Is the U.S. Aerospace Industry Exporting Its Way into a Crash? Yes: We Are Exporting to Asian Rivals the Rope They Will Use to Hang Us

By Hunter, Duncan L. | Insight on the News, January 22, 1996 | Go to article overview

Is the U.S. Aerospace Industry Exporting Its Way into a Crash? Yes: We Are Exporting to Asian Rivals the Rope They Will Use to Hang Us


Hunter, Duncan L., Insight on the News


Yes: We are exporting to Asian rivals the rope they will use to hang us.

The aerospace industry is America's crown jewel. We have marveled not only at its strength in the skies over distant battle-fields but also at the $22 billion trade surplus the industry ran in 1994--at a time when overall the United States was smarting from a $176 billion trade deficit. Exports account for about one-third of the aerospace industry's total revenues, a share that has been rising in the 1990s due to cuts in U.S. military procurement and a slump in domestic orders for civilian air carriers. American aerospace employment has declined by one-third since 1990.

Yet the push for exports may lead to the long-term decline of American aerospace dominance thanks to the rise of foreign rivals who have targeted this strategic sector. They know America's once-vaunted leadership in other areas, from automobiles through electronics and computers to shipbuilding, has been overturned. And once again, the intended victim seems more than willing to cooperate.

In a shrinking global market with abundant manufacturing capacity, buyers have the negotiating leverage. This power is enhanced if the buyer has government support or is itself a government agency. A government with a national-development strategy will not base procurement decisions purely, or even primarily, on cost. Instead, the government will seek to acquire technology and production experience that will move its domestic industrial base forward. They will demand a piece of the action in the form of local-content requirements for components, joint ventures, technology transfers and even coproduction. These offsets once were justified on the grounds that they lessened the costs to the customer for large-ticket items such as combat aircraft, but now they are mainly a way for clients to acquire the means to become rivals.

American companies, which must meet current financial obligations and keep stockholders and capital markets happy, are in a weak position. Clients can play them off not only against each other but also against foreign rivals, mainly European aerospace manufacturers. As McDonnell Douglas-China President Peter Chapman told the New York Times in February: "We're in the business to make money for our shareholders. If we have to put jobs and technology in other countries, then we go ahead and do it."

The first- and third-largest export markets for American aerospace products in 1994 were Japan ($3.3 billion) and China ($1.8 billion). Both are longtime aspirants of great-power status and have active aerospace industrial policies. Both countries run large trade surpluses with the United States, making it easier for their companies to purchase American aircraft directly, but both insist on production offsets and the transfer of technology.

The Japanese already are the world's leaders in avionics components and are making advances on a number of other fronts. The U.S. government has played a major role in rebuilding the Japanese aircraft industry by allowing Japan to coproduce some 19 American aircraft designs, starting with the F-86 Sabre and including the F-104 Starfighter, the F-4 Phantom II and the F-15 Eagle fighters. The F-15 is the most advanced air-superiority plane in the world, and Japan builds 70 percent of the F- 15s that enter its self-defense force under license at Mitsubishi Heavy Industries' Nagoya plant--the same site that produced Zero fighters during World War II.

During the Cold War it was argued frequently that this transfer of technology and expertise maximized "free-world" military capabilities. American leaders in Washington and in the private sector reasoned that helping Japan modernize its industry was part of the price for cementing the U.S.-Japanese alliance. The issue of coproduction reached its apex in 1989 when Lockheed began joint production with Mitsubishi Heavy Industries of the FSX fighter-bomber. The FSX is chiefly a redesign of the F- 16C fighter-bomber using a composite wing and a phased-array radar system developed in Japan. The Japanese were willing to spend seven times as much to build the FSX as it would have cost to buy the original F-16 off the shelf--and this to fulfill a defense requirement of only 140 aircraft.

Japan also has turned its attention to civilian airliners. Boeing has contracted out most of the body of the new 777 to Japanese aerospace companies that invested $2 billion in the project (with other components contributed by Italian, Australian, Korean and Canadian firms). Officially, Japanese components will account for 21 percent of the 777. However, since Japanese firms also are selling components to Boeing's other subcontractors, the actual Japanese content will be much higher. With financial backing from Tokyo, Japan's airlines were able to give large, early orders to Boeing, thus gaining leverage for production-sharing with Japanese aerospace firms. Tokyo earlier used this same coordinated strategy of government, airlines and manufacturers (orchestrated by the infamous Ministry of International Trade and Industry, or MITI) to gain work on Boeing's 757 and 767 and to get a piece of Pratt & Whitney's jet-engine production. Meanwhile, Ishikawajima Harima Heavy Industries is in a jet-engine development partnership with General Electric. The willingness of MITI to arrange financing makes Japanese companies attractive partners to American companies needing to spread the risk of expensive new projects.

