2
Background and Policy Context

HISTORICAL BACKGROUND

Aircraft development has always been a high-risk, demanding business. Historically, new product development costs have often exceeded the market value of the company making the investment. Currently, development costs for a major new program (such as the Boeing 777) may exceed $5 billion.1 The economics of the aircraft industry push toward international linkages formed to share risk.

Powerful counterforces, however, explain the desire for an indigenous aircraft industry in many nations where entry into the airframe integration segment of the industry is economically irrational from the perspective of any individual company. Throughout the history of the Japanese aircraft industry there has been an interplay between the push for indigenously developed technologies by an independent Japanese industry, and the need to form technology linkages, given the realities of the global marketplace and the need to access technology from abroad.

The four Japanese "heavies"—Mitsubishi Heavy Industries (MHI), Kawasaki Heavy Industries (KHI), Fuji Heavy Industries (FHI), and Ishikawajima-Harima Heavy Industries (IHI)—that dominate Japan's aircraft industry today have all been involved in aircraft production since the early part of the twenti

1  

See "Betting on the 21st Century Jet," Fortune, April 20, 1992, p. 102.



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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft 2 Background and Policy Context HISTORICAL BACKGROUND Aircraft development has always been a high-risk, demanding business. Historically, new product development costs have often exceeded the market value of the company making the investment. Currently, development costs for a major new program (such as the Boeing 777) may exceed $5 billion.1 The economics of the aircraft industry push toward international linkages formed to share risk. Powerful counterforces, however, explain the desire for an indigenous aircraft industry in many nations where entry into the airframe integration segment of the industry is economically irrational from the perspective of any individual company. Throughout the history of the Japanese aircraft industry there has been an interplay between the push for indigenously developed technologies by an independent Japanese industry, and the need to form technology linkages, given the realities of the global marketplace and the need to access technology from abroad. The four Japanese "heavies"—Mitsubishi Heavy Industries (MHI), Kawasaki Heavy Industries (KHI), Fuji Heavy Industries (FHI), and Ishikawajima-Harima Heavy Industries (IHI)—that dominate Japan's aircraft industry today have all been involved in aircraft production since the early part of the twenti 1   See "Betting on the 21st Century Jet," Fortune, April 20, 1992, p. 102.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft TABLE 2-1 Selected Japanese Aerospace Manufacturers (Estimated FY 1992 million dollars, ¥110 per dollar) Company Sales Aerospace Sales (% of total) Corporate R&D MHI 22,545 3,382 (15%) 1,064 KHI 8,636 2,245 (26%) 209 IHI 7,272 1,236 (17%) 340 FHI 7,909 474 (6%) 227 Four Heavies, total 46,362 7,337 (16%) 1,840 Toray 5,409 ?   291 Shimadzu 1,569 439 (28%) 118 Teijin Seiki 623 224 (36%) 19 JAE 564 118 (21%) 26 Nippi 300 288 (96%)   3.6 Selected suppliers total 8,465 ?   458 NOTE: Companies do not provide breakout figures for aerospace or aircraft-related R&D. SOURCE: Compiled by Office of Japan Affairs from data appearing in Toyo Keizai, Japan Company Handbook—First Section (Tokyo: Toyo Keizai, 1993). eth century. Today they manufacture structural parts of aircraft and act as risk-sharing partners for large aircraft and engine development projects led in most cases by foreign-based firms (see Table 2-1). In addition to the four heavy industry companies that lead Japanese participation in commercial programs and act as prime contractors for major weapons systems purchased by the Japan Defense Agency (JDA), the Japanese aircraft industry consists of many subcontractors as well as many companies that have developed competitive capabilities in the manufacture of various aircraft components. In a number of cases, these companies, such as Toray, are applying technologies developed for another market segment. The United States has become increasingly dependent on Japanese suppliers for some types of components, such as flat panel displays. A distinguishing feature of the Japanese industry is its strength in components supply. Japan's aircraft industry is also distinguished by its reliance on military production (see Table 2-2).2 In 1991, defense production accounted for almost 75 percent of Japan's total aircraft industrial output.3 At the same time, it is 2   For FY 1992, JDA aircraft procurement was $2.46 billion (¥270 billion at ¥110/$1) versus U.S. Department of Defense aircraft procurement of $23.95 billion (estimated). See Boeicho (JDA), Heisei Yonendo Boeihakusho (Tokyo: Okurasho Insatsu Kyoku, 1992), p. 302; and Aerospace Industries Association (AIA), Aerospace Facts and Figures 1992–1993 (Washington, D.C.: AIA, 1992), p. 22. 3   See Nihon Kokuchukogyokai (Society of Japanese Aerospace Companies), Heisei Yonendohan Kokuchunenkan (Aerospace Industry Yearbook 1992 Edition), (Tokyo: Koku Nyusu, 1992), p. 433.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft TABLE 2-2 U.S. and Japanese Aircraft Industries—1991 Sales and Trade Comparison (million dollars, ¥110 per dollar)   United States Japan Total aircraft sales 68,593 7,735 Sales to domestic governmenta (% of total) 21,703 (32%) 5,926 (77%) Aircraft imports 12,626 5,127 Aircraft exports 42,412 841 Aircraft trade balance 29,786 -4,286 NOTE: a For both countries, nearly all domestic government sales are military. SOURCE: Nihon Kokuchukogyokai (Society of Japanese Aerospace Companies), Heisei Yonendohan Kokuchukogyo Nenkan (Aerospace Industry Yearbook 1992 Edition), (Tokyo: Koku Nyusu, 1992), pp. 433–437; and Aerospace Industries Association, Aerospace Facts and Figures 1992–1993 (Washington, D.C.: AIA, 1992), pp. 28, 126. important to note that the same major Japanese companies that produce aircraft engage in widely diversified production of ships, nonaircraft military vehicles and engines, and missiles, as well as nonaerospace production in areas such as motorcycles, electronic devices, and textiles. Industrial diversity is a hallmark of the large companies, a characteristic that enhances synergies between military and civilian production that are unusual in the United States and explicitly encouraged by Japanese government policies. Japan's pre-World War II industry was promoted for national purposes, and organized to acquire needed foreign technologies through licensing and other linkages to foreign companies while at the same time building domestic Japanese capabilities through government-directed procurement, R&D, and planning.4 Japan's success with the Mitsubishi A6M5, popularly known as the Zero fighter, demonstrated the high level of domestic capabilities spawned by the ''independent aircraft policy'' of the 1930s. Japan's aircraft industry, which had been one of the largest and most technologically advanced in the world during World War II, was initially prohibited production by the American occupation after the war. In the early postwar period, the industry was formally dismantled, and some of its accumulated technical and human expertise flowed to other Japanese industries such as automo 4   For a detailed analysis, see Richard J. Samuels, chapter 4, "Vie Japanese Imperial Aircraft Industry," Rich Nation, Strong Army: National Security, Ideology, and the Transformation of Japan (Ithaca, N.Y.: Cornell University Press, forthcoming 1994).

