PACIFIC REPORT : Will Japan Shift Its Plane-Making Ties?

As Boeing Co. and Europe’s Airbus Industries consider plans to develop competing super jumbo jets--Leviathans with a third more seats than existing Boeing 747s--industry observers are raising a critical question: “Who will the Japanese work with?”

The question is important because the firm that forms partnerships with Japanese aerospace concerns will not only find itself paired with reliable, high-quality suppliers, but also will have indirect access to Japanese government subsidies and be well-positioned to sell planes to Japanese airlines.

“There is an expectation that Airbus will woo Japan,” says Jeff Cook, senior manager of International Business at Boeing Co., which has partnerships with two Japanese aerospace firms on major projects. “But as long as we have a good working relationship, we would hope the relationship would continue with Boeing.”

Japan had a strong aerospace industry before World War II, but it was forced to dismantle factories making its famous Zero fighting planes in the aftermath of defeat. Today, the aircraft industry is tiny next to the aerospace giants of Europe and America. Japan makes none of the world’s commercial jets and only a small number of military planes under license from U.S. manufacturers. But Japan has nevertheless positioned itself as a key player in the industry by concentrating its national and industrial resources to nurture a few firms and by backing them up with government subsidies.

“Measured in terms of producing things that have wings and fly, (Japan) is not successful,” says Richard Samuels, a political scientist at Massachusetts Institute of Technology, “but the percentage of value added in aircraft . . . components, avionics and subsystems is greater than ever.”

Samuels is working on an article about Japan’s aircraft industry tentatively entitled, “How to Succeed Without Flying.”

Although Japan’s aircraft industry makes little money, earning roughly 2.6% on its $6 billion in 1990 sales, sales growth is estimated at an admirable 10% a year, according to the Society of Japanese Aerospace Companies. More importantly, the critical commercial aircraft sector, which primarily supplies parts for foreign aircraft makers, is projected to grow at a 17% annual rate over the coming decade.

The government has made a concerted effort to strengthen such key players as Mitsubishi Heavy Industries, Fuji Heavy Industries and Kawasaki Heavy Industries. They, for example, receive the bulk of Japan’s government aerospace contracts and have joined together to form the Japan Aircraft Development Corp. This nonprofit consortium receives subsidized loans from the government and has provided a united front in negotiations with Boeing on joint ventures. “You have a single funnel through which international offers come,” says Samuels. “That gives Japan a lot of leverage.”

Japan’s leverage in negotiations with partners is substantially increased by the implicit understanding that Japanese airlines, which have significant purchasing power, will buy planes from international aerospace firms that have significant partnerships with Japanese companies. According to the journal Aviation Week, Japanese airlines have $21 billion in aircraft on order from Western companies, the bulk from Boeing.

The Mitsubishi/Fuji/Kawasaki consortium recently signed an agreement to supply parts and components worth 21% of the value in the new Boeing 777, a 350-seat jetliner under development. The deal, signed in April, was a disappointment to Japan because Boeing, in an effort to protect its proprietary technology, refused to allow Japan to join in the development of such key portions of the plane as the cockpit and the wings. As a result, Japanese firms chose not to take an equity role in the project as had been originally anticipated.

Nevertheless, the agreement boosted Japan’s role as a supplier compared to its role in the smaller B767 airliner project, for which Japan supplies 15% of the value of the plane.

A similar consortium, the Japan Aero Engines Corp., holds a 23% stake in the $1-billion, V2500 aircraft engine project that includes U. S.-based Pratt and Whitney and Rolls-Royce of Britain. Ishikawajima-Harima Heavy Industries, the leader in this Japanese consortium, is also seeking joint development in two other cooperative engine projects, one with General Electric and the other with Rolls-Royce.

Looking further ahead, Japan’s Ministry of International Trade and Industry is putting $215 million into a major new program to develop an engine that would power a new hypersonic airliner in the year 2015. The new project, for which most major Japanese, European and American engine makers have signed up, will give Japanese engineers an opportunity to work side by side with the world’s top engine designers and get a better understanding of the requirements of designing an engine from scratch.

Japan has come a long way since the period after World War II when the Allies demanded that military aircraft factories be retooled for “peaceful” industries. Mitsubishi engineers remember the period as one of shame. “We were reduced to making pots and pans, bicycles, anything out of aluminum to keep our workers fed,” says Hiroshi Hayafuji, director of the Aircraft Engineering Department at Mitsubishi Heavy’s Nagoya plant.

Aircraft production has steadily risen in Japan, with technological help from American military contractors and subsidies from the Japanese government. But, many industry insiders remain skeptical of whether Japan will ever regain the glory in aerospace it enjoyed when its Zero fighters bombed Pearl Harbor 50 years ago.

Shoichiro Tozuka, a young engineer with Fuji Heavy Industries working on the Boeing 777 project in Seattle, says he is impressed with Boeing’s massive airport and manufacturing facilities and doubts Japan will ever be able to build its own airliners competitively.

Most Japanese industry and government officials agree. Nevertheless, they would like to see Japan’s technological level and market share in this key industry continue to grow.

Japan underscored the importance it put on developing an independent technological base for its aircraft industry when it initially insisted on developing its own next-generation fighter aircraft, the FSX, rather than co-producing one with American companies as it had done in the past.

Japan eventually backed down from the decision to build an all-Japanese plane and chose instead, under American pressure, to work with General Dynamics on the plane design. Still, the project is a major technological challenge to Japanese companies, and Mitsubishi Heavy, the main contractor for the FSX, says it expects to learn a great deal about airplane design as a result of the project. Mitsubishi will also earn as much as $10 billion in revenue from its participation.

The declining ability of the Defense Agency to finance Japanese aerospace development is forcing Japan’s aircraft companies to push more aggressively for civilian orders. That’s fine for the Ministry of International Trade and Industry, which would like to see commercial aircraft industry sales increase to 50% of total industry sales by 2010--up from about 20% today.

One proposal getting official backing is a project to develop a 75-seat plane dubbed the YSX. “Now people move from comfortable large jets to noisy uncomfortable props (propeller planes),” says Yoshiji Hagura, senior managing director of the Japan Aircraft Development Corp. He says Japan’s YSX will offer a “seamless” transfer to smaller routes.

Japan is also making progress toward building its own helicopters and light aircraft. Mitsubishi Heavy recently won the lead role in a government effort to develop the engine to be used in Japan’s first, totally made-in-Japan helicopter, the OHX. Mitsui & Co., a big customer and backer of McDonnell Douglas, has put up $40 million for half the development costs of a new 10-seat helicopter being built at Bell Helicopter Textron Inc.

Toyota has created an aerospace division and is developing a small aircraft engine based on the 4000-cc engine used in its top-of-the-line Lexus.

Japan’s main goal, however, is to get more involved in making large commercial aircraft, and Japan is learning to play European and American aircraft makers off against each other. Over the past year and a half, Japan has dramatically increased its purchases and joint-venture discussions with European companies.

American companies see this as a threat. “If the U.S. continues its take-it-for-granted attitude about the Japan market, we will forfeit our commanding market position here,” Stanley Krueger, president of United Technologies Corp.’s Japanese unit, wrote earlier this year in a paper for the American Aerospace Industry in Japan.

Even Boeing may find that it must offer more inducements in terms of technology transfer to keep its Japanese partners on board. Takaaki Yamada, executive vice president of Mitsubishi Heavy Industries, recently told the Nihon Keizai Shimbun, Japan’s business daily, that Boeing and Airbus had “a 50-50 chance” of getting Japanese participation. “It’s too early to decide which group we’ll join. Boeing, of course, has a great share of the world aircraft market, but that may change.”