Opportunities and Challenges in US-Taiwan
Defense Industry Cooperation
(Arlington, Virginia, July 11, 2018)
Editorial by Lotta Danielsson – Global Taiwan Brief
Taiwan President Tsai Ing-wen and her government have identified the domestic Taiwan defense and aerospace industries as key areas for future growth. These sectors are targeted for development as part of the “five plus two” innovative industries plan aimed at strengthening the island’s industrial base. The concerted effort to expand development and increase investment in Taiwan’s indigenous defense industry would both enhance Taiwan’s national security posture and expand its economy. Prioritizing innovation and growth in the Taiwan defense sector could lead to expanded partnerships with global defense companies, to participation by domestic companies in the international defense supply chain, and to increased defense-related exports.
In addition to developing indigenous defense capabilities and upgrading the competencies of domestic defense contractors, Taiwan is also supportive of expanded cooperation between defense companies in the United States and Taiwan. The Taiwan government has encouraged expansion of business-to-business ties and of opportunities for executives on both sides to build trusted relationships with their counterparts. With the Tsai Administration’s focus on developing the indigenous defense industry—along with the support of the Trump Administration and the US Congress for increased ties with Taiwan—the current political environment in both the United States and Taiwan is also supportive of bilateral ties in the defense sector.
The United States and Taiwan already have well-developed defense relationships. Many US companies have long been working with companies in Taiwan to implement US arms sales programs and to discharge offset obligations. Given Taiwan’s new focus on indigenous development for its military systems, however, the situation for US companies in Taiwan is evolving. There is a sense that the bulk of new contracts will not be major new systems, but instead will consist of sustainment, munitions, training, systems integration, aftermarket support, and other work. But while the bilateral defense environment is changing, there are still many opportunities for US and Taiwan companies to work together.
US defense companies are seeking practical and constructive ways to collaborate with international partners. Taiwan has extensive experience in the global technology supply chain, and Taiwanese companies—in particular in the aerospace and shipbuilding industries—are currently exploring ways to similarly join the international defense supply chain. The hope is to provide parts and services to the US government, US defense contractors, and other global defense companies.
Given the already intense competition in global markets and Taiwan’s complex political situation, this is a tall order. But, the key to making this ambition a reality lies in finding the right economic incentives. Economic drivers from civil and commercial business lines are unlikely to transfer directly to the defense sector, as defense marketplace orders tend to be both low volume and sporadic, which makes finding and cultivating alternative or additional supply sources both expensive and risky.
Because of the cost and risk associated with developing new sources for existing product lines and equipment, Taiwan industry players will likely find it difficult to break into existing supply chains. The exception could be systems already operational in Taiwan, where there may be enough of an economic incentive for US partner companies if production is at the volume necessary. However, an alternate approach could be for Taiwan to focus on jointly developing future systems and equipment, for example by working towards the next-generation capabilities identified in the 2018 US National Defense Strategy, as an international partner either with the US government or directly with US defense companies.
(See attachment for full text)