Executive Summary

OVERVIEW

For more than 50 years, U.S. leadership in aircraft manufacturing and aviation has been a major component of our economic strength and national security. Today, that leadership is being challenged as U.S. aircraft primes1 and a broad range of suppliers face depressed commercial markets, cuts in defense spending, and intense international competition. As markets, capital, and technological capabilities become increasingly global, international strategic alliances and other cross-border linkages have become a familiar feature of this industry. The importance of Japan and Japanese companies for the U.S. aircraft industry—as partners, customers, and competitors—is already substantial and growing rapidly.

It is in this environment of upheaval and opportunity that the National Research Council's Committee to Assess U.S.-Japan Technology Linkages in Transport Aircraft has examined the context, current status, and implications of U.S.-Japan relationships that develop or transfer aircraft technology. Although the European consortium Airbus Industrie is the only existing foreign prime for large commercial transports, this study of U.S.-Japan linkages is timely and appropriate for several reasons. To begin with, Japan's participation in the global aircraft industry is more extensive than is generally recognized, and has been achieved largely through alliances with U.S. industry. Further, the technological capability of Japan's aircraft industry is rising rapidly. If we look beyond the existing competition between primes to an industry constituted of sophisticated parts and subsystem suppliers, Japan's importance becomes more evident. Finally, other countries may seek to emulate Japan's strategies for aircraft industry development in the future. Therefore, a focus on U.S.-Japan relationships carries important implications for how overall competitive challenges will evolve in this industry.

1  

In this report, the term "primes," refers to prime contractors.



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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft Executive Summary OVERVIEW For more than 50 years, U.S. leadership in aircraft manufacturing and aviation has been a major component of our economic strength and national security. Today, that leadership is being challenged as U.S. aircraft primes1 and a broad range of suppliers face depressed commercial markets, cuts in defense spending, and intense international competition. As markets, capital, and technological capabilities become increasingly global, international strategic alliances and other cross-border linkages have become a familiar feature of this industry. The importance of Japan and Japanese companies for the U.S. aircraft industry—as partners, customers, and competitors—is already substantial and growing rapidly. It is in this environment of upheaval and opportunity that the National Research Council's Committee to Assess U.S.-Japan Technology Linkages in Transport Aircraft has examined the context, current status, and implications of U.S.-Japan relationships that develop or transfer aircraft technology. Although the European consortium Airbus Industrie is the only existing foreign prime for large commercial transports, this study of U.S.-Japan linkages is timely and appropriate for several reasons. To begin with, Japan's participation in the global aircraft industry is more extensive than is generally recognized, and has been achieved largely through alliances with U.S. industry. Further, the technological capability of Japan's aircraft industry is rising rapidly. If we look beyond the existing competition between primes to an industry constituted of sophisticated parts and subsystem suppliers, Japan's importance becomes more evident. Finally, other countries may seek to emulate Japan's strategies for aircraft industry development in the future. Therefore, a focus on U.S.-Japan relationships carries important implications for how overall competitive challenges will evolve in this industry. 1   In this report, the term "primes," refers to prime contractors.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft From its assessment, the committee concludes that although continuing and expanded U.S.-Japan cooperation is inevitable and consistent with U.S. interests, a new approach is needed to ensure that this cooperation contributes to reenergizing U.S. leadership in the aircraft industry. MAJOR FINDINGS 1. Leadership in global competition will increasingly go to the firms emphasizing high-quality, low-cost manufacturing. This is precisely the area that the Japanese have made their top priority—at the same time that the U.S. aircraft industry is making deep cuts in capital equipment investment. A major purpose of the assessment was to reexamine the widely held assumption that Japan's aircraft industry is unlikely to move into the ranks of global leaders. During its study mission to Japan in June 1993, the committee was impressed by the investments in state-of-the-art manufacturing equipment made by the four "heavies" that lead Japan's aircraft industry—Mitsubishi Heavy Industries (MHI), Kawasaki Heavy Industries (KHI), Ishikawajima-Harima Heavy Industries (IHI), and Fuji Heavy Industries (FHI)—as well as by dedicated aircraft suppliers such as Teijin Seiki. Japanese industry has attained world-class capabilities in manufacturing aircraft components such as fuselage panels, thick and complex composite structures, long shafts for aircraft engines, and primary actuation. Advanced technologies—including processes utilizing five-axis machines driven by design data bases—are combined with a meticulous approach to manufacturing practice to achieve high quality, low cost, and reduced cycle time. In addition, the manufacturing excellence achieved by companies such as Toray in carbon fiber and Sharp in flat panel displays has allowed Japanese industry to establish dominant positions in several critical areas of the aircraft supplier chain. Although some U.S. companies are making the investments necessary to stay on the cutting edge of manufacturing, many are not, largely as a result of ongoing cuts in military aircraft procurement and the current commercial market slump. This is a critical issue because the forces shaping competition over the next decade—growing but price-sensitive markets, industry restructuring, and fewer brand-new aircraft and engine programs than in the past—mean that both U.S. primes and suppliers will be continually pressured to deliver more value at lower cost. 2. Japan's aircraft R&D and defense production systems actively foster an integrated and flexible dual-use technology and manufacturing base. In contrast, the commercial benefits of U.S. military aircraft R&D and procurement have declined over time—largely as a result of policies that implicitly discourage military-commercial synergies. Although the amount of public resources expended on the Japanese aircraft industry is relatively small, Japan's government-sponsored domestic cooperative programs are more strongly oriented to technology sharing among

