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A Study of the Influences of Technology in Determining International Industrial Competitive Advantage
Copyright © 1985 National Academy of Sciences
All right reserved.
Civil aircraft manufacture is experiencing profound change, created by a combination of domestic and international circumstances. The industry, comprising large commercial transports, rotorcraft, regional transports, business aircraft, and light piston aircraft, holds a unique position in the nation's industrial structure-in its contribution to trade, its coupling with national security, and its symbolism of U.S. technological strength. Consequently, the implications of the change that is occurring are of national importance.
Civil aircraft (including engines and parts) are an important component of manufactured durable goods (sales-including exports of military aircraft-of $17 billion in 1982 represent 1.88 percent of all durables) and a major source of employment for skilled production workers, scientists, engineers, and technicians.
Large transports are the dominant element in sales of civil aircraft, and export sales now represent 60 percent of large transport sales. Exports will become even more important, due to themore rapid growth of air transport in foreign countries. These export sales are vital to the economies of scale that help give cost leadership to the United States.
Aircraft manufacture plays a unique role in national security. The teams that could help develop design and production technology for new military aircraft are kept in a state of increased readiness by the requirements of the civil market. The competitions and requirements of the civil market stimulate technological and product advances that contribute to these associated industries. The production base is also available in an emergency surge capacity. This base comprises not only the aircraft companies, but also a massive specialized infrastructure of some 15,000 firms that supply sophisticated components, materials, and equipment.
The U.S. aviation industry has dominated world markets since the end of World War II. This success, of course, was in part a legacy of the technology and production base created for that war. Additional factors include:
A generally healthy domestic economy that encouraged an aggressive and effective program of technology development, aircraft design, manufacture, service, and operations.
A continuing productive relationship among government, the airlines, and the manufacturer.
An aggressive effort on the part of the airlines and aircraft manufacturers to continually improve surface transportation, resulting in significant passenger advantages in trip time, trip cost, and trip safety.
The resulting rapid growth in domestic and international air transport.
The history of success began to change in the mid-1970s and has altered the outlook for the United States in all classes of aircraft. These changes include the impact of deregulation on domestic air transport, the emergence of foreign competition, internationalization of aircraft manufacture, and growing involvement of foreign governments in the industry.
United States air transport had grown and matured as an industry in which regulation of routes and fares encouraged focus on passenger amenities and political lobbying for routes rather than on competition in fares and efficiency of operations. Service to smaller communities was of lower priority, and experimentation with fares and service to probe customer preferences was virtually nonexistent.
Deregulation of fares and routes in 1978 has led to greatly increased competition for routes, the appearance of many new carriers, and unprecedented competition and diversity in fares and services. Airlines have responded by seeking to protect or improve their share in markets where they were strongest by emphasizing hub-and-spoke feeder systems. Many new commuter airlines have arisen to serve smaller communities. Evaluation of the effects depends on the use made of air transport. Many frequent travelers experience increased inconvenience in point-to-point service, deterioration in service in many instances, and chaotic fares on many routes, but they can also benefit from frequent-traveler bonuses if they are prepared to accept some inconvenience. Travelers can also obtain dramatically lower fares on many routes and in scheduling benefit from lower fares on some flights and new classes of service on some routes. Service to smaller communities is mixed-some have better service with better equipment, others have seen it deteriorate or disappear.
It is clear that competition is creating constant pressure on fares and that strenuous efforts are being made to reduce costs and improve operating efficiency. Furthermore, the change in route strategy is altering the nature of the optimal fleet mix, with increased need for somewhat smaller aircraft. A large global supply of secondhand aircraft is making it easy for new entrants to lease equipment or buy it at bargain prices, and to some extent is acting as a barrier to the purchase of new aircraft.
