BMI's Executive Summary

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At first glance, it seems that relations between Taiwan and mainland China continued to deteriorate through Q407. The 2007 National Day (10 October) saw the first full-scale military parade for 16 years in Taiwan. President Chen Shui-bian assumed the leadership of his Democratic Progressive Party (DPP) and, although he will not be standing as a candidate in the elections that will take place in early 2008, made it clear that full independence for Taiwan will be a key part of the DPP's electoral programme. However, several other aspects are worthy of note. First, President Chen himself did not actually declare independence. He stressed that the proposed referendum in relation to Taiwan's name at the United Nations is only a rejection of unification with China – and not a move towards complete independence. He also noted that Taiwan's Hsiung Feng II cruise missiles, which were featured at the aforementioned military parade, are second-strike weapons which would not be fired without permission of the US government – which is the ultimate guarantor of Taiwan's de facto independence.

A second aspect is that it remains to be seen how aggressive the DPP will be in its promotion of independence through early 2008. Frank Hsieh, the DPP's candidate to succeed President Chen, has taken a clearly more conciliatory approach to cross-strait relations. Mr Hsieh fears that the robustly confrontational line taken by the President may alienate voters. His reasoning is that voters dislike the political and diplomatic tactics used against Taiwan by the mainland, but they fear the economic consequences of a break with the mainland.

Most other observers (including BMI) agree with Mr Hsieh. The opposition Kuomintang (KMT) party has long been in favour of closer ties (but not outright union) with the mainland. An electoral victory for the KMT's candidate, Ma Ying-jeou, would make possible the full exploitation of the opportunities from cross-strait relations, provided that the KMT can also consolidate the hold on the Legislative Yuan that is held (just) by the coalition which it leads.

Electoral victory for the KMT would be good news for Taiwan's economy and is an outcome hoped for by the authorities in Beijing, who showed some signs of conciliation during Q407. At the Chinese Communist Party's XVII Congress in mid-October, President Hu Jintao advocated a formal peace agreement with Taiwan. However, President Hu made it clear that the mainland would not accept Taiwan's de jure independence.

Other trends and themes remain intact. Spending on and preparation for defence has been constrained by the assumption that the USA will prevent China from initiating an invasion of Taiwan. Taiwan remains a substantial importer of materiel: nonetheless, its air force is estimated to have munitions that are sufficient for just two days of combat. A shortage of recruits has forced Taiwan's defence planners to emphasise a second-strike role (i.e. as guerrillas after a Chinese invasion) for the army. Although Taiwan's indigenous arms companies have had some successes in export markets, they are hampered by structural weaknesses. It is difficult to envisage the emergence of a dynamic and substantial private sector firm in an industry that continues to be dominated by state-owned enterprises.

Contents

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Chapter 1 - Executive Summary

Chapter 2 - SWOT Analysis

Taiwan Security SWOT

Taiwan Defence Industry SWOT

Taiwan Political SWOT

Taiwan Economic SWOT

Taiwan Business Environment SWOT

Chapter 3 - Political Overview

Domestic Political Outlook

Short-Term Reprieve, But Challenges Remain

External Political Outlook

Negative Implications Of Ongoing Cross-Strait Impasse

Chapter 4 - Security Risk Analysis

BMI’s Security Ratings

Risk Ratings

Table: Regional Risk Ratings

Table: State Terrorism Vulnerability Index

Regional Security: North And South-West Asia

Overview

Inter-State Conflicts

Internal Conflicts

Taiwan Conflict Risk

Taiwan Terrorism Risk

Taiwan Physical Safety Risk

Chapter 5 - Security Overview

Internal Security Situation

External Security Situation

Taiwan-China Relations

Taiwan-US Relations

Chapter 6 - Military Structure & Defence Industry

Armed Forces

Table: Regional Armed Forces (including conscripted) 2006

Weapons Of Mass Destruction

Chapter 7 - Market Structure

Recent Changes

Arms Trade Overview

Imports

Industry Trends & Developments

Procurement Trends & Developments

Chapter 8 - Industry Forecast Scenario

Table: Taiwan Defence Sector – Historical Data & Forecasts

Key Risks To BMI’s Forecast Scenario

Chapter 9 - Macroeconomic Forecast

Recovery Continues

Table: Taiwan: Macroeconomic Data And Forecasts

Chapter 10 - Competitive Landscape

Chapter 11 - Company Profiles

China Shipbuilding Corporation

Aerospace Industrial Development Corporation

Combined Service Forces

Chung Shan Institute of Science and Technology

Chapter 12 - BMI Forecast Modelling

How We Generate Our Industry Forecasts

Defence Industry

Sources

Chapter 13 - Appendix A: Risk Ratings Methodology

Conflict Risk Methodology

Terrorism Risk Methodology

Physical Safety Risk Methodology

Overall Risk Rating

State Vulnerability Index

Competitive Landscape for Asia Defence & Security: Sample of  
Companies Ranked

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Rankings and Competitive Landscapes by production and sales; market share and change on previous year; number of employees, ownership structure and year established. Also includes analysis of company expansion, export and investment strategies.

Network of Defence & Security Sources

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BMI's Asian Defence & Security Reports are based on an extensive network of multilateral organisations, government departments, automotive industry associations, chambers of commerce and company reports. Information sources include: