Taipei is reluctant to go on bankrolling state-owned AIDC as it struggles to find foreign investors for its risk-sharing international projects

Brent Hannon / Taichung, Taiwan

Taiwan's Aerospace Industrial Development Corporation (AIDC) - the government-owned aircraft builder and parts producer - continues to lose money, and, as the government struggles to support 12 other huge state-owned industries, it is reluctant to provide continued funding.

Meanwhile, many of AIDC's recent risk-sharing ventures are still in the development stage and are years from profitable production. These projects include building cockpits for the Sikorsky S-92 helicopter, empennages for the Bombardier Continental business jet and wings for the Aero Vodochody Ae-270 turboprop.

Lack of money means AIDC is unable to rebuild and retool its three factories and it cannot take further substantial risk-sharing stakes in international projects. A joint venture with Airbus to build parts for the A380 has been abandoned because AIDC does not have the $120 million required to take a 1% share in the project.

AIDC became a state-owned corporation in 1996, when the Department of Defence turned it over to the Ministry of Economic Affairs (MoEA). The MoEA was tasked with reducing the number of employees, signing subcontracting and risk-sharing deals with overseas companies, and eventually privatising the corporation.

The MoEA has had some success in attracting risk-sharing work. In addition to delivering 91 empennages for the Boeing 717-200 AIDC has carried out pre-production work on the Continental, Ae-270 and S-92. It also performs subcontract work, including empennages for the Alenia/ Lockheed Martin C-27J Spartan transport aircraft, rudders for the Dassault Falcon 900 and 2000, and parts for aircraft engines, including the General Electric CT7 and Honeywell AS900.

AIDC recently secured the contract to supply 717-200 horizontal stabilisers to ShinMaywa of Japan, a Boeing subcontractor, and has signed a contract to provide crew doors for the Sikorsky S-76 helicopter. It may also supply empennages for the Boeing 737, a deal said to be worth $100 million over the next three to five years. AIDC hopes the contract can be signed soon, because it would help ensure another government cash injection.

Tough competition has limited AIDC's ability to attract work. In one instance, a co-operative deal with France's Latecoere to help produce fuselage parts for the Airbus A340-500 and A340-600 fell through when a Korean Air bid undercut AIDC. Taiwan's international political predicament - China claims the island is a renegade province - has not helped. A plan to upgrade the Ching-Kuo Indigenous Defence Fighter (IDF) and sell it overseas as a training aircraft fell through, partly because potential buyers feared a negative reaction from China.

Sharp fall in income

The corporation's income fell sharply at the end of 1999, when it delivered the last of 130 IDFs to the Taiwanese air force. Since then AIDC has struggled to find revenue to offset the loss of IDF production. Currently, 70-80% of its income comes from military projects, including service and maintenance of the IDF fleet.

AIDC has tried to attract overseas investors for several years. It sought finance from Boeing, Bombardier, Dassault and GE, but talks stalled and have since been suspended. According to an AIDC source, the foreign companies were reluctant to take co-operative shares in the firm as it would have made them co-owners with their competitors.

As a result, AIDC's planned privatisation, originally scheduled for completion by 2000, has been delayed. The new deadline is 31 December, but that date is unlikely to be met.

AIDC's revenue has shrunk from about $750 million a year during IDF production, to about $300 million. Vice-chairman Willy Peng will not disclose how much AIDC is losing, but sources put the figure at $60-$85 million a year. "Our revenue is at the very bottom, but we are gradually trying to recover," says Peng.

AIDC has sought money from various government sources. It applied unsuccessfully to a cabinet-level development fund, and a National Defence Industry development fund. AIDC has also turned to a pair of industrial banks, Chiao Tung and China Development Industrial Bank (CDIB), which are now carrying out due diligence. If they agree, state-owned shares of AIDC would be transferred to the banks, together with a new stock issue that would boost the company's working capital. Other possible investors, says Peng, are the China Aviation Development Foundation, which owns 71% of China Airlines, and employee shareholdings. "Our future depends on the attitude of the government," says AIDC. "The banks [CDIB and Chiao Tung] still have the money."

