Printed headline: Aeropolis Opportunities
A major aerospace project in the center of South Korea has recovered from an early setback by broadening its scope, and it is now poised to benefit from emerging opportunities in both commercial and military aviation.
The original plan was to build an MRO cluster at Cheongju International Airport, taking advantage of its surrounding free economic zone. However, this concept was scuttled when anchor tenant Asiana Airlines withdrew in 2016. The backers of the Cheongju Aeropolis project revised their plan to include a wider range of aerospace-related companies in the development and have now generated significant industry participation.
The next phase of potential growth for the aeropolis could be its most important yet. This likely will be driven by the dual-use airport’s role as the base for South Korea’s Lockheed Martin F-35 fighter aircraft and the recent approval of a low-cost carrier (LCC) that will be based at Cheongju and has ambitious plans for developing related businesses. These initiatives likely will spur other companies to move in, and the airport and surrounding area are also projected to become a major logistics and transportation hub.
Driving the aeropolis project are the Chungcheongbuk provincial government and the Chungbuk Free Economic Zone Authority (CBFEZ). They have so far established two areas for development, which are known as District 1 and 2. Enough companies have already signed up to fill the larger District 2, and CBFEZ is now in discussions regarding plans for District 1, which adjoins the airport runway and is most suited to aviation businesses. Demand has been such that an even bigger third district is also being considered, although this is still in the planning stages.
Sixteen aerospace and logistics companies have signed memoranda of understanding (MOU) to build facilities in District 2, CBFEZ Business Development Manager Sung Hong tells Inside MRO. Development of this 321 km2 (124 mi.2) site is estimated to cost $111 million and is due to be completed in 2020. Companies could then build their facilities, and some could be moving in and beginning operations in 2021.
Developing District 1 is expected to cost about $45 million. Earthworks have been largely completed for this section, although supporting infrastructure has yet to be finished. Depending on how talks proceed, the anchor tenants could be an airline, the military or other aviation businesses. As this section is closest to the airport, it will have access to ramp and taxiway areas.
In terms of commercial aviation, the new Cheongju-based LCC could be a significant District 1 tenant. The carrier will be called Aero-K, and it plans to begin operations in the second quarter of 2020. It was one of three LCCs granted licenses by South Korean regulators in March.
While other airlines already serve Cheongju, Aero-K will be the first based there. The carrier is looking at establishing other businesses in the aeropolis, says Aero-K founder Mike Kang. These could include an MRO operation for airframe light maintenance, potentially performing third-party work. Aero-K has also signed an MOU for a ground-handling joint venture and is interested in establishing a training academy for pilots and cabin crew.
South Korean company Guardian Air wants to set up a cargo airline based in Cheongju, although its plans were dealt a setback when it was not included in the latest list of government airline license approvals.
There is already a helicopter MRO operation located adjacent to Cheongju Airport, and it has expressed interest in moving to the aeropolis precincts. RH Focus Corp. performs maintenance and conversion work on South Korea’s sizable fleet of Russian-made helicopters, which are primarily used in firefighting and rescue.
Significant opportunities also exist for the aeropolis—including District 1—on the military side. This is mainly due to the fact that the Republic of Korea Air Force has chosen to base its F-35s at Cheongju, with the 17th Fighter Wing. The first two of the 40 F-35s ordered have already been deployed at Cheongju.
The U.S. Defense Department in February approved a consortium of five South Korean aerospace companies to be Tier 2 maintenance providers for F-35s. This allows them to conduct maintenance for 34 F-35 components and systems. The companies involved include Hanwha subsidiaries and Korean Air’s aerospace division.
CBFEZ has begun discussions with the South Korean consortium companies about what role the aeropolis could play in F-35 maintenance. CBFEZ Commissioner Jeon Hyung Sik says the agency is optimistic about the possibility of gaining tenants for the aeropolis related to F-35 work. He notes it would be “really inefficient to choose somewhere else” for F-35 MRO, and Cheongju is “the ideal location,” as it is the aircraft’s main base.
