Asia Times: US-Taiwan: The guiding hand of Frank Carlucci
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  March 19, 2002  

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US-Taiwan: The guiding hand of Frank Carlucci
By Tim Shorrock

WASHINGTON - The talks last week between Paul Wolfowitz, the US deputy defense secretary, and Tang Yiau-ming, Taiwan's minister of national defense, marked the highest-level contacts between Washington and Taipei since diplomatic relations were severed in 1979.

They took place during a closed-door conference of US and Taiwanese defense officials organized by the US-Taiwan Business Council, and infuriated China.

On Sunday, Chinese Vice Foreign Minister Li Zhaoxing summoned US Ambassador Clark Randt and expressed Beijing's "strong indignation and resolute opposition" to what it perceives as a US tilt toward Taiwan and a violation of its "one China" policy. Assistant Secretary of State James Kelly, who also met Tang, countered in Washington that the sessions were mere "courtesy meetings".

Whatever their purpose, the meetings illustrate the Bush administration's determination to press on with policies to expand US arms sales to Taiwan and to improve Taiwan's defensive capabilities against China. But missed in the media coverage was the crucial role played in the US-Taiwan talks by Frank C Carlucci, who was secretary of defense during the Ronald Reagan administration and is currently chairman of the Carlyle Group, the Washington private equity fund that is the nation's 11th-largest defense contractor and which has significant investments in Taiwan.

Carlucci, in addition to his many other corporate directorships, is the chairman of the board of the US-Taiwan Business Council that sponsored last week's defense summit. The council is a coalition of US multinational corporations that do business in both Taiwan and China, including Boeing, General Electric, Honeywell and Babcock & Wilcox.

The council was established in 1976 as a private business group. But when the United States recognized the People's Republic of China in 1979, the council became an important unofficial conduit between Washington and Taipei on strategic and defense issues. In 1995, for example, the council played a key role in organizing the US visit of Taiwan president Lee Teng-hui, which set off a diplomatic furor with Beijing. Carlucci was elected chairman in 1999 and followed in the footsteps of several other former defense officials, including former defense secretary Caspar Weinburger and former national security adviser William P Clark.

At the council, Carlucci keeps a vigilant eye out for US business interests. In 2000, after Taiwan canceled a major nuclear power project, Carlucci pressed Premier Chang Chun-Hsiung to compensate GE and other companies involved and urged the government to "move swiftly" to "speed the deregulation and privatization of Taiwan's energy sector". These steps, he said, would "ensure that US companies see an environment conducive to foreign direct investment".

Although some council activities, such as last week's conference, have angered Beijing, Carlucci himself has had extensive contacts with the Chinese government through Nortel Networks, where he served as chairman of the board from 1999 to 2001. In May 2000, Carlucci visited Beijing and met with Chinese President Jiang Zemin to discuss Nortel's extensive business ties with China. Shortly after that meeting, Nortel signed a US$40 million contract to run the national network for China Unicom, the country's second largest telecom provider, and to build a fiber-optic network for China Railcom, a major fixed-line operator.

With many Taiwanese (and US firms in Taiwan) doing business with the mainland and even transferring some production lines there, Carlucci has been using his position at the council to ease US-China tensions - and presumably improve the long-range investment climate for US companies represented by the council. Last May, for example, when tensions between Washington and Beijing were running high over the collision of a US spy plane with a Chinese fighter near Hainan Island, Carlucci wrote an opinion piece for the Wall Street Journal cautioning US officials against taking a simplistic "martial perspective" toward China.

"The economies of the US, Taiwan and China are more closely linked today than ever before, with globalization playing a powerful role," he wrote. "American companies are building an intricate web of relationships to jointly develop intellectual property, seek out lower costs and open new markets. While this trend is producing important gains for the companies involved, it is also further exposing the US economy to the risks of conflict in the Taiwan Strait." One reason that maintaining peace in the Taiwan Strait was so important, he said, was because "manufacturers are increasingly producing their technology components - components the US relies on for its domestic productivity gains - in China".

Carlyle's $750 million Asia fund has invested in two Taiwan companies, including one that has substantial interests on the mainland. They are Taiwan Broadband, the country's fourth-largest cable company, in which Carlyle has invested $187 million, and Pacific Department Stores, a joint venture with a Taiwan group that operates a chain of retail stores in mainland China, worth $43 million. Carlucci has played a key role in these investments as a member of the Carlyle Asia advisory board, which is chaired by former president George H W Bush, himself a former US ambassador to China.

Last week's defense summit was organized by the council to "clarify, for both the American and the Taiwan business and policy-making communities, the future of US defense sales to Taiwan and the defense procurement process".

