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THE PRESENT ENVIRONMENT 68 unprofitable. One must assume, however, that a number of the U.S. programs may have achieved sizable positive cash flows at times during their production that were critical to company reinvestment needs for successive rounds of new product developments; otherwise, the U.S. civil industry would reflect a different history. During this period U.S. manufacturers dominated a world market that was growing vibrantly. The modest financial performance of the past suggests there could be serious problems addressing future competitive opportunities. In addition to the changes in markets and international competition noted above, the manufacturers are increasingly exposed to additional risk because of the necessity to participate in financing the sale of aircraftâa subject that will be discussed later. One cannot envy aircraft manufacturers this financial and management challenge. MANAGEMENT CHALLENGES The changes occurring in the environment pose major challenges to the management of civil aircraft manufacturing. This environment can be summarized as follows: Projections of market requirementsâalways precarious âare even more so with the structure and performance of U.S. airlines in turmoil and foreign markets looming as increasingly important in the future. The investment required to launch new aircraft incorporating new technology is escalating. With the life cycle of the first commercial jet transports drawing to a close, one can begin to assess their impact on the investment attractiveness of the aircraft manufacturers, and the results are modest. The deteriorating balance sheets and uncertain future of domestic airlines are leading to increasing caution by the conventional providers of financing for new aircraft; they are becoming more cautious in providing additional funds. Consequently, manufacturers themselves are finding it necessary to participate in financing sales of aircraft and thus to enlarge their own exposure and increase their own requirements to raise capital. After only limited success in 30 years of trying, the Europeans now have presented to the world market a large transport that is technologically sound and commercially viable. While one cannot predict the future, it is unlikely that with this budding success the Europeans will continue to accept a U.S. monopoly in large transports. The A300 provides the entry on which Airbus can build. In addition, Japan has now announced its intention to become a significant participant in aerospace industry. In the face of this array, U.S. manufacturers also possess formidable strengths: a decades-long record of producing technologically advanced, cost- effective aircraft that meet customer needs; a global capability for service; massive investment in
THE PRESENT ENVIRONMENT 69 modern facilities; an infrastructure that in fact supports aircraft manufacture globally; and technological leadership that, while admittedly narrowing and vulnerable, still exists.15 Among the many challenges with which manufacturers must contend the following warrant special mention: 1. Accommodating the increasing cost associated with validating and introducing new technology in the face of a historical record of modest financial results is a major challenge. The trend toward managing escalating financial risk by moving toward incremental improvements in technology and incorporating them gradually through derivatives is a rational response. The skill demonstrated in this initial phase of managing technology will play a major role in determining the future success of aircraft manufacturers. 2. Participating in financing aircraft sales will in many cases determine whether a sale can be made. The ingenuity now being displayed in this arena has opened a new dimension in competition; the size, sophistication, and flexibility of the U.S. capital market and its long time scale are important competitive resources that are being exploited through new financial instruments and arrangements. These efforts inevitably include deeper involvement in the sale of secondhand aircraft and increase the risk of serious loss. Special attention needs to be paid to the development of new financial instruments and mechanisms that will spread this risk. 3. Perhaps the biggest challenge is also the most subtleâmoving from a position of overwhelming global dominance to senior partnership with manufacturers in other countries. With clear evidence of progress in intra-European cooperation and potential market success in sight, the Europeans are unlikely to abandon their 30-year effort to participate in large transports. The emergence of likely Japanese participation broadens this competition and makes it more threatening. U.S. manufacturers have already begun to respondâ continued confrontation across the board does not appear attractive. Steps toward interdependence will require learning how to work effectively in a partnership modeâand some Europeans are saying they will make more effective partners with the Japanese than will the powerful U.S. firms. Subtle problems of balancing domestic employment versus access to foreign markets and of preserving technological leadership while cooperating in technology development must also be faced. 4. Accommodating to the likelihood that the United States will no longer be able to maintain leadership in every aeronautical design and production technology and ensuring leadership in those technologies critical for preserving competitive advantage are additional challenges. Many governments in developed and
