Saturday, September 27, 2008

Taiwan Arms Sales: The Defense Industrial Alternative

With the Bush administration's indefinite deferment of at least seven Congressional notifications for major Foreign Military Sales (FMS) programs, observers and stakeholders are beginning to assess the implications. This week's U.S.-Taiwan Defense Industry Conference provides an initial opportunity for participants to evaluate the way ahead. In Taiwan, media reports have reflected optimism that the notifications could be forwarded soon. Other reports are harsh in their condemnation of the Ma Ying-jeou administration's performance in managing the issue. However, of most interest are initial indications of Taiwan's most likely response to a prolonged, indefinite freeze on major arms sales: a strategic shift away from FMS and toward direct commercial sales (DCS) and indigenous defense research and development (R&D) and production.

The U.S.-Taiwan Defense Industry Conference and the Minister of Defense Visit

First, the upcoming U.S.-Taiwan Defense Industry Conference is scheduled to begin on Monday in Amelia Island, Florida. As the seventh defense industry conference that the U.S.-Taiwan Business Council has sponsored, the arms sales freeze is almost certain to be on minds of most participants. Last year, Deputy Assistant Secretary of State Tom Christensen spoke at the conference and reaffirmed U.S. commitment to Taiwan Relations Act, argued for greater domestic debate regarding security issues, and placed responsibility on Taiwan's people for providing for their own defense:

The Administration's commitment to fulfillment of TRA requirements remains beyond question. The principal issue in Taiwan's defense, however, is not whether Taipei buys a particular weapon system or whether that system comes from domestic factories or from abroad. The principal issue is the substance of Taiwan's overall defensive strategy and the maintenance of core capacities to sustain it. And the decision on that strategy, once again, rests with the Taiwan people themselves.

The first conference in this series was the St. Petersburg, Florida event where former Minister of Defense Tang Yiau-ming gave the keynote address in March of 2002, and met privately with Deputy Secretary of Defense Paul Wolfowitz. Wolfowitz' attendance as a senior official at that first conference reflected the importance the Bush administration placed on its unofficial relations with Taiwan. For the first time in six years, an ROC Minister of Defense -- this time retired ROC Air Force General Chen Chao-min -- is said to be visiting the United States and attending the conference. The minister's travel is a positive sign of the Ma administration's continued confidence in the U.S. commitment to Taiwan's security. However, the Bush administration's response is less than inspiring. Senior officials are said to be stiff arming the minister, barring access to Washington DC to meet with counterparts, and limiting the Bush administration's representation to the level of a deputy assistant secretary. Presumably, the cool reception could be the result of Chinese protests over the minister's visit, which could be viewed as implying an official state-to-state relationship.

Recent Media Reporting on the Freeze

The continued arms sales freeze and the attendance by Minister Chen provides an interesting context for this year's conference. Over the weekend, Taiwan media outlets carried some of the first reactions to continued hold on Congressional notifications for at least seven Foreign Military Sales (FMS) programs.

Taiwan's United Daily News (UDN), normally considered sympathetic to the KMT and the People's First Party, carried a set of articles today that criticized senior officials in the Ma administration for misjudging the freeze. On the other hand, one report lauded the ROC Ministry of National Defense (MND) preparing for a worst case scenario, specifically assessing alternatives to procurement through FMS channels (see following section). In the first case, a UDN editorial blasted President Ma and his national security team for being naive or overly confident that they would be welcomed into Washington DC with open arms after eight years of the DPP. The editorial argues that the new national security team's misjudgment has resulted in an embarrassing setback. Other reporting from Taiwan shows that some officials still believe that the notifications will go through. The Taipei Times also has carried a critical editorial of the KMT's handling of the freeze.

A Strategic Shift toward a Defense Industrial Alternative?

During this week's U.S.-Taiwan Defense Industry conference, an entire session will be dedicated toward defense industrial cooperation. According to the agenda, the session "will assess the impact on Taiwan of defense industry globalization, including opportunities for partnerships with U.S. companies and for domestic production and R&D by Taiwan industry." The session will also "examine the changing views on Industrial Cooperation Programs (offsets), as well as the effects of Taiwan’s experience with private defense procurement company Taiwan Goal."

