Competition, collaboration,

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Competition, collaboration, offsets in
aircraft

• Industry characteristics contrast with those of
  the IT, biomedical sectors
• Exit, rather than entry, has dominated industry
  development since 1945 in US, Europe.
• User-innovation is much less common in commercial
  aircraft.
• Vertical specialization has very different
  characteristics.
• Asian markets and international production
  networks are important, similarly to IT.
• Governments are important actors in military
  civil segments of the industry.
• State-owned airlines, regulatory other
  nontariff barriers to market access.
• Govt actions in military affect civil industry.

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Other industry characteristics

• High development costs (new Airbus 11B).
• Development requires complex integration of
  numerous different technologies.
• Primes work with huge of suppliers.
• Relatively few stable, well-defined interfaces.
• Designs stay in production for decades.
• Markets are global, product support is critical.
• Wide swings in demand for commercial aircraft.
• Links between civil and military aerospace remain
  important, but have changed since 1945.
• Reduced spillovers from military to civil
  aircraft .
• Military demand is more stable and supports RD.
• Interfirm alliances are used for development,
  production of new commercial aircraft engines.

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Evolution of industry structure markets

• 1970 3 US airframe firms, 2 European.
• 2003 1 US, 1 European.
• Japanese firms have failed to enter as primes,
  instead are risk-sharing partners.
• Small domestic launch market contrasts with
  semiconductors, computers.
• US accounts for declining share of global
  aircraft demand.
• Asia, esp. PRC, is projected to grow rapidly.
• PRC has very large domestic launch market.
• In US, overall aerospace industry has shrunk
  since end of the Cold War.
• Employment losses driven by military cutbacks.

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1981 75 firms 2001 5 firms
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1999-2019 projected growth in fleet capacity
Airbus Industrie
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N. American share of fleet declines from 43 in
1999 to 36 in 2019
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gt300-seat aircraft share of fleet projected to
grow from 15.5 to 26
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Offsets What are they?

• Promises of workshare (purchases of components,
  subassemblies) for firms in nation ordering
  aircraft.
• In some cases, offsets involve seller firm taking
  other goods in countertrade (e.g., Polish hams
  for McDonnell Douglas aircraft).
• Offsets are a response to nontariff barriers to
  market access erected by govts.
• Offsets are more pronounced and explicit in
  military aircraft procurement.
• Similar offset-like provisions are common in
  sales of telecom equipment, other expensive
  capital goods sold to state-owned or
  state-influenced firms.

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Offsets originated in postwar US policy

• US govt encouraged coproduction (licensed
  production) of U.S. military aircraft in
  purchasing nations during the 1950s and 1960s.
• Reconstruction of military allies economies an
  important goal in the Cold War.
• Encouragement for standardization.
• 28 missile/aircraft coproduction agreements
  during 1950-80
• Coproduction agreements aided revival of aircraft
  industries in Japan, Germany, other allied
  economies, creating demand for offsets.
• Offsets remain important in foreign sales of US
  military aircraft.
• December 2002 Polish purchase of 3.5 billion
  in F-16s includes indirect offsets calculated at
  gt9 billion.

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Evaluating military offsets

• US govt data on share of offsets in military
  exports reveal little evidence of strong trend.
• Most military-aircraft offsets have transferred
  employment economic activity. Transfers of
  advanced technology have been relatively modest.
• US govt (witness Polish sale) has been
  ambivalent about offsets, criticizing them in
  general and supporting them in specific deals.
• US industry retains primary responsibility for
  offsets negotiation, but govt retains right to
  review agreements.
• US purchases of foreign military aircraft, other
  systems also include offset demands (domestic
  production).
• Presidential Commission established in 1999.

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Employment effects of military offsets
Presidential Commission calculations

• Survey of managers in 8 firms responsible for
  gt90 of defense offset transactions during
  1993-98.
• Each firm asked to calculate job losses/gains for
  8 transactions.
• Jobs lost through transfer of work or procurement
  must be compared with jobs preserved through
  successful export.
• Results rest critically on the counterfactual
  What would have happened without offsets?
• Job losses roughly 3700 aerospace jobs.
• Jobs preserved, assuming that offsets were
  necessary for export sales nearly 86,000.
• For aerospace overall, exports continue to grow.

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Alternative policy solutions to the offsets
problem

• Pursue a multilateral standstill agreement.
• Enforceable? WTO disciplines can be waived on
  national security grounds.
• US firms argue that a multilateral agreement
  would reduce US military exports govts would
  buy domestic without the benefits offered
  through offsets..
• Encourage offsets that can be fulfilled through
  other workshare agreements with less
  significant effects on US employment
• Encourage collaboration with foreign firms
  upstream, in the RD phase.
• Huge controversy over outflows of US technology.
• RD collaboration may not reduce pressure for
  offsets downstream.

