5
Conclusions And Policy Recommendations

THE GLOBAL CONTEXT AND U.S. NATIONAL INTERESTS

Aircraft manufacturing is critical to America's long-term economic growth and national security. In terms of the economy, it is a major factor in domestic employment and international trade; in terms of security, U.S. airpower has played a major role in strategic nuclear deterrence, and the Gulf War clearly demonstrated the importance of modern, technically advanced aircraft to America's military superiority. Additionally, this industry is global—not only in its markets and its basic mission, but also in its industrial structure, technical talent, and financing. Finally, aircraft development requires enormous capital investments (tens of billions of dollars) whereas payback is achieved only over the long term and individual programs face a high risk of never breaking even. It is this combination of factors that makes the aircraft industry both unique and of significant national importance. Thus, it has historically been singled out for government support—particularly through advanced research funding by the National Aeronautics and Space Administration (NASA) and through R&D and production funding by the U.S. Department of Defense (DOD).



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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft 5 Conclusions And Policy Recommendations THE GLOBAL CONTEXT AND U.S. NATIONAL INTERESTS Aircraft manufacturing is critical to America's long-term economic growth and national security. In terms of the economy, it is a major factor in domestic employment and international trade; in terms of security, U.S. airpower has played a major role in strategic nuclear deterrence, and the Gulf War clearly demonstrated the importance of modern, technically advanced aircraft to America's military superiority. Additionally, this industry is global—not only in its markets and its basic mission, but also in its industrial structure, technical talent, and financing. Finally, aircraft development requires enormous capital investments (tens of billions of dollars) whereas payback is achieved only over the long term and individual programs face a high risk of never breaking even. It is this combination of factors that makes the aircraft industry both unique and of significant national importance. Thus, it has historically been singled out for government support—particularly through advanced research funding by the National Aeronautics and Space Administration (NASA) and through R&D and production funding by the U.S. Department of Defense (DOD).

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft Today, the U.S. aircraft industry remains a world leader, but significant adjustments will be needed for it to remain so in the future. Over the next decade, U.S. industry will continue to come under increasing international competitive pressure. The aircraft industries of Europe, Japan, Russia, Taiwan, China, and other nations are aggressively seeking opportunities to tap into the expected long-term growth in commercial aircraft markets. Forecasts for growth in the Asian market are particularly impressive. Heightened international competition will take place in an environment of unprecedented U.S. industry restructuring as a result of dramatic reductions in the defense budget. Therefore, U.S. industry will be severely challenged over the next decade just to hold its current position in global aircraft manufacturing. Achieving growth in global market share will be an even more difficult task. This study of U.S.-Japan alliances illustrates the key features of this evolving global competitive environment and highlights the broad challenges faced by the U.S. aircraft industry. In order to reenergize U.S. leadership in the face of these challenges, a new approach must be developed by industry and government. Conclusion • Leadership in aircraft design and manufacturing—including a full spectrum supply chain—remains a vital U.S. national interest. In order for the United States to maintain its leadership position in this critically important industry, it is essential that aircraft be singled out for specific, strong, government-industry partnering in the development and implementation of a long-term strategy. THE JAPANESE AIRCRAFT INDUSTRY Japan is currently a significant player in global aircraft manufacturing. Japanese companies are formidable competitors in a number of aircraft subsystem and component areas. Although Japanese industry is not competing today at the prime integrator level, Japan already possesses or could acquire the capabilities needed to do so. The committee has seen that Japan is making the long-term investments necessary to be a world leader in air transport design, development, and manufacturing. Japan's primary strength lies in the manufacturing capabilities of its companies, and Japanese firms are focusing on low cost and high quality as differentiating factors. Japan has established an aircraft industry as a matter of national policy with managed internal competition but with a resilience to changing economic conditions. Technological, financial, and human resources are leveraged across civil-military, supplier-prime, and horizontal interfaces to maximize industry's long-term competitive position. Strong industry-government partnership in formulating and implementing strategies in the aircraft industry has long been