Compounding AIDC's difficulties is Taiwan's bleak economic climate. The New Taiwanese dollar has fallen 5% against the US dollar this year and is almost 30% below its pre-Asian-crisis trading range. The island's exports and stock market have fallen sharply in the past few months and the economy is close to recession. The predicted gross domestic product growth for 2001 is just 2%, the lowest in 26 years.

As in other Asian countries, much of the capital value of Taiwan's banks is linked to the stock market, through cross-shareholdings and equity stakes in listed companies. When the stock market falls it lowers their lending base and makes them reluctant to support risky ventures.

Investment stage

In a best-case scenario, AIDC would get about $120-200 million from banks and other government sources, land lucrative contracts from foreign companies and use the money to modernise and rebuild its three factories. Meanwhile, revenues would peak from programmes such as the S-92, Ae-270 and Continental, which have received the development costs but are not yet in full-scale production. "Many of our products are still just in the investment stage, so it will take many years to recover the revenue," says Peng.

One promising source of new business is target practice. In co-operation with the USA's Meggitt Defence Systems, AIDC has bought an Astra SPX, which is certified by the US Federal Aviation Administration to carry up to 545kg (1,200lb) under each wing for target towing. The aircraft offers a towing distance of 9,150m (30,000ft), an altitude of 36,000ft and a speed of 500kt (925km/h). Among the targets offered are radar, infrared, flare, night vision, air-to-air gunnery and sea skimming. AIDC has a three-year contract with the Taiwanese air force, and a one-year contract with the Taiwanese navy, to provide target services.

The MoEA has had some success in streamlining AIDC. Workforce numbers have been cut from 4,500 to 3,600, which has helped to cut losses. Last year the company was restructured into four business divisions: engines, aerostructures, defence systems and technology.

AIDC has some notable strengths. The company has trained personnel, including about 100 doctorate and 500 masters degree holders. About 70% of employees are university graduates, many from US schools, while the remainder have been to technical school. AIDC has received ISO9001 and ISO9002 quality standard certification, plus certification from Boeing and Sikorsky. Taiwan itself has long been known for its ability to produce quality parts at low prices.

Brief venture

Altogether, AIDC has produced orco-produced more than 700 aircraft: 58PL-1 primary trainers; 52 TCH-1 basic trainers; 118 Bell UH-1H helicopters; 308 Northrop F-5E/F fighters; 62 AT-3 jet trainers and 130 IDFs. AIDC also ventured briefly into civil aviation, building a single prototype 38-seater turboprop-powered XC-2, which flew in 1979.

The AIDC's Aero Engine Factory has built 154 T53 turboprop engines and produced engines with US makers, including the TFE731 for the AT-3, in co-operation with Garrett (now Honeywell), and the TFE1042 for the IDF, also with Honeywell. AIDC also equipped the IDF with US radar, mission computer and other avionics.

Peng acknowledges the difficulty of moving from the slow production of IDFs into the just-in-time delivery now demand- ed by manufacturers, but he says AIDC has proven its ability. "The 717 and Bombardier work show that we can do high-rate, low-cost production," he says. "Boeing and Bombardier are looking for high-rateproduction, low cost and a one-shop concept from study to manufacturing."

AIDC has delivered 91 717 empennages and now produces one a week. It has delivered four S-92 cockpits to Sikorsky, with a fifth undergoing bird strike tests. "We will focus on narrowbody, regional and business jets, and we will continue to produce empennages," says Peng.

Taiwan's government is unlikely to let AIDC fail. It has put an estimated $13 billion into the company since 1969 and AIDC remains a key element in Taiwan's national defence. The company's total assets are worth about $300 million.

Meanwhile, AIDC is still listening to offers from foreign companies. "For $100 million, a foreign company could buy a controlling stake in us," says AIDC. "Now is the best time to invest."

Source: Flight International