Aerospace Strategic Trade

How the US Subsidizes the Large Commercial Aircraft Industry

Philip K. Lawrence, Derek Braddon

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351960526
• Edition: 1
• Topic: Technologie et ingénierie
• Subtopic: Ingénierie de l'aéronautique et de l'astronautique

The U.S. economy is generally considered to run on free market or laissez faire principles, implying that U.S. policy makers do not provide government support for industrial or commercial sectors. While mostly true, it is not the case with strategic industries, such as aerospace. Support for the aerospace sector has been viewed as essential, because aerospace technologies have been the material backbone of U.S. security systems. But American historic dominance in commercial aerospace, and particularly the large commercial aircraft sector, arose on the back of defence technology paid for by the US government. Aerospace Strategic Trade analyses the subsidy of the U.S. large commercial aircraft (LCA) industry and redefines the terms of the Airbus/Boeing subsidy debate. This is achieved by tracking the benefits to Boeing, of the Research and Technology contracts granted by the DoD and NASA. The book is characterized by a new level of methodological precision in the database upon which the factual claims rest and the analysis derives from an exhaustive search of U.S. public databases and also data on federal R&D contracts, obtained under the Freedom of Information Act (FOIA) in the USA. The overall analysis brings together these two approaches and provides a balanced and highly informative account of U.S. federal funding of the American large commercial aircraft sector. This book is of interest to academics, industrialists and government officials concerned with the aerospace industry, to managers and executives in the aerospace industry.

1 Introduction: Explanation and Scope of the Study

Purpose of the Study

This analysis of the U.S. large commercial aircraft (LCA) manufacturing sector aims to provide greater detail and accuracy than previous studies on this vexed question (see chapter two). The information provided here is critical to the LCA trade debate, as since the beginning of the 1990s, the U.S. government has felt able to increase federal support for the large commercial aircraft sector, seemingly without fear of invoking a legal challenge under the ensemble of GATT regulations, which apply to LCA trade. In short the U.S. authorities seem confident that billions of dollars of support for the American aerospace industry, including the LCA manufacturing sector, does not constitute subsidy. The analysis here will contest this assumption and will show that subsidy does indeed exist. This study is being written to widen and deepen the European understanding of the U.S. LCA manufacturing industry and to seek to trace with greater accuracy the flows of government financial support which go to U.S. LCA manufacturing companies, notably the Boeing Corporation, which absorbed its one U.S. rival, McDonnell Douglas, in 1997.

The trade friction between the EU and U.S. in the large commercial aircraft sector concerns rival allegations regarding public subsidy of the LCA industry. For the European side a continuing problem has been a refusal by the Department of Commerce, the USTR and U.S. industry executives to acknowledge any government support of U.S. LCA programs. However, this study will show that the U.S. LCA sector is the recipient of substantial federal subsidy and will further detail its form and quantity. In this chapter we will introduce and outline a number of arguments that are fundamental to proving the existence of subsidy. Our focus here concerns the following:

1. 

   Definitions and explanation of the R&D process
2. 

   The nature and definition of subsidy

Aerospace Strategic Trade

1. 

   The purpose of NASA and DoD R&T programs
2. 

   The existence of defence/civil synergy.

R&D: A Note on Terminology and Definitions

This study seeks to show how the U.S. LCA manufacturing sector benefits from the research and development funded by the American federal government. In layman’s terms R&D is the generic concept that applies to the overall process we have investigated in this study of U.S. subsidy. However, within the aerospace industry, government offices and research establishments, the R&D process is often referred to as Research & Technology (R&T). In Europe, development is often designated as a separate activity, which commences when components, systems and platforms are developed towards actual production. The problem, though, is that R&T is actually an early part of the product development process, which is why the generic term R&D is not invalid. To complicate matters further, the U.S. DoD calls its R&D process, Research, Development, Testing and Evaluation, (RDT&E).

To give guidance to the reader we outline below the definitions of the R&D process we have utilized. In this study we have adopted the terminology of the NASA/DoD Aerospace Knowledge Diffusion Study conducted by Thomas Pinelli et al, which construes R&D as divided into three distinct phases:

R&T development

Technology demonstration

Systems development.

These three phases represent an interrelated set of activities in the R&D process where technology is conceptualized, demonstrated, produced and then fed into systems development. However, a key point about R&T and technology demonstration is that definitions refer to the intended outcome, not the physical mechanisms involved in R&D, (Pinelli et. al. 1997, p. 111). R&T consists of the first two phases listed above. Systems development consists of activities aimed at producing aircraft systems, or systems intended for use on a particular platform. In this report NASA activities will be referred to as R&T, as technically they conclude before systems development commences. However, a key point to bear in mind is that NASA programs emphasize technology demonstration. This is a vital support to U.S. LCA because demonstration involves testing configurations that are very close to the final intended market application. In other words demonstration bridges the gap between R&T and development and is therefore of direct benefit to private companies. Demonstrators often lead to significant savings at the development stage, thus reducing financial risk to the companies. As the NASA/DoD Aerospace Knowledge Diffusion Study notes, the U.S. LCA sector is closely involved in the large scale testing of technology with NASA and the DoD, (Pinelli et. al, 1997, p.112).