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Military offsets affected postwar commercial
aircraft markets

• US coproduction offset deals contribute to
  growth in production capacity (often state-owned)
  in other industrial economies, increasing
  political pressure on govts to influence
  commercial aircraft purchases.
• State-controlled airlines, state-controlled
  regulators, state-controlled loan guarantees all
  provide leverage can limit foreign firms
  access to markets.
• Result is formal, informal pressure for
  offset-like arrangements in large commercial
  sales.
• But international collaboration in commercial
  aircraft reflects other factors as well.

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International collaboration in large (gt100 seats)
commercial aircraft

• Very common since the 1970s.
• Boeing collaboration with Japanese, British,
  Italian firms in 747, 767, 777.
• McDonnell Douglas licensed production of MD-82
  in PRC, proposed collaboration with Taiwanese
  group.
• Airbus intra-European, little extra-European
  collaboration.
• Collaboration also is common in large engines.
• 3 broad motives
• Market access (offset-like arrangements).
• Access to capital (from partner firms and/or
  partner-firm govts).
• Access to technology (components, process
  technologies).

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Managing collaboration

• Management of technology transfer is crucial and
  requires a balanced approach.
• Partners typically share in development, as well
  as production, for a given design.
• Senior partners need to adopt a strategic view.
• Blocking technology transfer creates problems.
• Decisionmaking can be problematic.
• Need to avoid pushing decisions upward within
  partner organizations.
• JVs with a dominant partner appear to operate
  more smoothly.
• Especially in partnerships of equals,
  competition in other product lines may undercut
  collaboration.
• Cost management Partner workshares based on
  transfer prices, rather than costs.

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Evaluating the effects of collaboration in
commercial aircraft

• As in the case of military-aircraft offsets, what
  is the counterfactual?
• Would a given sale have occurred without
  collaboration?
• McDonnell Douglas limited collaborationgtdwindli
  ng product line and eventual exit through
  acquisition.
• Boeing more extensive collaborationgt broader
  product line. No prime has entered yet.
• Primes engineering, production workers (Boeing
  labor strikes) and US supplier firms likely to
  feel greatest employment losses from
  collaboration.
• Prime contractor firms are globalizing their
  production network, supply sources.
• But US aircraft-component trade balance has
  improved.

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Trade policy and collaboration

• Market access barriers affect motives for
  collaboration.
• WTO procurement code limits scope for govts to
  use public procurement strategically.
• PRC not yet a full signatory to procurement code,
  and its huge market gives it enormous leverage.
• US and EU have negotiated for decades over
  subsidies for Airbus, DoD RD support for US
  aircraft firms.
• EU US firms benefit from NASA and DoD RD.
• US EU firms benefit from soft loans for
  product launch.
• US firms remain reluctant to invoke trade
  sanctions.
• Boeing remains largest single customer for US
  Export-Import Bank, supplier of subsidized credit
  for exports.

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Airbus v. Boeing

• Airbus founded in 1967 as a collaboration among
  national champions, has become much stronger
  with the gradual removal of direct state control.
• New assembly techniques enabled more widely
  distributed worksharing among European partners.
• Arguably has been more aggressive in
  incorporating new technologies.
• The A380 super-jumbo aircraft targets
  trans-Pacific, Europe-Asian routes.
• Boeing shelved the Sonic Cruiser, now is
  reconsidering another upgrade of a 35-year-old
  design, the 747.
• Airbus has gained market share since the 1980s.

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Asia and the commercial aircraft industry

• A major source of future demand growth
  (especially PRC).
• Airbus 380 targeted on Asian long-haul routes.
• Japan, Korea, Taiwan, PRC all have considered or
  participated in collaborative commercial aircraft
  ventures.
• Japan in particular has largely given up on
  independent entry.
• Small domestic market.
• Despite long experience as a risk-sharing partner
  in commercial ventures, co-production agreements,
  leading Japanese aircraft firms lack the design
  systems integration skills for prime contractor
  entry.
• Domestic defense market is much more profitable.

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The outlook

• Asian markets (esp. PRC) will dominate US,
  European firms strategies for the next decade.
• Govts matter, but their interests dont always
  coincide with those of firms.
• Airbus will maintain and/or intensify pressure on
  Boeing, which is reducing dependence on
  commercial aircraft.
• US defense market may grow more rapidly military
  export market more uncertain.
• Continued growth of international production
  networks and alliances (offsets and
  offset-like), many of which will focus on PRC.
• Continued erosion of employment in US aircraft
  industry (military and civilian) is likely.

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The politics of offsets Japan, US, the FSX

• 1985 Japanese aerospace firms lobby Japanese
  Ministry of Defense for independent development
  of next-generation fighter aircraft.
• 1987 US Japan negotiate a co-development
  agreement for the FSX.
• Huge controversy over transfer of
  military-aircraft technologies with (alleged)
  civil applications from US to Japanese aerospace
  firms.
• 1988 Co-development agreement renegotiated,
  providing US firms greater access to Japanese
  aerospace firms technologies.
• 1997 F-2 project is over budget (4B vs
  1.1B), and US firms have expressed little
  interest in technology flowbacks.