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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft 1 Introduction The strong position that the U.S. aviation industry holds in the world today represents one of America's great industrial success stories. The U.S. aerospace industry, a major exporter, supplies more than half of the world market and ranks sixth among U.S. industries in total sales. (See Appendix A for an analysis of the importance of the U.S. aircraft industry.) Many of the competencies built in this R&D-intensive industry diffuse to other industries and contribute to the overall economy. The industry is in a real sense a major national asset. The U.S. leadership position in aircraft is the result of a continuous stream of investments in new technologies across a broad spectrum. Substantial support has come from government-funded projects that have spun off commercial applications—the J52 engine formed the core for the Pratt & Whitney JT8D engine on the DC-9; the core of the GE F110 engine for the F-16 was used as a basis for development of the CFM56 engine for the 737, A320, A321, and A340. Commercial aircraft are tested in National Aeronautics and Space Administration (NASA) wind tunnels, and NASA's work in areas such as computational fluid dynamics helped Boeing locate the nacelles on the wings of the 737, 757, and 767 to minimize drag.1 At the same time, technology employed in commercial transports is often used in military programs, and commercial aircraft produc 1 See U.S. Congress, Office of Technology Assessment (OTA), Competing Economies—America, Europe and the Pacific Rim (Washington, D.C.: U.S. Government Printing Office, 1991), p. 347.
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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft tion increasingly contributes to maintaining the supplier and work skill base, and produces cost economies for companies that manufacture both civilian and military aircraft. The critical questions for this study are whether the United States can maintain its lead in the future, and the likely impacts of U.S.-Japan technology transfer and engineering relationships, broadly defined as technology linkages.2 Japan's aircraft industry has generally been assumed unlikely to move into the ranks of the global leaders. A major purpose of this study, carried out by a committee of individuals with considerable experience in the industry and knowledge of Japan, was to reexamine that assumption and to look ahead to the future. The third in a series of studies on technology linkages organized by the National Research Council's Committee on Japan, this study, which included a committee study trip to Japan, was carried out during 1993 with support from the Defense and Commerce Departments and from the Japan-United States Friendship Commission. A number of important contextual changes suggest that the future will be different from the past. Global competition is intensifying. Airbus rapidly increased its sales in Japan in 1991 and 1992, overtaking McDonnell Douglas.3 Industry experts predict that Asia will play a major role in global demand in the 1990s and the first decade of the next century.4 Over the next decade, or until new technology developments permit the introduction of supersonic and hypersonic transport aircraft, the committee believes that leadership in global competition will increasingly go to the firms emphasizing high-quality, low-cost manufacturing. This is precisely the area that the Japanese have made their top priority. A major transformation is occurring in the industry as defense spending declines with the end of the Cold War. In the past, U.S. defense procurement drove R&D and capital spending in important segments of the industry and aircraft-related technologies. Today, the U.S. aircraft industry is struggling to adjust to these historic changes in a difficult context—a downturn in demand for commercial transports during the past few years. In Japan, where the U.S.-Japan alliance has formed the cornerstone of Japan's defense policy, declines in military procurement are also beginning to force hard choices.5 President 2 Technology linkages include company-to-company activities (sales and maintenance agreements, licensed production, joint production or development, equity arrangements), as well as relationships involving governments and universities. See National Research Council, U.S.-Japan Technology Linkages in Biotechnology and U.S.-Japan Strategic Alliances in the Semiconductor Industry (Washington, D.C.: National Academy Press, 1992), for a detailed discussion of the term and approaches to analysis. 3 These data were provided by GE Aircraft Engines. Airbus has sold to Japan Air Systems, a relatively new domestic airline. Japan Airlines (JAL) and All Nippon Airways (ANA) generally continue to purchase Boeing airplanes. 4 Boeing Commercial Airplane Group, 1993 Current Market Outlook, March 1993, p. 3.5. 5 Japan Defense Agency (JDA) officials emphasized this point in discussions with the committee during their trip to Japan in June 1993. For example, AWACS purchases will comprise 30 percent of Japan's aircraft procurement budget in the next few years. In August of 1993 it was reported that the
