Taiwan’s Aviation Industry: Readying for Takeoff

The island enjoys a number of potential competitive advantages in the sector, including strong manufacturing and supply chain expertise.  

At a ceremony on November 24, Taiwanese airline EVA Airways announced a major expansion to its fleet through an agreement to purchase 24 Boeing 787 Dreamliners and two Boeing 777-300ER aircraft, with the package valued at US$8 billion. National carrier China Airlines is also in the midst of a major upgrade. Eight of the ten Boeing 777-300ERs ordered in 2012 are already in service, with the remainder scheduled to be delivered in 2016. Fourteen Airbus A350s, valued at US$4.2 billion, are also to be delivered in 2016.

The acquisitions coincide with major construction set to happen at the Taiwan Taoyuan International Airport, where two addition terminals are to be constructed within the next decade, more than doubling total terminal space. Still, experts fret that the capacity will be insufficient to meet the needs of the 80 million travelers – more than twice the current number – expected by 2040.

Taiwan has seen strong growth in the number of passengers visiting and transiting in the last eight years. Given its central location, less than four hours’ air travel time to all major destinations in East Asia, Taiwan has high hopes of becoming a hub for regional travel.

It’s not only in the operations/transportation side of aviation that business is flourishing. Taiwan’s aerospace manufacturing and MRO (maintenance, repair, and overhaul) sectors have also been seeing strong, steady growth over the past decade. “The aerospace industry in Taiwan is booming,” says Tung Wan, chairman and CEO of Taiwan Aerospace Co. (TAC), a public-private joint venture charged with promoting Taiwan’s aerospace industry.

The total value of Taiwan’s aviation industry, including the operation of commercial passenger and cargo airlines, manufacturing, MRO, and military contracts, rose in value 42% from 2008 to 2014, from NT$61.1 billion (US$1.87 billion) to NT$87.07 billion (US$2.67 billion), according to data supplied by the Committee for Aviation and Space Industry Development (CASID) under the Industrial Development Bureau (IDB) of the Ministry of Economic Affairs (MOEA). TAC’s Wan, who is also a professor at Tamkang University’s Department of Aerospace Engineering, estimates that Taiwan’s aerospace industry will reach nearly NT$100 billion in value in 2015.

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Taiwan brings a number of attributes that contribute to its growing clout in global aviation. CASID’s website lists proximity to regional aviation hubs, “well-integrated industrial clusters, solid R&D capabilities, abundant high-quality human resources, sound infrastructure, and solid industrial foundation” as among Taiwan’s advantages.

“Taiwan’s long experience in manufacturing and servicing for the international market has enhanced Taiwan’s ability to manage production to match the needs of the aerospace industry,” added representatives for Tainan-based MRO firm Air Asia in an email.

The beginnings of Taiwan’s aerospace industry can be traced to the establishment in 1969 of the Aero Industrial Development Center by the Ministry of National Defense. The Center went on to manufacture several types of military aircraft, including the multibillion dollar Indigenous Defense Fighter (IDF). The aerospace industry’s production value peaked in 1998 at NT$37.85 billion before plunging to NT$25.2 billion in 2000 – coinciding with the delivery of the last of the IDFs.

Following the IDF project, the government launched the Aviation Industry Development Program in 2003 to take advantage of existing capacities in the industry, with hopes of propelling the industry into the global market for both military and civilian aircraft. The program called for a variety of means to develop the industry, including helping firms to obtain international certification, gain international partners, and apply for funding for R&D and investment, as well as creating a sound regulatory framework for the industry. At the same time, however, the Industrial Technology Research Institute (ITRI), Taiwan’s main research center, closed down its aerospace department, and industry insiders say the government never followed up on its promise of strong support for the sector.

Aerospace firms have the same opportunities as other industries at gaining access to the IDB’s small business innovation programs and other programs used by Taiwan’s government to support industry in general, but aerospace has not been considered a “key industry” for special attention by the IDB.

Instead, industry associations such as the Taiwan Aerospace Industry Association (TAIA), along with the Aerospace Industrial Development Corporation (AIDC) – a reorganized version of the former MND bureau, transformed into a state company under the MOEA in 1996 – took the lead in promoting the industry. The results began paying off as early as 2005, when the industry began to crawl out of its slump to reach NT$37.27 billion in production value. Taiwan’s aerospace industry has risen in value in nearly every subsequent year.

“Twenty-five years ago our government put a lot of effort into policy for the aerospace industry, but provided too little budget,” recalls Wan. Now, “AIDC and aerospace companies are doing great and basically they are on their own,” he says.

Manufacturing components

Taiwan’s aviation manufacturing industry includes not only AIDC but an estimated 200 small and medium-sized enterprises (SMEs) that supply the global demand for high-quality aerospace components.

Just a handful of manufacturers dominate the global civilian aerospace industry: Boeing and Airbus in larger jets; Bombardier and Embraer in mid-size corporate jets; along with several makers of small personal aircraft. Yet each plane is a complex machine made of millions of parts, most of which are not made directly by the nameplate manufacturer. Boeing’s 747-400 has 6.7 million parts, for example, while the most advanced Boeing jumbo jet, the 787 Dreamliner, has 2.3 million parts, and the 777 some three million. According to Boeing’s website, 25-30% of those parts are sourced from suppliers outside the United States.

Taiwanese suppliers are involved in manufacturing components, subsystems, and even entire systems for the world’s major aircraft makers. “Every single piece of an aircraft has high value,” notes TAC’s Wan.