The change in competitive environment noted above, combined with a severe recession, has had a dramatic effect on the financial performance of the airlines in operation at the time of regulation. Most have experienced severe losses, balance sheets have deteriorated, and perhaps most important, forecasting the future has become much more uncertain. This affects projection of future equipment needs, return on investment, and security of the return. Airlines are displaying great variability in their ability to respond. For example, American Airlines can place a large order for planes at the same time that Continental and Braniff are struggling with bankruptcy and Eastern and TWA face severe cost problems. These changes have, not surprisingly, reduced demand for new aircraft. They also affect the future capability of U.S. airlines to serve as launch customers for new aircraft. Thus, the importance of international markets may grow because large foreign carriers may play a more important role in launching new aircraft.
One important effect of deregulation has been to stimulate the growth of regional airlines. This has in turn stimulated interest in specialized aircraft to serve these markets-aircraft that heretofore had not been attractive to U.S. manufacturers. Thus, demand for cost-effective, smaller transport aircraft represents a new opportunity.
It is difficult to predict the eventual equilibrium after the transition to deregulation, but it is likely that a few strong national carriers will emerge. This panel believes it is important that evaluation of the results of deregulation include its effect on the aircraft manufacturers.
The European countries have tried repeatedly to create a viable air transport manufacturing industry. In 1970 efforts were rationalized by creating Airbus Industrie to draw on the resources of a number of countries and to develop a coordinated worldwide marketing approach.
The A300 that resulted from this endeavor is a technically proficient aircraft that has begun to achieve market penetration, reaching a peak of 50 percent of orders for wide-bodied transports in 1982. Airbus has made clear its intention to develop a family of aircraft that will cover generally all of the large commercial transport market.
In the United States the situation regarding the manufacture of other classes of aircraft-rotorcraft, regional transports, executive and business aircraft-is perceived to be urgent. The requirements of these types of aircraft are more within the economic and technical capability of smaller countries. Consequently, for reasons of economic growth, improved foreign trade, and even prestige, they have been targeted for production by many countries-e.g., the United Kingdom, France, Italy, Spain, Japan, Brazil, Indonesia, and Israel.
In rotorcraft, the U.S. industry product line is matched in all significant classes and sizes by competitive foreign helicopters. The long practice of developing civil derivatives of military vehicles is no longer Practical, due to the specialized demands for military use. U.S. civil helicopter manufacturing must use private capital to compete with financing granted or guaranteed by foreign governments. Imports of helicopters have grown from 14 percent in 1979 to 35 percent in 1982.
Regional transports present a difficult situation for U.S. manufacturers. As noted above, until recently the U.S. commuter market did not attract the development of specialized aircraft to serve it. Other countries did have such requirements and had developed the needed vehicles. With deregulation leading to increased growth in domestic regional airlines, foreign manufacturers are moving to capitalize on this opportunity. U.S. manufacturers face a dilemma: their own product lines are not extensive; the U.S. market is relatively open to competitors while many foreign markets are closed; and foreign manufacturers -typically supported in some form by their governments-are active in the field and frequently have been for many years.
A desire to avoid a U.S. monopoly worldwide has been an important driving force behind the persistent European effort. It is important to recognize that this increase in the strength of foreign competition is not without its benefits for the U.S. consumer. The demands for capital and for technology development are such that not even the United States can support many suppliers of large transports. It would not be in the interest of the U.S. consumer to have only one domestic supplier-a not improbable scenario.
A factor of more immediate benefit to the U.S. economy is the large U.S. content in foreign-manufactured aircraft-even the A300. For example, engines, controls, and a wide variety of specialized materials and components for most foreign-built aircraft are purchased from U.S. suppliers because economies of scale will not justify local manufacture or because local capacities are inadequate. All of these exports, of course, strengthen U.S. trade and provide domestic employment. This circumstance will not persist without aggressive efforts by U.S. manufacturers to maintain leadership because foreign manufacturers continue to seek ways to increase local content; thus the U.S. content is diminishing. Despite the widespread concern over the strength of the U.S. dollar as an impediment to exports, this concern does not appear to be applicable to the export of large transports. Airbus is regarded as certain to compensate for changes in the rate of exchange irrespective of which way it goes. The large U.S. content also exerts a buffering influence. A strong dollar increases the cost of the U.S. content but reduces pressure on European content and vice versa.
Growing Importance of International Markets
The size and dynamism of the domestic air transport industry that fostered U.S. leadership in aircraft began to change-at least relatively-in the 1970s. The U.S. market grew more slowly (5 percent vs. 9 percent worldwide), and U.S. passenger-miles dropped from 57.5 percent of the free world to 40 percent. Although U.S. manufacturers have always excelled at interpreting the needs of foreign customers, they will have to be even more sensitive in the future. Most foreign airlines are government-owned or-supported. Consequently, purchase of aircraft is often a politicized process that essentially requires approval of, if not negotiation with, governments. The developing countries represent the area of most rapid projected growth in air transport, but they also experience the most difficulty in arranging financing. Consequently, U.S. manufacturers face increasing pressure to help finance the purchase of aircraft. This trend will increase their requirements for raising capital, enlarge their financial exposure to risk, and bring them into confrontation with foreign governments that use financing terms and other government-to-government trade factors as a competitive weapon in the marketplace.
Internationalization of Aircraft Manufacture
The manufacture of aircraft and engines is becoming increasingly internationalized. The growing capital requirements, increased risk, and greater technical complexity associated with aircraft manufacture create pressures to form partnerships. Perhaps more important, the desire of many countries to participate in the industry leads them to use access to their domestic markets as a lever to increase their participation in the industry. These arrangements, of course, encourage a two-way flow in technology from which U.S. manufacturers can benefit to some extent.
The formation of such international partnerships is the subject of controversy, and the relative merits are not easily judged. One must balance denial of access to a market against at least partial access, but with the risk that one may be accelerating the development of technical competence by a potential competitor.
The eventual outcome depends largely on maintaining momentum in long-range domestic aeronautical R&D2 and the incorporation of advanced technology in new designs. The panel believes that a healthy, effective domestic technology development program is the best possible foundation for maintaining competitive leadership.
Financial Performance of the Industry
Manufacture of large commercial transports is a long-term endeavor that involves committing huge amounts of capital in the face of great market uncertainty. Developing a wholly new aircraft requires four to six years and a $4 to $5 billion investment. Even for a successful venture, return of investment will typically require at least 10 to 15 years.
The great market success of U.S. manufacturers and the long record of technological leadership have not led to outstanding financial performance. The aerospace industry (separate data on civil aircraft are not available on a current basis) has a return on sales and on assets below the average for all manufacturing. Anecdotal data on individual aircraft are even more discouraging. At most, 3 out of 22 commercial jet transports introduced worldwide are thought to have been profitable. Thus, with the changes now confronting the industry, management faces a great challenge.
COMPETITIVE ASSESSMENT OF TECHNOLOGY
Translating advanced technology into products suited to the marketplace has been a major factor in the success of U.S. aircraft manufacturers. As competition intensifies, the timing of the introduction and the fit of the product to the customer's need become increasingly important.
Despite decades of technological progress, there are important areas for continued advance that will improve reliability of aircraft and air travel as well as increase fuel efficiency and efficiency in operations. The integrated effects of a variety of advances in aircraft could improve fuel efficiency by as much as 30 to 50 percent-and some studies are even more optimistic. Introduction of advanced turboprops or propfans could provide up to 20 percent additional improvement, and the experimental unducted propfan engine could raise this figure.
Aeronautical technology is conventionally categorized into seven major areas: design techniques, aerodynamics, flight controls, structures, air frame-propulsion integration, avionics, and propulsion.
High-speed computers make possible the use of sophisticated computational analysis that reduces dependence on empiricism and experiment. This technology is applicable to all classes of aircraft. The United States is thought to have a slight lead over Europe (and probably a larger lead over Japan) at this time. Nevertheless, European efforts are very good, as shown by the aerodynamic efficiency of the A300 and A310. Japanese strength in electronics provided the foundation for Japan to develop greater capability.
Excerpted from The Competitive Status of the U.S. Civil Aviation Manufacturing Industry Copyright © 1985 by National Academy of Sciences. Excerpted by permission.
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