Paul Lewis/SEOUL and CHANGWON
Two years is not generally considered a long time in the world of aerospace, but for South Korea's industry, it must have seemed like eternal purgatory. Once- bold visions of being a major international aerospace player have been shattered by the cold blast of fiscal reality and local companies now face their biggest post-war shake-up as they struggle to survive.
An endless succession of elusive proposed joint ventures, missed opportunities, industrial in-fighting and political procrastination have conspired to cripple South Korean dreams of being among the top 10 aerospace nations by 2005. The country's worst economic recession in years has delivered the final blow and, in turn, has ushered in an era of urgently needed corporate consolidation and reform.
Whereas the focus of the 1996 Seoul air show was on a Samsung Aerospace-led effort to save bankrupt Dutch manufacturer Fokker, the attention is now on finding foreign investors to support South Korea's struggling aerospace industry. Ambitious talk two years ago of a national civil aircraft programme has had to give way to more modest foreign subcontracting work as local industry struggles to sustain itself.
Perhaps more worrisome for South Korea's four main aerospace companies is a cutback in its main revenue stream - defence contracting. The military's lengthy aerospace shopping list, which includes new fighters, helicopters and large transport and patrol aircraft, has also been chopped back by a severe squeeze on defence expenditure. The net result is a growing shortage of work.
CORPORATE CONSOLIDATION
"Today, there are four major manufacturers and around 100 subcontractors in South Korea. The logic from this is clear - we cannot survive this kind of situation where there are not enough work packages for the four big companies to share and where there are only limited national projects," concludes Bang Un Chung, Samsung Aerospace executive senior director.
As a result, Samsung has consented to a government-brokered merger of its aerospace division with those of competitors Daewoo Heavy Industries (DHI) and Hyundai Space & Aircraft. The so called "big deal", which includes a quid pro quo swap of other conglomerate interests, is intended to lead the way to a detailed agreement by the end of the year and the creation of a new single corporate entity by April 1999.
Reaching a general understanding was relatively easy, but working out the finer details and implementing the deal is going to be a little more involved. There is first the task of share allocation, which will be determined by assessing the three companies' assets, orderbooks and debts. The latter is of particular concern given that all three are deeply in the red, of which Hyundai's massive 2,700% debt-to-equity ratio is the largest. For this reason Korean Air (KAL) has, for now, opted out of the planned merger.
"We don't have any interest in going in and losing money-they [DHI, Samsung and Hyundai] want to share those losses with us, and that's simply unfair. I'm sure that for the next five to 10 years we can make a profit, and we don't want to lose that position. Whatever arrangements the government makes, I insist that the company is profitable. I don't want to help organise one to lose money," states KAL Aerospace division executive vice-president Yi Taek Shim.
One solution being proposed is to convert outstanding company loans - much of which are owed to the Korean Development Bank - into state equity. This could in turn then be sold off to foreign investors, with officials suggesting that as much as 50% could be up for grabs. It is believed that overtures have already been made to Boeing, British Aerospace, Daimler-Benz Aerospace (Dasa) and Lockheed Martin, among others.
Foreign companies have for now adopted a "wait and see" approach, preferring first to view the composition and conformity of the single entity that finally emerges before making any commitment. "We need to speak with one voice. Airbus Industrie and Boeing are looking for one partner, not three or four," notes DHI aerospace managing director K J Lee.
Integral to this will be the willingness on the part of DHI, Hyundai and Samsung to consolidate and downsize their respective operations at Changwon, Sachon and Seosan. It is estimated that rationalisation of business and facilities could cut the three companies' combined 4,300-strong workforce by as much as 30%. Should KAL elect eventually to join, its Kimhae plant would add another 2,500 staff.
"This is not going to be easy," acknowledges Chung, "but there is nothing to do but go this way. There is so much overlapping and duplication of facilities among the companies that, if we form one company, there will a lot of overcapacity. These issues are very delicate, but we must overcome this and go through with these kind of discussions."
A fundamental problem faced by all three companies, as well as KAL, is the pending completion of major manufacturing programmes with little in the way of immediate follow-on work in the pipeline. The government's promise to channel all future national programmes into the new single corporate entity appears to be largely an empty gesture in the near term. "What programmes do they have?" asks Shin. "The Samsung KTX-2 is in the development phase and mass production will not start until 2005."
FIGHTER GAP
The shortfall in work is starting to become critical, with Samsung due to deliver in April 2000 the last of 72 licence-produced Lockheed Martin Block 52 F-16C/Ds. The $5.2 billion Korean Fighter Programme (KFP), which included the kit assembly of an earlier 36 aircraft, is the country's biggest single aerospace undertaking ever. "My biggest single concern at the moment is filling the gap between the KFP and KTX-2. This is a daily headache," complains Chung.