U.S. Department of Defense Definitions of R&D

NASA R&T corresponds to DoD budget classifications 6.1 (research), 6.2 (exploratory development) and 6.3A (advanced engineering). However, DoD programs extend to 6.3B and beyond, which is where development begins. For a full listing of DoD R&D categories the reader is referred to Appendix F. In this study, we adopt the following rule. DoD R&D will be termed RDT&E, NASA R&D will be designated Research and Technology (R&T), as it is pre-developmental, (according to European usage). However, in keeping with normal usage we will refer to the generic process as R&D. We can only apologize to the reader for the fact that sources we quote may use other terminology, such as Research Development and Production (RD&P), (Pinelli et. al., 1997).

NASA and DoD Mechanisms of Federal Support to U.S. LCA

In the United States the two major mechanisms by which the federal government provides financial support to the LCA sector are via NASA R&T and DoD RDT&E programs. The DoD also provides additional support through a number of other mechanisms. The following activities and processes constitute the basis of NASA and DoD supports:

NASA:

1. 

   Facilities, materials and personnel funded by the U.S. government whose function is to ensure the continued world leadership of U.S. civil aeronautics
2. 

   Generic research undertaken in the Research and Technology Base Program to provide long-range technology transfer into U.S. LCA programs
3. 

   Research in the Aeronautics Focused Programs to provide technology transfer into U.S. LCA programs which are already in a multi-definition concept phase
4. 

   Technology demonstrators to bridge the gap between conceptual analysis and real components, systems or platforms
5. 

   Transfer of skills and technology to U.S. LCA sector employees working on NASA programs.

DoD:

1. 

   Procurement of military aircraft where airframe technology, avionics, flight management systems and propulsion technology migrate to civil aircraft
2. 

   R&D contracts for military aircraft systems and platforms that have spin-off potential
3. 

   Independent Research and Development funds as an overhead on procurement contracts
4. 

   Military procurement as a buffer against downturns in the commercial market
5. 

   Dual-Use initiatives to promote the development of commercial technologies that can be leveraged into defence systems
6. 

   Manufacturing Technology (ManTech) programs to improve production efficiency in prime aerospace companies and the supply chain
7. 

   Training of engineers on defence projects who transfer to civil programs.

The list of support mechanisms listed above is not exhaustive, other supports come from tax concessions, financial support for exports and executive level co-ordination of sales campaigns. In addition the departments of Commerce and Energy undertake technology initiatives relevant to the U.S. LCA sector.

The Function of NASA R&T

It is now widely recognized that knowledge is a core element in corporate competitiveness. As Golich and Pinelli comment, ‘Knowledge is the foundation upon which researchers build as they innovate. Knowledge lies at the core of a state or firm’s ability to survive in a competitive world’, (Golich and Pinelli, 1998, p.l). The wider understanding in society and the business world that knowledge is now the key corporate asset has come about rather slowly. However, in the last few years the media and serious management journals have come to recognize the strategic role of what is now called “knowledge management”, (Schendel, 1996, p. 166). As a number of studies have noted, knowledge is often situated outside the firm and must be diffused across institutional boundaries, (Lynskey, 1999, p. 317).

Knowledge management necessitates knowledge creation and knowledge dissemination. The role that NASA plays in creating and disseminating aeronautical knowledge warrants explanation. A core requirement for commercial competitiveness in aeronautics is now knowledge. In order to remain competitive in LCA manufacturing, companies require that their core competence in technical knowledge be constantly upgraded. As Phil Condit, CEO of Boeing, succinctly noted in 1997 ‘...you fail to innovate you lose’, (quoted Golich and Pinelli, 1998, p.l). This requires an intensive effort in research, technology and development, as well as the ability to move knowledge between institutions. The need for state of the art technology in civil aeronautics comes from the commercial pressure on the LCA business to accelerate the aircraft development cycle and to bring advanced technology to market more rapidly. Further, new products must have reduced direct operating costs (DOCs). As we will show this was achieved by Boeing on its B-777 program with federal assistance. The strategic role of public agencies in this process, such as NASA, is to fill the funding gap between what is required in R&D and what is actually funded by private companies. As the 1997 NASA/DoD Knowledge Diffusion Study notes:

In the case of LCA, where RD&P costs are very high, technological innovation is virtually impossible for individual firms to appropriate, and return-on-investment cycle – assuming they are successful – can take as long as 10-15 years, creating demand may not be enough to impel firms to innovate. National governments with active LCA producers... all invest public money in an effort to underwrite the risk because LCA manufacturing is a strategic industry sector, (Pinelli, et al, 1997, p. 65).

Federal funding of aeronautics R&T can thus be construed as a subsidy to companies to assist them in remaining at the forefront of technological k...