Coverage of defense industrial cooperation may be well-timed. Advocates in Taiwan for strengthening Taiwan's indigenous defense industry may be posturing to fill the vacuum created by the continuing freeze on major FMS programs. A UDN article published today outlined near term MND contingency plans for shifting a portion of the budgets authorized for the seven programs toward other related programs, mostly involving domestic industry. These include:

  • E-2T upgrade (NT $6 billion - US $194 million): To be shifted toward mobile radars;
  • PAC-3 (NT $118.5 billion - US $3.8 billion): To be shifted toward acceleration of on-going upgrades to the three existing ground systems and upgrade of existing PAC-2 Guidance Enhanced Missiles (GEM), presumably to GEM+;
  • Submarine design (NT $11.7 billion - US $377 million): Still under evaluation;
  • Sub-Launched Harpoons (NT $5.9 billion - US $190 million): To be shifted toward an unnamed National Science Council program;
  • UH-60 utility helicopters (NT $71.8 billion - US $2.3 billion): To be pursued through Direct Commercial Sales (DCS) channels;
  • AH-64D attack helicopters (NT $59.3 billion - US $1.9 billion): To be shifted toward upgrade of existing AH-1W attack helicopters;
  • Anti-armor missiles (NT $1 billion - US $32 million): Unclear, since UDN report said the budget would be transfer from Marine procurement of missiles (ostensibly Javelin) to Army procurement;
  • F-16C/D (NT $160 billion - US $5.16 billion): To be shifted to upgrade existing F-16A/B fighters.

The reported shifts in budget allocation presumably would need to take place before December 31st, when unallocated funds in this year's defense budget would be returned to the treasury.

Why a Shift Toward Greater Industrial Cooperation May be Inevitable

If prospects for arms sales through FMS channels continue to decline between now and beginning of the new U.S. administration, the ROC may seek to revert back to the model for defense industrial cooperation from the Reagan administration, and seek industrial partners in the U.S. and elsewhere to satisfy ROC defense requirements. Should the Congressional notification issue carry over into the next administration, there's a decent chance that a new administration would make no decision on releasing the notifications until at least May 2009, when the rumored 18-month Joint Defense Capabilities Assessment (JDCA) is said to be scheduled for completion.

One scenario is that an Obama or McCain administration's Asia policy team would want to conduct a Taiwan policy review as a first order of business, including an examination of arms sales policies. With the JDCA not scheduled for completion until May, a new policy team may opt to defer decision until the assessment is completed. It should be noted that since the 1950s, U.S. decisions on security assistance, including those made in 2001, have often depended upon military assessments of ROC military capabilities and future requirements. Unlike these previous assessments, which were managed by the Pacific Command or other agencies that report to the Secretary of Defense, the Institute of Defense Analysis (IDA), a commercial firm and Federally Funded R&D Center (FFRDC), was contracted to conduct the JDCA and render judgments on Taiwan's required capabilities.

As the UDN report above indicates, MND, while preferring procurement through FMS channels, may get tired of waiting for the U.S. side to find the perfect time to render judgments on what it will release and what it won't. As a result, going local, working directly with U.S. industry, may become an increasingly appealing option.

There's a precedent for significant U.S.-Taiwan defense industrial cooperation. In fact, during the 1980s, it was the way business was done. In the wake of the 1979 shift in diplomatic relations and subsequent 1982 Communique, Reagan administration officials encouraged licensed production, cooperative R&D, technical assistance, and sales of sub-systems, sub-assemblies, and components to Taiwan through direct commercial sales (DCS). Because these types of assistance don't require public Congressional notification, the Chinese response to media reports of commercial cooperation was relatively muted. Plus, DCS programs weren't included in the State Department's accounting exercise that could demonstrate a decrease in the total value of arms sales.

