AIDC transforming to to meet new aerospace requirements

Singapore
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Ask Shung Yeou Kuang about the problems at Taiwan's Aerospace Industrial Development Corporation and you get a direct answer from the straight shooter.

"There are many changes to make, there is resistance and it is not easy," says Shung, who took over as chairman of the state-owned aerospace firm in September 2008. "But we have to make those changes for the future of the company."

AIDC was formed in 1969 under the ministry of national defence to create an indigenous aerospace manufacturing capability in Taiwan. It has licence-produced the Bell UH-1 helicopters and Northrop F-5 fighters, and developed the AT-3 jet trainer and the F-CK-1 Indigenous Defence Fighter (IDF).

It was restructured in 1996 and came under the auspices of the ministry of economic affairs. This enabled it to collaborate with foreign companies, form joint ventures and bring their technology to Taiwan. It has been moderately successful, winning contracts from the likes of Bell Helicopters, Boeing, GE, Honeywell and Sikorsky. AIDC, however, has not taken off like its counterparts in Japan or South Korea.

 AIDC chairman Shung Yeou Kuang

Part of the problem is that it is still part of the Taiwanese bureaucracy and encumbered by red tape. It also has far more employees than it needs and little scope to trim that as a state-owned firm. There is also a perception that the company has fallen behind over the years in meeting its customers' expectations.

Shung, who has a PhD in aeronautical engineering from Colorado State University and was the chief engineer in the IDF programme, says that privatisation is not on the cards. But he wants to draw on his experience in the private sector - four years as vice-president of Taiwan's Air Asia and another four as president of plastics manufacturer Taiwan Styrene Monomer before his latest stint at AIDC - to transform the company.

"The aerospace industry is very competitive and there are three key targets for us. Our quality must meet the customer's expectations, our delivery schedules must be on time and we must be competitive on cost," says the youthful looking 64-year-old.

AIDC's core capability, he adds, is in the engineering talent that it has developed through military programmes like the IDF and commercial programmes with companies such as Boeing and Sikorsky. This will help the company move beyond its manufacturing capabilities to designing parts, particularly in the commercial business.

"We must become original design manufacturers, using our brains to come up with products that can be used by the original equipment manufacturers," he says. "Given that 50% of all aircraft structures are made of composites, we must have expertise in that field. We must find out how we can meet the manufacturers' requirements."

To achieve this, the company is constructing a $70 million facility to design, develop and manufacture composite parts. The plant will be operational in the third quarter of 2010, and initially focus on the Mitsubishi MRJ regional jet programme. AIDC will design and manufacture slats, flaps, belly fairings, rudders and horizontal stabiliser rotating blades for the MRJ, which is due to enter service by 2014.

Another major contract, but one with political and economic implications, could be with China's Comac, which is developing the 919 narrowbody to compete with the Airbus A320 and Boeing 737 series of aircraft.

China has considered Taiwan a renegade province since the communists won a civil war in 1949 in the mainland and the nationalists fled to the island. Relations have improved since Ma Ying Jeou became Taiwan's president in 2008 and brought a more conciliatory tone to ties with the mainland.

AIDC was invited earlier this year to bid for a contract to manufacture flaps, slats, leading edge flaps, rudder elevators and belly fairings for the 919. AIDC had to get permission from the economic affairs ministry to proceed with the deal, and it is preparing a proposal and quotation. Shung, who has the ear of the Ma administration, insists that this is a purely commercial deal. The political implications of a Taiwanese firm helping a Chinese company take on Western firms, however, are immense.

Despite the growing civil aerospace business, the military segment remains important to AIDC. It hopes to get the nod to go ahead with an upgrade to the IDF later this year, it has proposed the development of an updated version, and aims to fulfil the air force's future requirements for primary and advanced trainers.

"This is a golden opportunity for AIDC to support the air force's requirements, and for the air force and government to help develop a viable Taiwanese aerospace industry," he adds. "The military business is the company's base and it the most important part of AIDC. We have to ensure that this continues."

The company made a profit before tax of NT$800 million ($24.3 million) in the first six months of 2009. Shung says that a lot of this was due to the "aggressive and successful cost cutting measures", although he was reluctant to say exactly how much was saved.

Continuing this depends on how successfully Shung transforms the company, and he has been pressing his managers to pay attention to the ways in which AIDC can improve its cash flow. Inventory levels have fallen from NT$8.3 billion in January to NT$6 billion in June, and production cycles have been shortened due to some of the measures that have been implemented since Shung came on board.

"We cannot just pay lip service to these measures, it is something that we really must do," says Shung. "We are changing the culture at AIDC. We need accountability together with the responsibility, we have to take action to get results."