Globalizing Taiwan’s Defense Industry

Opportunities exist for much greater cooperation between Taiwanese defense firms and partners around the world. But before this can happen, the Taiwanese government must address a number of issues.

Uncertainty over the willingness of foreign countries to sell weapons to Taiwan, primarily due to pressure by Beijing on the governments and firms involved, concerns over the espionage risks associated with the transfer of high-tech equipment to a partner that is a direct target of Chinese intelligence collection, and the high costs associated with the procurement of high-value foreign defense articles, have compelled Taiwanese authorities in recent years to increasingly look for a domestic solution to meet the nation’s defense requirements.

As Taipei endeavors to strike a balance between foreign procurement — still indispensable in various areas, not to mention the political symbolism that is inherently associated with the practice — and indigenous development, new opportunities to plug Taiwan’s defense industry into the global supply chain may be arising which could be both beneficial to Taiwan’s self-defense and to its economy.

Since her election in January 2016, President Tsai Ing-wen has made clear her intention to develop Taiwan’s defense industry for purposes both of national defense and to help revive the nation’s economy. In her year-end press conference in 2017, which tellingly was held at the National Chung-Shan Institute of Science and Technology (NCSIST), the nation’s premier R&D institute, President Tsai again reaffirmed her commitment to such goals.

A sustainable, if not profitable, indigenous defense industry will perforce have to open up to the world, much more significantly than it has to date. Not only would this enlarge the potential market for defense articles developed or manufactured, in whole or in part, by Taiwanese companies, it would also facilitate the transfer of technologies that are currently unavailable in Taiwan. Another, if derivative, positive offshoot of connecting Taiwan’s defense sector with foreign partners would be political, in that it would create another channel linking Taiwan to the international community. (A role for Taiwan as part of an international consortium could also engender less backlash from Beijing than the acquisition of a complete platform from a foreign firm, thus lowering the political costs for both Taiwan and the foreign countries and firms involved.)

President Tsai Ing-wen holds her year-end at the National Chung-Shan Institute of Science and Technology on Dec. 29, 2017 (Photo: Tsai Ing-wen official Facebook page).

However, before any of this can take off, the Taiwanese government will have to tackle a number of longstanding issues which currently stand in the way. Chief among them are the culture within the indigenous defense industry and the legal framework under which the sector currently operates.

Culture: Industry sources have repeatedly told me that Taiwan’s defense sector jealously guards its niche market and is highly resistant to striking partnerships with foreign companies. Such culture will have to change if Taiwan is to become a partner to a number of foreign defense firms that have expressed interest in working with Taiwan. Foreign collaboration would help remedy some of the blind spots in Taiwan’s defense sector while creating new market opportunities for areas where local firms do have an edge (well beyond the assault rifles and ammunition that Taiwan has been exporting overseas). With Taiwan increasingly emphasizing an asymmetrical approach to its strategy against its principal external threat, several areas — cruise missiles; fast-attack, radar-evasive vehicles; radar; air defense; sensors; unmanned vehicles; automation and so on — could help consolidate a niche market for its export sector and attract foreign partners.

Additionally, partnerships with foreign firms will be feasible only if Taiwanese firms keen on collaboration begin to think not in terms of current platforms but instead of the weapons of tomorrow. Given the relatively low profit margins defense firms are facing, foreign companies will be loath to move existing plants to Taiwan, as the costs of doing so are prohibitive. Therefore, early entry into a future program — in the R&D phase or for a projected role in component manufacturing or assembly — will be essential for the ability of Taiwanese defense firms to enter into partnerships with foreign counterparts. Furthermore, such weapons will have to be capable of meeting the defense requirements not only of Taiwan but of several countries; in other words, Taiwanese firms will have to be more global in their understanding of defense requirements.

Thus, a change in the culture within Taiwan’s private-sector and government-sponsored defense industry will need to occur; that sector needs to globalize and to seize the opportunities that are now within its grasp. Rather than a culture of isolation, Taiwan needs to develop one that favors engagement. As with other areas of Taiwan’s economy, protectionism is proving detrimental to Taiwan. Undoubtedly, any opening up will create losers in some sectors which risk being elbowed out by foreign competitors or which may be forced to work harder to secure lucrative deals. However, this would also allow Taiwanese firms to play to their strengths and to secure a larger role in the global defense sector. Only by doing so can the defense sector play the secondary role — benefiting the economy — that President Tsai has envisioned for it.

As with many other issues, opportunities exist for Taiwan to deepen its interactions with the international community and, in doing so, to counter Beijing’s efforts to isolate it. But for this to happen, the Taiwanese themselves must be willing to change some longstanding practices and be ready to face the accrued competition that inevitably accompanies opening up to the world.

Legal environment: The globalization of Taiwan’s defense industry will also necessitate changes to the legal environment under which it operates. Current export control regulations for defense articles are highly restrictive and would therefore inhibit the export of platforms in which Taiwanese firms were involved (according to industry sources, NCSIST is the exception to this rule). A more permissive export environment will be crucial for Taiwan’s ability to position its national champions (and smaller firms) as alluring partners for foreign firms. While some restrictions will arguably remain necessary to avoid turning Taiwan into a weapons proliferator, rules pertaining to a variety of technologies should be relaxed to facilitate partnerships.

Investment environment: Taiwan will need to level the playing field in the loan guarantee and banking sectors so that foreign firms wishing to invest in Taiwan or to create partnerships with local firms are not at a disadvantage, as they unquestionably are at the moment. Current rules are unfavorable to foreign investment and often serve as a deterrent to partnerships.

Counter-espionage: If Taiwan is to succeed in attracting foreign partners, it will also need to strengthen its counter-espionage capabilities so that foreign companies will be less hesitant to share their technologies and trade secrets with Taiwanese firms, or to set up operations in the country. Such efforts must also be accompanied by a counter-propaganda campaign to dispel the propaganda, much of it coming from China and amplified by those in the West who champion U.S. “abandonment” of Taiwan, that depicts Taiwan as completely and irremediably penetrated by the Chinese. Undoubtedly the espionage problem is quite a challenge, but the situation is not as dire as the propaganda would have us believe.

Education: Finally, as defense cooperation involves governments, Taiwan and its allies within industry must redouble their efforts to educate foreign and defense ministries, as well as export-control agencies, on the “one China” policy and what is permissible under that framework. Far too often, a misunderstood “one China” policy has stood in the way of a firm’s ability to reach out to potential partners in Taiwan, either because management at the firm itself didn’t understand what is and isn’t allowed, or because government agencies above them created the impression that engaging Taiwan is disallowed or too problematic. Foreign partners — including governments — must also be reassured as to the survivability of doing business with Taiwan if and when Beijing threatens retaliation.

As with many other issues, opportunities exist for Taiwan to deepen its interactions with the international community and, in doing so, to counter Beijing’s efforts to isolate it. But for this to become reality, the Taiwanese themselves must be willing to change some longstanding practices and be ready to face the increased competition that inevitably accompanies opening up to the world. The defense industry is one of many sectors where Taiwan can no longer afford to drag its feet.

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