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft Japanese companies and commercialization of aircraft technologies than those supported by the U.S. government. For example, the Key Technology Center project on aluminum-lithium alloys launched in 1989 provides investment funding to aluminum manufacturers and fabricators for research likely to have important applications in the aircraft industry. In the United States, the National Aeronautics and Space Administration (NASA) aeronautics program has produced many advances that have enhanced the competitiveness of U.S. firms in the past, but there has been no comprehensive effort directed toward technology commercialization and product application technology. Japanese and U.S. policies on the defense side provide contrasts as well. For example, Japan's defense R&D spending has a strong dual-use orientation, while U.S. military aircraft development increasingly emphasizes unique capabilities that enhance combat performance—such as stealth and high maneuverability—but have few direct commercial applications. In addition, the production facilities of Japanese companies often manufacture components for both military and commercial aircraft side by side or even on the same equipment, whereas U.S. companies such as McDonnell Douglas and Boeing have found it prudent to separate similar military and commercial manufacturing because of procurement regulations and unique military specifications. Although the current administration is initiating efforts to change such regulations, the existing system inherently separates (rather than integrates) military and civilian R&D and production. 3. Japan uses international partnerships strategically to foster technology acquisition. Japan's policy and business environment allows industry to gain maximum leverage from international alliances, resulting in a gradual upgrading of independent technological capabilities and a diffusion of these skills throughout the manufacturing network of primes and suppliers. The Japanese aircraft industry does not carry out full independent integration of commercial airframes, engines, or avionics, but it has achieved increasing independence and growing technological strength by promoting international linkages. The Japanese government supported the JFR-710 project in the 1970s, laying the foundation for Japanese industry's participation in the multinational V2500 engine program. More recently, the Ministry of International Trade and Industry (MITI) launched the HYPR program in 1989, designed from the start as an international collaborative effort in advanced, supersonic engine technologies. The Japanese government has also supported and coordinated Japanese participation in Boeing's aircraft programs. MHI, KHI, and FHI have increased the extent and technical sophistication of their relationship with Boeing over time. While the Japanese policy process for international partnerships is oriented toward ''behind the scenes'' advance government-industry coordination, the U.S. policy process is more ad hoc and uncoordinated. This contrast is particularly important now since both the U.S. and Japanese aircraft industries are being forced by changes in the global environment to make significant

