Policy Issues in Aerospace Offsets

Report of a Workshop

Charles W. Wessner and Alan Wm. Wolff, Editors

Based on a National Research Council Workshop held on June 9, 1997, in Washington, D.C.

Board on Science, Technology, and Economic Policy

National Research Council

NATIONAL ACADEMY PRESS
Washington, D.C.
1997



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Policy Issues in Aerospace Offsets Report of a Workshop Charles W. Wessner and Alan Wm. Wolff, Editors Based on a National Research Council Workshop held on June 9, 1997, in Washington, D.C. Board on Science, Technology, and Economic Policy National Research Council NATIONAL ACADEMY PRESS Washington, D.C. 1997

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NATIONAL ACADEMY PRESS 2101 Constitution Avenue, N.W. Washington, DC 20418 The National Academy of Sciences is a private, nonprofit society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by Congress in 1863, the Academy has a mandate that requires it to advise the federal government on science and technical matters. Dr. Bruce Alberts is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. William A. Wulf is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Bruce Alberts and Dr. William A. Wulf are chairman and vice chairman, respectively, of the National Research Council. Limited copies are available from: Board on Science, Technology, and Economic Policy National Research Council 2101 Constitution Ave., N.W. Washington, DC 20418 202-334-2200 Additional copies are available for sale from: National Academy Press Box 285 2101 Constitution Ave., N.W. Washington, DC 20055 800-624-6242 202-334-3313 (in the Washington Metropolitan Area) International Standard Book Number 0-309-05840-6 Copyright 1997 by the National Academy of Sciences. All rights reserved. Printed in the United States of America

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BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY For the National Research Council, this project was overseen by the Board on Science, Technology, and Economic Policy (STEP), a standing board of the NRC established by the National Academies of Sciences and Engineering and the Institute of Medicine in 1991. The mandate of the STEP Board is to integrate understanding of scientific, technological, and economic elements in the formulation of national policies to promote the economic well-being of the United States. A distinctive characteristic of STEP's approach is its frequent interactions with public and private sector decisionmakers. STEP bridges the disciplines of business management, engineering, economics, and the social sciences to bring diverse expertise to bear on pressing public policy questions. The members of the STEP Board and the NRC staff are listed below: A. Michael Spence, chair Dean, Graduate School of Business Stanford University Stanford, California James F. Gibbons Professor of Engineering Stanford University Stanford, California George N. Hatsopoulos President, Chief Executive Officer Thermo Electron Corporation Waltham, Massachusetts Dale Jorgenson Frederic Eaton Abbe Professor of Economics Harvard University Cambridge, Massachusetts Ralph Landau Consulting Professor of Economics Stanford University Stanford, California James T. Lynn Adviser Lazard Freres Bethesda, Maryland Burton John McMurtry General Partner Technology Venture Investors Menlo Park, California Stephen A. Merrill Executive Director Lena L. Lawrence Administrative Assistant Ruben Mettler, vice chair Chairman and Chief Executive Officer (ret.) TRW, Inc. Los Angeles, California Mark B. Myers Senior Vice President Xerox Corporation Stamford, Connecticut James M. Poterba Professor of Economics Massachusetts Institute of Technology Cambridge, Massachusetts Paul M. Romer Professor of Economics Graduate School of Business Stanford University Stanford, California William J. Spencer Chairman and Chief Executive Officer SEMATECH Austin, Texas Joseph E. Stiglitz Senior Vice President for Development Economics The World Bank Washington, D.C. Alan Wm. Wolff Managing Partner Dewey Ballantine Washington, D.C. STAFF Charles W. Wessner Program Director George Georgountzos Program Associate