It has already begun to affect major subcontractors. DHI is due to deliver its last side panel this month and centre fuselage section in March 1999, while KAL will complete the final wing and aft fuselage by July. Six smaller companies will also be hit, including pylon producer Hyundai, landing gear vendor Kia Machine Tools, servo actuator supplier Hanwha Machinery and avionics contractors Daeyoung Electronics, LG Precision and Samsung Electronics.
The hoped-for solution two years ago had been to secure a follow-on order for 50 more F-16s and/or to begin work on a major new civil aircraft programme. Neither has so far materialised. Even if the South Korean Government were to now order more fighters, a prospect most observers view with scepticism in the current economic climate, production lead time means that there is already probably a 24-month gap before new deliveries could start.
Post-Fokker moves by the Korea Commercial Aircraft Development Consortium (KCDC) to take a risk-and-revenue stake in the 70-seat ATR Airjet and, more recently, the Fairchild Aerospace 728JET, have gone nowhere. Previous state promises to underwrite 50% of South Korea's share in a major civil project must also be in doubt in the wake of the International Monetary Fund's $60 billion bail out. "It's not a good time to ask," says Chung.
Civil work already in hand includes Hyundai and KAL's private involvement in the Boeing 717-200, with the former supplying the twinjet's wing and the latter the nose section. For newcomer Hyundai, its 717 package was handed down by associate company Halla and has proved to be a painful eye opener to the cut-throat margins of aerospace. Its entry ticket has been a $350 million outlay on a new plant and tooling at Seosan and therein lies the problem.
Hyundai Space and Aircraft's new president, Dong-jin Kim, explains: "We're planning to produce 600 wing shipsets over 15 years as a conservative projection. If we amortise our non-recurring cost over 600 wing packages, we can't break even-If we had been negotiating with McDonnell Douglas [now Boeing], I would not have signed the contract at that price."
Accordingly, approaches by Boeing for Hyundai to double its contracted six per month 717 wing production rate have not been positively received, leaving the US manufacturer looking for a second supplier. Hyundai, under mounting corporate pressure to cut its debt drastically and improve on its $25 million sales in 1997, is instead casting around for higher- yield work to fill out its 54,400m2 (585,500ft2) factory floor.
AIRTRUCK WINGS
One possibility is a memorandum of understanding signed with Israel Aircraft Industries to develop and produce the wing for its planned Airtruck freighter being proposed to FedEx. "If we're going to invest in additional production capacity, I would rather produce the Airtruck wing than more 717 wings. We're in this business to make money, not charitable donations," states Kim.
According to Hyundai estimates, the price of joining the Airtruck programme would be $70 million in non-recurring costs to develop the turboprop's 29m (95ft)-span wing. The investment would give the company a 13% stake, with a projected breakeven point of 400 aircraft. FedEx, however, has indicated a requirement for only 100 aircraft.
For this reason, and the Airtruck's niche application, Hyundai's KCDC partners remain sceptical about the programme's chances of success and possible wider South Korean Industrial involvement. "I don't see the market," argues Shin. "I don't want to build an aircraft that can't be sold. They're not for entertainment."
DHI, KAL and Samsung instead have been focusing efforts on improving manufacturing efficiency to secure new civil subcontracting work. DHI has re-equipped its former Fairchild Dornier 328 fuselage shop with some $6 million-worth of new automated riveters, flexi-jigs and IBM/Dassault CATIA design systems to supply frames for 747 section 42, 44 and 46 fuselage panels, as part of Boeing's new accurate fuselage assembly (AFA) process
DHI was contracted in September 1997 to produce 300 shipsets and recently delivered the first frames to 747 panel manufacturer Northrop Grumman. DHI's package of work has grown from 48 stretched upper deck (SUD) frames, contracted in 1985, to 217 different frames covering all -400 passenger, combi and freighter variants. "Conventional SUD frames were assembled in backshops, but because of AFA and the increase in work, we're now doing the work in house with automated machinery," explains Lee.
KAL has similarly invested in new, lean manufacturing machinery and moved in-house 300,000 man hours of work previously contracted out to backshops to keep former KFP workers occupied at Kimhae. "We're the exclusive flap track and fairing house for the Boeing 777, 767, 757, 747 and new generation 737," explains Shim.
Samsung has also been contracted to supply 747 AFA/SUD frames to Northrop Grumman, covering eight section 46 fuselage panels, along with stringers and fixed trailing edges. Other work includes 757 slats, 737 stringers and Gulfstream V wing leading edges. "We're pushing for more than $100 million in orders this year and we've already achieved half that target," claims Chung.
