The Defense Committee was formed in 2020 to gather, discuss, and disseminate members’ collective thinking on how the defense sector could better contribute to the development of the U.S.-Taiwan bilateral relationship. Given that defense is one of the pillars of that relationship, the Committee is committed to identifying specific ways by which the defense sector can help the U.S. and Taiwan governments meet their defense goals.
All the companies on the Committee have a long-term presence in Taiwan and a shared commitment to contribute positively to Taiwan’s security.
Defense spending in Taiwan has been on a strong upward trajectory in the past few years, not only through Foreign Military Sales (FMS) purchases from the U.S., but also in the form of domestic programs such as the Advanced Jet Trainer (AJT) and Indigenous Defense Submarine (IDS). Future domestic shipbuilding programs such as the indigenous corvette, as will new procurements arising from the special budget passed at the end of 2021, are poised to add opportunities for Taiwan’s defense industry ecosystem.
However, Taiwanese domestic industry participation in international defense industry supply chains is still largely limited to supplying semiconductors. The main reason is that defense industry economics are unlike most other sectors. For complex sub-assemblies, for example, order volumes can be low and sporadic as companies do not usually keep them in inventory. As a result, it can be hard to break into existing supply chains.
As noted in Suggestion 1 below, the best opportunity for Taiwanese industry will be to integrate into the supply chains of U.S. equipment of the future. Winning a place for Taiwan suppliers in U.S. defense supply chains will have the additional strategic benefit of demonstrating Taiwan’s capacity and commitment to serve as a long-term, fully trusted technology and security partner of the U.S. in the Indo-Pacific.
Taiwanese domestic industry is highly capable in some of the aspects of high-end manufacturing called for by international defense industry supply chains. The key lies in finding the economic justification to make such cooperation happen, as well as having a degree of government involvement from both the U.S. and Taiwan.
Such mutual involvement might take the form of co-production, in which Taiwanese industry could perform elements of a program in Taiwan (even under FMS), or co-development, in which local industry would partner with U.S. companies to develop solutions to either Taiwanese or U.S. requirements.
This year the Committee presents five specific suggestions for improving the general environment for the defense sector in Taiwan. They reflect the Committee’s strong support for the Taiwan government’s goal of increasing domestic participation in and indigenization of the defense industry.
Suggestion 1: Lower the local content threshold for research and development (R&D) programs with foreign collaboration.
The high local content requirement for any program designated as R&D at the National Chung-Shan Institute of Science and Technology (NCSIST) makes it difficult for the Institute to succeed in attracting the foreign collaboration it seeks for some projects. Some R&D programs at NCSIST have even had to be halted because the local content minimum could not be met. The resulting situation brings no benefit to Taiwan or Taiwanese industry.
Taiwan has for many years successfully produced weapons and developed various defense technologies on its own. But no matter how advanced or innovative these indigenous efforts may be, they could be even more effective if carried out in collaboration with specialized foreign companies.
The Tsai administration’s policy is to encourage Taiwanese industry to manufacture defense products locally. The government also aims to encourage collaboration with foreign partners to help local companies be more forward-leaning in developing their manufacturing capabilities, potentially enabling Taiwan to become a global defense supplier.
For indigenous R&D programs at NCSIST, foreign collaboration at any level can help build capacity in Taiwan and develop products and solutions not just for the Taiwanese market but the international market as well. To lower or remove barriers to further foreign collaboration with indigenous industry, we suggest that the Taiwan government consider the following measures:
Introduce greater flexibility into the application of local content requirements for R&D programs at NCSIST, allowing them to proceed with foreign collaboration on the basis of merit. Without such a change, some significant indigenous R&D programs may languish.
Incentivize foreign companies to collaborate with Taiwanese industry through such methods as offset multipliers and tax incentives.
Through AmCham and the U.S.-Taiwan Business Council, provide industry with a list of technologies that Taiwan is potentially interested in acquiring. Such a list would help foreign industrial partners initiate the technology release process with the U.S. government as early as possible.
Suggestion 2: Hold regular high-level meetings to enhance beneficial relationships between the U.S. defense industry and the Taiwanese military.
U.S. defense companies with a presence in Taiwan generally have well-established relationships with Taiwan’s military services and organizations. These relationships enable the individual companies to better understand the Taiwan military’s policies, rules, and regulations, as well as to determine what action to take to meet various requirements.
The Committee represents a potential platform for collaboration between government officials and our member companies on issues affecting the defense industry in Taiwan as a whole. The Committee meets regularly to discuss how to improve the bilateral defense relationship and share our common experiences in operating in Taiwan. We also interact with visiting U.S. Congressional delegations to relate our on-the-ground experience and insights for reference in making relevant laws and policies.
To increase its effectiveness in that role, the Committee sees the need for more regular consultations with Ministry of National Defense (MND) leadership, specifically with the Defense Minister. When such high-level meetings have taken place in the past, they have led to extensive collaboration with major U.S. defense suppliers resulting in the development of new weapon systems to Taiwan’s benefit. Moreover, the current crisis in Ukraine highlights the importance of maximizing the communication channels between MND and the U.S. defense industry to help ensure that Taiwan can acquire exactly what it needs in the timeliest manner.
