Korea Aerospace Industries is targeting a place among the world's ten largest aerospace companies by the end of the decade despite economic uncertainties

The creation of Korea Aerospace Industries (KAI) from the merger of the aerospace divisions of South Korean conglomerates Daewoo, Hyundai and Samsung brought with it high hopes for the revitalisation of the country's debt-laden aerospace industry.

Indeed KAI's chief executive Lim In-Taik says 2000 was "the year in which we confirmed KAI's unlimited potential and intrinsic possibilities". But despite such optimism, KAI faces tough challenges as it attempts to establish itself as one of the world's top industry players. These challenges are likely to be harder following the 11 September terrorist attacks in the USA.

In December last year major creditors were forced to throw KAI a financial lifeline by agreeing to take a minority stake in the company via a debt-for-equity swap, boosting its capital by 72.8 billion won ($56 million). The financial restructuring came as KAI slumped to a net loss of 112 billion won in 2000, compared with a 963 billion won profit a year earlier.

Three-pronged strategy

The ultimate aim of KAI's restructuring is to achieve its "double 10" corporate goal - to become one of the world's top 10 aerospace companies in sales terms by 2010. This is supported by a three-pronged strategy targeting more effective management, improved competitiveness through technology acquisition and better labour relations.

However, KAI admits it will have to continue to rely on "stable demand from government-led projects" in its quest for improved profitability. Its stated goal is annual sales of 2 trillion won by 2008, of which 26% or 523 billion won is to be contributed by activities in the civil sector. This compares with the 2001 sales figure expected to come in at 816 billion won, of which 85% will come from government-backed military programmes.

Concurrently, KAI wants to reduce the proportion of fixed-wing aircraft production work from 83% this year to 57% in 2008, allowing fuselage exports to grow from 11% to 17% and rotary wing production from 5% to 24%. Space-related work and other projects are expected to remain flat at about 2%.

KAI, formed in October 1999 under orders from the South Korean Government which moved to consolidate key industries after the onset of the Asian financial crisis in 1997, has had a busy couple of years in terms of programmes. It completed deliveries of 160 Lockheed Martin F-16C/Ds built under licence as part of the Korean Fighter Programme in April 2000, prompting the government in July last year to buy another 20 of the type. The follow-on contract is designed to keep the company's production lines busy until the T/A-50 supersonic trainer/light combat aircraft developed in partnership with Lockheed Martin comes fully on line.

Export potential

The ministry of defence has ordered 94 T-50s for delivery between 2005 and 2009, and has the option to acquire up to another 100 aircraft. Lockheed Martin and KAI, are however, bullish on the potential export market for the trainer and A-50 light attack version, predicting sales of several hundred aircraft.

Deliveries of KAI-built KT-1 basic trainers to the South Korean air force began in November 2000, around two years later than originally planned. The South Korean air force has ordered 85 aircraft, and Indonesia signed up as the first export customer in February 2000. The first T-50, meanwhile, is due to be rolled out in late October.

Deliveries of the Korean Light Helicopter (KLH) to the army have been completed while deliveries of the SB427 twin-engined multi-purpose helicopter - developed in partnership with Bell Helicopter Textron - have recently started. China signed a contract to become the first export customer for the KLH - based on the Eurocopter BO105 and developed with technical help from the European manufacturer - in November 2000.

KAI is responsible for the aircraft's cabin and tailboom, and for sales and marketing in South Korea and China. The SB427 is also the first helicopter to be certificated by the South Korean authorities.

Another helicopter project involves production of W-3A Sokol 14-seaters under licence to Poland's PZL-Swidnik. KAI handles sales in Australia, China, Iran, Korea, South Africa and Vietnam.

Simultaneously, KAI has closed and sold its Seosan plant, which was inherited from Hyundai, and implemented sweeping job cuts among its management. Despite this, some in the industry question whether KAI has gone far enough to realise the potential efficiency gains from the merger, particularly as it faces an ongoing competitive threat from national rival Korean Air Aerospace. "This is KAI's last chance to become more competitive," says a South Korean industry source.

Strategic partner

At the time of the merger that created KAI, the South Korean Government had hoped to secure a foreign strategic partner to help rehabilitate the struggling manufacturer. A joint Boeing and BAE Systems bid was selected over a rival offer from Lockheed Martin, Aerospatiale and Dassault Aviation, but the pair were unable to conclude negotiations over the terms of a deal that would have given them a 35% stake in the company.

The talks failed, but industry sources say the Boeing/BAE proposal has not been formally withdrawn, although the chances of the investment going ahead are seen as extremely remote.

The deal foundered on arguments over valuations after due diligence had been completed and over issues of corporate governance. This prompted KAI to approach the South Korean Government requesting approval of a "self-rescue" without the participation of foreign partners.

However, Boeing and BAE continue to work closely with KAI. BAE, for example, provides the avionics suite for the T-50 and is a major supplier of naval equipment to the South Korean navy. On the civil side, KAI supplies parts for Boeing's 717.

Despite KAI's perceived over-reliance on government-funded military programmes, the company is pinning its hopes on being able to start development of an indigenous Lockheed Martin F-16-class fighter in 2003, using technology it acquires as part of industrial offset for the 4.3 trillion won F-X advanced fighter programme. The aim is for this aircraft to become operational by 2015 to replace the South Korean Air Force's F-16s. A decision on the F-X is due in November when an initial 40 aircraft are likely to be ordered, although the eventual requirement could be for as many as 120 aircraft. The competition pitches Boeing's F-15K against the Eurofighter Typhoon, Dassault Aviation Rafale and Sukhoi Su-35. The South Korean Government is demanding industrial offset worth 70% of contract value, of which 40% must come from manufacturing contracts, 25% from depot-level maintenance of the aircraft and 35% from technology transfer, which will be valued at $10 "per page".

South Korean defence minister Kim Dong Shin says initial design will take two to three years, followed by five to six years of full-scale development and another three to four years of testing.

Future prospects

Also under study is a new indigenous Korean multi-role helicopter to replace the large number of MD Helicopters MD500s operating in South Korea.

A part of the business crucial to KAI's future prospects is aerostructures, which is growing steadily and which the company says will result in a "more balanced business portfolio". It is already responsible for the Boeing 717 main wing, in-spar rib assembly for the 747, the wing of the BAE Systems Hawk and outer wing of the Lockheed Martin P-3. It also produces empennages for the Bombardier Dash 8 regional turboprop.

KAI also aims to be a leading manufacturer of fuselage assemblies as part ofinternational collaborative programmes. It already makes components for most Boeing airliners as well as fuselage sections for the Fairchild Dornier 328 and Airbus A320 upper fuselage shells.

The company says it will "develop the fuselage component business, which is focused on the production of each part, into one more focused on assembling and fully utilising the technological capabilities that it has built through the development of the KT-1 and T/A-50. Overall, KAI will have a more profit-oriented business".


Source: Flight International