In China, all aerospace manufacturers are state-owned. The newly formed Aviation Industries of China, or AVIC, oversees both domestic industry (including airlines) and relations with foreign firms. Its president, Zhu Yuli, has said that China will seek an "equal partnership" in joint production with foreign firms "to narrow the gap between the civil-aviation industry and the more advanced countries." China has a coproduction agreement with McDonnell Douglas to build 40 MD-82s and 20 MD-90 airliners, with the Chinese content rising to 85 percent by the end of the run. The second stage of the development plan is to codesign a 100-passenger airliner and then, as the third stage, design indigenously a 180-passenger plane for both domestic use and for export. Chinese production threatens markets for U.S. exports both in China and elsewhere.

Xian Aircraft Co. has a close relationship with Boeing and supplies components for the 737 and 757. As part of the deal to sell 737s to Chinese airlines, Xian will manufacture 100 rear fuselage and tail assemblies. Some of this work will be shifted from Boeing's plants in America. Xian also builds bombers. AlliedSignal will build a factory in Nanjing with the Chinese Research Institute of Aero Accessories to supply engines for the K-8 fighter-trainer and Y-8 cargo plane. Ronald Hoge, president of Allied's Aerospace Equipment Systems Division, has said the goal is to produce parts for worldwide distribution taking advantage of China's cheaper labor costs.

When South Korea purchased 120 F-16s, only 12 came directly from American factories. South Korea assembled 36 from kits, learning in the process how to build the other 72 in Korean factories. Turkey also gained a coproduction agreement for F-16s and now assembles them for export to Egypt. McDonnell Douglas offered to sell 40 percent of its business to Taiwan Aerospace Corp. and to establish production facilities in Taiwan for the MD-12 jumbo jet. This deal fell apart because of concern over McDonnell Douglas' financial health.

Since private American companies are no match for strong foreign governments, Washington must intervene to halt the transfer of resources overseas. The structure of the industry deviates far from "free-market" models, but, even if this were not the case, the stakes are too high for a laissez-faire attitude to prevail. In the Wealth of Nations, Adam Smith proposed that the maritime industries be exempted from "free trade" and endorsed the Navigation Acts because of the importance of seapower to British security and commerce. The United States must do the same in regard to airpower.

Domestic demand for aircraft and components must be bolstered. To its credit, Congress has voted to increase procurement of the F-15, F-16, F/A-18 and AV-8B fighters and the C-17 transport; to sustain development of the F-22 fighter; and to keep the B-2 strategic bomber line open. In the civil sector, one-third of all new commercial jets will be bought by U.S. airlines during the next 20 years. In part, new orders are mandated by environmental laws which call for the retirement of "noisy" DC-9s, 727s and older 737s by 1999. Washington must use persuasion and, when needed, financial support to ensure that US. airlines buy American aircraft. Tokyo already uses restrictions on landing rights and its hefty financing of aircraft leasing, in addition to its airlines, in order to influence aerospace purchases, a strategy of which Adam Smith likely would have approved. The United States should make similar use of its sovereign powers. In exchange for an improved domestic environment, aerospace firms should be willing and able to curtail the shifting of production overseas.

Washington should make the reduction of China's $30 billion trade surplus with the United States a condition for renewal of most-favored-nation status. Aerospace purchases, as opposed to coproduction and offsets, should be the leading contender for bringing U.S.-China trade into balance. Talks also should be opened with the European Union to restrain the kind of cutthroat competition that primarily benefits third-party clients and threatens the future of the European aerospace industry as much as the American. The aerospace industry is still small, making a Euro-American cartel more feasible than in other areas. Still, the temptation to "cheat" in a tight market means that international agreements are undependable. Unilateral actions will be needed.

The administration and Congress should work together to encourage aerospace firms to enter domestic joint ventures rather than partner with foreign firms. Antitrust regulations that restrict such domestic ventures should be dropped. Prime candidates for cooperation are the next generation of large airliners and supersonic transports. Such actions will steer U.S. aerospace firms toward American, rather than foreign, investors when these firms need to merge or gain a fresh infusion of capital. These efforts should be supported by government research projects such as those that helped U.S. industry achieve superiority during the Cold War.

The U.S. also should tighten restrictions on technology transfers, not relax them as is the current trend. The demand for "offsets" should be declared an "unfair" trade practice subject to retaliation, including sanctions. No U.S. financial aid should be available for agreements that include coproduction or other offsets. The Federal Aviation Administration should revoke regulations allowing U.S. carriers to perform maintenance work overseas (creating a demand for foreign components).

As the world's leader in both military and commercial aerospace, America's primary aim must be to prevent the rise of any rival power or coalition that can match it.

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