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BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY STEERING GROUP ON POLICY ISSUES IN AEROSPACE OFFSETS Alan Wm. Wolff, chair Managing Partner Dewey Ballantine Washington, D.C. James F. Gibbons Professor of Engineering Stanford University Stanford, California Dale Jorgenson Frederic Eaton Abbe Professor of Economics Harvard University Cambridge, Massachusetts Ruben Mettler Chairman and Chief Executive Officer (ret.) TRW, Inc. Los Angeles, California Mark B. Myers Senior Vice President Xerox Corporation Stamford, Connecticut William J. Spencer Chairman and Chief Executive Officer SEMATECH Austin, Texas PROJECT STAFF Charles W. Wessner Director George Georgountzos Associate

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BOARD ON SCIENCE, TECHNOLOGY, AND ECONOMIC POLICY SPONSORS The National Research Council gratefully acknowledges the support of the following sponsors: The White House National Economic Council The Department of Commerce Bureau of Export Administration and International Trade Administration The Department of Defense The Under Secretary of Defense for Acquisition and Technology Office of the Deputy Under Secretary for Industrial Affairs & Installations and Office of the Deputy Under Secretary for International and Commercial Programs The Defense Advanced Research Projects Agency Program Support for the Board on Science, Technology, and Economic Policy is provided by a grant from the Alfred P. Sloan Foundation Any opinions expressed in this publication are those of the participants and do not necessarily reflect the views of the project sponsors.

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The Board on Science, Technology, and Economic Policy wishes to acknowledge the many fine contributions of the symposium speakers and participants from universities and thinktanks, the aerospace companies and unions, and the government agencies concerned with the future of this strategic industry. The Board would particularly like to thank the White House National Economic Council for its leadership. The Board also wishes to express its appreciation to one of its members, Ambassador Alan Wm. Wolff, who generously made himself available to serve as chairman of this project. Special recognition is due to Dr. Charles Wessner and Mr. George Georgountzos for their exceptional effort in developing the workshop program and preparing the summary report in what was, by any measure, a remarkably short period.

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Contents Preface   ix Introduction   1     Welcome: Wm. A. Wulf, President, National Academy of Engineering   1     Opening Remarks: Gene Sperling, White House National Economic Council   1     Workshop Introduction: Alan Wm. Wolff, Board on Science, Technology, and Economic Policy   2 Panel 1: Overview of the Offsets Issue Charles W. Wessner, Moderator   4     The U.S. Aircraft Industry in a Global Market Robert Trice, Lockheed Martin   4     Origins, Definitions, and Consequences of Offsets David Mowery, University of California at Berkeley   5     Strategies for Success in the Commercial Aircraft Market Raymond Waldmann, Boeing Company   6     Ready or Not: Competing in a Global Economy William Greider, Rolling Stone Magazine   6     Discussion   7 Panel 2: Direct and Indirect Offsets Gregory Martin, Moderator   9     Operational Perspectives, George Soteropoulos, General Electric Gordon Healy, Belt Helicopter Michal Stephen, Litton Industries   9     Assumptions and Questions Randy Barber, Center for Economic Organizing   11     Discussion   12 Panel 3: Technological Dimensions of National Security William Keller, Moderator   13     Alliance Politics, Defense Trade, and Technology Transfer Paul Hoeper, Department of Defense   13     Offsets: Drivers and Technological and Policy Consequences Carol Evans, Georgetown University   14     New Technologies: Battlefield Advantage from Not-So-New Technologies Lee Buchanan, DARPA   15     Holding the Technological Edge James Sinnett, McDonnell Douglas   16     Discussion   16

