Commercial Aircraft: Cooperation and Competition between the U.S. and Japan

The following statement by the General Accounting Office is representative: “Many U.S. Government and industry representatives believe that Japan can and eventually will become a serious competitor in the world's civil aircraft market; the remaining questions are when, and how much Japan's share will be … While Japan's aircraft industry is small by comparison with its U.S. and European counterparts, it is expanding and being encouraged with government support.” U.S. General Accounting Office, U.S. Military Co-production Agreements Assist Japan in Developing Its Civil Aircraft Industry (Washington, D.C.: U.S. Government Printing Office, 1980), p. 17.

See Kendrick J. W. , Productivity Trends in the United States (Princeton, NJ: Princeton University Press, 1961); and Kendrick J. W. , Postwar Productivity Trends in the United States, 1948–1973 (New York, NY: Columbia University Press, 1973).

All Figures taken from Aerospace Industries Association, Aviation Facts and Figures, 1983/84 (New York, NY: McGraw-Hill, 1983).

The 1981 study of aeronautics R&D by the Office of Science and Technology Policy concluded that “the aeronautics industry is characterized by high research intensity and a wide technology base. That is, aeronautics depends on R&T (Research and Technology) performed within the aeronautics industry and on R&T performed by virtually every other high-technology industry.” (V-28). Statistical support for this characterization may be found in a recent study by the International Trade Administration, analyzing “embodied” research intensity in various American industries. Embodied research intensity attempts to account for R&D expenditures that are incorporated in the inputs purchased by a given industry. The aircraft industry ranked third among U.S. manufacturing industries on this index with an embodied research intensity of 15.4 percent of the value of shipments in 1980, exceeded only by missiles and spacecraft and electronic components. International Trade Administration, U.S. Department of Commerce, An Assessment of U.S. Competitiveness in High Technology Industries (Washington, D.C.: U.S. Government Printing Office, 1983).

For a more detailed discussion, see Mowery D. C. Rosenberg N. , “The Commercial Aircraft Industry,” in Nelson R. R. , ed., Government and Technical Progress: A Cross-Industrial Analysis (New York, NY: Pergamon Press, 1982).

Jordan W. A. provides an interesting comparison of adoption rates for new aircraft in the regulated interstate airline market with those observed in the intrastate market of California, where the CAB regulations did not apply. Jordan W. A. , Airline Regulation in America (Baltimore, MD: John Hopkins University Press, 1970).

Miller R. Sawers D. , The Technical Development of Modern Aviation (London: Routledge & Kegan Paul, 1968).

One study estimates that development costs, adjusted for aircraft size and exclusive of engines, have increased at an average annual rate of nearly 20 percent during the 1930–70 period. Gellman A. J. Price J. P. , Technology Transfer and Other Public Policy Implications of Commercial Airframes (Washington, D.C.: NASA, 1978).

The recently announced V2500, a high-bypass engine designed to produce 23–25,000 pounds of thrust, is widely expected to cost $1.5 billion for development. See, among other estimates, that in Business Week, “A Jet Engine Creates An Unlikely Alliance,” September 13, 1982, p. 47.

Recent instances of interfirm cooperation in new aircraft and engine development include cooperative product development and manufacture of airframes by the Boeing Company and a Japanese consortium (discussed below), the General Electric-SNECMA consortium and the seven-firm, five-nation V2500 project in engines, as well as the European Airbus. Subcontracting also has expanded greatly. According to Rae, subcontracting of airframe assembly in the 1930s “… constituted less than 10 percent of the industry's operations.” Rae J. , Climb to Greatness (Cambridge, MA: MIT Press, 1968), p. 83. The production of the Lockheed Electra (in the 1950s) subcontracted 30–40 percent of these activities. Production of the Boeing 747 entailed subcontracting 70 percent of the components and subassemblies of the aircraft; this percentage is higher for the 767, where subcontracting also was extended somewhat into the design and development phase, and involved greater financial participation and assumption of risk by subcontractors.

Industry executives also have noted that fluctuations in the demand for aircraft in foreign and U.S. markets frequently are uncorrelated. A decline in domestic airline orders thus may be offset by strength in foreign demand, supporting greater stability in production rates.

One industry estimate suggests that 24 percent of total commercial aircraft sales by Boeing were influenced by the availability of such offsets. See Boeing Commercial Airplane Company, Potential Boeing-Japan Aircraft Industry Cooperation in Commercial Aircraft (Seattle, WA: Boeing Commercial Airplane Company, 1984), p. 4.

