On September 4, United Technologies Corporation (UTC), a US conglomerate best known for being the parent company of Otis Elevators and Pratt & Whitney aircraft engines, confirmed widespread rumours when it announced it had agreed to a USD $30 billion takeover of avionics company Rockwell Collins. The deal was widely presented in media reports as a means of strengthening the position of aerospace components manufacturers in their negotiations with plane makers, so perhaps not surprisingly Boeing has already threatened to oppose the deal.
Taiwan could be forgiven for not being concerned by the planned deal. Analysis has focused primarily on the two companies’ commercial aerospace business. In addition to Pratt & Whitney aero-engines, this includes cabin in-flight entertainment, simulators, and communication and navigation systems. Much less attention has been given either to the two companies’ defense contracts or their sales to China. As a proportion of overall business, defense contracts are more important to Rockwell Collins than to UTC: its 2016 4th quarter sales to governments (read: “defense”) were 8 percent higher than corresponding commercial sales. As the margins on such sales were also bigger, their importance to the company was even greater; 70 percent of these sales were of avionics. In the defense business, avionics may not have the same high public profile as fighter aircraft, such as an F-16 or F-35 or even an engine, but they play an increasingly critical role in aircraft. The fuselage of an aircraft might typically last for 40 years or even longer but ICT control systems are likely to be outdated in less than half that time.
New avionics systems are therefore essential to keeping planes combat effective and account for the majority of Taiwan’s F-16 upgrade program. And, if Taiwan goes ahead as planned with domestic manufacture of a new jet trainer, the avionics will almost certainly have to be sourced from a foreign supplier. Rockwell Collins is not the only such supplier, nor even the most important, but it does offer key technology such as Heads-Up Display helmets (HUDs) for pilots, by means of which essential cockpit display information is projected onto the pilot’s helmet visor, removing the need for him or her to look down at the controls; anti-jam electronics and other vital electronic warfare material . Could Taiwan’s ability to procure such equipment be at risk from the merger?
UTC’s Pratt & Whitney currently provides engines for the F-15, F-16 and F-35 aircraft, among others, but UTC’s Chinese business is of greater interest in the current context. It has 20,000 employees in China, with Pratt & Whitney alone having four joint ventures with Chinese companies. In 2016, UTC’s group sales were USD $57.4 billion. Although a separate figure for sales to China is not given, in 2011 these were around USD $11 billion, so roughly 20 percent of all UTC group sales and almost double Rockwell Collins’ total 2016 sales. Sales of defense equipment to China are prohibited under export control regulations but in 2012, UTC was fined USD $75 million after it admitted selling military technology to China in contravention of these regulations. The fine was barely a slap on the wrist in the context of UTC’s annual sales but the technology was of vital importance to China, enabling it to produce its Z10 attack helicopter. This is designed to carry both air to ground and air to air missiles and trials have also been conducted of amphibious operations, suggesting the Z10 would play an essential role in any attack on Taiwan .
At the time, UTC owned Sikorsky helicopters and apparently sold the technology to China, with the hope of gaining a competitive advantage in the helicopter market there by doing so. UTC has since sold its Sikorsky business to Lockheed Martin; however, the offending technology came, not from Sikorsky, but from Pratt & Whitney Canada, which remains very much part of UTC.
Taiwan is more than ever reliant on the United States for its defense needs. European companies such as Rolls-Royce of the United Kingdom and MAN of Germany, makers of aircraft and naval engines respectively, have already refused to supply their equipment to Taiwan on defense platforms for fear of incurring Chinese displeasure. Might an enlarged UTC, for whom business in China is so important, follow suit?
In the case of the provision of engines for military aircraft from Pratt & Whitney, the answer is most probably not. Under the US’ Arms Export Control Act (AECA), overseas sales of defense equipment can be either on a government-to-government basis under the Foreign Military Sales (FMS) program, or approved as Direct Commercial Sales (DCS). All Taiwan’s purchases of defense “platforms” or complete equipment, such as fighter aircraft, armored vehicles or anti-missile defense systems, take place under the FMS program. The US agrees what platforms it will allow Taiwan to acquire and the manufacturers are mandated to supply them. This gives the companies involved an important degree of cover if they also do business in China. The jet engines on the majority of Taiwan’s fighter aircraft (its French built Mirages are an exception) come from GE, Honeywell, and Pratt & Whitney, all of whom have large business interests in China, which do not appear to have suffered from their defense sales to Taiwan.
Avionics are another matter. While much of Taiwan’s requirements in this area are supplied through FMS there is also scope for Direct Commercial Sales under which Taiwan would buy equipment direct from the manufacturer, with the US government’s approval but not under a formal government program. And where equipment is supplied through FMS, competitive bids are possible if alternative suppliers exist, injecting a degree of competition into the process and helping keep prices under control. The avionics element of defense procurement will grow in importance for Taiwan in coming years, partly because of upgrade programs for both the IDF and F-16 and the project to build an indigenous jet trainer, but also because the ICT element of defense systems will grow ever more important. Rockwell Collins is not the only supplier of the equipment it makes in these areas, nor even the most important. But that means it would also be easier for new parent UTC to make a gesture to the PRC government by declining to bid for Taiwanese avionics business. Doing so may not be a critical blow to Taiwan’s defense but it would reduce competition, thereby raising prices, reducing options, and putting further pressure on the remaining suppliers.
The main point: In this case, what might be bad for Boeing may also be bad for Taiwan.