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft a key feature of the Japanese environment. These characteristics of the Japanese aircraft industry will serve it well as it seeks to expand its global presence in the post-Cold War competitive environment. Japan is committed to deepening its capabilities across a range of aircraft-related technologies and to increasing its presence in the commercial aircraft market.1 Japan's current strategy is to develop international linkages to achieve these goals. Japan has more options today in terms of international linkages than it has ever had (Russia, Europe, etc.), and U.S. government and industry should not assume that they have a lock on the action. Conclusion • Japanese industry's role in global aircraft manufacturing, design, and technology development will continue to grow. Japanese industry retains an option to enter the market as a prime integrator and/or to further expand the scope of its international alliances. Although currently facing difficulties, the Japanese industry has inherent strengths that will see it through the current downturn and allow it to emerge as a more formidable competitor in both established and emerging areas. U.S.-JAPAN TECHNOLOGY LINKAGES The 40-year modern history of cooperation between the United States and Japan in the aircraft, and associated subsystem, industries has been mainly positive for both sides. Japan has used linkages to build its technological and manufacturing capabilities in military and commercial aircraft production. American industry has earned significant revenues from Japan through aircraft sales and licensing, as well as the benefits of effective business partnerships. Characteristic linkage mechanisms have evolved from licensed manufacturing of U.S. designs to the present stage in which a number of alliances involve the design of significant components and subsystems by Japanese aerospace companies. We now appear to be entering a new stage, partly spurred by several Japanese initiatives, of more extensive cooperation in major aerospace R&D programs (such as the FS-X and HYPR). U.S.-Japan linkages can continue on a constructive basis, provided there is balance and fairness in the flow of technologies. Here, the challenge for the United States is to continue to build effective U.S.-Japan relationships, while 1   Recent news reports on renewed efforts to line up partners for a YS-X feasibility study and Mitsubishi Heavy Industries' (MHI) participation in Bombardier's Global Express business jet program (MHI will manufacture the wings and center fuselage) underscore the intention of Japanese industry and government to push forward in aircraft despite tough economic times. See Christopher J. Chipello, "Bombardier Board Approves Plans for Corporate Jet," Wall Street Journal, December 20, 1993, p. As; and "YSX, Nichi-Bei-O-Chu de Kaihatsu" (YSX to Be Developed by Japanese-U.S.-European-Chinese Partnership), Nihon Keizai Shimbun , December 28, 1993, p. 1.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft developing a sharper focus on defining the technologies that we want to flow to U.S. industry, as well as those that we should maintain domestically. In maintaining its leadership and meeting the global competition, the overall U.S. approach must not be "protectionist" or "defensive" but proactive—to maintain U.S. leadership and enhance U.S. capabilities. Markets and technology development in this industry are global—Japan and the rest of Asia are of increasing importance in both areas. U.S.-Japan and other international technology linkages are facts of life and likely to increase globally in this industry. Efforts must be made to structure alliances with Japan so that they enhance U.S. access to Japanese technology, markets, and capital. Conclusion • The challenge for U.S. industry and government is to stay ahead, using technology linkages with Japan as part of a strategy to build capabilities needed for a strong domestic manufacturing and technology base and an industry consistently capable of effective global competition. DEVELOPING A U.S. STRATEGY The majority of the actions needed to maintain America's leadership position in the aircraft industry and to ensure mutually beneficial relationships between American and Japanese firms must be the responsibility of the U.S. aircraft industry itself—both prime integrators and the supplier base. However, it is also clearly necessary for the U.S. government to create a favorable overall environment for these actions, as well as play a specific role in creating incentives or actually making selected, limited investments. Providing the desired overall environment and assistance requires both a long-range strategy and an institutional structure to implement it. Currently, neither the strategy nor the needed institutional mechanisms exist. The committee therefore recommends a five-part strategy to address U.S.-Japan relationships and the larger competitive challenges facing the U.S. aircraft industry. The objectives are to revitalize U.S. aviation leadership (both in technology and in market share) and to maintain a significant, full-spectrum domestic engineering and manufacturing base. The five elements of a comprehensive U.S. strategy include: 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.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft Maintaining U.S. Technological Leadership U.S. leadership in aviation is largely the result of a continuous, long-term stream of investment that has supported the development of a wide range of advanced technologies. This investment has come from the private and the public sectors. 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. Industry, NASA, and DOD all have a vital role to play; and other agencies (Department of Transportation/Federal Aviation Administration, Department of Energy, Office of Science and Technology Policy, National Economic Council) also are significantly involved. Clearly, aviation is an area in which the best policy for future U.S. economic growth is to stay ahead. Other nations, including Japan, Europe, Russia, and China, are focused on this industrial sector, and U.S. industry's technological lead has narrowed considerably in recent years. For some time the civilian aviation arena has been characterized by incremental technological advance, rather than by dramatic breakthroughs comparable to the high-bypass engine. Partly for this reason, aircraft manufacturers currently face intense price pressure. The Japanese have recognized this trend and are now focusing on low-cost, high-quality manufacturing as a differentiating feature. For U.S. industry to survive and grow in this environment, the United States should take steps to overhaul and refocus aircraft-related R&D activities. What the United States must do is strive for quantum improvements in the application of process as well as product technologies. This will involve setting and meeting concrete targets—such as lowering the unit and life-cycle costs of aircraft and of air travel for advanced subsonic aircraft and the next-generation high-speed transports by one-third or more. The entire system will need to be addressed—from the cost of aircraft and engines, to fuel efficiency, maintenance, reliability, and airport air and ground operations. This will require a significant restructuring of the large R&D investments government makes—mainly through NASA and DOD—in order to achieve greater efficiency and commercial impact. The committee supports NASA's recent initiatives to increase research on subsonic aircraft and propulsion systems. NASA should continue on this course by aggressively increasing its emphasis on developing cost-effective, product-applicable technologies, increasing the flow-through of R&D funding to industry, and supporting greater cooperative efforts among U.S. companies. Particularly in the subsonic area, an important focus should be on lowering the cost to industry of incorporating new technology in aircraft and related systems. Although greater attention and resources should be devoted to advanced subsonic aircraft, NASA's partnership with industry in high-speed civil transport research should also continue as a high priority. The Department of Defense aircraft R&D budget for enabling technologies must be maintained at current levels despite overall cuts in the defense budget

