The Competitive Status of the U.S. Civil Aviation Manufacturing Industry: A Study of the Influences of Technology in Determining International Industrial Competitive Advantage (1985)

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THE PRESENT ENVIRONMENT 61 The situation regarding risk is somewhat ironic because the understanding of technical phenomena, analytical procedures, testing, and operating experience that underlies present technology is clearly superior to that available earlier. It is the financial consequences of an error, or even a perceived error, that have changed. INTERNATIONALIZATION OF AIRCRAFT MANUFACTURING Given the situation described above, it is not surprising that since the end of World War II the number of prime free-world manufacturers of large commercial transports has decreased from 22 to 5. Competitors failing to capture sufficient market share have gone out of business or merged into larger entities. The massive infrastructure of vendors and subsystem suppliers who helped to spread the capital requirements of the U.S. prime contractors certainly contributed to their survival. One obvious response has been to spread the risk and the requirement for large financial resources by forming partnerships. In Europe this led first to national realignment of firms and then to multinational programs, principally among the nationalized industries of Great Britain, France, and West Germany, with each industry receiving the financial backing of its respective government. It also led to demands for offset manufacture of military aircraft among NATO countries to help build an indigenous production base and to generate the funds to buy aircraft. This trend of increasing internationalization can also be observed among U.S. airframe and engine producers in the past 10 years. The joint venture of General Electric and SNECMA in engines, the Fairchild-Saab joint venture in developing the 340 commuter aircraft, the Rolls Royce engines on the Lockheed L-1011, and the involvement of Japanese and Italian firms as risk-sharing partners on the Boeing 767 are examples of growing foreign participation in the product development efforts of American firms. This same mode of operation is apparent worldwide—witness the General Electric and Pratt and Whitney engines on the A300, the 42 percent U.S. content in the British BAe146, and the 40 percent U.S. and 20 percent Canadian content in the Brazilian Bandeirante. In addition to these joint ventures in aircraft and engine development, the export of U.S. components for incorporation into aircraft designed and built abroad has increased significantly. From 1978 to 1982 civil aircraft engine exports alone increased from $300 to $800 million and parts from $2.1 to $4.0 billion. The full extent of these exports has not been carefully examined. 

THE PRESENT ENVIRONMENT 62 Access to foreign markets and capital has also been a powerful motivating force for internationalizing the industry. Since many foreign airlines are state- owned, selection of aircraft for purchase is often subject to political review. Other considerations, such as the drawdown in foreign exchange, a desire to stimulate local employment, and the infusion of advanced technology, are weighed in these deliberations. Governments may demand offsetting arrangements as a part of the transaction. Consequently, a strong foreign marketing advantage can be achieved by forming partnerships, which respond to these additional criteria. The converse is also considered to be true. Failure to form such arrangements can reduce or eliminate market penetration. The economic necessity for manufacturers to serve the total world market is conceptually illustrated in Figure 2-10, which shows representative effects on unit costs (of changes in produc Figure 2-10 Importance of Market Size to Aircraft Production Costs *Those costs directly associated with production of the aircraft, including manufacturing overhead. Remaining costs are associated with development, prototype testing, design, tooling, etc., prior to production. Source: McDonnell Douglas. 

THE PRESENT ENVIRONMENT 63 tion volume) for a projected fleet of 700 aircraft. A 25 percent reduction would result in a cost increase of 10 percent. A 50 percent reduction would result in a cost increase of 35 percent. If a foreign government elected to incur a cost penalty in order to establish a domestic industry that serves 25 percent of the world market, the effect would be to dramatically change the pricing and thus the profit prospects for a privately funded U.S. manufacturer. The 30- to 50-seat commuter aircraft market is a good example of such a possibility. With the opportunity for profit reduced or destroyed, due to a split market, the U.S. firm might well choose not to enter, and the foreign competitor would then have the total market available. Other countries have made and will continue to make important contributions to aircraft and engine technology that U.S. manufacturers will want to tap (e.g., aluminum-lithium alloys, composite materials, electronic displays). International partnerships are an effective way of gaining access to such technology. The concept can work in both directions. The relative merits of international partnerships are not easily judged. One must balance denial of access to a market and possible creation of a future independent competitor against at least partial access to a market, with accompanying risk that one may also be accelerating the development of technical competence by a partner—who may still eventually become a competitor. Another complicating factor in evaluating the economic effect of the internationalization of the industry is U.S. content in ''foreign" aircraft—a situation noted earlier. Today American manufacturers dominate the production of components used in commercial transports. It is believed this position will hold for the near future, but the longer term is less certain. U.S. firms manufacture the major share of engines, avionics, control systems, environmental systems, and auxiliary power systems used in aircraft in the free world, and much of the fasteners and aluminum from which the airframes are constructed. When sales to third parties of foreign airplanes with high U.S. content are taken into account, there can be a net positive U.S. foreign trade balance despite the importation of these same aircraft by U.S. customers. U.S. buyers, as well as third-party buyers of foreign-made aircraft, are purchasing parts manufactured in the United States —e.g., the A300 includes some 30 percent U.S. content in terms of value. In most cases (France is the principal exception) U.S. components tend to continue to be used on aircraft of foreign manufacture because local suppliers cannot afford the investment for the sales volume available domestically. Internationalization of aircraft manufacturing has a number of additional important implications. One of the most significant is the evolution of a new skill in managing transnational technology 