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft biles.5 The revival and expansion of the industry were made possible under the U.S.-Japan security treaty and were given their first stimulus during the Korean War when the U.S. military contracted with Japanese firms for significant maintenance and repair work. The major mechanism for expansion of the military aircraft industry was licensed production in Japan of U.S.-designed aircraft, despite the considerably higher costs of production versus purchase of U.S.-made aircraft. Over time, Japanese firms progressed in defense production from assembly of U.S.-fabricated "kits" to production of more components of greater sophistication. The FS-X program represents a new stage of joint development, with the Japanese firm MHI acting as the prime contractor and Japanese firms taking on a much larger role in design from the outset. Independent Japanese programs have centered on trainers and day fighters, rather than the highest-technology military aircraft (see Table 2-3). Over the past 40 years or so, Japan has pursued an incremental approach to building its industry by maximizing and expanding its participation through linkages primarily with U.S. firms and consistent with U.S. government policy encouraging military cooperation. The Aircraft Promotion Law of 1958 established the policy framework for promotion of commercial aircraft production. Although Japan did make one attempt (the YS-11) to develop a commercial aircraft, the 64-seat, twin-engine turboprop was a failure in the market.6 Since that time, all major commercial transport aircraft programs in which Japan has participated have involved technology linkages with foreign firms. Japanese firms progressed from work as subcontractors on Boeing's 747, 727, and 737 models and on McDonnell Douglas's DC-9 and DC-10 during the late 1960s and early 1970s to "risk-sharing subcontractors" involved in the development and production of the 767 in the late 1970s. These linkages are explored in more detail in the next chapter. U.S. AND JAPANESE POLICIES Japanese and U.S. government policies toward the aircraft industry provide striking contrasts. The contextual changes mentioned above are forcing adjustments in both countries, and in many ways the 1990s are a watershed period. Critical choices made today will have significant impacts for many years to come. As a basis for comparison, a number of policy vehicles are examined briefly, along with the overall process of decision making. The policy instruments include direct financial assistance, support for civilian R&D, military and civilian procurement synergies, and other forms of government action to 5   Richard Samuels points out that despite the formal ban, 40 percent of the facilities were maintained and 80 percent of the engineers stayed on at IHI and Nakajima. Ibid., chapter 7. 6   Only 182 planes were sold and the government forgave a large debt. MHI and FHI made several attempts to enter the smaller business-class aircraft segment without success.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft TABLE 2-3 Japan's Postwar Military Aircraft Programs (Excluding Helicopters) Program Manufacturer/Partner, Linkage Period Number Produced Independent Japanese Programs T-1A/B Fuji Heavy Industries (FHI) 1955–1962 60 PS-1 ShinMaywa Industries 1965–1978 23 US-1 ShinMaywa Industries 1973-present 14+ T-2 Mitsubishi Heavy Industries (MHI) 1970–1987 97 F-1 Mitsubishi Heavy Industries 1974–1976 77 C-1 Kawasaki Heavy Industries (KHI) 1971–1981 29 T-4 Kawasaki Heavy Industries 1985-present 76+ Programs with American Participation F-86F MHI-North American, licensed production 1955–1960 300 T-33 KHI-Lockheed, licensed production 1954–1959 210 F-104J MHI-Lockheed, licensed production 1960–1966 210 (20 FMS) F-4EJ MHI-McDonnell, licensed production 1968–1980 138 (2 FMS) F-15J/DJ MHI-McDonnell, licensed production 1977-present 250+ (14 FMS) P-3C KHI-Lockheed, licensed production 1978-present 75+ FS-X MHI-Lockheed, codevelopment 1987-present ? NOTE: "FMS" refers to the U.S. foreign military sales program—these aircraft were direct sales undertaken in addition to those produced under license. SOURCE: Compiled from various sources by the National Research Council Working Group on U.S.-Japan Technology Linkages in Transport Aircraft. organize the industry, set overall national goals, and develop the aviation infrastructure. In Japan, direct and indirect financial assistance has been an important policy instrument for government support of the commercial aircraft industry. The second Aircraft Promotion Law of 1958 set the policy framework for promoting the civilian aircraft industry. One concrete manifestation was the organization by the Ministry of International Trade and Industry (MITI) of the Nippon Aircraft Manufacturing Company, a consortium of MHI, KHI, FHI, ShinMaywa Industries, Showa Aircraft, and Japan Aircraft, to build the YS-11 in which the government held half the equity. MITI provided more than half of the development costs and even guaranteed coverage of losses that the companies incurred in the production phase. Another example was the formation in 1971 of Japan Aeroengines, a consortium of IHI, MHI, and KHI, to develop a high-bypass engine. Once again, MITI covered half the development costs with success-conditional loans.7 Beginning in the early 1970s, MITI provided success-conditional loans for Japanese partnerships with Boeing as risk-sharing subcontractors in a development program that ultimately became the Boeing 7   Success-conditional loans are repaid as the borrower earns revenue on the targeted project.