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Problems Surface over Submarines Pledged for Taiwan (16 Jul 2002)

Despite Bush's promise, Chinese hostility makes selling arms to Taipei difficult.

For Taiwan's China Shipbuilding, a chance to build submarines would be just the thing to ensure that a company which has turned a profit in only four of the last 20 years stays afloat.

CSBC is eager to play a role in the construction of eight diesel-electric submarines promised last year by US president George W Bush, a procurement deal that has won close attention from leading US defence contractors.

In Taiwan, however, weapons procurement is never a simple business. Indeed, some on the island doubt that the promised submarines will ever be built, despite what officials say is the urgent need to beef up the puny underwater forces.

Officials say the island's four submarines - including two second world war survivors - are no match for the threat posed by rival mainland China, which backs its claim to sovereignty over the island with threats of military force.

A Pentagon report at the end of last week warned that preparation for conflict in the Taiwan Strait was the "primary driver" for china's military modernization, saying Beijing was steadily developing more potent submarine forces.

China's own diesel submarines boast German engines and its Song-class vessels ae thought to have French-designed sonar, the Pentagon says, while its has also purchased Russian Kilo-class diesel-electric submarines that are among the quietest of their type.

Beijing has taken delivery of four Kilo vessels and its most recent purchase, a US$1.6bn deal to buy eight more, is directly tied to its determination to tip the cross-strait military balance. Along with purchases of Su-27 and Su-30 aircraft, destroyers and air defence systems worth about US$10bn altogether, the submarines cement China's status as the largest buyer of Russian weapons.

Such procurement challenges the qualitative advantage that Taiwan's military relies on to deter the much larger mainland forces.

Underlining the difficulties, Taipei is finding it extraordinarily difficult to acquire its own advanced submarines.

Mr Bush's offer was hailed in Taiwan as a break through, but more than a year later the US government, military and industry have yet to decide how to deliver.

The all-nuclear US has not made diesel submarines for decades, making the project hostage to technological, diplomatic and even corporate issues.

And while a number of western European nations produce non-nuclear submarines, fear of offending China makes them reluctant to sell to Taiwan.

Mr Bush's promise provoked tensions with Germany and with Netherlands, which bore the brunt of such Chinese outrage when it supplied Taiwan's only two modern submarines in the 1980s that it promised never to repeat the sale.

A Chicago -based investment company, One Equity Partners, emerged as a potential stalking horse when it moved to take a 75 percent stake in Howaldtswerke Deutsche Werft (HDW), a German submarine producer.

Part of the purchase is being contested by shareholders in HDW's parent company, and German officials have warned that their ban on sales to Taipei will hold even if HDW comes under US control.

However, some observers believe the deal could allow a US contractor to use HDW's technology to build vessels for Taiwan.

One of the directors of One Equity is James Crown, whose family owns 8 percent of General Dynamics, US defence contractor. And Northrop Grumman, another US potential submarines supplier, has expressed interest in an alliance with HDW.

The alternative to overseas technology - developing a diesel submarine from scratch in the US - also faces problems.

US development would be expensive - a big concern in Taiwan, which has been hit by an economic slowdown and where many suspect US contractors use their virtual monopoly status to raise prices.

Industry insiders say the most recent delay to the project was caused by Taiwan's laxity in paying bills incurred by the US navy in preparing detailed bids and promotion.

Others suggest the Taiwanese top brass is relatively sanguine about the threat from China, even though President Chen Shuibian often reminds the military that defence is a matter of "life and death".

For all the difficulties, Tang Yiau-min, Taiwanese defence minister, insists the submarine deal is going very smoothly.

Since the US government's announcement, it has repeatedly made assurances that it has the confidence and ability to complete this deal according to Mr. Tang.

Even if such faith is well founded, Mr. Hsu at China Shipbuilding could still struggle to win a role.

Taiwan's legislature has ordered the military to push for CSBC to build six of the eight vessels under licence, but the defence ministry has expressed doubt about the company's credentials.