasts two or three decades for the life of the aircraft. An estimated 60% of the total life cost of a plane goes for maintenance, repair, and overhaul.

Industry specialists have been promoting a plan for Taiwan to become a maintenance center for the Asia-Pacific, taking advantage of its central geographical location, technical skills, and abundant capital. Over the next ten years, Japan and China combined are expected to account for more than half of the Asian maintenance market. "This gives Taiwan a great opportunity because it is geographically near those two countries, its labor is cheaper than that of Japan, and its technical level is better than China's," says David Chu. "But the issue remains of how to allow Chinese aircraft to fly to Taiwan." Another strategy calls for military cooperation with the private sector through the sharing of production facilities, human resources, and technology to make both military and civilian aircraft. The aim would be to reduce costs for both sides. As a way to start the transfer of military know-how to the private sector, the government has been proposing a program for military aircraft to be maintained in Taiwan (currently it is generally done by the original manufacturers overseas) under what is known as a GOCO (government-owned, company-operated) plan. The maintenance and repair work would be carried out by private firms at military-owned facilities. The plan, now in the final stage of preparation, projects annual contract value of NT$10 billion (almost US$300 million) in ten years. Founded in 2000, InterContinental Aerocraft Service is a Taiwan-based joint venture owned jointly by China Airlines, EVA Airways, Air Asia, and AIDC to seek business opportunities for aircraft freighter conversion. With the government's assistance, the company signed a contract last October with Flight Structure Inc. of the United States, a unit of Boeing, becoming a strategic partner in the freighter conversion business in the Pacific region. The alliance will seek to convert old Boeing 737-300 and 737-400 passenger airplanes into cargo planes, aiming to complete 120 to 150 cases over the next 10 years for business worth an estimated NT$21 billion (US$617.6 million). "The market potential is huge, as it takes only US$6 million to convert a passenger aircraft into a freighter, but it costs US$40 million to US$60 million to buy a new one," says an InterContinental official. He says the company is expecting the first aircraft to arrive in Taiwan next January. Besides its assistance to InterContinental, the government is taking other steps to encourage the industry. In July 2003, it approved an "Initiative for Aerospace Industry Development" with the aim of attracting NT$40 billion (US$1.2 billion) worth of investment into the industry so as to enable annual production value to reach NT$120 billion (US$3.6 billion) in ten years. Technical support will be given to encourage the development of the up-, middle- and down-stream manufacturers. In addition to the freighter conversion business, the development of military trainer aircraft is being singled out for special attention.

The future of AIDC
Established in 1969, AIDC has been the cradle of Taiwan's aerospace industry. One of the few companies in the region qualified to undertake total aircraft development, it has produced more than 700 fighters for Taiwan's Air Force, including 130 IDFs and 62 AT-3 Advanced Jet Trainers. It was transformed from a military enterprise into a state-owned company under the Ministry of Economic Affairs in 1996, but after IDF production ended in 2000, business went into a sharp decline. The company lost NT$1.2 billion (US$36 million) in 2000, and NT$977 million (US$29 million) in 2001. In 2002, it recovered to make a slight profit of NT$36 million (US$1.06million) on sales revenue of NT$9.2 billion (US$273 million). In 2003, the company had a profit of only NT$3 million, and for 2004, the government is targeting revenue of NT$12.7 billion (US$377 million). "As a market-oriented commercial entity, AIDC is working towards commercialization, privatization, and globalization," says Chairman and CEO Tony Sun, a retired army general. In line with those objectives, AIDC's business strategy has turned from supplying products and services solely for military applications to serving as a well-balanced and diversified provider to both the military and commercial markets. Sun says that AIDC was not profitable in the past mainly "because of a lack of clear direction." Since taking office this February, he has set the goals of completing AIDC's privatization within three years and turning it into a first-rate aerospace technology service company by 2008. "Privatization is needed to boost the company's competitiveness, allowing it to manage its own development rather than depend on government funding," he maintains.
In preparation for privatization, the company plans to undergo restructuring, identify profitable products, and seek viable international cooperation projects. Reducing the personnel burden is also a top priority. From a peak of more than 6,000 employees when the IDF was under production, the employment level has been cut to 3,400, and more downsizing is being planned.

After the IDF project was phased out, AIDC needed to cooperate with international manufacturers to stay above water. But none of those projects has turned a profit, a situation that Sun blames on the lack of marketing and international negotiating specialists at the time, resulting in deals that were not to the organization's advantage. AIDC has been dubbed "the tail expert" because most of its on-going international cooperation projects have involved empennage manufacturing, including B717 Regional Jet, BD-100, and Lear jet 45 projects with Bombardier of Canada, and the C-27J Military Transporter project with Alenia Aeronautica of Italy. Other projects with U.S. manufacturers include the cockpit for the Sikorsky S-92 helicopter and General Electric's CT7 Turboshaft engine. Despite the lack of profits, says Sun, "we can't break the contracts now because the penalties would be too great and it would be detrimental to our reputation."

To change the impression that AIDC is merely a second-tier supplier to international manufacturers, Sun believes that the assembly of complete aircraft is the only direction to go. AIDC is now exploring such markets as the production of short-distance transporters, emergency-rescue helicopters, and reconnaissance planes.
In other countries with successful aerospace industries, the sector is generally considered to be a strategic industry whose development relies on government support. Given the immense difficulties the Taiwan industry is facing, Sun says it still needs the government's assistance in "adopting correct business strategies, finding the right business partners, and obtaining private-sector investment."