Wed, Dec 03, 2008 - Page 8 News List

John Tkacik ON TAIWAN: Pricing Taiwan’s missile defense

By John John Tkacik

China’s missile deployments against Taiwan are the single most dangerous threat to the nation’s sovereignty, yet some insist that Taiwan either doesn’t need the Patriot Advanced Capability (PAC-3) missile defense system or that the US is trying to cheat Taiwanese taxpayers with hidden PAC-3 price tags — or both. Both charges are false and the latter borders on insulting.

The fact is both Taiwan and the US have a vital interest in seeing that PAC-3 ballistic missile defense systems are deployed in Taiwan and neither can afford to allow political grandstanding to unhinge the historic bilateral security relationship. Both Washington and Taipei should approach the ongoing PAC-3 pricing consultations in a spirit of cooperation, maturity and a sense of common vulnerability to China’s ever-expanding missile threat.

There is much misinformation and disinformation about the PAC-3 sale. Two Chinese Nationalist Party (KMT) legislators, Shuai Hua-min (帥化民), a former army general, and Lin Yu-fang (林郁方), said the US government has suddenly added US$800 million in hidden “research and development costs” to the PAC-3’s US$3.1 billion price tag. Both legislators are familiar with defense procurements, and both must be aware that “nonrecurring engineering” (NRE) costs are a fact of life in every order for advanced US weapons systems. But the US$800 million fee quoted by the legislators seems very high and I suspect it is exaggerated.

Still, NRE fees are a line-item consideration in all new weapons systems that the US offers for export — and the PAC-3 system is one of the newest systems that the US shares with friendly and allied countries. Kuwait purchased the same missiles last year (80 missiles and launch systems), as have the Netherlands and Japan. The United Arab Emirates has a deal almost the same size as Taiwan’s. They all face NRE costs in one form or another (some in cash, some in kind) and they can be negotiated. In fact, Taiwan’s unit price for the actual PAC-3 missiles — about US$3 million — is considerably less than the US$4 million unit price that Japan paid in 2004. Taiwanese legislators should know that including NRE costs on major foreign military sales is nothing new.

Behind the NRE fee is the fact that the Pentagon must try to normalize “asynchronous” order streams as new orders for advanced weapons come from the US’ friends and allies around the world. By “asynchronous” I mean that as each order for a particular new weapons system reaches the Pentagon, the system itself is at a new and distinct stage of maturity. Therefore, the associated quantities, delivery schedules and latest upgrades must be factored into each separate incoming order after the customer gets the initial pricing data. NRE costs can include special ordering of long-lead items, tooling, line expansion or anything else that is required to accommodate increased production lots beyond the orders from the Pentagon.

In the case of the PAC-3 system, NRE costs can also be associated with the radar sets, tactical command stations, information and coordination centrals, communication replay groups, engagement control stations, the launch tubes and carriers and a series of other subsystems that are custom-made for each PAC-3 contract. As such, each new PAC-3 missile defense order from each new country is treated as a standalone case and each country has NRE costs associated with its individual order. In practice, once all of the individual sales cases are “normalized” there is a reconciliation of NRE charges.

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