Kawasaki Heavy Industries currently manufactures the P-3C patrol aircraft and the Chinook helicopter under co-production agreements, while Ishikawajima-Harima Heavy Industries is manufacturing the Pratt and Whitney jet engines for the F-15. Other military aircraft manufactured on a co-production basis in Japan include the F-104 and F-4 fighter aircraft.

A less sanguine view of the impact of the co-production program may be found in a U.S. General Accounting Office study, op. cit.

Eckelman R. L. Davis L. A. , Japanese Industrial Policies and the Development of High Technology Industries: Computers and Aircraft, prepared for the Office of Trade and Investment Analysis, International Trade Administration, U.S. Department of Commerce (Washington, D.C.: U.S. Government Printing Office, 1983).

“CAC, which comprises Mitsubishi, Kawaski, and Fuji Heavy Industries, had been planning on a production rate for fiscal 1983 of up to 10 aircraft a month. Due to the sales slump, the rate will be only 2–3 a month, cutting CAC's profits and reducing its ability to repay the government, the MITI official said. The reduced production rate also has left the CAC companies with excess capacity—a particularly heavy burden in Japan, where firms traditionally do not lay off employees, even in hard times.” Aviation Week and Space Technology , “Japan Setting Higher Aerospace Goals,” November 21, 1983, p. 16.

Following the completion of this article, Boeing announced that it planned to delay for at least two years the launching of its 7–7 aircraft. “Boeing Postpones Launch of 7-7 150-Passenger Aircraft Program,” Aviation Week and Space Technology, February 4, 1985, pp. 28–29.

Interview, Ministry of International Trade and Industry, June, 1983.

The RJ500 joint engine venture originated because of the need for the Japanese consortiums to utilize the test facilities at Rolls-Royce in England—no comparable installation existed within Japan. Interview, Ishikawajima-Harima Heavy Industries, June 1983.

The importance of the Japanese domestic market as a launch base for export industries has been stated forcefully by Myohei Shinohara, former Director of the Economics Research Institute within the Economic Planning Agency: “One of the basic factors which made export promotion easier in Japan was the huge domestic market of approximately 100 million people. If the domestic market expands in line with or ahead of export expansion, a product with a higher rate of expansion would be subject to a considerable reduction in unit cost through mass production, thus allowing an increase in exports. In other words, even though the relationship between the expansion of the domestic and export markets might have been that of a trade-off on an extremely short-term basis, it proved to be highly complementary for the mid- and long-term. The existence of a feedback relationship between expansion of domestic demand and exports resulted in high growth in Japan.” Shinohara Myohei , Industrial Growth, Trade, and Dynamic Patterns in the Japanese Economy (Tokyo: University of Tokyo Press, 1982), pp. 22–23. Other policy instruments for the encouragement of markets include The Japan Electronic Computer Corporation, founded in 1962 to purchase and lease computers produced by Japanese firms, as well as the more recently established leasing firm for industrial robots.

In the aftermath of the restoration of convertibility, the incomplete liberalization of the Japanese capital market has continued to confer considerable powers of moral suasion upon the Ministry of Finance and MITI in their dealings with the major Japanese banks, allowing for some influence over the allocation of investment.

Lynn L. H. provides a detailed account of MITI's involvement in the acquisition by Japanese steel firms of basic oxygen furnace technology. Lynn L. H. , How Japan Innovates: A Comparison with the U.S. in the Case of Oxygen Steelmaking (Boulder, CO: Westview, 1982).

See Okimoto D. T. , Pioneer and Pursuer: The Role of the State in the Evolution of the Japanese and American Semiconductor Industries, occasional paper, Northeast Asia-United States Forum on International Policy, Stanford University (Stanford, CA: Northeast Asia-United States Forum on International Policy, 1983).

“The scope of basic research will have to be expanded if Japan is to build up new technology on its own.” Japan Committee for Economic Development, Building an Industrial Structure for the 21st Century, 1982, p. 2.

It has been hypothesized by Okimoto (op. cit.) and others that the system of lifetime employment and other obstacles to interfirm labor mobility in Japanese industry have the effect of restricting the interfirm diffusion of knowledge and technology, thus increasing the importance of such policies as those discussed here.

