Experts press gov't to revamp procurement policy to boost helicopter industry

South Korea's government must revamp its outdated procurement policy to help fuel the growth of its helicopter industry that possesses good export potential, local experts said Thursday.

In a meeting hosted by Korea Aerospace Industries Ltd. (KAI) in Seoul, researchers, government officials and state agencies that use choppers called for changes at the policymaking and legislative levels to streamline purchasing procedures and enhance maintenance for safe operations.

South Korea was the 11th country in the world to make its own rotary aircraft and has made strides to localize parts used in choppers. The country started deploying the Surion (KUH-1) medium chopper as of 2013 and is currently in the process of developing a light civilian and light armed helicopter for both domestic and overseas markets.

It is also the sixth-largest military helicopter operator in the world with over 700 machines, and ranks 35th in term of choppers used by civilians and public organization such as the police. The civilian and public sectors operate some 200 helicopters.

Despite gains made and its large domestic market, Seoul's procurement policy and lack of legislative support has allowed foreign manufacturers to dominate new orders.

In the past five years, state agencies signed 10 purchase deals with only one being to buy the KUH-1 made by KAI.

The company, the country's sole aircraft manufacturer and total system integrator, said the reason for the lack of headway is that South Korea still maintains the lowest bidding price system when deciding the winner of public orders, instead of adopting the so-called highest value arrangement that is used in countries such as the United States, European Union and Japan. These countries switched to the value system in the 2000s, it said.

The highest value arrangement prioritizes best value over the long term rather than lowest price. 

"Seoul's bidding process led to a myriad of different helicopters being used by various agencies that invariably pushes up maintenance costs, operational readiness and training that can lead to safety issues," the company said, pointing out that as a result of the bidding system, South Korea has nine different helicopter models in service. 

Highest value purchasing only accounted for 19.4 percent of all procurement deals in 2012, it said.

Kim Dae-shik, a senior fellow at Korea Institute of Procurement, said countries like China have laws that make it mandatory for public agencies to buy locally made products, and even have market share targets for Chinese goods in such sectors as steel, autos, petrochemicals and ships.

"Even in advanced industrialized countries, policymakers can select aircraft types unilaterally if the machines are deemed to be used for defense, security and the public good," he said.

U.S. policymakers award contracts that best meet the needs of projects and have the most beneficial impact overall, he said.

Kim said South Korea, likewise, needs to pay more attention to building up the industry and job creation that comes with ordering domestically-built machines without jeopardizing exports and triggering trade disputes.

For instance, the Surion project alone would hire 50,000 new workers and translate into 12 trillion won in industrial benefits, according to the expert.

Others said that ensuring a steady sale of helicopters to the South Korean military and public sector will help with the sale of the Surion and choppers that will be developed in the future. They, in particular, said exports are very important for growth.

"With aircraft, it is imperative that the country which developed such machines uses them in large numbers that can provide assurances in regards to performance, safety and long-term logistics support," an official at KAI said.

Lee Duck-joo, professor of aerospace engineering at the Korea Advanced Institute of Science and Technology (KAIST), said more exports are needed  to meet the government target of creating 70,000 new jobs in the aerospace sector.

"In aerospace, the sale of a product is followed by 2-3 times more earnings generated by the seller because of parts sales and logistics support requirements," he said.

The scholar said that the country's prowess in information technology areas can be an advantage in exporting flight simulators like those in operation for the Surion.

The KAIST professor said accreditation standards also need to be streamlined. 

He cited the example of South Korea's forestry and fire fighting services requiring different electromagnetic compatibility requirements than those used by the military and police.

Yoo In-sang, a partner in Ernst & Young Han Young advisory service, raised issue with financial support. The government needs to consider a differentiated approach to providing monetary assistance, without getting caught up in trade disputes, he said.

For South Korean companies that can sell directly to Boeing and Airbus, such as KAI, Korean Air and Samsung Techwin, support needs to be given in the form of interest make-up or low interest subsidy policy schemes, while for smaller firms that sell parts to these companies, policy loans may be best suited. 

The former could cost up to 240 billion won while policy loans could require 220 billion won in subsidies.

Experts say global helicopter sales in the next 10 years will come to US$635 billion, while there are estimates claiming that demand from the civilian sector alone will hit 22,000 by 2030.

At present, there are some 23,000 military choppers and 32,000 civilian rotary aircraft in operation around the world. (Yonhap)