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft 767.8 In 1986, the Japanese government supported the initiation of Japanese partnership with Boeing in the 7J7 project (later put on hold) to develop a narrow-bodied civil transport. In FY 1993, the government of Japan reportedly provided 2 billion yen ($16 million) for the 777 project,9 as well as loans from the Japan Development Bank (JDB) and the Export-Import Bank for development and for aircraft imports.10 The International Aircraft Development Fund (IADF), since its establishment in 1986, has been a major vehicle for government support of Japanese participation in new international commercial aircraft programs. Establishment of the IADF reflected MITI's decision in the 1980s to foster international collaboration as the major mechanism for strengthening Japan's domestic aircraft industry. The IADF, supported by corporate member contributions and indirect government aid,11 distributes interest-free loans that must be repaid out of revenue from the project.12 Although the Japanese financial contributions to a large project such as the 777 make up only a portion of the total, it is a significant portion. The Japanese are risk-sharing partners developing 20 percent of the airframe for the 777 project, which may cost as much as $5 billion; in addition, support from the government (in the form of loans from the JDB and indirectly through the IADF) may well total $300 million to $400 million annually for the project, not to mention JDB and Export-Import Bank loans for aircraft imports that provide revenues to Boeing. Direct financial support brings benefits to foreign as well as Japanese firms (see Table 2-4). Direct financial assistance to the commercial aircraft industry has not been a major U.S. policy instrument. During the postwar period, such assistance has been extended on three occasions—$1 billion for development of the supersonic transport in the 1960s, and loan guarantees (never actually called upon) to two struggling aircraft producers. The Office of Technology Assessment (OTA) observes that these examples "pate in comparison" to direct financial assistance by other governments and that the interventions "were ad hoc, not a part of a coherent strategy to support the commercial aircraft industry."13 Reflecting differences in government policies and corporate practices, the Japanese aircraft industry made comparatively large investments in capital spending. In 1990 the U.S. aerospace industry invested $3.4 billion (2.7 percent of sales) in capital spending, while the Japanese aerospace industry spent $1 8   Loans from MITI totaled 14.7 billion yen for the development phase. According to MITI officials, the loans were more than 90 percent repaid by the summer of 1993. 9   Wing Newsletter, January 13, 1993, p. 7. 10   JDB loans in the amount of almost $1 billion were allocated for the V2500, 777, and 7J7 projects. 11   In FY 1992, 4.3 billion yen (about $40 million) was provided through MITI's budget for the V2500, 777, and YXX programs. See Nihon Kokuchukogyokai, op. cit., p. 426. 12   See Samuels, op. cit., chapter 7, for a more detailed analysis of Japanese government support for the Japanese aircraft industry. 13   U.S. Congress, Office of Technology Assessment, op. cit., p. 348.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft TABLE 2-4 Fiscal 1993 Japanese Government Aircraft Industry Support (million dollars, ¥110 per dollar) R&D and Program Support MITI total 92.5 V2500 19.3 777 18.2 YXX 5.3 HYPR 36.8 SST market studies 1 Advanced heat-resistant materials 16 Small airplane studies 1 Small engine research 0.1 Test facilities 0.1 (program support includes $5.5 million from non-MITI sources) Japan Development Bank Loans V2500, 777 and YXX 1,091 (1) Science and Technology Agency National Aerospace Laboratory 66 (2) Japan Defense Agency 1,091 (3) Other Support Japan Development Bank and Export-Import Bank loans for aircraft imports 1,597 NOTES: (1) The JDB figure is the total available—it is possible that not all of this will be lent. (2) According to the National Aerospace Laboratory (NAL), NAL budget reporting significantly overstates aeronautics funding because most personnel and overhead costs for both aeronautics and space research are reported under aeronautics. NAL aeronautics R&D funding minus overhead and salaries was about $3 million in 1993. (3) The figure given here is the budget for the Japan Defense Agency's Technical Research and Development Institute (TRDI). In 1992, over half of TRDI's budget went toward research contracted to industry in connection with the FS-X codevelopment program. SOURCE: The Wing Newsletter, January 13, 1993, pp. 7–8; Communication from National Aerospace Laboratory, July 1993; Science and Technology Agency, Indicators of Science and Technology 1993 (Tokyo: Okurasho Insatsukyoku, 1993), p. 125; and Japan Defense Agency, November 1993. billion (10 percent of sales).14 Capital equipment spending will have long-term payoffs in improved production. Furthermore, high capital expenditure encourages important forms of technological change that are not captured in the R&D figures. Large capital equipment purchases enable the Japanese firms to move quickly in adopting new, advanced production methods. The manufacturers work closely with the equipment suppliers in this process. As discussed later in this report, this focus on technical change in the manufacturing process is con 14   See AIA, op. cit., p. 160; and Nihon Kokuchukogyokai, op. cit., pp. 430, 437.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft sistent with the Japanese emphasis on cost and quality in production (rather than on overall product design) (see Tables 2-5 and 2-6). The Japanese government promotes diffusion of technology through cooperative civilian R&D projects. During the 1980s the government of Japan launched a number of R&D consortia designed to develop new technologies needed in the aircraft industry, particularly engines. The advanced turboprop engine project, for example, was supported as a Key Technology Center project beginning in 1986. The Frontier Aircraft Basic Research Center Company was established to carry out the work with 70 percent equity participation by the Key Technology Center (under MITI and the Ministry of Posts and Telecommunications) and the remaining equity provided by the 34 participating firms, TABLE 2-5 1991 Capital Spending (million dollars, ¥110 per dollar)   Total Percentage of Sales U.S. aerospace industry 4,040 2.9 Japanese aerospace industry 852 8.2 NOTE: U.S. figure for SIC codes 372 and 376. Japanese figures represent the results of a survey of 24 companies. Both sets of figures may, therefore, undercount total aircraft-related capital expenditure by not including a number of supplier firms. SOURCE: Aerospace Industries Association, Aerospace Facts and Figures 1992–1993 (Washington, D.C.: AIA, 1992) p. 160; and Nihon Kokuchukogyokai (Society of Japanese Aerospace Companies), Heisei Yonendohan Kokuchukogyo Nenkan (Aerospace Industry Yearbook 1992 Edition), (Tokyo: Koku Nyusu, 1992), pp. 430,437. TABLE 2-6 New Plant and Equipment Expenditures by U.S. Business (percentage change from preceding year in current dollars)   Actual 1991 Actual 1992 Planned 1993 (July–August 1993 survey) All industries -0.8 4.6 7.1 Manufacturing -5.1 -4.8 3.4 Aircraft 0.8 7.6 -22.1   SOURCE: U.S. Department of Commerce, Bureau of the Census.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft which included auto and machinery makers and materials fabricators. 15 The project, which ended in 1993, was carried out through distributed research and sharing of results. The project paid for new testing equipment eventually sold to the participants on depreciated terms at the end of the project. Another Key Technology Center project beginning in 1989 focused on fabrication and design technologies for aluminum-lithium alloys. Although aircraft manufacturers are not shareholders, the project provides investment funding to the aluminum manufacturers and fabricators for research likely to have important applications in the aircraft industry. Projects such as these promote the diffusion of knowhow not only throughout the aircraft industry, but also through related industries, and divide the research work in ways that create niches of unique expertise for various corporate participants. International partnerships are used strategically to foster technology acquisition. Japanese government agencies have sponsored two R&D consortia in the engine field. The first, the JFR-710 project, supported by the National Aerospace Laboratory as an experimental development project in the 1970s, provided the foundation for Japanese participation in the V2500 project.16 More recently, MITI launched the HYPR program in 1989, designed from the start as an international collaborative effort in supersonic engine technologies. Scheduled to continue until 1996, the project is funded by MITI at a level of about $37 million in FY 1993 and administered through MITI's Agency for Industrial Science and Technology and the New Energy and Industrial Technology Development Organization. The aim is research and scale demonstration of a Mach 5, methane-fueled, combined-cycle engine. The major Japanese companies (IHI, MHI and KHI) participate, along with foreign firms, which make up a total of 25 percent participation.17 The Japanese firms are the lead companies, teaming with foreign firms for various aspects of the development project (see Figure 2-1). The HYPR project is important as Japan's first attempt to organize and lead an international collaborative effort to develop advanced aviation technology. The project is also important because the Japanese government eventually revised its legislation on intellectual property rights, allowing foreign firms ownership in response to jointly organized representation from the foreign firms.18 The U.S. government funds R&D for civil applications through the National Aeronautics and Space Administration's (NASA) aeronautics program (see Tables 2-7 and 2-8). Although research supported by NASA has produced many advances, a recent National Research Council (NRC) report concludes that "the attention paid to civil aeronautics in the NASA budget is not 15   See Samuels, op. cit., chapter 8, for a more detailed analysis of the FARC project. Information about the Key Technology Center projects here is based on Samuels' more extensive analysis. 16   David C. Mowery, Alliance Politics and Economics: Multinational Joint Ventures in Commercial Aircraft (Cambridge, Mass.: Ballinger Publishing Company, 1987), pp. 91–92. 17   Foreign firms participating are United Technologies, GE, Rolls Royce, and Snecma. 18   The U.S. Department of State approves export licenses for technology transfer by participating U.S. companies.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft FIGURE 2-1 HYPR Technical R&D Responsibilities. Source: Pratt & Whitney.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft TABLE 2-7 NASA Aeronautics Programs (million dollars) Category 1993 1994 Research and development 717 957 Aeronautics (555) (877) National Aerospace Plane (4) (80) Research operations support 149 144 Research and program managementa 303 318 Construction of facilities 65 212 Total 1,234 1,631 a Includes aeronautics and national aerospace plane portions. SOURCE: National Aeronautics and Space Administration. commensurate with the importance the industry plays in the nation's economy." The NRC committee recommended that NASA review its budget and emphasize the development of technologies that will make U.S. aeronautical products more competitive.19 NASA's total budget for aeronautical R&D was $574 million in 1992; about 17 percent went to R&D contracted with industry. Although there have clearly been cases where NASA-supported programs have produced technological advances that have enhanced the competitiveness TABLE 2-8 U.S. Government Outlays for Aeronautics R&D (million dollars) Agency 1991 NASA (includes research and program management) 1,017 Department of Defense 6,792 Department of Transportation (FAA) 1,870 Total 9,679 NOTE: NASA figure includes research and development, construction of facilities, research and program management. Department of Defense figure includes research, development, and test and evaluation of aircraft and related equipment. Federal Aviation Administration figure includes research, engineering, and development; and facilities, engineering and development. SOURCE: National Aeronautics and Space Administration, "Aeronautics and Space Report of the President" (annual), appearing in Aerospace Industries Association, Aerospace Facts and Figures 1992–1993 (Washington, D.C.: AIA, 1992).

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft TABLE 2-11 U.S. Export-Import Bank (million dollars—1991) Total loan authorizations 604 Loan authorizations supporting commercial jets 0 Total guarantee authorizations 6,016 Guarantee authorizations supporting commercial jets 566 NOTE: Commercial jet category includes complete aircraft, engines, pans, and retrofits. SOURCE: Aerospace Industries Association, Aerospace Facts and Figures 1992–1993 (Washington, D.C.: AIA, 1992), p. 134. TABLE 2-12 U.S. Export-Import Bank 1992 Guarantees Supporting Commercial Jets (million dollars) Country Number Type Guarantee Brazil 2 B-737 42.3 Mexico 1 B-737 30.4 Tanzania 2 B-737 52.8 Morocco 4 B-737 114.1 Chad 5 B-737 122.6 India 4 B-747 600.0 Norway 2 B-737 42.3 Pakistan 1 B-737 30.0 China 1 MD-11 94.5 Australia 5 B-737 130.7 Poland 9 B-737 246.1 China 1 MD-11 91.3 Total 37   1,597.1 (Export Value)     (1,889.1) Total Guarantee     7,301 Authorizations         SOURCE: Aerospace Industries Association and U.S. Export-Import Bank. Like the United States, Japan is a signatory of the General Agreement on Tariffs and Trade and imposes no formal quotas on aircraft imports or formal offset requirements to increase Japanese-supplied content. Japan's three major airlines are now all formally private entities. However, U.S. manufacturers selling to Japan do feel informal pressures to source some parts in Japan in or

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft der to enhance access to Japanese airlines. The Ministry of Transportation has a major influence on the industry through its regulation of routes and fares. The Treaty of Mutual Security and Assistance with the United States, Japan's only formal security treaty, is the bedrock of the defense relationship. This 40-year-old treaty26 remains critically important to the overall bilateral relationship, although there is also a growing belief in the United States that the nature of the alliance will undergo change. The combination of threat reduction in Asia stemming from the end of the Cold War and budgetary pressures in the United States suggests that U.S. troop deployments in Asia will continue to decline, a prospect that worries some Japanese and other Asian allies. However, President Clinton's stress on the commitment of the United States to active engagement in the region and to multilateral discussions on security was well received in Japan.27 Military R&D and procurement constitute an area where U.S. and Japanese policies differ markedly. The U.S. Department of Defense (DOD) alone spent almost $7 billion in research, development, construction of facilities, and program management on aeronautics R&D in 1991 (see Figures 2-2 and 2-3).28 Japan's defense budget, compared to that of the United States, allocates a smaller share to R&D. In 1992, for example, the ratio of capital equipment expenditure (including weapons procurement) in JDA's budget was 31 percent as contrasted to 2.5 percent for R&D (see Table 2-13). In the United States, the federal aeronautics budget for R&D was $9.6 billion and the total defense budget $273 billion.29 Despite the fact that JDA's direct R&D funding is small, however, TRDI (JDA's Technical Research and Development Institute) focuses this effort on technologies that contribute to the overall industrial base. For example, emphasis on radar development and composite materials reflects an assessment that these technologies will have wide applications in both nondefense and defense areas. 30 In contrast, the DOD budget has focused increasingly in the last 15 years on areas such as stealth technologies that have no immediate applications to commercial aircraft. On the one hand, a higher percentage of aircraft production directed to military demand in Japan as compared to the United States suggests a strong effect on capital equipment spending by JDA. On the other hand, Japanese companies finance a large share of their R&D investments with their own funds, with the expectation of large, lucrative JDA procurement down the line. In the early postwar period, as mentioned earlier, Japan's military aircraft industry was reborn on the basis of production licenses from U.S. firms, negotiated with the support of the U.S. government. Since the 1970s, the United 26   The treaty was modified in 1960. 27   See, for example, Ruth Marcus, "Summit a Winner for Clinton," The Washington Post, July 10, 1993, p. Al. 28   AIA, Aerospace Facts and Figures 1992–1993 (Washington, D.C.: AIA, 1992), p. 108. 29   Outlays, by NASA, DOD, and the Department of Transportation. Ibid. pp. 18 and 108. 30   Michael W. Chinworth, Inside Japan's Defense: Technology, Economics and Strategy [Washington, D.C.: Brassey's (U.S.), 1992], pp. 42–44.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft FIGURE 2-2 DOD manufacturing technology—fixed-wing aircraft. Note: ManTech shown for fixed-wing is about 50 percent of total ManTech. Source: U.S. Department of Defense. FIGURE 2-3 Aeronautical core R&D funding—fixed-wing aircraft. Note: Tech demos, dem/vals not included. Avionics include sensors, ASW, and EW technologies. Source: U.S. Department of Defense.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft TABLE 2-13 Japan's Defense Budget for Fiscal 1993 (million dollars, ¥110 per dollar)   Amount Percentage of Total Personnel, provisions 17,632 41.8 Materiel 24,552 58.2 Equipment 9,811 23.3 R&D 1,125 2.7 Facilities 1,821 4.3 Maintenance 6,855 16.3 Base countermeasure costs 4,401 10.4 Other 540 1.3 Total 42,187 100   SOURCE: Boeicho (Japan Defense Agency), ed., Heisei Gonen Boei Hakusho (1993 Defense White Paper), (Tokyo: Okurasho Insatsukyoku, 1993), p. 333. States has attempted to increase the flow of defense-related technology from Japan. Despite the 1983 exchange of notes in which Japan agreed to exempt the United States from its political prohibition on military technology exports, and the work of the U.S.-Japan Systems and Technology Forum, the results have fallen far short of expectations. There are a number of possible explanations, including a lack of understanding about what the United States wants from Japan, as well as Japanese reluctance to transfer technologies to the United States that might be incorporated into weapons systems and retransferred abroad. Japan has strongly emphasized dual-use facilities in its defense R&D. Indeed, Japan's world-class commercial industrial base is seen as the foundation for military production. A former director of the TRDI, JDA's R&D institute, has noted that in technology there is no black or white, only gray—it becomes military or civilian in application. 31 Japan's approach to military R&D has been not to focus on technology breakthroughs, but rather to stimulate industrial sectors and technologies that have a wide range of applications, carefully arranging for a division of labor among companies that promotes building of specialized skills that complement those of other firms. Japanese companies have developed substitute components for weapons systems licensed from the United States (either because the components were "black boxed" and Japan wished to develop independent technology or as improvements on U.S.-origin technologies). These components are commonly derived from commercial products, often without Japanese government funding. In general, the Japanese consider these technologies to be nonderived and interpret provisions for exemption of commercial technologies from technology flowback arrangements with the United States quite broadly. 31   Ibid., p. 36.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft Although there are sharp contrasts in the nature of military-civilian interface in the two countries, the committee concludes that Japan does a better job of effectively utilizing its resources to promote synergies between military and civilian aircraft production. DOD procurement practices pose significant obstacles to companies that wish to promote military-civilian synergies. Accounting practices, military specifications, unique contract requirements, and policies on technical data rights all inhibit interactions and force companies to use separate plant facilities.32 The large amount that DOD spends on R&D compared with the Japanese government clearly benefits U.S. industry in supporting its technology base, but the synergy between U.S. military and commercial technology has been declining.33 In contrast to DOD's support in years past for technologies (Jet engines and swept back airfoils) with both military and defense applications, during the past 15 years, DOD has oriented its support to defense-unique technologies such as stealth and high maneuverability. In Japan, while there also exist some obstacles to military-civilian interactions related to military specifications and procurement practices, there are offsetting factors. The fact that military aircraft production is carried out by large Japanese companies with diversified production in other sectors, as well as the colocation of military and civilian production lines create opportunities for cross-fertilization of manufacturing know-how and sensitivity to the potential applications of technologies developed on the commercial side. Japan's procurement system helps to reinforce "technology highways" that link larger companies with suppliers, integrate military and civilian production, and foster an integrated and flexible dual-use technology and industrial base. In Japan, technological and commercial competence is as much a matter of national security as force deployment.34 Dramatic cuts in the U.S. defense budget in recent years have resulted in a fundamental restructuring within the industry and companies engaged in military production are pursuing a combination of downsizing, consolidation, diversification, and exit strategies. In Japan, industry observers are also worried about declining defense procurement, which is expected to hit the industry hard in the mid-1990s.35 The push toward commercial production is thus a clear im 32   Report of the Center for Strategic and International Studies Steering Committee on Security and Technology, Integrating Commercial and Military Technologies for Military Strength (Washington, D.C.: CSIS, 1991). 33   See John A. Alic, Lewis M. Branscomb, Harvey Brooks, Ashton B. Carter, and Gerald L. Epstein, Beyond Spinoff: Military and Commercial Technologies in a Changing World (Boston, Mass.: Harvard Business School Press, 1992). 34   For a detailed analysis of Japan's "technology highways" and the "protocol system" among companies, see Samuels, op. cit., chapter 8; and David B. Friedman and Richard J. Samuels, "How to Succeed Without Really Flying: The Japanese Aircraft Industry and Japan's Technology Ideology,'' in J. Frankel and M. Kahler, eds., Regionalism and Rivalry: Japan and the U.S. in Pacific Asia (University of Chicago Press, 1993). 35   In FY 1991, JDA's defense acquisition budget was cut 16.1 percent over the previous year. The Air Self-Defense Force received funds for 29 F-15 fighters rather than 42. Procurement of four AWACS ($465 million each)—which are produced in the United States by Boeing—is planned during the current

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft perative in both countries. One key question is whether Japan's aircraft industry may be particularly well positioned to capture increasing shares of the aircraft and commercial engine components manufacturing, and repair markets in the future. Based on examination of the policies (public and private) that have fostered close integration of large and small companies, flexibility of capital equipment, and tight coupling of defense and commercial production, the committee judges it likely that the already apparent trends of increasing Japanese shares in these areas, particularly components manufacturing and repair markets, will continue in the future. Planners in both Japan and the United States, attempting to adjust to the dramatic changes mentioned at the outset, are considering new approaches. In the United States, the Advanced Research Projects Agency (ARPA) is leading a new set of programs aimed at fostering defense conversion, while DOD's leadership is focusing on reducing barriers between military and civilian production through streamlined procurement in the context of a lower defense budget, and NASA has announced a new stress on aeronautical R&D. Meanwhile, a commission on the future of the airline industry has recommended policy changes relevant to that industry.36 In the United States, the approach to policy redirection appears to be largely ad hoc and uncoordinated, whereas Japan's decision-making agencies are fewer in number and work together to formulate a common vision for the industry. These differences have significant implications for U.S. and Japanese companies interested in forming partnerships. A Japanese company interested in forming a technology linkage with a potential U.S. partner coordinates with a smaller number of key actors in government than does the U.S. company (see Table 2-14). Within the government, MITI is the major player, but interactions with JDA are also required with respect to military programs. MITI's Aircraft and Ordnance Division, which plays the central role in policy formulation, has shifted policy focus on "national production" (kokusanka ) to international joint ventures.37 Japan's major aircraft companies and suppliers are members of the Society of Japanese Aerospace Companies (SJAC), which sometimes acts as coordinator (as has been the case with the international consortium on commercial aircraft components and foreign missions such as the recent trip to Russia) and Keidanren's Defense Production Committee. In contrast to the situation in the United States, the number of actors is smaller, the major players     1991–1995 plan. Japanese defense planners worry that procurement of two in FY 1993 will account for a large share of JDA's total defense procurement budget for all services. See Barbara Warmer, "Japanese Defense Industry Grapples with Post-Cold War Conversion," JEI Report , No. 12A, April 2, 1993. 36   See National Commission to Ensure a Strong Competitive Airline Industry, Change, Challenge and Competition: A Report to the President and Congress (Washington, D.C.: U.S. Government Printing Office, 1993). 37   Michael Green, Kokusanka: FSK and Japan's Search for Autonomous Defense Production (MIT Japan Program Working Paper, 1990).