South Korea has also begun to turn its attention to Europe, with DHI contracting in December 1997 to supply Dasa with the Airbus Industrie A320 fuselage section 15 upper "bonnet" panel, and in June with BAe for A330/A340 machined ribs. There has also been ongoing discussion with KCDC on taking a risk-and-revenue sharing stake in the proposed A3XX, although this will largely hinge on the formation of a single corporate entity.
DEFENCE CONTRACTS
Local industry has traditionally relied heavily on defence expenditure and, in the absence of a major civil programme, this looks set to continue. About 70% of DHI's $114 million turnover in 1997 was derived from military contracts. This is projected to increase to 81% by 1999, with the start of production of the indigenously developed KTX-1 basic trainer aircraft.
"The KTX-1 is our one key programme. Without it, Daewoo's aerospace division could not exist," says Lee. "This is why we have invested so much money, even during these difficult economic times, in a new production hangar to demonstrate how important that project is. It's all our own investment."
Its new 15,500m2 plant at Sachon, built at a cost of $70 million, is the largest freestanding building in the country. DHI had initially sought to make use of Samsung's rapidly emptying F-16 plant, but the two companies could not come to a satisfactory arrangement, testament perhaps to the corporate rivalry that has existed in South Korea for so long.
The South Korean air force requires 85 newly designated KT-1 trainers and a further 20 armed forward-observation versions, beyond which DHI is hoping to export the aircraft. "Up until now, we've only engaged in limited marketing, but this coming Seoul air show will be a turning point, as we'll be flying the aircraft during the display," says Lee.
Domestic production of the KTX-1 alone should keep DHI busy through to 2005, at which point production of a planned 95 KTX-2 advanced jet trainer/light combat aircraft for the air force is due to begin. The government gave a long awaited green light for full-scale development in late 1997, but cuts in initial funding have already meant that the $2 billion programme is six months behind schedule.
Workshare will be loosely modelled on the KFP, with prime contractor Samsung responsible for final assembly, fabrication of the forward fuselage and licence assembly of the General Electric F404-402 engine. DHI will supply the centre fuselage section, KAL the aft body and Hyundai the aircraft's pylons. Lockheed Martin has a 13% stake in the project and anticipates building the wing, but Hyundai - as the country's self-declared "wing specialist" - considers this to be rightly its preserve.
Hyundai's play for the KTX-2 wing is viewed by other local manufacturers as "wishful thinking" and intended as a hedge against Dasa dropping development of the rival AT2000 Mako. Hyundai's interest is in producing the composite wing for the German supersonic trainer/light fighter, which it estimates would cost some $200 million in non-recurring costs.
"The AT2000 is a purely commercial venture. It has nothing to do with the KTX-2 programme," says Kim. "We've analysed the viability of the aircraft, the market and sales volume over the next 20 years. All data analysis shows it is a good business plan and that's why we intend to participate as long as we're the wing manufacturer."
Local manufacturers are also manoeuvring to compete for two potentially lucrative rotary-wing programmes, the Korean multipurpose helicopter (KMH) replacement for the army's 300 Boeing MD500s and the more imminent attack helicopter (AHX) requirement, for which the government is expected to issue a formal request for proposals by December (Flight International, June 17-23, P18).
KAL, with help from Sikorsky, has already begun preliminary design work on a new 3.4t machine designated the KMH, a mock-up of which was unveiled at the Seoul show in 1996. DHI hopes to extend its Eurocopter BO105 Korean Light Helicopter contract under which the army ordered an initial 12 machines after more than eight years' procrastination. It is to begin assembly of the first two kits in late 1999.
Samsung is pinning its hopes on a militarised version of its SB427, developed with Bell. The company has poured $60 million into the development and, as part of its 20% stake, has design and production responsibility for the cabin and tail boom and final assembly for those 427s sold locally and in China. It claims to have commitments for 25 machines, including letters of intent from China Ocean Helicopters, Zhuhai Helicopters and Hainan Helicopters.
KAL's Kimhae plant is due to deliver the last of 138 licence-produced Sikorsky UH-60 Black Hawks on order by the end of 1999, but is hoping to extend the line by offering an armed variant for the army's AHX programme. Samsung appears to be swinging its support behind either the Black Hawk and Boeing AH-64D Longbow Apache, on the basis that it already licence produces the GE T700 turboshaft which powers both types.
Hyundai appears similarly to be wavering between the considered favourite, the Apache, and teaming with Denel to offer the CSH-2 Rooivalk. The initial requirement is for 18 machines, a number which Hyundai claims Boeing considers too few to offer local production. On the other hand, says Kim, "-Denel has been very co-operative and has proposed that, whatever the number, they will allow South Korea to produce the CSH-2 locally."
Source: Flight International