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft (see Figures 2-2 and 2-3). DOD should also reorder its procurement and R&D funding priorities to promote integration of military and civilian systems. As in the case of NASA funding, more emphasis should be placed on cost-effective technologies. The issue of civil-military integration is treated in more detail below in the discussion of revitalizing U.S. manufacturing capabilities, but this goal should be a focus of Department of Defense R&D spending as well. The committee is encouraged by recent initiatives2 and the stated positions of DOD officials, but the barriers to changing old ways of thinking and doing business should not be underestimated. Some aspects of the Japanese experience are instructive. For example, working with fly-by-wire technology on the T-2 trainer helped maintain Japanese industry's strong position in primary actuation, and Japanese strength in microwave integrated circuits for civilian applications contributed to the development of the FS-X phased array radar. In addition, U.S. industry must continue to invest its own resources in new technology development. For many aircraft and aerospace companies, this is a difficult prospect in the current environment. Even companies that now have a healthy cash flow may be reluctant to make long-term investments because of uncertainties related to ongoing industry restructuring. In addition, the recently renewed R&D tax credit does not serve as an incentive for companies shifting from military to commercial applications unless the overall amount of R&D spending increases. By working closely with industry in its technology development programs and modifying the tax credit, government could help industry maintain the necessary level of R&D investment. Finally, cutting-edge academic research in fields such as computational fluid dynamics also makes a substantial contribution to U.S. capabilities. A number of government agencies fund relevant academic research (NASA; DOD through the Advanced Research Projects Agency, Air Force Office of Scientific Research, and Office of Naval Research, and the National Science Foundation). Currently, there is no coordination of this investment across agencies. In recent years the federal government had begun to coordinate some of its technology activities through the Federal Coordinating Council on Science, Engineering and Technology, an initiative that the current Administration has consolidated with other interagency policy councils, establishing the National Science and Technology Council. The High Performance Computing and Communication Initiative is another good example. Agencies funding aeronautical research at universities should establish a similar committee that incorporates industry input in order to achieve a better focus on work relevant to industry. 2   An Advanced Research Projects Agency initiative on ''low-cost aircraft'' and an Air Force initiative on "lean aircraft manufacturing" are recent examples.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft Recommendations The 35 percent increase in NASA aeronautics R&D funding for fiscal 1994 is a step in the right direction, and efforts should be made to continue this percentage increase for the next three years, primarily through reallocation within NASA.3 NASA should further expand its enabling technology R&D programs in subsonic aeronautics and propulsion systems, with the primary objective of reducing the initial investment and operating cost of future aircraft and subsystems. NASA's traditional role in basic research should be expanded to include nearer-term, product-applicable technologies. This will involve support for more technology demonstrations aimed at lowering the cost to produce, operate, and support aircraft incorporating new technology. NASA should significantly increase the share of aeronautics funding contracted to industry (currently 17 percent) with the objective of reaching 50 percent over the next five years, in particular, targeting technologies relevant to suppliers. DOD should maintain the current level of R&D support allocated for the development of advanced "enabling" technologies for the aircraft industry at both the prime and, particularly, the subcontractor levels. The committee supports other groups that have called for the R&D tax credit, which was recently extended for two years, to be made permanent.4 It also believes that a mechanism should be developed to avoid penalizing companies that reorient their R&D from defense-unique to dual-use or commercial areas. The focus should be on creating incentives for greater commercial and dual-use R&D investments, even if the level of defense R&D is reduced. An interagency body should be created to coordinate—with industry cooperation—federal government investment in university and national laboratory research in aerodynamics and other related fields (e.g., computer science and materials science). Revitalizing U.S. Manufacturing Capabilities In view of the global competitive environment of continuing cost pressures on aircraft manufacturers, U.S. primes and suppliers will have to continually improve manufacturing performance in terms of cost, quality, and delivery to remain competitive. This is especially critical in light of the large investments in state-of-the-art equipment being made by the Japanese aircraft industry. While some U.S. companies are making the necessary investments, many are 3   By using the FY 1994 authorization of $1.69 billion as a baseline, this would imply an aeronautics budget of about $4 billion in FY 1997. 4   See National Science Board, The Competitive Strength of U.S. Industrial Science and Technology: Strategic Issues (Washington, D.C.: U.S. Government Printing Office, 1992), p. 46; and Competitiveness Policy Council, A Competitiveness Strategy for America (Washington, D.C.: U.S. Government Printing Office, 1993), p. 19.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft finding it difficult because of the current commercial aircraft slump and defense cutbacks. Although an aircraft industry structure with fewer U.S. players at various levels is perhaps inevitable, it is important that the remaining companies—particularly the supplier networks—have the wherewithal to match or exceed the manufacturing performance of Japanese and other international competitors. There are four major aspects to ensuring that the U.S. aircraft industry develops world-class manufacturing capability. First, companies themselves must make the necessary investments in new equipment. Other groups have called for the reintroduction of an investment tax credit.5 Although the committee is well aware of the severe budget environment, its view is that a tax incentive structured to encourage companies in this capital-intensive industry to stay on the cutting edge of manufacturing technology would be in the national interest. The second requirement for revitalizing U.S. manufacturing capabilities in aircraft is greater civil-military integration to increase the economic impact of DOD aircraft spending. This should be a priority in DOD aircraft R&D, production, and support investments. DOD spending has a pervasive influence on the business activities of aircraft companies—including investment and manufacturing. Over time, there has been a dramatic widening of the gap between military and civilian aircraft R&D, engineering, and production within firms in the United States. This is apparent in the major technical issues that have become the focus of military aircraft development over the past several decades, such as stealth and high maneuverability, which have little commercial relevance. Although DOD will continue to have some unique requirements, efforts to increase the dual-use applicability of defense systems and components wherever possible would lower procurement costs and support the commercial competitiveness of defense contractors. The benefits to industry of a more dual-use oriented defense industrial base might be greatest in terms of manufacturing. For example, both Boeing and McDonnell Douglas have found it prudent to separate military and commercial transport work because of the significantly higher administrative and other costs associated with defense contract work. The potential benefits of removing these barriers are likely to be even greater in the supplier base. Thus, DOD must provide incentives for companies to integrate their military and commercial production, and reduce the huge barriers to civil-military integration—including cost-accounting standards, military specifications, procurement practices, and rebalancing DOD's stress on performance versus cost. The Japanese aircraft industry is achieving plant integration in its advanced aircraft manufacturing operations—in areas such as composites and metal parts—for the FS-X fighter and the 777 transport. The committee commends recent 5   Council on Competitiveness, Technology Policy Implementation Assessment 1993, (Washington, D.C.: Council on Competitiveness, 1993), p. 6.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft statements by DOD officials indicating that tackling this problem is a top priority, and urges timely and vigorous follow-through. A third requirement for ensuring a strong U.S. aircraft manufacturing base is building more effective vertical relationships between firms at all levels of the supply chain. The importance of these relationships for advancing state-of-the-art manufacturing is obvious in some areas—such as the relationship between structures manufacturers and machine tool builders. Effective supplier relations can significantly improve design and manufacturing performance in terms of cost, quality, and cycle time throughout the aircraft manufacturing infrastructure. This is one of the key strengths of the Japanese aircraft industry. Most of the responsibility for building vertical links that improve the performance of the U.S. aircraft manufacturing system lies with the companies themselves. There is evidence that a number of U.S. primes and suppliers are making positive changes—particularly on the commercial side of the aircraft business, where some primes are increasingly recognizing the long-term benefits of closer, more stable links with suppliers and are instituting programs that help increase supplier capabilities. However, policy changes should create incentives that support and expedite this process, particularly on the defense side. Although the Department of Defense has made efforts to encourage more effective relationships, further changes in R&D and procurement funding contract mechanisms could encourage closer cooperation between U.S. firms and their suppliers, leading to lower costs and greater technology sharing in the long run. The occasional practice of "breaking out," or putting the supply of parts for ongoing programs up for international competitive bids, has an especially adverse impact on the supplier base. R&D and procurement funding and contract mechanisms should encourage, rather than discourage, cooperation among U.S. companies. The fourth aspect of revitalizing U.S. aircraft manufacturing is R&D. Of the additional funding for aeronautics and aircraft-related R&D recommended above by the committee, a significant portion should be devoted to process technology development. DOD's Mantech program is an existing mechanism that a number of U.S. companies have found delivers significant benefits. Recommendations In order to maintain global leadership, U.S. aircraft manufacturers—both primes and suppliers—must invest in high-quality advanced manufacturing processes that will position them to compete as low-cost, high-quality, low cycle time producers in the years ahead. Introduction of a tax incentive for productivity-enhancing investments should be studied. The tax credit should be targeted to investments by lower-tier suppliers in technologies considered critical, or to investments in advanced manufacturing equipment and training. The Department of Defense should reform the procurement system to promote greater civil-military integration. This reform should include more