There may be other reasons, beyond the arms sales freeze, to increase reliance on an indigenous defense industry. As in the United States, Japan, the European Union, and almost every other developed economy, popular sentiment drives development of a viable defense industrial base as a means to create jobs, income at the local level, and R&D into dual use technologies that could be spun off to the commercial sector. The hollowing out of Taiwan's manufacturing base, a more assertive Legislative Yuan, and the need to diversify the U.S.-Taiwan economic relationship may provide additional rationales.

The Reagan Model: An Inconvenient Necessity

During the 10 years following the signing of the 1982 Communique, the United States executed much of its legal obligations under the Taiwan Relations Act through licensed production, co-development, and hybrid FMS/DCS arrangements that minimized the U.S. government footprint. Congressional notifications under section 36(b) of the Arms Export Control Act (AECA) traditionally have been the trigger for whatever punishment Beijing dishes out. Industrial partnerships, with the licensed consent of the U.S. government, succeeded in shoring up Taiwan's fragile defense position after the break in formal diplomatic relations with the Republic of China (ROC) in 1979 and signing of the 1982 Communique on arms sales. Before 1992, few if any FMS programs notified to Congress had a value that exceeded U.S. $500 million.

Taiwan’s defense industry has its roots in the 1969, when the Nixon Doctrine portended an eventual withdrawal of the United States from Taiwan. In that year, the Chungshan Institute of Science and Technology (CSIST), AIDC, and other defense industrial establishments were formed. Some of the first joint programs included co-production of 108 UH-1 utility helicopters and 308 F-5E fighters. In 1979, the commitment to indigenous production was strengthened after the formal break in diplomatic relations and the signing of the 1982 Communiqué. Following are the major programs from the 1980s:

Tienkung (TK) Surface to Air Missile. President Chiang Ching-kuo authorized the initiation of R&D into the TK surface to air missile system a year or two after the break in diplomatic relations in 1979, the retiring of the ROC's Nike/Hercules air defense systems, and failing to secure release of the the U.S. PATRIOT air defense system. With CSIST serving as the lead systems integrator, initial testing began in July 1985. Although not confirmed, one estimate is that approved technology assistance from the United States accounted for 85% of the program. The system’s Changbai radar is believed to be a derivative of the SPY-1 radar system used on AEGIS destroyers. {UPDATE, 10/01/08: One senior engineer who worked on the TK program in the early 1980s claims the the TK missile was almost entirely indigenous. Some of the materials, such as aluminum powder, did have to be imported. U.S. industry, however, provided licensed assistance on the radar, including sales of components}

Indigenous Defense Fighter (IDF). Chiang Ching-kuo is said to have authorized design work in August 1980, shortly after the break in diplomatic relations Failing to secure a new generation fighter (Northrop’s F-20 Tigershark) to replace Taiwan’s aging F-104 fighters and assured of U.S. industrial support, a decision was made in 1982 to proceed with an indigenous alternative. With AIDC, supported by CSIST, serving as lead systems integrator, General Dynamics (GD) played a key role in the design and systems integration. Housing for an estimated 200 GD and other U.S. contractors was built near CCK airport and AIDC in Taichung. In addition to GD (now Lockheed Aero), Hughes, Smiths Industries, Westinghouse, Allied Signal/Garrett (now Honeywell), and Litton all supported the program through supply and integration of sub-systems. With design reviews starting in 1985, roll-out of the first prototype took place in 1988 and it made its maiden flight in May 1989.

During the licensing review process, the Reagan administration, concerned about the aircraft’s potential to strike targets in China, placed provisos on export licenses that restricted the performance of the fighter’s engine and radar/avionics. With an estimated unit cost of U.S. $24 million, the fighter began coming off the production line in 1994 and began operations with the ROC Air Force in 1997. AIDC manufactured 130 of the fighters (250 were originally ordered, and the program was cut back to 130 in 1991).

The program also included development of an air-to-air missile, the Tienchien 1 and 2 (TC-1/TC-2), which incorporated sub-systems sold by Motorola and other U.S. companies. The TC-2 incorporates an active seeker that some believe had been considered but lost in a completion for the AMRAAM program.