More opportunities could arise from requirements for day-to-day maintenance of the aircraft as well as the South Korean government’s desire to have F-35 airframe maintenance performed domestically rather than overseas. CBFEZ has also engaged in talks with South Korea’s Defense Acquisition Program Administration (DAPA) about what these maintenance requirements could mean for the aeropolis. Another local company, Green Optics, is hopeful of securing some work on optical systems for the F-35.
Jeon says that while few obvious changes have been made to the aeropolis site over the past two years, there have been many developments behind the scenes. And the new possibilities arising in the civil and military sectors mean 2019 is an “important period for the success” of the aeropolis project.
Cheongju’s aeropolis does face competition from other developing and existing aerospace clusters elsewhere in South Korea. However, the Cheongju area has a range of advantages that CBFEZ can use to attract aerospace and MRO businesses. It is located in the center of the country, meaning it has good access to other areas and any city in South Korea is within a 2-hr. drive. Cheongju and neighboring Osong are also hubs for road and rail networks, and the province is a center for high-tech industries.
In terms of workforce, there are five universities and one vocational high school nearby that train aerospace engineers and technicians. More than 1,000 aerospace workers per year are produced by these institutions, including 300 per year for the MRO industry.
As the number of aerospace tenants in the aeropolis grows and achieves critical mass, the industry concentration will provide benefits to companies located there.
One of the businesses that has signed an MOU to participate in District 2 is ENC Tech, which conducts maintenance and repair of military aircraft simulators and also works on a range of other electronic equipment. It has plans to develop products for commercial aviation as well.
ENC intends to build a new facility in the aeropolis to complement its existing plant in Cheongju. Being part of an aerospace cluster will have many advantages for ENC, says Executive Director Duck-Soo Lee. It would make it easier if ENC needs to cooperate with other companies to expand into new aerospace business or to exchange information and expertise.
The growth of Cheongju Airport is another positive factor. It offers scheduled service to nine destinations including eight international, with passenger and route numbers rising. There are 5.6 million people living within 50 km (31 mi.) of the airport, and it is the closest gateway to Sejong City, South Korea’s fast-growing administrative capital. Cheongju is also well-located to serve the southern part of the vast Seoul metropolitan area.
Being in a free economic zone brings significant advantages. Numerous incentive packages and tax breaks are offered to foreign companies establishing in a FEZ, although certain parts of the tax exemption policies are currently under review by the central government and may be adjusted.
These incentives make the aeropolis an attractive option for foreign aerospace companies looking to establish operations or joint ventures in South Korea to fulfill defense acquisition offset requirements, CBFEZ says.
South Korea requires overseas suppliers or contractors to meet offset obligations representing a certain percentage of acquisitions over $10 million. These obligations can be met through means such as local co-production, licensed production, technology transfer or counterpurchase. The main aim of the policy is to strengthen South Korea’s aerospace and defense industries and to create jobs.
With South Korea being one of the top 10 countries for defense spending and defense imports, there is a significant amount of offsetting business required. The government has proposed a defense budget of $42 billion for 2019, with the 8.2% year-on-year growth the largest increase in 10 years.
Joint research programs are also encouraged as a way to provide offsets. CBFEZ says Cheongju is a good location for these, due to the presence of universities and defense think tanks, and the proximity to related high-tech industries. This could benefit research programs in areas such as avionics, aircraft batteries, displays, and carbon-fiber materials, the agency says.
The aeropolis program complements another project that aims to make Cheongju airport a central part of the development of the local economy and nearby industry clusters. The government is pushing this concept through its “airport economy” initiative, and Cheongju is one of the candidates to be an early participant.
Such an approach would be linked to the Cheongju area’s prominent role in South Korea’s semiconductor industry and a major biotech cluster just 20 km away in Osong.
Being so close to these industrial concentrations means there is strong potential for logistics and air cargo service at the airport, says Gyeonggi Lee, an expert in urban planning and senior researcher at the Chungbuk Research Institute. He notes that while many of the province’s exports such as semiconductors, electronics and biomedical products are ideal for direct air shipment, almost all of it is transported by ground links to Seoul’s Incheon International Airport.
According to a study by Lee, Cheongju should aim to emulate the success of Memphis in the U.S. as a logistics hub. The size, central location and strong road and river transport networks give them similar attributes, he says.