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft adjustments. International linkages are very much a focus of current Japanese planning, as a series of new studies, working groups, and international missions have been organized in past months to consider critical decisions relevant to the future of the industry. MITI and industry are jointly developing new approaches to strengthen Japan's aircraft industry for the twenty-first century. There is no such effort under way in the United States. 4. The U.S. aircraft industry has gained significant benefits from its relationships with Japan, including sales and licensing income, world-class components, and financial leverage for costly new programs. Yet cooperation entails risks and raises concerns as well, particularly the long-term impacts of technology transfer from the United States to Japan and the effects of linkages on the U.S. supplier base. Although the predominant flow of technology in U.S.-Japan aircraft alliances has been from the United States to Japan, the U.S. Department of Defense (DOD) and U.S. companies involved in military and commercial linkages have structured programs with the aim of protecting critical technologies. Still, the impacts of the most recent technology transfers are unclear. Japanese industry is not competing today at the prime integrator level, but it already possesses or could acquire the capabilities needed to do so. In addition, Japanese companies are displacing U.S. suppliers in areas such as fuselage structures, and they dominate several critical component technologies. While Japan does not have offset requirements or other formal market barriers, U.S. manufacturers selling to Japan feel informal pressure to source there in order to enhance access to Japanese airlines, and some have found it difficult to participate in the Japanese market without a joint venture with a Japanese company. Rather than retreat into a "protectionist" or defensive stance, the United States should pursue a proactive approach to building effective U.S.-Japan relationships that involve a more balanced flow of aircraft technologies between the two countries. Further, there is a need to promote more effective working relationships between U.S. companies and between industry and government to ensure the retention of an innovative, full-spectrum aerospace capability in the United States. IMPERATIVES FOR THE FUTURE Although this study focuses on Japan, it is clear that U.S. leadership has been and will continue to be challenged by other industrialized countries that view aviation as fundamental to their economic growth. The committee developed future scenarios for the course of the global aircraft industry and U.S.-Japan alliances over the next decade and beyond. Several scenarios that contemplate declining U.S. market share are plausible and could come about if current trends continue. The most desirable scenario—a resurgent, globally

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft competitive U.S. aircraft industry—will not be realized unless U.S. companies and government work together to bring about a significant change in course. Leadership in aircraft design and manufacturing—including a full-spectrum supply chain—remains a vital U.S. national interest. As a result of its assessment, the committee concludes that in order for the United States to maintain its leadership in this critically important industry, government-industry partnering in the development and implementation of a long-term strategy is essential. While the major responsibility lies with the U.S. aircraft industry itself, government must do more to create a favorable overall environment. Currently, neither a coherent policy nor the needed institutional mechanisms exist. POLICY RECOMMENDATIONS In response to the need for a comprehensive and proactive U.S. approach, the committee has developed a five-part strategy outlining the critical imperatives for U.S. industry and government attention, along with specific action items.2 The five elements are maintaining U.S. technological leadership, revitalizing U.S. manufacturing capabilities, encouraging mutually beneficial interaction with Japan, ensuring a level playing field for international competition, and developing a shared U.S. vision. Maintaining U.S. Technological Leadership The current massive restructuring on both the military and the commercial sides of the aircraft business makes it critical that U.S. technological leadership be maintained. NASA must continue to play a key role in aeronautics. Its currently proposed 35 percent increase in aeronautics funding should continue for three more years. NASA's traditional role in basic research should be expanded into product-applicable technologies in subsonic aeronautics and propulsion systems, with the primary objective of reducing the investment and operating costs of future aircraft systems. To ensure increasing commercial application of these technologies, NASA should increase significantly the funding share contracted to industry. Also, the U.S. Department of Defense should maintain its aircraft R&D budget for enabling technologies at current levels despite overall cuts in the defense budget. U.S. industry must continue to invest its own resources in new technology development. In order to facilitate this investment, the R&D tax credit should 2   An abridged set of recommendations is presented here. The complete list is contained in Chapter 5

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft be made permanent, and incentives should be developed to avoid penalizing companies that reorient their R&D from defense-unique to dual-use or commercial areas. Revitalizing U.S. Manufacturing Capabilities U.S. primes and suppliers will have to improve manufacturing performance continually in terms of cost, quality, and delivery to remain competitive—especially in view of the large investments in state-of-the-art equipment being made by the Japanese aircraft industry. To this end, a well-structured investment tax incentive designed to encourage productivity-enhancing investments should seriously be studied, both for its practicality and effectiveness, and compared to the incentives provided to industry in Japan and Europe. Department of Defense reform of its procurement system is the key to promoting greater civil-military integration, especially in the area of reducing barriers to common R&D and manufacturing facilities for military and civilian aircraft production. Reform of the system should include more extensive use of commercial item descriptions, a greater emphasis on low cost and high quality, and revisions in accounting standards. R&D funding by DOD should place a high priority on manufacturing and design processes, and give priority to cooperation between primes and suppliers in U.S. government RFPs (Request for Proposals). DOD should also consider carrying aircraft and subsystem prototypes forward to limited production in order to demonstrate low-cost "manufacturability" as well as performance. Encouraging Mutually Beneficial Interaction with Japan The environment surrounding U.S.-Japan linkages has evolved significantly, demanding a new approach to ensure that the benefits of cooperation are maximized and the risks are managed. As part of its activities to promote greater reciprocity in the transfer of aircraft technology between the United States and international partners—including Japan—a private sector effort should be launched to identify critical technologies, establish guidelines covering the transfer of commercial aerospace technology, and periodically assess international technology transfers. The Department of Commerce should also consider leading a new initiative to collect and disseminate technical and business information from global sources to the U.S. aircraft industry, including expanded technology benchmarking. Ensuring a Level Playing Field for International Competition In light of heightened international competition in all segments of the aircraft industry and the context of heavy government involvement, U.S. trade

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft policy should aggressively promote fair global market competition. The U.S. government should work closely with industry and other governments to achieve multilateral rules that govern and reduce subsidies in this industry. The recently increased Export-Import Bank guarantee and loan activity should also be maintained. Developing a Shared U.S. Vision The four previous strategic elements and their associated recommendations are important ingredients for a reenergized U.S. aviation industry with enduring global leadership. What continues to be missing is an institutional mechanism that is committed to the further development and refining of a U.S. aviation strategy, that can understand and include the views of all the necessary players, and that has the visibility and persuasive powers to champion implementation. There is no present government agency that has singular responsibility for the aviation infrastructure. There is no U.S. equivalent of MITI, nor should there be. In any event, it is the private sector that is ultimately responsible for the success or failure of any aviation strategy. The committee explored several alternative mechanisms for developing a shared vision, such as organizational changes in government, utilization of an existing advisory panel, or tasking one or more industry associations, and found all of these approaches wanting. Accordingly, its final recommendation is the establishment of a National Aviation Advisory Committee (NAAC), composed of knowledgeable leaders from industry, academia, and elsewhere, reporting to the National Economic Council or an interagency group of senior officials. The committee believes that the stature of its membership coupled with its strategic reporting level would help ensure knowledgeable input from the private sector to government councils, as well as a higher likelihood of a coordinated approach for an industry where the United States needs to retain world leadership. The committee recognizes that such a recommendation might be viewed as self-serving for a particular industry, and is aware of problems and mixed effectiveness of similar high-level advisory committees for other sectors. Nevertheless, during this period of restructuring following the ending of the Cold War and with increasing frictions in high-technology competition between the United States, Japan, and Europe, the committee believes that maintaining U.S. leadership in the aviation industry requires a careful assessment and a focused strategy from both U.S. industry and government. This report outlines some of the specific tasks that need to be accomplished. The NAAC as outlined here could perform these tasks as well as address the overriding need for a shared U.S. strategic vision for a continually reenergized leadership position in aviation.