S-70C(M). Although details are unavailable at the current time, Sikorsky and AIDC are said to have coproduced the S-70C, a civilian version of the UH-60 BLACHAWK utility helicopter. Initial deliveries took place in 1992. AIDC has been producing the S-70 cockpit/nose assembly under license.

PFG-2 Frigates. Initial concept for the PFG-2, reportedly a 10 year program for design and production of eight frigates at a cost of US $5 billion, began in the mid-1980s. Gibbs and Cox worked to develop a modified design of the FFG-7 that incorporated a CSIST-developed combat system (developed in partnership with Honeywell). Gibbs and Cox also assisted in the design of a modified version of the PFG-2, the Advanced Combat System, which incorporated an AEGIS-derived SPY-1F combat systems and radar. Bath Iron Works assisted with the hull work. Fowler International Group provided program management support to the ROC Navy under FMS contract with the U.S. Navy.

The 1990s Shift from DCS to FMS

Having sufficed as a matter of necessity, things changed toward the end of the first Bush senior administration in 1991/1992. The Chinese Communist Party's violent crackdown on students in Beijing in 1989, the fall of the Soviet Union in 1991, and subsequently sales of Russian weapons systems to the China all contributed to a long needed adjustment to U.S. arms sales policy. The relative strategic shift toward FMS -- or perhaps better described as a spike -- began in 1992 with the release of F-16A/Bs ($5.8 billion notified), PATRIOT air defenses ($1.3 billion notified), C-130H transports ($62o million notified), and E-2T airborne early warning aircraft ($700 million notified).

From 1992 until today, Taiwan has relied on FMS as a portion of its overall defense procurement perhaps more than any country, with the possible exception of Saudi Arabia. There have been a number of obstacles to increased reliance on a domestic defense industry. First is political, bureaucratic, and commercial inertia. Because in 2001 the door was opened wider than at any time since 1979, there’s been little impetus to change. For U.S. defense industry, sales to the DoD to support FMS programs offer a tried and true route, with a set margin, and U.S. government buffer.

Another impediment has been the lack of a professional acquisition corps. Management of large public projects, such as weapons acquisition - either domestic or foreign -- is complex. The uniformed military focuses on warfighting, and planning, programming, and budgeting or acquisition-related assignments tend to be temporary "touch and go's." Countries such as the U.S., Japan, Australia, UK, France, etc, tend to rely on a cadre of civil servants.

There’s also risk averse culture in Taiwan's defense establishment, especially in the wake of the Lafayette frigate scandal in 1993. High cost programs managed by the U.S. government, including selection of the prime contractor, relieves the military of having to take responsibility for the decision. No one wants to open themselves up to charges of corruption. Fact is, however, potential exists for corruption regardless of whether a program is FMS or otherwise since US federal acquisition regulations include Taiwan among a select group of customers in which “contingency fees” for FMS programs are an allowable expense. Despite these obstacles, reformers in the legislature and MND did begin to evaluate means to hedge against a sudden reversal of U.S. arms sales as early as 1999. The end result was enactment of the National Defense Law in 2003 and inclusion of a section (Article 22) that called for prioritization of indigenous R&D and production.

The Defense Industrial Cooperation Alternative?

So what happens if the hold on submarines, PAC-3, Apaches, UH-60s, and other programs continues indefinitely? Assuming Taiwan's defense authorities remain resolved to procure these capabilities, then the obvious answer is to seek other channels.

Submarines. Indigenous R&D and production of diesel electric submarines may be the logical starting point. The United States has no requirement for the manufacturing of conventional military submarines, although a few commercial entities, such as U.S. Submarines, do design, produce, and sell diesel electric submarines for commercial use in the United States and to a range of customers overseas. There has long been a strong faction in Taiwan that favors domestic build over procurement via FMS channels. In fact, media reporting indicates that the Bush administration's commitment to assist Taiwan in its acquisition of submarines based upon an expectation that the program be carried out via DCS channels. China Shipbuilding Corporation (CSBC) had been expecting to serve as prime contractor until the program was shifted to FMS shortly after the April 2001 announcement. Interruptions of plans resulted in a downsizing of CSBC.

