Taiwan's Aerospace Industrial Development Corporation (AIDC), once assured of a steady income from the country's defence ministry, is struggling to become a private corporation by the end of 1999. Its survival is at stake.
Government funding for the AIDC-built Indigenous Defence Fighter (IDF) will dry up by the end of 1999, when the last of a total 130 aircraft is scheduled for completion, leaving the company without its main source of income. Only 15% of AIDC's annual revenues of NT$25 billion ($910 million) comes from the private sector, with the rest accruing from the sale of 24 IDFs a year to Taiwan's air force.
Open policy
As a result of the privatisation programme, AIDC is throwing its once-closed doors open to the world. "If any companies want to invest, they are most welcome, including foreign companies, and including individuals," says AIDC chairman Tsai Chuen-Huei, a three-star general. He says that AIDC will enter joint ventures either as a risk- and revenue-sharing partner, or as a subcontractor. "We have some working capital in hand," he says. The company's total assets are worth about NT$10 billion.
In July 1996, AIDC became a state-run company (after 27 years of military control), as operation was transferred from the defence ministry to the economic affairs ministry. The ministry changed the company's name from Aero Industry Development Centre, established a public-relations office, and began to seek new business. Tsai says that "big negotiations" are now under way with several overseas companies, but he says that the names cannot be disclosed until the deals are completed.
AIDC is required by law to become fully privatised before the end of 1999, meaning that non-Government-owned shares in the company must total more than 50%. Potential majority owners are not known yet. "We would like to know also," jokes Tsai. "The economic affairs ministry told us to take care of ourselves." Eventually, he says, AIDC will be listed on the Taiwan Stock Exchange.
The challenge facing AIDC is daunting. Taiwan's Committee for Aviation and Space Industry Development (CASID), which serves as a liaison office representing AIDC and other Taiwan aerospace ventures to interested overseas companies, is trying to persuade an often unwilling, bureaucratic enterprise, used to operating in a subsidised military environment, into the free market.
CASID has drawn up a three-point plan: AIDC should hire an overseas consultant, break up into three separate companies, and lay off nearly two-thirds of its current employees. "They need a professional to help organise, set up, and help them enter the private culture," says Alex Wang, chief of planning and information at CASID. "The military culture is not suitable," he says.
CASID wants AIDC to divide into three companies, corresponding to its present production sites. AIDC builds avionics and machine parts at one site in Taichung. IDF assembly and flight testing are carried out at a second Taichung site, and engines are produced at a third site, near Kaohsiung in southern Taiwan. As for employees, CASID suggests that AIDC reduce its staff from 4,500 people to between 1,500 and 2,000, and use the savings to invest in joint ventures.
AIDC has so far agreed to just one part of the plan. It will hire an overseas consultant, and is talking to four companies: Deloitte Touche, Andersen Consulting, McKinsey, and KMPG. It rejects the other two parts, however, because it is reluctant to break up into separate companies, and it will not lay off any employees.
Engineering asset
"We are a team," says AIDC president Wang Shih-Sen. "Our most valuable asset is our engineering capability. We have background in design, production, integration, flight-testing, and manufacturing. We will try to obtain new business, rather than lay off personnel."
The key point, says CASID's Wang, is that AIDC should co-operate for its own survival. "If they have the same goals, they'll be successful. I worry that the high-level divisions, above the managers, don't have the same vision. Three years is very soon past. In one or two years, it will be too late," he says.
AIDC has some notable strengths. Following the normalisation of US-China relations in the 1970s, Taiwan found itself with few international friends, and was forced to become self-sufficient in many aspects of aircraft design and manufacture. Altogether, in the past 25 years or so, AIDC has produced 650 aircraft: 58 PL-1 primary trainers, 52 TCH-1 basic trainers, 118 UH-1H helicopters together with Bell, 308 F-5E/F fighters with Northrop, 62 AT-3 jet trainers, and 50 of an eventual 130 IDFs, also called Ching-Kuo fighters after Taiwan's second president, Chiang Ching-Kuo. AIDC was responsible for the design and production of the AT-3s and IDFs.
