S Korea's KAI eyes bigger role in aviation

SINGAPORE - Korea Aerospace Industries Ltd wants to become a bigger player in the global supply chain for Airbus and Boeing commercial aircraft, and reduce its dependence on the South Korean defence market, its chief executive told Reuters.

Tapping the growing international demand for passenger aircraft will help KAI to eventually reach its annual revenue target of US$10 billion (S$12 billion), Ha Sung-yong, who became the chief executive in May, said in an email this week.

The company, which primarily makes military aircraft for South Korea and components for Western defence contractors, posted 2012 revenues of 1.53 trillion Korean won (S$1.7 billion), a 19.3 per cent jump from 2011. Most revenue is generated from defence, and at home.

In recent years, it has diversified by securing more commercial contracts and becoming a supplier for Boeing Co and Airbus, a unit of European aerospace and defence company EADS.

"Defence contracts remain KAI's backbone. But in order to grow, it is key for us to expand in the commercial aircraft business. It is going to be our future growth engine," said Ha.

"We have successfully demonstrated our capability as a major supplier for Airbus and Boeing, and we will continue to expand that business."

Kim Ik-sang, an analyst with HI Investment and Securities in Seoul who has a buy call on KAI, said that the company can benefit from both South Korea's defence requirements and the growing airline business.

"South Korea has several military requirements to cope with its threats, and KAI will supply many of the fighters, trainers and helicopters that it needs," he said.

"And with Airbus and Boeing delivering passenger aircraft in record numbers, KAI will benefit as an established supplier."

The company is a supplier for every Boeing passenger jet, and in April signed a US$450 million contract to continue manufacturing Boeing 737 horizontal stabilisers and vertical fins until 2021.

It also produces parts of all existing Airbus passenger aircraft, and is manufacturing the wing ribs, the nose landing gear bay and doors for the upcoming A350.

An Airbus spokesman said that this forms a "strong base for further collaboration", and added that his company is "actively looking" at possible developments in its industrial partnerships with Korean companies.

KAI's plans dovetail with Seoul's goal to emulate Japan, whose aerospace firms have become an important part of the global supply chain.

South Korea accounted for only 0.5 per cent of global aerospace exports last year, and the aim is to raise that to 5 per cent, said KAI in an email.

KAI's deals pale in comparison to what goes to Japan where companies like Mitsubishi Heavy Industries Ltd, Kawasaki Heavy Industries Ltd and Fuji Heavy Industries Ltd manufacture around 35 per cent of the latest Boeing 787 passenger jet.

But with Airbus and Boeing set to ramp up production rates to keep up with growing demand, there are concerns about the ability of existing foreign suppliers to keep up.

Diversifying the supply chains will also ensure that a disruption at one sub-contractor does not hold up production. That could benefit ambitious aerospace companies like KAI, which want to join the ranks of Mitsubishi and Kawasaki.