“While there is a stereotype of Japan as the home of cartels and government limitations on competition, the extent of competition appears significantly high for the industrialized oligopolistic economy that is found in all major market economies … The pattern of prices in the high technology industries supports this view. Wholesale prices in such industries as iron and steel, transportation equipment, electric equipment, chemicals and petroleum products decline through the sixties, even though wages were rising at an annual rate of more than 10 percent.” Peck M. J. Goto A. , “Technology and Economic Growth: The Case of Japan,” Research Policy, 10 (1981): 238. It should be noted that MITI's policies have not been consistently supportive of intense interfirm competition. The attempts of MITI to force mergers among Japanese automakers suggests some considerable trepidation concerning the benefits of competition.

“The aircraft industry is a typical knowledge-intensive industry, characterized by high added value and far-reaching technological spin-off. It will play an important role in the national plan to remold Japan's industrial structure into an innovative knowledge-intensive type … At present the aircraft industry is smaller in scale in Japan than in advanced Western countries and relies excessively on demands for defense industry. It should direct more attention to the manufacture of planes for civil transportation which has a big future. … It seems realistic that the private sector should bear the ultimate risks involved in an aircraft development project, but for the time being the government will subsidize projects on the condition that a percentage of profits be contributed to the government, contingent on success . … It is hoped that Japan will build up a system for basic research and development of aircraft engineering so that it may be fully ready for the expected technological innovation in the 1990s for the manufacture of the next generation aircraft. Development of aircraft engineering must be conducted on the initiative and assistance of the government as it involves highly sophisticated and complex technology.” Ministry of International Trade and Industry, Industrial Structure Council, The Vision of MITI Policies in the 1980s (Tokyo: Industrial Bank of Japan, 1980), pp. 291–292.

This general basis for the choice by MITI of particular industries for focused assistance has been noted by Hadley in a survey of Japanese industrial policy: “Japanese target industries have been selected not only for their own importance, but for their ramifying effect on other industries.” Hadley E. M. , “The Secret of Japan's Success,” Challenge 26 (1983):6.

It is also likely that political obstacles to successful export of an all-Japanese large commercial transport would be raised by other industrialized nations. Government ownership or control of many international carriers means that new aircraft purchase decisions frequently are highly political in nature.

Indeed, as was noted above, the financial rewards thus far for the Japanese participants in the 767 venture have been very modest.

Interview with MITI personnel, June 1983.

Rapoport A. , “A Macro Comparison of Civil Aviation and Civil Space R&D Projects Among Major Industrial Countries During the 1970s,” unpublished paper, Division of Policy Research and Analysis, National Science Foundation, 1982, Tables 5 and 7. Rapoport's data do not include hojokin. However, these amounted to no more than $40 million in 1979. Note as well that the U.S. data excludes both contract research and independent R&D funded by the Department of Defense.

Indeed, the primary reason for Nissan's participation in the YXX project is the need of Fuji Heavy Industries for additional financial support.

The National Aeronautics Laboratory has conducted an extensive research program in short takeoff and landing (STOL) aircraft, culminating in the development of an experimental prototype. However, the prototype has been developed largely by the public laboratory, with modest levels of interaction with the private sector. Thus far, there have been no serious efforts to develop a commercial aircraft based on the prototype.

See Hirsch S. , “An International Trade and Investment Theory of the Firm,” Oxford Economic Papers, 28 (1976): 258–269.

However, fragmentary evidence suggests that the character of direct foreign investment also has changed in recent years to a more “pluralistic” form. Dunning cities evidence collected by the United Nations Center on Transnational Corporations in arguing that “important changes have been taking place in the ownership structure of international production … the proportion of foreign affiliates established in developed countries between 1961 and 1975 with a 100 percent ownership was 25.3 percent compared with 41.1 percent of those set up before 1960.” Dunning J. H. , International Production and the Multinational Enterprise (London: George Allen & Unwin, 1981), p. 76.

See Vernon R. , “International Investment and International Trade in the Product Cycle,” Quarterly Journal of Economics, 80 (1966): 190–207; and, Caves R. E. , Multinational Enterprise and Economic Analysis (Cambridge: Cambridge University Press, 1982).

For additional discussion of this point, see Cohen W. M. Mowery D. C. , “Firm Heterogeneity and R&D Investment: An Agenda for Research,” in Bozeman B. Crow M. Link A. , eds., Strategic Management of R&D: Interdisciplinary Perspectives, (Lexington, MA: D. C. Heath, 1984).

Vernon presents similar arguments concerning changes in the international economic environment. Vernon R. , “The Product Cycle Hypothesis in a New International Environment,” Oxford Bulletin of Economics and Statistics, 41 (1979): 255–267.