AIDC is the largest aerospace firm in Taiwan, with about 6,000 employees working in manufacturing plants in the Taichung area. It makes components for many of the biggest Tier-1 suppliers in aerospace, including General Electric Aircraft Engines, Rolls Royce Aerospace, and Snecma of France. In August 2014, AIDC was itself chosen as a Tier-1 supplier to Airbus of composite panels for aircraft belly fairings.

The company was privatized in an August 2014 IPO in which nearly 54% of the company’s shares went on the block, raising over NT$9 billion in capital. Share prices were originally offered for NT$12.95 each, but soared soon after the IPO and are currently trading at NT$41 as of November 30, a sure sign of confidence in the market.

Other leading aircraft components and systems makers include Aero Win Technology Corp. (sheet metal components for gas turbine engines), U&U Engineering Inc. (navigation systems), Topkey (fireproof aircraft seats), and Super Textile Corp. (fireproof blankets).

Getting into the aerospace industry is not easy, and Taiwan’s SMEs have leveraged their experience and skills in an array of industries – including metal tooling, machinery manufacturing, and software and systems integration – to enter the market.

Taiwan Fylin Industrial Co. (TFI) is an example of one such firm. According to manager Jason Marlow, TFI’s parent company, machinery and sheet metal maker Huagu, took advantage of government programs in the late 1990s aimed at promoting the aerospace industry and began manufacturing Unit Load Devices (ULD) – pallets, net straps, and cargo containers needed by commercial passenger and freight airlines. Marlow observes that the commercial aviation industry has a high barrier to entrance, particularly due to the high number of certifications that manufacturers must get in order to service global supply chains. “It took us three years of R&D and design work and going through the procedures before we could even start selling anything,” he recalls. “Certification keeps a lot of companies out of this industry.”

TAC’s Wan concurs. “You cannot just set up your company and start to produce products,” he notes. “You have to pass extensive checks before you get proper certification of airworthiness.” The main certifying bodies are the Federal Aviation Administration (FAA) of the United States and the European Aviation Safety Administration (EASA).

Taiwan’s Civil Aeronautics Administration (CAA), under the Ministry of Transportation and Communication, has entered into a bilateral airworthiness certification agreement with the FAA, which allows aerospace suppliers to first be inspected and certified locally, and then take that certification to get FAA approval in the United States. However, Taiwan doesn’t have a similar agreement with the European Union, so firms desiring such certification must engage directly with European authorities.

TFI’s Marlow says that his company has more certifications for its products than any other similar firm in Asia, but that doesn’t necessarily give them an advantage, as most of their competitors are from the United States or EU, where the certification process is easier.

Strategic location

On the other hand, Taiwan’s location in East Asia, the fastest-growing region for aviation in the world, is a distinct advantage. TFI already counts many of the major East Asian airlines among its customers – including China Airlines, EVA, All-Nippon Airlines, Japan Airlines, Korean Air, and Asiana – and is expanding into the Middle Eastern and North African markets.

Taiwan’s relatively low cost of manufacturing is another advantage, but so is the sophistication and capability of its industries. For example, Marlow notes that some of the products TFI makes require special high-grade aluminum, a material that is difficult to produce, extrude, or obtain, and yet it is available in Taiwan.

“A key advantage we have is we are able to take advantage of the local supply chain,” he says.

Taiwan also has a growing stake in the third leg of the global aviation industry: MRO. The much storied Air Asia Co., once a front company for the CIA to maintain U.S. military aircraft stationed in the region, particularly during the Vietnam War, is a shadow of its former self, with only 800 employees, compared to 6,000 during its heyday. Yet the firm’s MRO business for commercial and military aircraft in the region is growing steadily.

Taiwan’s massive Evergreen Group, the parent company of EVA Air, also has an MRO division, Evergreen Engine Services (EGAT), as well as a joint venture with General Electric to maintain the advanced GE jet engine, the GEnx, employed on Boeing 747 and 787 aircraft. Launched in 2014, the new firm is called GE Evergreen Engine Services.

China Airlines is also expanding its MRO services with a new NT$1.46 billion (US$44.9 million) MRO facility at the Taoyuan International Airport, set to open in 2017. It will service China Airline’s own fleet as well as the aircraft of third parties.

A key factor in the growth of the MRO business is the increase in commercial aviation traffic through the island, as more aircraft landing in Taiwan translates into expanded demand for maintenance and overhaul.” By email, Air Asia said it recommends that the government “continue to promote Taiwan to become a maintenance center for the Asia-Pacific, taking advantage of its central geographical location, technical skills, and abundant capital.”

Taiwan’s relatively low salaries are also a benefit for aerospace firms looking for high-quality engineering talent at lower cost than available in many advanced economies. However, low salaries also make it hard for local firms to retain talent in an increasingly competitive arena.

Air Asia noted that Taiwan’s MRO sector faces a number of challenges, including “increasing global competition from more Asian aerospace companies in countries such as Singapore and China” and the possibility that airlines will “change the way [they] make decisions about their MRO supply chains.”

Air Asia also cites the intense competition among local aerospace SMEs as a key weakness in the industry. “Taiwanese aerospace companies do not collaborate effectively but compete fiercely among themselves,” the company wrote. “This causes intense price wars and gradual loss of profit margins.”

Another shortcoming in Taiwan’s aerospace industry is the lack of design capability. “We do very little design because we are not producing our own aircraft,” says TAC’s Wan. “We are just subcontractors to major makers and systems companies.” He sees prospects for turning that situation around, however, through the design of both military aircraft and Unmanned Aerial Vehicles, a currently burgeoning sector.

[Note: a report on Taiwan’s defense industry will follow in an upcoming issue of Taiwan Business TOPICS.]

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