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft extensive use of commercial item descriptions, greater emphasis on low cost and high quality in addition to performance, provision of data bases and training to enhance the use of commercial specifications, 6 and increased use of commercially available components and processes. Perhaps most important, DOD should reduce, to the extent possible, barriers to utilizing common manufacturing facilities for military and civilian aircraft production through revision of its accounting and oversight requirements, military specifications and standards, and procurement practices.7 The committee concurs with recent Defense Science Board recommendations on low volume production and further recommends that DOD explore steps toward revitalizing U.S. aircraft manufacturing capability, such as carrying prototype aircraft systems and subsystems forward in limited quantity fabrication in order to demonstrate low-cost "manufacturability" in addition to specified performance.8 The Department of Defense should modify its procurement and R&D funding mechanisms to eliminate current disincentives for long-term prime-supplier relationships that enhance quality and lower costs. As part of a stronger emphasis on technologies that are applicable in the near term and contribute to lowering aircraft and air travel costs, NASA and DOD aircraft-related R&D programs should place a high priority on manufacturing and design processes. Encourage Mutually Beneficial Interaction with Japan The committee recognizes that U.S.-Japan alliances that transfer or develop technology are a fact of life in this industry. Cooperation with Japan has delivered significant benefits to the U.S. aircraft industry over the years, which have been outlined above in the discussion of distinctive features of U.S.-Japan linkages. Yet technology transfer to Japan also carries risks for individual companies and U.S. industry as a whole. In addition, the environment surrounding U.S.-Japan linkages has evolved significantly. Japan's growing technological and manufacturing capabilities, as well as the passing of the Cold War context in which alliances were structured in the past, necessitate a new approach by the United States to ensure that the benefits of cooperation are maximized and the risks are managed. U.S. government and industry must create new mechanisms and devote additional resources to encouraging mutually beneficial U.S.-Japan relationships in several key areas: (1) technical information management and technol 6   See Center for Strategic and International Studies, Integrating Commercial and Military Technologies for National Strength (Washington, D.C.: CSIS, 1991) for a detailed analysis of more specific options on specifications and fostering military-civilian synergies. 7   For example, DOD's Manufacturing Quality Requirements have been revised recently to permit integration of civilian and military production in the electronics area. 8   See Defense Science Board, 1991 Summer Study on Weapon Development and Production Technology (Washington, D.C.: Office of the Under Secretary of Defense for Acquisition, 1991).