THE PRESENT ENVIRONMENT 64 development among partner firms. Until recently, multinational development programs in any industry, even within a single company that operated in more than one country, were considered very poor risks. The early difficulties in European cooperation in aeronautics reinforced the apparent validity of the perception. The success of the A300, the much smoother development of the A310, the productive partnership of General Electric of the United States and SNECMA of France, and the use of venture partners on the Boeing 767 all signify the change. The Europeans, and the Japanese for that matter, have accumulated much experience and management skill in such undertakings. The competitive value of such partnerships should not be underestimated. U.S. manufacturers, approaching such a relationship from a position of dominance, will need to demonstrate great sensitivity to the position and attitude of their potential partners. A number of members of Airbus Industrie perceive European companies as potentially more attractive partners for the Japanese than U.S. firms. Although this attitude may reflect some wishful thinking, it also reflects past experiences with U.S. firms that adopted a superior attitude in dealing with "junior" partners. The use of consortia also has important implications for the nature of the industry itself. The major European partners in Airbus all began as relative equals in aircraft manufacture. They are evolving into specialists in portions of aircraft —wings, fuselage, control systems, flight deck, etc. Concurrently, project management, which was originally intended to rotate among partners, is solidifying in the Aerospatiale complex at Toulouse, where the major product integration and assembly work is located. Airbus is headquartered in Paris. With this increasing specialization—which is also fostered by the need to reduce technological risk—the role of the systems integrator and project manager assumes greater leverage. While a number of non-French representatives of the Airbus consortium have expressed concern about the long-term implications of this trend, they see no alternative at this point; nor do they perceive the eventual situation that may emerge. They have begun a journey because they felt they had no choice, but the destination is unclear. The increasing participation of foreign firms as partners and major subcontractors in the development of new aircraft and engines by U.S. firms has led to similar expressions of concern over the impact of such arrangements on American technological leadership and on employment in the U.S. aircraft industry. Of concern is the increased opportunity such arrangements may provide for foreign participants to gain access to advanced American aircraft and engine technology. According to this argument, the more ready access of foreign firms to U.S. technology, in combination with their own technology development—to which 

THE PRESENT ENVIRONMENT 65 (presumably) U.S. firms do not have access—can eventually imperil the technological lead of the United States. The recipients of the technology see the situation differently. Technology exchange agreements typically call for all improvements in the technology to be made available to all partners. This has been characterized as attempting to win a race with a rigid pole between the runner-up and the leader—the former's efforts only push the leader faster. These concerns may reflect a misunderstanding of the basis for the current American technological lead and misconstrue the process and chain of relationships among research, technology development, and product development. The key to maintaining technological leadership is to sustain a vigorous R&D program, which generates a continuing stream of new knowledge and understanding. A particular product development extracts from that stream selected advances in technology to incorporate into the product. By the time that development is complete, the R&D effort, if it has continued, will have produced a rich additional stream of new knowledge. Making a particular embodiment available to a partner does not expose the underlying body of test data, analytical procedures, design principles, and related experience associated with its production. Consequently, while the product could be copied, it would provide limited information for creating a different embodiment and of itself would not give away leadership. The valid hazard against which one must guard is not that the technology might be given away by being embodied in a product, but that support for the long-range research and technology development might diminish, or of equal importance, that the United States might fail to develop new aircraft that incorporate the new technology. The present status of U.S. technology is perceived by the panel as a mixture of both parity and leadership. Increasingly, the United States stands to benefit from, as well as to contribute to, partners who are technically advanced. The European partners in Airbus attest to the benefits derived from such partnerships. One benefit, perhaps not so obvious, is that the vigorous, often frustrating discussions that occur among partners help to minimize design errors before they get as far as hardware—even though the discussions may also lengthen the project. Undoubtedly, national pride also contributes to a sense of competition and a desire to "look good" in comparison with international partners. The negative side of partnerships is the building of potential competitors and the slower decision-making process that is entailed. 

THE PRESENT ENVIRONMENT 66 Figure 2-11 Financial Performance of Aerospace Industry, 1970–1983 Source: Aerospace Industries of America, Inc.