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Competition, collaboration,

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Title: Competition, collaboration,


1
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.

2
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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4
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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7
1981 75 firms 2001 5 firms
8
1999-2019 projected growth in fleet capacity
Airbus Industrie
9
N. American share of fleet declines from 43 in
1999 to 36 in 2019
10
gt300-seat aircraft share of fleet projected to
grow from 15.5 to 26
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12
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.

13
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.

14
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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16
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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18
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.

19
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.

20
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).

21
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.

22
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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24
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.

25
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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27
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.

28
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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31
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.
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