The Global Commercial Aviation Industry

Sören Eriksson, Harm-Jan Steenhuis, Sören Eriksson, Harm-Jan Steenhuis

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317657071
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book provides a state-of-the-art overview of the changes and development of the civil international aircraft/aviation industry. It offers a fully up-to-date account of the international developments and structure in the aircraft and aviation industries from a number of perspectives, which include economic, geographical, political and technological points of view.

The aircraft industry is characterized by very complex, high technology products produced in relatively small quantities. The high-technology requirements necessitate a high level of R&D. In no other industry is it more of inter-dependence and cross-fertilisation of advanced technology. Consequently, most of the world's large aircraft companies and technology leaders have been located in Europe and North America. During the last few decades many developing countries have tried to build up an internationally competitive aircraft industry.

The authors study a number of important issues including the political economy of the aircraft industry, globalization in this industry, innovation, newly industrializing economies and the aircraft industry. This book also explores regional and large aircraft, transformation of the aviation industry in Central and Eastern Europe, including engines, airlines, airports and airline safety. It will be of great value to students and to researchers seeking information on the aircraft industry and its development in different regions.

1 The contours of the global commercial aircraft manufacturing industry

Dániel Vértesy

Introduction

The capacity to design and produce an airplane is very much distributed around the world today. If we board a plane flown by any major airline today, we will find that it is made of advanced parts and components produced in American, European and Asian countries. It has not been this way throughout the history of commercial aircraft manufacturing. Even during the 1960s, aircraft design and engineering, manufacturing and product support activities were typically conducted in the same country, and in all these activities the dominance of US producers was overwhelming.

Events affecting the international developments of the aircraft industry often feature in news headlines. Not only new technologies, but also changes in markets and global shifts in the industry garner public interest. For example, news on the new Chinese aircraft manufacturer Comac starting to establish risk-sharing partnerships to develop its C-919 mid-range jet that would make it a direct competitor of Boeing and Airbus, on Embraer and Airbus opening aircraft assembly lines in China, or Bombardier establishing a component manufacturing centre in Mexico¹ attract heated debate. Many argue that the potential impact of such international redistribution of technological capabilities and production is worrisome for traditional industry players. For instance, MacPherson and Pritchard (2003) link the increased use of global suppliers to a significant reduction in the number of aerospace jobs in the United States and fear the effect on future competitiveness. Others see this high-tech industry as an instrument for moving up the value chain and a way of breaking out of the middle-income trap (Wade 2010). In addition to being a source of prestige and national security, commercial aircraft manufacturing is an important economic activity that can generate significant export revenues and demand for highly skilled employment.

Regardless of its impact, the international expansion of the aircraft industry is not a new phenomenon. This chapter argues that what is new is the direction of internationalization and its driving mechanisms. International trade in aircraft has intensified, and the reliance on global supply chains is a reality in today’s commercial aircraft industry. However, it is easy to overestimate its scale without assessing relevant statistical evidence.

This chapter investigates the changing global patterns of production and trade in civil aircraft, and aims to paint with broad strokes the contours and the major underlying dynamics that define that. This being said, it is about commercial aircraft manufacturing rather than military,² and is about the producers or large aircraft-making companies rather than their user, the airlines; also, its main focus is on dynamics at the country level. The questions that guide our investigation are:

• In what way is the current wave of internationalization different from previous ones?

• What is the size of the global commercial aircraft industry and how has it evolved over the past five decades?

• What are the main producer and exporter countries?

• How has globalization shaped the industry? Can we observe any patterns in the internationalization of commercial aircraft manufacturing?

This chapter will provide an empirical overview of the evolution of the global aircraft industry from an economic point of view and identify changing patterns in its geographical distribution.

Two waves of internationalization

The process of internationalization of the aircraft industry has been studied for some time. Mowery and Rosenberg (1989) explained how the process took off at the end of the 1970s due to a confluence of changes in policies, market conditions and technology. Deregulation in the US air transport services sector, the erosion of the government’s funding of (primarily military) research and development (R&D) which was essential for establishing US dominance in the industry, the decline in the commonality of military and commercial technology, the increasing technological complexity and the increasing development costs all contributed to increased financial risks for companies. Furthermore, the market share of the United States in new aircraft started to decline, making foreign sales crucial for financial success of US producers, spurring international collaboration. By the 1990s, as Golich (1992) pointed out, collaboration of former national champion enterprises had become the only means of survival in an industry characterized by high risks and costs associated with R&D and production, long investment cycles which had increased 2–3-fold to 10–15 years since the end of World War II, and features of the market it served, in which – apart from a product’s price, performance and on-time delivery – politics played a key role for competitiveness.

Eriksson (1995) surveyed the sector in a number of newly industrialized economies and emphasized the increased importance of East and Southeast Asia in the global aircraft industry. Niosi and Zhegu (2005) highlighted that the main steps in the internationalization process following the initial period of the United States’ supremacy were Europe’s catching up in the 1970s and 1980s and the emergence of the duopolistic war between Airbus and Boeing, and eventually the worldwide diffusion of the industry.

The industry today is characterized by concentration, competition and also collaboration in R&D, while new countries are becoming part of the international aircraft supply chain. Esposito (2004) showed that the evolution and intensification of international collaboration in commercial and military aircraft and engines has been a gradual process which began with collaboration agreements initiated by engine makers, and continued through the creation of the European Airbus consortia, which was building on lessons from the Concorde project, evolving into a complex web of global cooperation. Hagedoorn (2002) offered further evidence that international R&D partnering in the aerospace and defense industry increased substantially by the 1990s, in contrast with that of the previous three decades, and in that decade in particular, also in contrast with other high-tech industries. With regards to the more recent trends, authors point out that new countries beyond the US–Europe core are entering the industry through the supply chain; e.g., China emerged as an international parts and components supplier, applying its strong bargaining power to offer market access (Eriksson 1995; Goldstein 2006; Eriksson 2011).