The issue has been a subject of long and heated debate. Critics argue that Taiwan's shipbuilding industry is incapable of developing and manufacturing a submarine. Advocates counter by highlighting the fact that a number of less developed industries such as Yugoslavia, as well as commercial entites and universities around the world, have successfully fielded viable submarine platforms for both military and civilian purposes. In May 2008, CSBC was rumored to have sent a letter to President Ma advocating a shift toward domestic program and Taiwan's National Security Council and Ministry of Economic Affairs held a series of conferences on the issue over the next three months.

Critics also highlight written DoD policy that forbids Taiwan's domestic industry from manufacturing submarines. However, that policy was premised on the assumption that the program would be carried out via FMS channels, in which the U.S. Navy assumes liability and responsibilities for a seaworthy design and safe construction. A program carried out via DCS channels, or perhaps an FMS-managed, DCS-executed, in which the U.S. Navy is absolved of liability and responsbility, is an entirely different matter. In 2006, Taiwan's legislature earmarked funding for a domestic design feasibility study that hedged for the possibility of a shift toward domestic production.

Presumably, a shift toward a domestic program would be of interest to those in the Bush administration wanting to avoid problems with China, and to elements in the U.S. Navy wanting to keep conventional submarine assembly out of U.S. shipyards. While some may argue against such an approach based on export control concerns, a viable technology safeguard program would provide the basis for approving licenses.

PAC-3. Should the sale of PAC-3 missiles and new ground systems continue to be held in abeyance, the obvious alternative is Taiwan's own Tienkung program. CSIST has had a program to upgrade its TK system and fielding an upgraded interceptor. The motor and seeker likely would not be on a par with the PAC-3 missile. However, if it's the best that can be done, then that's the likely solution. However, local assembly of the PAC-3 missile as well as U.S. industrial assistance in upgrading the Changbai radar could be a viable alternative. In addition, similar to the case of the TC-2 air-to-air missile in which Motorola was authorized to transfer to Taiwan its version of the AMRAAM seeker that lost in the DoD competitive acquisition, transfer to Taiwan of the design that lost to the current PAC-3 interceptor could be another route. Again, export control considerations would need to be taken into account and technology safeguard plan developed.

Apache and UH-60. No commercial variant of the Apache exists, although licensed production could be an option. A precedent may exist in given South Korea's July 2008 decision to accept an offer for licensed production. The alternative, of course, is the AH-1Z, a variant of which the ROC Army already has in its inventory. With regards to the UH-60, the obvious solution is a shift toward its commercialized counterpart, the S-70, which the ROC Navy and Air Force already have in its inventory.

F-16s. Alth0ugh not part of the Congressional notification package being held up, the Bush administration has refused to accept an MND letter of request for price and availability data for follow-on buy 66 F-16s. For Taiwan, assuming there's still a requirement for a new fighter, the obvious solution to is to seek other sources. An upgraded variant of the IDF may be one candidate. Given concerns in some quarters about the survivability of Taiwan airfields and runways, a STOL/VSTOL capability could be worthy of consideration. AIDC had studied the feasibility of a STOL/VSTOL variant of the IDF in the late 1990s. Such an effort would require a major redesign of the IDF. However, given the obstacles in procuring additional fighters from the U.S., investment in a redesigned IDF may be a necessity should the ROC Air Force desire additional fighter aircraft. Hopes of acquiring the VSTOL variant of the Joint Strike Fighter, when it's available for the international market in the outyears, may be misplaced given the reluctance to release the less capable F-16C/D.

In sum, a prolonged delay in forwarding Congressional notifications may provide an impetus for Taiwan to re-examine its procurement strategy. The natural course would be a strategic shift toward indigenous R&D and production, with a much diminished reliance on acquisition through FMS channels. Recent media reports provide initial indications that some thought has been given to the issue. The Reagan administration's encouragement of U.S. industrial assistance may provide a model for future efforts to ensure compliance with legal requirements under the Taiwan Relations Act.

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