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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft Clinton has made it clear that the United States will maintain its military presence in Asia, at the same time working with Japan to build new multilateral approaches to security in the region. However, this is a time of political change in Japan accompanied by a reexamination of fundamental principles. This climate of change and uncertainty is the larger context within which the U.S. transport aircraft industry must compete and cooperate with Japan.6 Although this study is primarily concerned with Japan, it is clear that U.S. leadership has been and will continue to be challenged by other industrialized countries that view aviation as fundamental to their economic growth. This report contains frequent references and comparisons to Europe and other parts of the world. The central issues dealt with in this study are generic ones—what are the benefits and what are the risks associated with expanding technological linkages? The committee begins with the premise, well substantiated by previous National Research Council (NRC) studies, that international technological linkages are a fact of life. In the aircraft industry the primary U.S. participants are private companies who seek investment partners, entry to markets, reliable suppliers with world-class manufacturing, and cooperators in new technology development. Japan is the world's second largest country market for aircraft, most of them purchased from U.S. firms.7 Although the committee did not study linkages with other countries in the same depth as those with Japan, overall the linkages and alliances that the U.S. aircraft industry undertakes with Japan are more significant—in both business and technological terms—than linkages with any other single country.8 On the commercial side, for example, the links that U.S. airframe manufacturers have with industries in China and Italy do not involve the extensive design collaboration that exists in Boeing's Japanese alliances. On the military side, Japan is still the only ally that has been allowed to produce the McDonnell Douglas F-15 under license, and most experts agree that the extensive interaction and technology flow contemplated in the FS-X program go far beyond what has been attempted in collaborative programs with other countries. A major motivation for U.S. linkages with Japanese firms—market leverage—is analogous to the motivation driving military offset deals concluded by Japanese Diet approved a plan drafted by the Japanese Ministry of Finance that will limit increase in JDA's budget for FY 1994 to about 1.9 percent (about $818 million) over the FY 1993 budget of $42 billion. See Barbara Wanner, "Defense White Paper Stresses Regional Threats," JEI Report, No.31b, August 20, 1993, p. 3. 6 In June of 1993, the Nihon Keizai Shimbun reported that Kawasaki Heavy Industries had agreed to provide British Aerospace with advanced production control techniques for application to a missile production facility. See "Kawaju no Kanri Gijustu Donyu" (Introducing KHI's Management Technology), Nihon Keizai Shimbun, June 8, 1993, p. 1. 7 The cumulative total of deliveries of jet airplanes to Japan through 1992 was $32.6 billion, with Boeing providing the bulk of them (data provided by Boeing). 8 The significance of U.S.-Japan linkages varies across segments in relative terms. For example, although U.S.-Japan alliances are extensive and important in aircraft engines, the CFM International joint venture between General Electric and Snecma of France is clearly the most significant international link by U.S. industry in this segment of the industry.
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High-Stakes Aviation: U.S.-Japan Technology Linkages in Transport Aircraft U.S. aircraft companies, and in some cases joint ventures involving companies from other countries. However, the available evidence indicates that no other country has achieved the level of success that Japan has thus far in leveraging international alliances to build and sustain a domestic aircraft industry.9 This is because Japan's significance as a market and strategic partner has given it more leverage, and because the Japanese aircraft industry—working closely with the Japanese government—has taken better advantage of the opportunities afforded by alliances. From the Japanese perspective, a significant share of overall aircraft industry sales is derived from projects involving a U.S. linkage.10 Perhaps the main concern is that these linkages will, however, result in the building of strong commercial competitors by expanded transfer of U.S. technology abroad. Although normally framed in terms of the potential emergence of new airframe integrators, the downside risks affect even more directly the U.S. suppliers of subsystems and components, some subsegments of which are already losing market share to foreign firms. The U.S. aircraft industry, broadly defined to include the networks of related technical expertise and manufacturing capabilities that link the primary manufacturers and the suppliers, is a major national asset. The focus of this report is Japan—as a partner in both cooperation and competition—but the questions are generic, and it is hoped that the answers will contribute to building effective national policy, public and private, for the twenty-first century. The chapters that follow provide a summary of the committee's analysis and recommendations. Chapter 2 provides a brief introduction to the historical evolution of Japan's aircraft industry and the overall policy context in Japan and the United States. Chapter 3 analyzes U.S.-Japan technology linkages in transport aircraft and draws conclusions about impacts on the United States. Chapter 4 outlines alternative scenarios for the future. Chapters 5 outlines policy issues and recommendations. Readers are encouraged to refer to the appendixes of this report for detailed information and assessment. 9 The members of Airbus Industrie have, of course, taken a very different path. They have leveraged their existing domestic capabilities in pursuing global market share through a multinational alliance. 10 Between 1987 and 1991, Japan's aerospace exports to the United States more than doubled. See Aerospace Industries Association, Aerospace Facts and Figures 1992–1993 (Washington, D.C.: AIA, 1992), p. 122.
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