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On October 1, 1999, following months of delays, Daewoo Heavy Industries, Samsung Aerospace, and Hyundai Space & Aircraft pooled their aerospace operations into a new, independent company, Korean Aerospace Industries Ltd (KAI). The three firms hold equal shares in KAI, having each contributed 289.2 billion won in assets to the company. KAI has total assets of 1.05 trillion won. KAI had combined annual sales of approximately $700 million and employed 3,200. The merger was sought to bring the Korean aerospace industry in line with the current trend of consolidation. Now as a single operation, any overlap among the three will be eliminated. The goal is to build KAI into a total integrator for the development and production of aircraft systems by the merger of three leading aerospace companies.

The aerospace industry is recognized as a high technology-oriented, high value-added and also strategically important industry. Especially in the 21st century, as air and space have been used more and more in various ways, many countries have become interested in the aerospace industry. The Korean aircraft industry developed as a maintenance center during 1950-60. The industry later expanded its activities to include licensed production of airframes and became heavily involved in the defense sector, building helicopters and fighters for the Korean military. Korea joined the aircraft industry in late 1970s by producing 500MD helicopters under the license agreement with McDonnel Douglas of the United States. By the 1980s, Korea's aerospace sector built an industrial base capable of producing parts and components under license from foreign interests, and the government assumed an active role in the promotion of commercial aerospace.

Despite the country's financial difficulties in the late 1990s, the Korean industry retained the long-held goal of becoming one of the world's top 10 aerospace manufacturers by 2010. Korean firms aimed to sustain a high level of sales as major first- and second-tier suppliers to Boeing, Airbus, and other Western producers, increase production of structures and fuselage sections, and in the process accumulate advanced aviation technologies. Korean industry sources further asserted that Korean manufacturers were interested in subsystem development projects such as medium-sized aircraft engines, landing gear systems, and transmissions. Finally, both the Korean Government and the nation's aerospace companies want the industry to participate in the development of a commercial aircraft.

A primary objective behind Korea's intent to assume a principal role in the design and production areas of a civil aircraft program is the nation's interest in establishing a greater presence in high technology sectors. Further, Korea hopes to bolster the economy through involvement in sophisticated industries and gain production work to occupy downtime between military programs. A more prominent though unconventional aim is Korea's desire to use the design technologies, understanding of airframe construction, and integration and manufacturing skills gained through the production of a complete aircraft to enhance the industry's status as a specialized parts manufacturer. Notwithstanding the latter, industry sources indicate that the industry fully intends to market any aircraft it produces both domestically and internationally.

By the late 1990s Korea's aviation industry lacked core competencies in design, systems integration, advanced manufacturing technologies, and the test and evaluation of finished products, all necessary components of an aircraft program. Korean aircraft companies primarily manufactured lower value-added parts and subassemblies according to blueprint, and thus had limited experience in the design, production, and evaluation of original products. Likewise, defense sector work had contributed little to the industry's foundation of basic technologies as most of the country's military aircraft programs have relied largely on technology borrowed from the United States. Moreover, while collaboration with Western airframers provided the Korean aerospace industry with training and technology transfer in basic process technologies, core technologies were not easily transferred. To build up the industry's weak technological base, the Korean aerospace sector invested in R&D across diverse fundamental disciplines and exercised its indigenous design capabilities on domestic and cooperative projects whenever possible. Nevertheless, in 1999 one Korean producer estimates that it would take a minimum of 10 years for the Korean aviation sector to develop independent technologies for the design and production of commercial aircraft.

Though weak in terms of independent design capabilities, Korean firms had acquired a command of process technologies, and enjoy a reputation for quality components, parts, and subassemblies manufactured according to schedule. Korean producers possess a high level of technical competence, particularly in the manufacture of structural components such as fuselage and wings and the assembly of airframe components and mechanical parts.

With respect to R&D, each of the major firms retained independent research facilities involved in design and product development. In addition, the Korea Aerospace Research Institute (KARI), a national center that conducts aeronautical R&D and provides technical support to the aviation industry, maintains a low-speed wind tunnel, test facilities for assembly, integration, and aeropropulsion, and a structure and flight dynamics laboratory. KARI and the industry's R&D facilities were researching a number of indigenous innovations.