The four-day meeting was sponsored by US defense contractors that either sell weapons to Taiwan or hope to in the future: Bell Helicopter, Boeing, Lockheed Martin, Northrup Grumman, General Dynamics, Raytheon, Sikorsky and Carlyle's own United Defense Industries, where Carlucci sits on the board of directors. Since 1979, the United States has been Taiwan's biggest arms supplier.

During the sessions, Carlucci told reporters, "We discussed the overall relationships between Taiwan and the United States, of course in the context of our respective defense establishments, and their military procurement systems." Asked about the possibility of US-Taiwan co-production, he replied that the defense industry "is really becoming a global industry. It's not just a question of selling military materiel. It's a question in many cases of co-production, joint R&D [research and devlopment], that's happening increasingly across the world and I see no reason why Taiwan should be left out of that equation."

He went on to say that "we're a commercial organization. We're essentially interested in helping our companies do business in Taiwan; we're not involved in the politics of it."

But the inclusion of senior policy-makers such as Wolfowitz and Kelly and Taiwan's Tang - who said he was personally invited to Florida by Carlucci - belies that claim. Carlucci, as chairman of Carlyle and a longtime operative in the US intelligence and national security establishment, is doing what he does best: parlaying his vast contacts in business and commerce to make money for himself and his companies behind the thin veneer of public service.

Carlucci began his government career in the Central Intelligence Agency (CIA). He began his long run as a government bureaucrat during the Richard Nixon administration, when he was hired at the Office of Economic Opportunity by Donald Rumsfeld, his classmate and wrestling partner at Princeton, who has become one of the most influential defense secretaries in US history.

In 1977, then-president Jimmy Carter appointed him deputy director of the CIA. He served there until 1981, when Weinburger, Reagan's first defense secretary, hired Carlucci as his deputy. In the second Reagan administration, Carlucci served as both secretary of defense and national security adviser.

In 1982, Carlucci left the Pentagon to run Sears World Trade (SWT), which was designed to replicate a Japanese-style trading company. Fortune magazine, citing international traders, speculated that Carlucci's SWT "was providing cover jobs for US intelligence operations", an accusation that gained credence when the Washington Post revealed that the SWT operated a secret subsidiary that advised US and foreign companies on selling arms overseas (Carlucci denied the story). SWT went bankrupt in 1986, but Carlucci walked away with a $735,722 termination settlement.

Carlucci was recruited by the Carlyle Group in 1989 at a time when the group was struggling to define itself. Since Carlucci took charge, Carlyle has become one of the world's largest private equity funds, with $12.5 billion in investments in the United States, Europe and Asia.

Through a string of acquisitions, Carlyle has become a major defense contractor. Led by United Defense, which makes the Bradley fighting vehicle and other weapons systems for the US army and navy, Carlyle's defense portfolio includes Vought Aircraft, the world's largest supplier of parts for the commercial and military aircraft industry; Lear-Siegler, which provides aircraft services to the military; and EG&G Technical Services, a big military contractor.

Carlyle is well known in the defense industry for its uncanny timing in buying and selling. Last week, Carlyle announced its second defense initial public offering (IPO) since the beginning of the US war against terrorism, a $160 million sale of its private stock in United States Marine Repair, the nation's largest non-nuclear-ship repair company that does 80 percent of its business with the US Navy. In December, Carlyle raised eyebrows when it earned more than $400 million with an IPO for United Defense, which had just won a major contract to supply a new-generation mobile artillery system to the army.

Taiwan's growing market for weaponry presents a major opportunity for US defense companies, including United Defense. Last spring, President George W Bush expanded the list of advanced weapons US companies could sell to Taiwan, including diesel submarines, P3C Orion aircraft and navy destroyers. That's where United Defense may hope to come in. One of its hottest-selling weapons systems is the Mk 45 family of naval guns, which are deployed on US Navy ships and on fleets in Australia, Greece, New Zealand, Spain, Thailand and Turkey. Last year, under a $22 million co-production contract with South Korea's Kia Heavy Industries, United Defense began deliveries of a lightweight Mk 45 system that is being deployed on South Korean naval destroyers.

Co-production and offsets - where US companies transfer technology and jobs to the buyer's country - is a specialty of United Defense and Carlyle, which until last July was the official offset adviser to Saudi Arabia. At last week's conference, Greyson Bassett, United Defense's country manager for Taiwan, spoke about offsets at a panel on how "US arms exports and the associated transfer of technology are furthering the development of Taiwan's defense and aerospace industry".

Next: Carlyle's private equity investment strategies in Taiwan, South Korea and Japan.

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