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft TABLE 2-14 Major Policy Checkpoints for Companies Forming International Technology Linkages Government Industry Japan MITI SJAC Aircraft and Ordnance Division Aircraft Industry Council AIST   JDA Keidanren Defense Equipment Bureau, Aircraft Division Procurement Office TRDI Air Self-Defense Staff Tech Department Production Committee STA   National Aerospace Laboratory   Related Organizations IADF   United Statesa Department of Commerce AIA International Trade Administration, Aerospace, Trade Development International Economic Policy, Japan Bureau of Export Administration Industrial Resources Administration National Security Preparedness Division Technology Administration American League for Exports and Security Assistance Department of Defense   International Security Affairs, Japan Desk Defense Security Assistance Agency Acquisitions, International Programs ARPA Defense Technology Security Assistance Administration Military Services   Department of State   Bureau of East Asia-Pacific, Political Affairs Bureau of Political Military Affairs, National Security Defense Relations, Security Assistance Center for Defense Trade Bureau of Economic and Business Affairs   U.S. Trade Representative   a Consultations differ, depending on the program. The FS-X project involved consultations with most of these agencies. SOURCE: Based on memos provided to the committee by Michael Green and Gregg Rubinstein.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft overlap, and the process is oriented toward quiet advance coordination among business and government. A U.S. company considering a technology linkage with a Japanese counterpart interacts with a more complex maze of U.S. agencies and regulations. In the case of a military project, the company must consult with a variety of offices within DOD, including the Japan desk of what is now Regional Security Affairs; the Defense Security Assistance Agency (DSAA), which coordinates defense sales and licensed production; and the Defense Technology Security Administration, which oversees technology transfer and export licenses for DOD.38 All military export applications are submitted to and approved by the Department of State, Office of Defense Trade Control. For military or commercial projects, a U.S. company is well advised to consult with the Department of Commerce (the International Trade Administration and the Bureau of Export Administration) as well as the State Department. Under normal procedures, approval of licenses is handled by the licensing offices of the various departments in coordination with the relevant program offices and country desks. However, official evaluation of military aircraft programs is complicated by the arbitrary division of responsibility in DOD for sales/licensed production and cooperative R&D programs in two separate and often uncoordinated bureaucratic entities (Undersecretary for Policy, DSAA and the Undersecretary for Acquisition, Dual-use Technology Policy & International Programs). This has often led to inconsistency in DOD positions on Japan programs, as well as problems in coordinating with other agencies. The increased role of the Department of Commerce in recent years reflects a recognition that the U.S. industrial/technology base is both a defense and an economic policy concern, but in practice, effective coordination among DOD, Commerce, and State is often difficult. In controversial cases, senior executive branch officials participate in an interagency process coordinated through the National Security Council or the National Economic Council and draw the attention of members of Congress and research organizations such as the General Accounting Office. 39 In Japan, the process of policy evaluation and adjustment is also multifaceted, but the locus of activity is clear: MITI and the industry. Japanese industry and government became more realistic in the 1980s concerning obstacles to becoming a world-class player in aircraft; MITI can not and does not direct the industry, but develops policy jointly with industry. Compared to other sectors such as computers and semiconductors, which are also the focus of policy, MITI has considerable influence over the aerospace industry because industry is 38   In addition, the Office of International Programs has jurisdiction relating to R&D programs (as does ARPA potentially), and consultations with the military services are essential for all cooperative projects involving military aircraft. 39   This material is summarized from memos prepared for the committee by Michael Green and Gregg Rubinstein.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft still highly dependent on JDA procurement, has not moved offshore, and is restricted from defense exports. Japanese government and industry continue to look ahead to the future, planning new programs and policy adjustments. In past months, a series of new studies, working groups and international missions have been organized to consider critical decisions relevant to the future of the industry (see Table 2-15). For example, MITI and the Ministry of Transportation in cooperation with SJAC have formed a committee to study requirements for the High Speed Commercial Transport (HSCT). The purpose is reported as developing a "Japanese proposal" for presentation to Boeing and Airbus concerning future specifications and domestic infrastructure requirements. Meanwhile, MITI, JDA, and SJAC are reportedly formulating a domestic development program for a medium-sized transport that can be used for military and commercial purposes. JDA has set up two working groups to look at defense procurement and R&D activities in defense technology. Some of this work, such as the HSCT study, will be made public. Other activities, such as the JDA working groups, will continue discussions for a number of months with no expectation of producing published reports. International linkages are very much a focus of planning. SJAC recently sent a mission to Russia, with a resulting plan to invite Russian engine specialists to Japan and expand access of Japanese companies to Russian test facilities.40 Airbus has, meanwhile, expressed interest in cooperating with Japan's committee examining HSCT issues. In the context of the U.S.