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft ogy benchmarking; (2) identification, valuation, and control of critical technologies; and (3) education and training. Although Japan-related activities may require special attention and greater resources, it should not be the sole focus of this new approach—the U.S. aircraft industry's technology linkages are global, and greater efforts to maximize the benefits of international cooperation should reflect this. Information Management and Technology Benchmarking Competitiveness in high-technology industries such as aircraft depends to a great extent on how quickly products can be brought to market. Reducing design and production time requires an efficient use of resources, both human and technical. The U.S. technology infrastructure is loosely linked, and initiative has a strong "bottoms-up" orientation. This structure promotes innovation but often inhibits the diffusion of technology. The U.S. government, by virtue of its broad information collection capabilities, is in a unique position to gather, package, and disseminate useful technical and business information from global sources to U.S. industry. Although this is an appropriate general role for government, collection, coordination, and dissemination efforts require a stronger industry focus than they have received up to now. Aeronautics could be a test case for a new approach. The U.S. government already has several programs that are relevant to this effort. For example, the Japan Technology Evaluation Center (JTEC) overseen by the National Science Foundation (NSF) has conducted numerous studies in recent years that benchmark Japanese technologies. Several of these studies have been funded by NASA or DOD and have examined aerospace-related technologies such as advanced composites and supersonic/hypersonic propulsion. In addition to existing programs with relevance to Japan, other U.S. government agencies collect, translate, and disseminate a variety of technical and business-related information of potential use to the U.S. aircraft industry.9 What is required is a coordination mechanism with strong industry input that focuses these efforts. The most logical place for this coordination function is the Technology Administration of the Department of Commerce. This effort should ensure that U.S. government information activities are tied to U.S. industry needs, and should permit a broader spectrum of U.S. industry to access usable knowledge on Japanese aircraft technologies and industry activities. The committee believes that it is also necessary, as part of this new effort, to support U.S. industry access to information through an industry outpost in Japan. Although most of the large U.S. aerospace companies maintain a presence in Japan, and the American Aerospace Industry in Japan (AAIJ) repre 9   Another relevant activity is the information exchange being launched between NASA and Japan's National Space Development Agency. See Laurie Harrison, Glenn P. Hoetker, and Thomas F. Lahr, "Access to Japanese Aerospace-Related Scientific and Technical Information: The NASA Aerospace Database," Japanese Technical Literature Bulletin, June 1993, p. 1.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft sents their common interests, many smaller U.S. companies do not have the resources to maintain a Tokyo office. Even the large companies focus their Japan efforts primarily on marketing rather than on technology access and related issues. A U.S. government-funded industry outpost in Japan—directed by a technically trained American fluent in Japanese—could serve as a source of "on the ground" information and as a liaison to Japanese government and industry. For example, some Japanese government advisory committees (shingikai) have invited foreign participation in recent years. The U.S. industry liaison would be available to participate in—or at least track—these advisory activities. Another area in which new approaches to dissemination are needed is information on the flowback of Japanese technical improvements and indigenous Japanese technologies through specific U.S.-Japan military aircraft programs—most notably the FS-X. The Department of Defense and the Department of Commerce are already making a contribution in this area, but additional efforts are necessary. For example, the wide range of opinions expressed about the value of FS-X technologies such as the composite wing and advanced avionics to U.S. industry illustrates the need for a more systematic effort. Sufficient resources should be made available for the responsible agencies to catalogue and distribute flowback data on an industry-wide basis. Identification, Valuation, and Protection of Critical Technologies U.S. government involvement in technology linkages between U.S. aircraft manufacturers and international partners has occurred mainly in the context of the export control system. U.S. government involvement has been extensive where government-to-government agreements on bilateral or multilateral military programs are required (F-15 licensed production and FS-X codevelopment with Japan; F-16 coproduction with several European nations). Even for purely commercial links, export licenses are sometimes required because of the dual-use character of the technologies involved (Boeing's joint work with Japan on the M), and in rare cases, alliances have been the subject of discussions at the highest levels of government (the formation of CFM International). The future U.S. government role in international transfers of aircraft technology is unclear. There has been a relaxation of export controls resulting from the end of the Cold War. The committee believes that white this is mainly a positive trend, it is important that the United States, for national security reasons, retain export controls on a limited number of critical aerospace technologies.10 The committee further believes that outside the few identifiable critical areas covered by export controls, actual negotiations for technology transfer and 10   A longer-term reorganization of the system to increase clarity and user friendliness may be necessary, as outlined in the National Research Council report Finding Common Ground—U.S. Export Controls in a Changed Global Environment (Washington, D.C.: National Academy Press, 1991).