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Luncheon Address: The Policy Challenge of Aerospace Offsets Senator Jeff Bingaman   18 Panel 4: Can Offsets Create Foreign Competitors? William Reinsch, Moderator   20     Japanese Capabilities and Dynamic Effects Richard Samuels, Massachusetts Institute of Technology   20     The Airbus Experience Sally Bath, Department of Commerce   22     Strategic Alliances in Engine Technologies Richard Ridge, General Electric   23     The Special Challenge of China Greg Mastel, Economic Strategy Institute   24     Discussion   25 Panel 5: Differing Impacts of Offsets on Key Suppliers and Sub-Tier Producers Christine Fisher, Moderator   27     Is Anyone There? Monitoring U.S. Strategic Interests Kirk Bozdogan, Massachusetts Institute of Technology   27     New Technologies: Opportunities and Challenges John Terranova, Tolo, Inc.   28     Current Trends in Offsets Karen Zuckerstein, General Accounting Office   29     Direct Costs of Indirect Offsets Lora Lumpe, Federation of American Scientists   30     Discussion   30 Panel 6: Do Offsets Cost or Keep Jobs? Mortimer Downey, Moderator   32     Trends and Issues in Aerospace Employment Robert Scott, Economic Policy Institute   32     Developing Competitors Chip Block, Veda, Inc.   33     Maintaining High Value-Added Exports Amidst Structural Change, Joel Johnson, Aerospace Industries Association   33     What Level of Concern Should Government Have? Owen Herrnstadt, International Association of Machinists and Aerospace Workers   34     Discussion   35 An Overview of the Issues: What, If Anything, Needs to be Done? Alan Wm. Wolff, Board on Science, Technology, and Economic Policy   37 Appendixes         Issues Paper   41     Global Trends in Defense Aerospace   44     Workshop Participants   49 Bibliography   54

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Preface In February of this year the National Research Council Board on Science, Technology, and Economic Policy was asked to consider a request by the White House National Economic Council (NEC) to organize a major workshop to examine the pressures facing U.S. companies to grant offsets in the increasingly competitive global aerospace markets for both defense and commercial aircraft and related products.1 While cognizant of the definitional and analytical challenges associated with this subject, the Board accepted the NEC's request. In accepting this task, the Board's principal concern was that in the timeframe required for this report, the Board would not be able to work through the analytical difficulties and overcome the data limitations associated with offsets. Consequently, the Board agreed to organize a comprehensive workshop and prepare a summary report of the workshop which would not, however, include recommendations or findings. Planning for the workshop began in earnest at the beginning of May and the workshop was held at the National Academy of Sciences building on June 9. The agenda for the meeting is reflected in the table of contents. A list of speakers and participants is available in the appendix to this report, as is an issues paper distributed at the workshop. The overarching objective of the workshop was to provide a forum in which the various parties with an interest in aerospace offsets could come together to express their views on the practices, rationale, and current or future impact of offsets on U.S. national security, the competitiveness of the U.S. economy, and domestic employment in the aerospace industry. As requested by the NEC, specific attention was directed to the impact of offsets on key suppliers and sub-tier producers in this important part of the U.S. industrial base. The workshop did not address a cluster of issues sometimes associated with offsets. Domestic or foreign outsourcing decisions taken on the basis of commercial considerations were outside the purview of the meeting, as were, at the other end of the spectrum, issues of arms control and proliferation. The focus of the meeting was commercial and military offsets, both direct and indirect, which companies are required to grant in order to complete sales of large systems. This area of inquiry proved to be more than adequate for the deliberations of a single workshop. Indeed, the quality and density of the workshop presentations were a challenge to summarize. Every effort was made to capture the main points and supporting arguments of each speaker within the limitations of the time and space available. We apologize in advance for any inadvertent errors or omissions in the summaries of the participants' presentations. The objective of this summary workshop report is to provide the reader an overview of the positions of the various participants on this complex and sometimes contentious topic. It is our hope that the report will contribute to a better understanding of what offsets are, why offsets are granted by U.S. producers, the different views of their impact and long-term consequences, and issues which may require further analysis. CHARLES W. WESSNER ALAN WM. WOLFF 1   The chapter entitled "Offsets" in the 1996 National Export Strategy Report describes offsets as compensation packages which are part of contract negotiations for large purchases such as aircraft. This description is elaborated in the issues paper in the appendix. However, it is important to keep in mind that different views on offsets sometimes lead to different definitions.

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