From another point of view, the internationalization of the industry in the past half a century happened in two waves. What began with the intensification of collaboration between producers that vertically integrated the capacity to design and produce aircraft, internationalization through joint ventures for R&D collaboration, company spin-offs, mergers and acquisitions, reshaped the industry in such a way that today’s producers are mostly specialized in a few activities along the supply chain. In the multi-tier structured industry, the largest aerospace (and defense) producers may be competitors at some level in certain products, while collaborating in others – for instance, as risk-sharing partners in components and subsystems. Even for the United States, where many of the collaborating partners are domestic, the trend observed by Craypo and Wilkinson (2011) on Boeing jetliners is rather telling: while only 2 percent of the B-707, a product of the 1960s, was produced outside the United States, this share was 30 percent for the B-777 of the 1990s; we now see that around 65 percent of the latest B-787 Dreamliner airframe relies on foreign suppliers.³

This first wave of internationalization, which began in the 1960s and ended with a major shakeout and consolidation in the 1990s, typically occurred between incumbent countries and firms of the North America–Europe–Japan triad. More recently, a second wave of aerospace internationalization has emerged, distinguishing itself from the first wave. Whereas the first wave saw the set of aerospace-producing countries largely unchanged, this new wave sees a global expansion of the industry. This expansion has many underlying reasons – structural, political and economic. The new structure of the industry had crystallized by the end of the 1990s and is more favorable for new entrants. By comparison, those latecomers that attempted to join the industry after World War II often faced insurmountable technological and capital barriers when they tried to launch mega-projects and establish (copying incumbents) the entire vertical spectrum of aerospace production. It is hardly surprising that many of these attempts – from Argentina to Indonesia, and even China – failed to deliver the ultimate goal, the serial production of indigenous aircraft; or, if successful, were short-lived (Eriksson 1995; Vertesy 2011).⁴ Yet both the technological and capital barriers of entry are significantly lower when a new entrant climbs gradually along the supply chain. From Mexico to China and South East Asia, we see new producers that specialize in supplying high-quality, high-tech components for major system assemblers such as Boeing and Airbus. They produce and innovate, as observed in many other high-tech industries (Kim 1997; Amsden 2001; Hobday 1995). This results in less visible, large-scale projects, but is probably economically more sustainable.⁵

After the end of the Cold War the world order was multipolar, in the economic and political sense (Wade 2011). Establishing aerospace production (and innovation) capabilities is seen in this context as a contributing factor for high-tech competitiveness, and a strategic aim for many emerging economies (BRIC countries, as well as others) that aim at increasing their regional or global influence. Given that airlines in these countries are often in state hands, they can strategically trade market access in exchange for access to technology, often in the form of offset agreements. On the one hand, high economic growth and demand for transportation go hand in hand, thus the growing demand for new aircraft gives strong leverage for emerging economies. On the other hand, incumbent parts and component suppliers also see potential in capitalizing on the growth outside their home territories, and are ready to invest even if it takes longer to recover their investments, and even if they are forced to enter joint ventures in partnership with receiving governments.

The second wave of internationalization is driven by transnational corporations, which integrate design and engineering, manufacturing, distribution and after-sales support activities in multiple locations around the world (Aerostrategy 2009). On the receiving end, governments increasingly compete to attract firms in the supply chain by establishing aerospace business parks, providing tax breaks and even supporting R&D.

In search of statistical evidence

Despite considerable public interest in the aviation industry, there is surprisingly little consistent statistical data available to compare the industry performance of aircraft-producing countries around the world. Without comparable production and export statistics, it is very easy to exaggerate any threat to established structures posed by new entrants to the industry, or overestimate the success of an industry that achieved the maiden flight of a new model but failed to sell to airlines. Why is it so difficult to find publicly available, comparable data? In general, this is due to the particularities of the industry. Aerospace producers are typically large firms, often without significant domestic competition, and often dual producers of commercial as well as defense products, which makes confidentiality a key issue. Of course, the reasons for limited data availability differ from country to country, but there are a few common patterns. For most of the industrialized economies (members of the OECD) data are available from 1970 onwards, but for earlier years it is mostly published as part of the more aggregated transport equipment manufacturing branch. Former socialist countries (from Central Eastern Europe to China) carefully limited access to information during the Cold War years, since all of the sector’s products were considered strategic assets for national security. Even the otherwise highly insightful estimates in declassified CIA reports (Maddison 1998) do not offer data on this industry in the USSR. (Spy agencies appear to have only been interested in aerospace as a source of military capabilities and less as a source of wealth creation.) Even today, the Russian Federation does not publish sectoral value added or sales figures, thus impeding historical extrapolations.

The high degree of concentration of industrial activity is another major difficulty, especially in newly industrializing economies. Often, there is only a single enterprise. In order to not jeopardize the respondents’ anonymity in industrial surveys, statistical offices are forced to publish branch-level aggregate figures when the industry consists of only a handful of firms. In other cases the manufacturing activity in the sector was simply too low to be measured separately. But even if domestic aircraft-manufacturing activities were measurable, they were short-lived (i.e. some Latin American countries) or could not be differentiated from maintenance, repair and overhaul activities. In sum, it is not surprising that no comparative study was ever published on the growth of aerospace manufa...