Given this need, we recommend holding quarterly meetings between Committee representatives and MND leadership and staff, as well as annual meetings with the Defense Minister. Through these meetings, Committee members will be able to better understand Taiwan’s challenges and concerns, support the U.S. government in developing appropriate solutions, and work together with MND to create more opportunities for partnerships to enhance Taiwan’s security. These meetings would aim to meet the following objectives:
1. Enhance overall collaboration between the U.S. defense industry and MND. For example, the government could pose questions to industry members on how to facilitate co-production and co-development.
2. Allow U.S. industry to raise questions about government policy on technology sharing early in a co-development process.
3. Address general trends concerning doing business in Taiwan and improve communication between the government and industry in areas such as offsets and taxation.
4. Ensure that key personnel in Taiwan are familiar with the most current U.S. government (Department of Defense and State Department) policies and assess the impact of any changes to them on the defense industry in Taiwan.
Prior to each meeting, the Committee would propose an agenda for discussion.
Suggestion 3: Prepare the groundwork for a bilateral defense industry dialogue.
In previous White Papers, the Committee recommended establishment of a U.S.-Taiwan bilateral defense industry dialogue along the lines of similar forums between the U.S. government and those of Brazil and India.
A major reason for Taiwan’s government interest in such a dialogue is to give more Taiwanese companies the opportunity to participate in international defense industry supply chains. The defense industry is not like commercial markets in that both governments and private companies play a role in deciding which new suppliers are incorporated into those supply chains. A bilateral dialogue that elevates the creation of co-production and co-development opportunities to the government-to-government level could help confirm the business case for future partnerships and supply chain relationships.
Such a dialogue could accomplish the following goals:
Encourage Taiwan to request co-production early in the manufacturing process, even in FMS cases. The MND already tracks which programs are in the pipeline. Its ability to request co-production at a government- to-government level could help drive more economic activity into Taiwan’s domestic defense sector. The U.S. government could then approach the relevant industry players to establish what level of co-production is feasible.
Identify future defense requirements in Taiwan that would benefit from co-development with U.S. industry, as well as pathways to execution. Taiwan’s defense companies could thus gain a role in the supply chains of the future. Since co-development programs will require co-investment by the Taiwan government and involvement by both sides in framing requirements, a degree of government-to-government dialogue will be essential.
Identify future U.S. programs where Taiwan can add value (and investment) as a developmental partner at the very outset and design means to fund such ventures jointly. This cooperation would result in work opportunities for Taiwanese industry, and enable Taiwan to be a purchaser of the resulting platforms.
Such a dialogue could help ensure that Taiwan not only builds necessary capabilities quickly and efficiently, but also that it can maximize opportunities for its companies to grow alongside international partners.
Suggestion 4: Seek input from U.S. industry to help Taiwan achieve maximum impact from its industrial cooperation goals.
Taiwan’s system of defense offsets, or industrial cooperation, has been in effect for many years. The offset rules were updated in January 2022 to reflect a desire to maximize their impact for the MND, Taiwan’s armed services, and local industry.
The Committee recommends establishment of a consultative process between the MND and U.S. industry (represented by AmCham and the U.S.-Taiwan Business Council) ahead of future offset policy revisions. Such a process could offer a chance for industry to offer recommendations to help Taiwan get the most out of the offset program. U.S. industry as a whole has extensive experience helping other countries reach similar objectives.
Suggestion 5: Utilize U.S. industry expertise to help boost the resiliency of critical infrastructure.
The past year has seen further evidence that cyberattacks against critical national infrastructure could become an element of future asymmetric offensive military strategies against industrialized nations. This approach has many important potential advantages from a military strategy perspective: it is relatively cheap, covert and deniable, complex and expensive to defend against, and can have a significant economic and military impact. Taiwan’s geostrategic location makes it potentially vulnerable to attacks of this nature, including as a precursor to more traditional military attacks.
Following the Executive Yuan’s establishment of the Department for Cyber Security in 2016, the Taiwan government has put in place a series of standards and regulations governing cybersecurity for key infrastructure. For example, equipment used on Taiwan’s rail system must comply with National Communications Commission standards, such as telecommunications regulations and communication regulations. Communications equipment must also comply with international standards such as those developed by the American National Standards Institute (ANSI) and the Electronic Industries Alliance (EIA). Software must comply with the “Information Operation Development and Construction Standards” of the Industrial Development Bureau, Ministry of Economic Affairs.
While the development of such standards and regulations is welcome, the extent to which they are complied with across critical infrastructure such as transport, power, and healthcare is not yet clear – especially as they are applied to both legacy equipment and new procurement.
The Committee welcomes the Department of Cyber Security’s announcement of its establishment of a team of cyber-experts tasked with testing the resilience of Taiwan’s critical infrastructure. We recommend the conducting of a regular dialogue between the Department and the Committee to discuss the cybersecurity of Taiwan’s critical infrastructure and whether and how U.S. expertise could assist in tackling any shortfalls in cybersecurity identified by the Department’s testing regime. The crisis in Ukraine drives home how meaningful such a regular dialogue would be.