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft other international collaboration are the responsibility of U.S. companies (or teams of U.S. companies) negotiating with prospective Japanese partners or the Japanese government. Companies themselves are normally the best judges of what relationships will serve their own long-term growth and interests, but national and corporate interests sometimes diverge. In addition, the long-term impacts of technology transfers are often difficult to predict. In the U.S.-Japan context, the semiconductor industry provides a useful example. U.S. companies licensed the key basic technologies for semiconductor manufacturing to Japanese industry in the 1960s, under conditions in which access to the Japanese market was severely limited.11 It was not until years later that the Japanese semiconductor industry developed into a formidable competitor. The U.S. aircraft industry has often transferred technology abroad in order to enhance market access, in many cases without a commensurate return technology flow. This historical pattern is understandable given the large gap in technological capabilities that often existed between U.S. industry and most foreign partners. However, in the current environment of intense global competition, U.S. industry cannot afford to ignore the increasing sophistication of its overseas partners and must aggressively pursue a balanced flow of technology wherever possible. Especially in the current business context in which international alliances are a fact of life, U.S. industry must make the best deals possible. Yet what distinguishes "good deals" from "bad deals"? Although even experts might differ over particular cases, the accumulated knowledge and expertise of U.S. industry regarding technology transfer in international alliances constitute a valuable resource. Past experience and current imperatives suggest the need for an independent body to develop guidelines for technology transfer consistent with national interests. More systematic consideration should be given to identifying and protecting critical aeronautical technologies at both the company and the industry levels. The committee believes that a most promising approach is to establish a new mechanism aimed at drawing on and disseminating the accumulated knowledge of industry and other experts. This effort led by the private sector could be a valuable resource for companies as they negotiate international technology alliances, the ultimate goal being to expand the data base required to properly value corporate technological assets and to structure international cooperation that brings clear economic and technological benefits to the United States. This could be accomplished by a working subgroup of a new National Aviation Advisory Committee, which is described in greater detail below. This activity ideally should incorporate the following tasks: Publish and periodically update a description of the critical technologies for the aircraft industry, to be used as an informal input for company decision 11   See National Research Council, U.S.-Japan Strategic Alliances in the Semiconductor Industry (Washington, D.C.: National Academy Press, 1992), pp. 11–12.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft making and for government R&D funding and international benchmarking activities. Develop guidelines covering the international transfer of commercial aerospace technology—including the development of data and methods for valuing technology—that would help corporate managements make and objectively evaluate technology transfer decisions. Carry out periodic assessments of international technology transfers and measure progress toward increasing the flow of aerospace technology into the United States, including acquiring the data needed to undertake these assessments. Education and Training American universities and research institutions play mainly a background role in U.S.-Japan linkages in the commercial aircraft industry. Nevertheless, this role can have a crucial impact on moving toward more productive and balanced technology linkages. This occurs primarily through the training of American engineers, scientists, and managers in Japanese language and area studies. Educational programs at American universities constitute an important vehicle for building awareness of Japan as a global competitor, and for providing students with the information and skills needed to interact with the Japanese in a more productive way (presumably enabling an enhanced flow of technology from Japan to the United States). A number of university programs have been established in recent years to train young scientists, engineers, and other professionals in Japanese language and technology management. Three years ago, DOD (through the Air Force Office of Scientific Research) launched a mechanism to fund such programs, in order to increase the effectiveness of those already existing and to spur the formation of new centers. 12 As a result, a larger pipeline exists for training technologists and managers to operate effectively in a Japanese environment. Several U.S. aircraft companies are hiring graduates of these programs. Closer interaction between industry and university programs of this type would lead to mutually beneficial impacts, including employment of qualified graduates, internships for students, and training programs tailored to industry needs. Education and training also have a bearing on technology outflow. In addition to technology transferred to overseas partners through licensing agreements, some technology flows out inadvertently as a result of inexperience or lack of training. Many employees do not realize that valuable technology can be transferred in a casual conversation or in activities such as a presentation to a professional society. Nor do they realize that their company's commercial technology may be specifically targeted by their foreign competitor or would-be 12   National Research Council Committee to Assess U.S.-Japan Industry and Technology Management Training Programs, Interim Report (Washington, D.C.: National Academy Press, 1993).

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft competitor. "Ego" also comes into play as engineers try to impress their foreign contacts with their knowledge and accomplishments, a characteristic encouraged by potential foreign competitors eager to acquire technology. It is in the general interest of U.S. industry to lessen this inadvertent technology outflow. Training programs and processes patterned after those used to protect DOD classified technology and information should be instituted at an industry level for companies establishing international alliances. The objective of the training and processes would be to make all employees knowledgeable of what type of technology should be protected and what they must do to protect it. In addition, employees who are going to interface regularly with foreign competitors should, whenever possible, learn the language of their counterparts. This could be augmented by Japan-specific training for negotiations and technical interaction—perhaps instituted as an industry outreach activity by one or more of the university-based Japan technology management centers. Recommendations The Department of Commerce should consider using the aircraft industry as a test case for a new approach to coordinating information collection and dissemination activities in various agencies, the goal being to increase the utility of government information to industry. This effort should incorporate regular technology benchmarking and include the establishment of a small aircraft industry outpost in Japan. The Departments of Defense and Commerce should devote additional resources to a systematic program of cataloguing, evaluating, and disseminating to industry information about technology flowback and indigenous Japanese technologies in connection with the FS-X and other collaborative military aircraft programs. An important goal of this effort should be to establish a basis for making judgments about the potential value of this technology to DOD and U.S. industry, and to improve U.S. access to Japanese manufacturing technology when there are both a demonstrated U.S. need and potential users. One of the central tasks of a new National Aviation Advisory Committee should be to support U.S. industry decision making in the areas of critical technologies and international technology transfer. A working subgroup of the new committee should identify critical technologies, develop guidelines for the transfer of aerospace technology, and conduct periodic assessments of international technology flows. University-based programs that provide Japanese language and management training to young technologists and other professionals should strengthen interactions with the U.S. aircraft industry to help meet industry's need for managers and technologists who can interact effectively with Japanese counterparts. The U.S. aircraft industry should collaborate to develop a training program for employees involved in technology exchange to enhance protection