-Japan Systems and Technology Forum, one new cooperative project on ducted rocket engine technology was initiated and others are in the planning stage. As the development stage is completed on the FS-X, it is expected that negotiations will begin on production. All of these efforts will feed into a process that provides Japan with the option for aircraft production in the twenty-first century. Many of the same individuals are key participants in all of the Japanese studies and missions. It may be some time before a change in Japan's official policy is formally articulated. In the meantime, a process of information gathering, foreign travel, discussion, and exchange will take place that builds a common framework for making choices. In this process, industry and government interact as partners who share a common overarching goal. Japan has more alternatives for international partnerships than ever before in the postwar period. With whom and how to form linkages of various sorts are major considerations. Increasingly, Japanese companies are experimenting with diverse partnerships that involve more than one foreign company. Further diversification of international linkages seems likely, but geopolitical questions remain, such as whether Japan and Russia can resolve their lingering World 40   U.S. firms are also expanding their linkages to Russia. For example, Pratt & Whitney will supply engines and Collins will supply avionics for the new Ilyushin IL-96M aircraft, which reportedly will sell at a cost far below similar sized airplanes now on the market.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft Table 2-15 Aircraft Industry-Related Studies in Japan 1. Requirements for HSCT and Very Large Transport MITI and the Ministry of Transportation, in cooperation with SJAC, are forming a ''Committee to Promote the Introduction of Next-Generation Aircraft." Including representation from the four heavies and the three largest airlines, the committee will study demand for the superjumbo and HSCT. The purpose will be twofold: (1) to present a "Japanese proposal" to airframe manufacturers concerning the specifications of these future aircraft; and (2) to study the domestic infrastructure implications of introducing them (Nihon Keizai Shimbun, April 13, 1993). 2. SJAC-Russia Joint Programs A mid-May 1993 SJAC mission to Russia resulted in an agreement to invite Russian engine specialists to Japan and for Japanese companies to gain access to Russian test facilities (Japan Digest, May 27, 1993). 3. Multipurpose Medium Aircraft A joint planning committee of MITI, JDA, and SJAC has reportedly been charged with formulating a domestic development program for a medium-sized transport that could be used by domestic airlines and by JDA for transport and antisubmarine roles. Total production volume is anticipated to be 300–500 (Nikkan Kogyo Shimbun, January 19, 1993). 4. Second-Generation SST Studies Since 1987, the Supersonic Transport Development and Survey Committee of SJAC has conducted studies under commission from MITI on the airframe specifications for next-generation SSTs, so that key technologies could be identified and developed (Kokusai Koku Uchu, December 1992). 5. YS-X Transport MITI funding continues for research on the 75–100 twin-turbofan. Japan would take the lead in an international partnership (Aviation Week and Space Technology, June 1, 1992). 6. YXX/7J7 Transport MITI funding for this 100+ seat transport has continued, although future prospects are uncertain. 7. Study on the Future of the Japanese Aircraft Industry A MITI-led study was mentioned by Keidanren Defense Production Committee during a July 25, 1993 meeting with the NRC committee. 8. Basic Technology for Advanced Stealth Aircraft TRDI is reportedly proposing work on a proof-of-concept aircraft to begin as FS-X and OH-X development winds down in 1995 (Aerospace Japan-Weekly, June 14, 1993). 9. C-X Transport and T-X Trainer These are indigenous aircraft programs reportedly being considered by JDA. Connection between C-X and dual-use transport (item 3 above) is unclear (Aerospace Japan-Weekly, June 14, 1993). 10. Test Facilities Planning continues for new aircraft and rocket engine testing facilities under the auspices of TRDI (Aviation Week and Space Technology, August 24, 1992). 11. International Composites Program Press reports during the summer of 1992 described a new MITI program researching applications of lightweight composite materials for supersonic aircraft. The proposed program would run for six years, cost $240 million, and be open to foreign participation (Aviation Week and Space Technology, August 3, 1992).

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft 12. JDA Advisory Committees JDA's Equipment bureau has reportedly formed two advisory committees that do not appear to be connected with any particular potential program on Defense Equipment Procurement and on Defense Industry Technology. (Source: Mutual Defense Assistance Office.)   SOURCE: Compiled by National Research Council Committee on U.S.-Japan Aircraft Linkages from various sources. War II era territorial dispute over the Northern Territories. Another consideration is whether Boeing will pursue an ever-broadening and deepening role for Japanese companies. Airbus has been exploring cooperation with Japan, with success seen in expanded sales of aircraft in recent years. The Japanese policy and business environment allows industry to gain maximum leverage from international alliances and procurements, resulting in a gradual upgrading of independent technological capabilities and diffusion of those skills across civilian and military production and among the major contractors and the many subcontractors in Japan's aircraft manufacturing network. The Japanese aircraft industry does not carry out full independent integration of airframes, but it has become a major player in the subsystems and components areas and, with the support of the government, has built significant indigenous capabilities. Japan has achieved increasing independence and growing technological strength by promoting international linkages, particularly in the defense area.41 Japan is pursuing international linkages and the development of indigenous capabilities simultaneously, skillfully managing international cooperation to derive maximum gains in terms of autonomous development. 41   See Samuels, op. cit., chapter 8 for an analysis of "the paradox of autonomy through dependence." Samuels outlines how technology agreements permit the accumulation of skills with broad competitive implications. In this process, the government of Japan has played a strong role in managing competition and providing incentives for cooperative activities.