Protectionist policies in the U.S. also have played a major role in attracting the entry of foreign firms into joint ventures with U.S. automobile and steel enterprises.

See Teece D. J. , The Multinational Corporation and the Resource Cost of International Technology Transfer (Cambridge, MA: Ballinger, 1976), on the costs of intrafirm transfers of technology. Also, see Mowery D. C. , “The Relationship Between the Contractual and Intrafirm Forms of Industrial Research in American Manufacturing, 1900–1940,” Explorations in Economic History, 20 (1983):351–374; Mowery D. C. , “Economic Theory and Government Technology Policy,” Policy Sciences, 16 (1983):27–43; and Teece D. J. , “Technology Transfer and R&D Activities of Multinational Firms: Some Theory and Evidence,” in Hawkins R. G. Prasad A. J. , eds., Research in International Business and Finance, vol. 2 (Greenwich, CT: JAI Press, 1981) all provide additional discussion of the difficulties of interfirm transfers.

Bradley noted that “by providing shared profits and managerial control, joint ventures tend to protect the participants from opportunism and information imbalance. The problem of valuing the respective contributions of the participants is mitigated, because they can await an actual market judgment. The temptation to exploit a favored bargaining position by threatening to withhold infusions of capital or other contributions is reduced by the need for continuous cooperation if the joint venture is to be effective. Moreover, a firm supplying capital to the joint venture can closely monitor the use of its contributed capital and thereby reduce its risk of loss. Common ownership also provides a means of spreading the costs of producing valuable information that could otherwise be protected from appropriation only by difficult-to-enforce contractual undertakings.” Bradley J. F. , “Joint Ventures and Antitrust Policy,” Harvard Law Review, 95 (1982): 1528.

“Technology transfer questions were raised by both Pratt and Whitney and Rolls-Royce early in the consortium negotiations” according to Higginbottom Samuel L. , chairman and president of Rolls-Royce, Inc. “Both companies feel there will be a minimum of exchange of proprietary data in the final assembly process. We will have to know the interfaces, and there obviously will be some exchange of data involved in that,” Higginbottom said. “But we will not have to get into the details of technology … It took a lot of work to match the technology split to the work-sharing formula, one official said. But now that it is completed, final assembly essentially will involve bolting together the separate modules.” “Pratt, Rolls Launch New Turbofan,” Aviation Week and Space Technology, November 7, 1983, p. 29.

An argument similar to the one laid out in this paragraph may be found in Moxon R. W. Roehl T. W. Truitt J. F. Geringer J. M. , “Emerging Sources of Foreign Competition in the Commercial Aircraft Manufacturing Industry,” University of Washington Business School working paper, March 1984.

Stuckey J. W. , Vertical Integration and Joint Ventures in the Aluminum Industry (Cambridge, MA: Ballinger, 1976).

See Porter M. J. , Competitive Strategy (New York, NY: Free Press, 1980), especially Chapter 12, for a discussion of “harvesting” strategies within the product portfolio of the firm.

Mansfield and Romeo found, consistent with the portfolio strategy outlined above, that technologies exported by U.S. firms through licensing or joint ventures were substantially older than those exploited through direct foreign investment. Mansfield E. Romeo A. , “Technology Transfer to Overseas Subsidiaries of U.S.-Based Firms,” Quarterly Journal of Economics, 95 (1980):737–750.

Note that a substantial technological gap is likely to enhance the feasibility of only those joint ventures combining product development and manufacture. Typically, the existence of substantial gaps among the technological capabilities of prospective participants in R&D-only joint ventures operates to undermine them.

The GE-SNECMA joint venture involved both firms as co-equals. However, as was noted above, General Electric retained control of the key technological component of this partnership. Morevover, as Parker (1974) noted, the exigencies of the controversy over GE's employment of an engine technology developed with military funds in a foreign joint venture resulted in the assumption of effective overall management of the CFM-56 engine project by Parker Ge. E. C. , “Foreign Transfer of Technology: A Case Study of the GE/SNECMA 10-Ton Engine Venture,” Air War College Professional Study #5378, 1974.

See Schultze C. S. , “Industrial Policy: A Dissent,” The Brookings Review, 2 (1982):3–12.

Chandler A. D. Jr. , The Visible Hand (Cambridge, MA: Harvard Press, 1977), provides the definitive account of this evolution.