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft of critical technologies and effective technology transfer (both inflow and outflow) where appropriate. Ensuring a Level Playing Field for International Competition Japan has no formal barriers to aircraft imports, and to this point its industry subsidies have not caused massive distortions of international markets. However, in light of heightened international competition in all segments of the aircraft industry and the inclination of governments to be heavily involved in the development of national industries, U.S. trade policy must be a key element in any U.S. strategy for the aircraft industry. Continued U.S. leadership in aircraft requires that trade policy support fair global competition by limiting massive government subsidies to competitors. Although the issue was set aside in the agreement reached in the Uruguay Round negotiations of the General Agreement on Tariffs and Trade (GATT), it may be possible to gain agreement on multilateral trade rules that protect the interests of the U.S. aircraft industry. Goals for such an agreement include the multilateralization of last year's bilateral Agreement on Large Aircraft (which bans production supports and limits new program development financing) between the United States and the European Community, as well as a strong Subsidies Code agreement that applies to aircraft and provides for disciplines on export subsidies and a dispute settlement mechanism. Trade negotiations are particularly important in light of the emergence of new aircraft manufacturers not currently bound by all of the relevant GATT disciplines (Russia, China, and Taiwan). In formulating strategies for multilateral negotiations, the U.S. Trade Representative should work closely with industry. Another aspect of supporting U.S. industry's position in international markets is the financing support of the Export-Import Bank. Export-Import Bank financing was very important to U.S. aircraft exporters during the 1970s, but its role declined during the 1980s. Over the past two or three years, Export-Import Bank guarantees have again become an important factor in the export of U.S. aircraft due to the deterioration in the financial strength of airlines worldwide. The U.S. government should ensure that Export-Import Bank guarantee and lending authority for aircraft exports is sufficient to meet sales opportunities. Recommendations In order to support the position of the U.S. aircraft industry in international trade and ensure a level playing field, the U.S. government should strive through trade negotiations to achieve multilateral rules that will govern and reduce subsidies.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft The U.S. government should also maintain recently increased Export-Import Bank guarantee and loan authority to the extent needed to take advantage of export opportunities. Developing a Shared U.S. Vision The committee believes that the four elements of a U.S. aircraft industry strategy and the associated recommendations for action outlined above are necessary and stand on their own terms. However, the critical importance of this industry and the rapidly changing context demand ongoing high-level attention to these issues in order to ensure that a strategy is implemented. Continued American leadership in this industry also requires that the United States foster more effective working relationships within industry and between industry and government. This study of U.S.-Japan aircraft linkages and the Japanese aircraft industry highlights the need for a new approach. The committee has seen how Japan's aircraft industry—both prime contractors and suppliers—works with government to maintain and constantly upgrade skills and technological capabilities. Despite the industry's small size and the fact that Japanese companies are not among the major global players in prime integration, Japanese aircraft manufacturers are well established as key suppliers in the global markets for commercial transports and engines, mainly as partners in programs led by U.S. primes. Over time, the level and sophistication of Japanese participation in these programs have steadily increased. Strong, stable relationships between Japanese primes and suppliers ensure that technologies are diffused and benefit the entire aircraft manufacturing network. The Japanese aircraft industry currently faces a number of challenges as a result of civilian and military market contractions and exchange rate shifts, but the committee believes that the industry's demonstrated ability to function as a system will allow it to weather these shocks and emerge as a stronger global partner and competitor in the future. International alliances, particularly those with U.S. companies, have played and continue to play an important role in the development of the Japanese industry. Collaboration on both the military and the commercial sides has been supported by the Japanese government and has been structured to ensure a steady flow of aircraft-related technologies from abroad, as well as to provide opportunities for Japanese companies to develop and enhance indigenous technological strengths through their program participation. Although the U.S. aircraft industry has great strengths, and it would not be possible or desirable to duplicate the Japanese system here, contrasting our situation with Japan's highlights the challenges that we face and the critical need to cooperate and utilize resources more effectively. The United States spends a significant amount on aircraft-related R&D, yet its technological lead has narrowed in recent years. Although it would be impossible and

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft counterproductive to ensure that every aircraft prime contractor and supplier remains viable during the current period of restructuring, we face a greater risk of losing some critical capabilities altogether because our prime-supplier relations are more arm's length and less extensive than Japan's.13 Although larger U.S. aircraft companies have gained demonstrable business and even technological benefits from their relationships with Japan, the impacts on the supplier base have not been as beneficial, and the bargaining power of even the strongest U.S. companies has been affected by the necessity of competing with each other in negotiations with a coordinated Japanese industry. As has been pointed out elsewhere in this report, the major challenges faced by the U.S. aircraft industry are broad and generic—current weakness in the global market for commercial aircraft, declining defense procurement, and tough competition from a range of established and new international players. Competition from Airbus is obviously immediate and significant in airframe integration, and other national industries such as Russia's may pose a challenge in the future. Although this assessment demonstrates the need for a shared vision for the U.S. aircraft industry, developing this vision will require a comprehensive approach. In order for the U.S. aircraft industry to maintain a full spectrum of design, technical, and manufacturing activities in the United States and link itself more effectively with foreign economies, it will be necessary for U.S. stakeholders to find more effective ways of working with each other. In policy terms, this means that we need a mechanism to build consensus and implement strategy on an ongoing basis, as well as to remove unnecessary obstacles to cooperation that exist in the United States. The committee considered several alternative mechanisms for developing a shared vision for U.S. aircraft industry development and for providing a continuing focus for the associated tasks identified above (developing investment and R&D incentives, identifying critical technologies, assessing international technology transfer, and developing guidelines for these transfers). One possibility would be to charge NASA or another existing agency with the task. Indeed, until it was reformulated as NASA and given responsibility for leading the space program, the main task of the National Advisory Committee for Aeronautics (NACA) was to perform R&D and provide research infrastructure to ensure U.S. leadership in aviation. In terms of the circumstances that exist today, the major disadvantage of reconstituting NACA, charging NASA with the task, or undertaking some other form of government reorganization are that more than a redirection in R&D policy is necessary, and the policy questions come under the purview of a number of agencies. Existing private sector committees such as the NASA Advisory Council or the Defense Science Board that advise individual agencies on their R&D programs could perform specific tasks 13   For a comparison of the approaches taken by Japanese and U.S. aircraft suppliers in the face of periodic downturns, see David Friedman, Getting Industry to Stick: Creating High Value Added Production Regions in the United States (Cambridge, Mass.: MIT Japan Program, 1993).