Engine production
The AIDC's Aero Engine Factory near Taohsiung has built the Lycoming T53 turboprop engine, and produced various engines with US makers, including the TFE731 engine for the AT3, in co-operation with Garrett (now AlliedSignal Aerospace), and builds the TFE1042, for the IDF, in a 50-50 joint venture with AlliedSignal. The avionics factory has equipped the IDF with radar, mission computer, and other avionics.
The F-5E/F co-production has been AIDC's most successful, says Christine Cheng, senior public-relations officer. AIDC began building the forward fuselage in 1966, then learned in phases to build the wing box, rudder, and skin, eventually assembling the entire aircraft. The programme ended in 1986, but AIDC still performs structural upgrades to the fighter.
AIDC also ventured briefly into civil aircraft, building a single prototype of the 38-seater turboprop-powered XC-2, flown in 1979, "before the [AI(R)] ATR 42 or the [CASA/IPTN] CN-235," notes Cheng. "We're very regretful we didn't continue production," she says.
Commercial projects include a 5% stake in the Sikorsky S-92 helicopter, for which AIDC is building the forward fuselage and cockpit, production of the empennage of the McDonnell Douglas MD-95, and development and production of the TFE1042 engine. Work on the first prototype MD-95s began in June 1996.
Fan Wen-Chih, AIDC manager of strategic planning, points to the S-92, AIDC's first civil-aircraft programme, as an example of the type of work the company hopes to perform. The company would like to join the Asia-based AE-100 passenger jet project in a similar capacity, taking a stake of 5%.
"We'll do risk-sharing or subcontracting," says president Wang, "but it's too difficult to do a passenger aircraft alone." The company is discussing the exact nature of its involvement in the AE-100 with the programme's other partners.
AIDC's ultimate success or failure will depend on its commercial ventures. In the meantime, it will derive income from offset work, and it also hopes to extend the life of its two military aircraft. It wants to upgrade the AT-3 trainer, and downgrade the IDF into a trainer, extending the life of both aircraft.
Current IDF production is not at full capacity, as AIDC will only build 130, two a month, rather than the originally planned 250, or four a month, as Taiwan was able to buy 150 F-16s. It takes AIDC 12 months to build each IDF.
AIDC carries out offset work for three Western manufacturers: Lockheed Martin (in return for its purchase of 150 F-16s), Dassault (in return for the purchase of 60 Mirage 2000-5 fighters), and Raytheon (for buying 200 Patriot surface-to-air missiles). AIDC will build the ventral fin, fuel pylon, centerline pylon, inlet, and engine access door for the F-16.
AIDC is guaranteed a certain number of offset projects by the Taiwan Government, which meets after every major weapons purchase to determine how much offset work it will demand. It usually requires that local companies produce 30% of the finished product.
Private optimism
While acknowledging the magnitude of the task facing the AIDC, chairman Tsai says that he is optimistic that the company can successfully enter the private sector. Given Taiwan's success in other competitive fields such as electronics, where companies have shown an ability to produce goods of global quality while reducing costs to a bare minimum, there is little reason to doubt the company's ability.
It has the capacity. The cutback in IDF production and the end of the F-5E/F co-production has left AIDC with idle assembly lines and large rooms filled with little-used machines staffed by a mere handful of workers. AIDC will benefit from its personnel, says CASID's Wang. "Human resource is its first advantage," he adds, pointing out that 70% of the company's employees, many from the USA, are university graduates, including 100 people with PhDs and 500 with MScs. "The other 30% have been to technical school. Quality assurance is better than anywhere else in Asia, not including Japan," Wang claims.
Meanwhile, AIDC is still hoping that the Government will throw it a lifeline. "The AIDC has 28 years of history, and the Government has invested a lot of money, so they want to keep this capability," says Fan.
Source: Flight International