Though the industry did not perform full-scale production of commercial aircraft, it had experience in the licensed manufacture of helicopters and military aircraft. The industry's most comprehensive role in aerospace manufacturing was represented by the Korean Fighter Program, a $5.2 billion agreement with U.S.-based Lockheed Martin for the licensed production of F-16 fighters. Under the program, the Korean industry is responsible for producing 70 percent of the airframe, up to 50 percent of the avionics, and 43 percent of the aircraft's Pratt & Whitney engines. Two additional military programs were under development, the KTX-1 primary trainer project and the KTX-2 advanced trainer joint development program, both of which relied chiefly on Korean design and production resources.

The Korean aerospace industry was dominated by four major firms: Samsung Aerospace, Korean Air, Daewoo Heavy Industries, and Hyundai Space & Aircraft. These companies accounted for over 80 percent of total production, most of which served the military sector. Korea's aerospace sector enjoys greater commercial fund-raising capabilities than some Asian producers. As each major aircraft company belonged to one of Korea's large industrial groups or chaebol, they are able to borrow against a large asset base and spread risk over numerous industrial sectors, thus increasing financial stability and investor and lender confidence.

Korean producers largely remained build-to-print suppliers. The widely disparate characteristics and capabilities of the industry was evident in the different approaches used and mixed success met by Korean firms producing major structural components. For instance, Korean Air's production of the Boeing 717 nose, for which quality was said to be only slightly behind that of Japan, evolved from a 20-year history of aerospace manufacturing and a foundation of successful supplier contracts with Boeing, Airbus, and the former McDonnell Douglas. In contrast, Hyundai entered the aerostructures industry in 1994 and bypassed the traditional bottom up approach by promptly signing a contract to supply the 717 wing, which the company reportedly had trouble producing.

While Korea benefited from a market-oriented corporate system, decisions of the nation's aerospace firms were not always based on solid economic principles. For example, rather than basing decisions to enter the aerospace industry on the demand conditions prevailing in the market, the participation of certain chaebol in aerospace appeared to be based on the desire to parallel the industrial structure of other conglomerates. This led to an overabundance of firms in the industry and a lack of extant capacity utilization. Further, the lack of consensus among Korea's major aerospace firms was an impediment to the development of a national aerospace program, as infighting among the aircraft companies hindered the development of certain aerospace projects.

To speed Korea's recovery from the economic crisis of the late 1990s, the government pushed reform of the nation's industrial conglomerates. Korean industry sources anticipated that chaebol restructuring may facilitate industrial cooperation and participation based on market principles. Industry sources predicted that at least one firm would leave the aircraft industry as Korea's chaebol are forced to reevaluate the profitability and feasibility of business sectors. Corporate restructuring could result in a more competitive business environment and, consequently, lead to improved financial strength, greater specialization, and increased competitiveness in the Korean aerospace sector.

Prompted by the government's push for chaebol reform following the 1997 currency crisis, the aerospace divisions of Samsung, Hyundai, and Daewoo merged into a single company, Korea Aerospace Industries, Ltd. (KAI), officially formed on October 1, 1999. The three participants share equally in 45 percent of the new company, with 25 percent held by the Korea Development Bank and other quasi-governmental interests and 30 percent reserved for additional Korean investors. The cooperation of the three in production, development, and marketing should eliminate duplications in investment across the aerospace sector and pool the industry's most talented personnel. Moreover, collective resources may help KAI shoulder a greater degree of risk-sharing responsibility and thus obtain contracts on the diminishing number of new aircraft programs.

However, the new company was not all inclusive, as Korean Air Aerospace continued to operate independently; therefore, the potential remains for excess capacity among the nation's producers. Moreover, a long history of infighting among the four aerospace companies has hindered previous cooperative efforts on aerospace projects; thus, it could prove difficult for KAI to act as a cohesive unit. The fact that the three participants in KAI will continue to trade under their respective company names and can undertake certain contracts independently may prove symbolic of a company that operated under a single title but continues to possess the characteristics of an industry divided by inefficiencies.




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