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft related to developing a U.S. vision. However, these existing advisory committees share with their corresponding agencies a lack of breadth that constitutes a compelling reason for not designating one of them as the focal point. Another alternative would be for the Aerospace Industries Association (AIA) to play a leading role, perhaps in combination with other industry associations. AIA conducts ongoing technology road map activities for the industry and can be expected to make further contributions toward addressing the issues raised in this study. There are, however, other factors that argue against an industry association serving as the focal point for formulating a shared vision and undertaking the associated tasks. In addition to incorporating a wide range of industry views—including suppliers—rivate sector input to this process will need to incorporate viewpoints and expertise outside of the industry in order to represent the broader national interest. A final alternative would be an industry-government committee similar to the National Advisory Committee on Semiconductors (NACS), which was established by Congress with members appointed by the President. 14 NACS issued several reports over the years of its existence and disbanded in 1992. Although some experts credit NACS with helping to foster a closer industry-government partnership that has contributed to the resurgence of the U.S. semiconductor industry, others argue that its effectiveness was limited by political and other factors. Still, some useful insights can be drawn from this mixed experience. Clearly, a private sector advisory group cannot be fully effective in absence of government interest in its advice and willingness to incorporate that advice into policymaking. From the preceding consideration of alternatives, several necessary characteristics for an effective new institutional mechanism can be identified: (1) it should have high-quality industry membership, but not be constituted or perceived as representing a ''special interest''; (2) it should be a means to deliver regularized private sector input on policy questions of an interagency nature, preferably delivering that input to a high-level interagency group of officials; and (3) the effort to develop a shared vision for the aircraft industry must be supported by senior government and industry leadership. In order to accomplish the task of consensus building and strategy implementation, the committee recommends the creation of a National Aviation Advisory Committee (NAAC) to report to an interagency group of responsible government officials. The primary responsiblity of the National Aviation Advisory Committee should be to create and further the implementation of a national vision for aerospace industrial development in the United States. Because of the interagency nature of this responsibility—reflected in many of the recommendations above—the committee suggests that this group report to the National Economic Council (NEC) or other appropriate group with interagency 14   See National Advisory Committee on Semiconductors, A National Strategy for Semiconductors (Washington, D.C.: U.S. Government Printing Office, 1992).

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft responsibilities. The White House is already leading an interagency effort to reassess U.S. aeronautics and space policies, the effectiveness of which could be enhanced by regularized private sector input.15 The NEC should take advantage of this existing effort in forming NAAC. As a channel for building private sector consensus on policy issues related to aircraft manufacturing, and by providing guidance for the wide variety of agency activities that affect the industry, NAAC would be a focal point for developing a shared vision and an effective strategy for the U.S. aircraft industry. The National Aviation Advisory Committee would be composed of knowledgeable leaders from industry, academia, and elsewhere who could represent the national interest. Senior members of the government could attend meetings of this advisory committee in an ex officio capacity. To be effective, such a committee would need the full cooperation of the critical industrial sectors of the aircraft industry, including the lower-tier suppliers. NAAC could function well with a staff of two or three professionals detailed from industry or government agencies with responsibilities in aeronautics. The activities of NAAC could be reviewed periodically, and its agenda restructured as appropriate. The overall objective must be to maintain the leadership position of the U.S. aircraft (and its supplier) industry, and to maintain a strong domestic engineering and manufacturing base. Besides developing a shared vision, other necessary tasks have been enumerated above: suggesting changes in tax and other policies to encourage capital investment and R&D by U.S. aircraft manufacturers, identifying critical technologies, developing guidelines for international technology transfer, and assessing international technology flows. As part of its mission, the National Aviation Advisory Committee should further the implementation of the other key recommendations made above, including new policies that promote rather than discourage civil-military integration, as well as greater commitment of resources and focus in government R&D programs on product-applicable aerospace technologies. The National Aviation Advisory Committee should also be specifically charged with generating recommendations for policies to achieve balanced international flows of technology and symmetrical access. This task is central to continuing U.S. leadership in the global aerospace industry. In the past, Japan has utilized mandatory technology transfer to strengthen the technology base of its industries and enable companies to compete in global markets. Working with both U.S. primes and suppliers, NAAC should stimulate the development of new approaches—including incentives for transferring and utilizing technology from abroad—that advance the collective interests of the U.S. aircraft industry vis-à-vis the Japanese and other global industries. A further important task is the removal of unnecessary barriers to cooperation between companies. In recent years, laws and regulations have moved in a 15   "Washington Outlook," Aviation Week & Space Technology, September 27, 1993, p. 21.

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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft positive direction on this front. This has led to encouraging developments in the aircraft industry—the partnership between U.S. companies and NASA on the High Speed Civil Transport program, and collaboration between GE and Pratt & Whitney in negotiations with the Japanese government on the HYPR program. U.S. antitrust laws and enforcement must continue to move toward a recognition that competition in many high-technology industries—particularly the aircraft industry—is global. Collaboration at the U.S. industry level should be permitted and extended to the supplier level in order to conserve resources in technology and program development, to respond quickly to global market needs with superior products, and—perhaps most important in the context of this report—to allow individual firms to work together when appropriate in bargaining with potential foreign partners so that they and the U.S. economy as a whole maximize the benefits of international collaboration. Recommendations • In order to implement the steps outlined here and provide an ongoing focus for strategy building for the U.S. aircraft industry, the committee recommends an independent National Aviation Advisory Committee be established by the National Economic Council.