COLUMN ONE : Flying Into New Territory : Alliances between foreign companies and the U.S. aerospace industry are growing. Some question whether American producers can maintain dominance in the world.

When George Bush relaxes aboard Air Force One for a presidential meal, his food is served up on galley equipment produced by Jamco, a little-known Japanese firm that has gained international dominance in aircraft kitchens and lavatories.

As goes President Bush’s Boeing 747, so goes much of the rest of U.S. commercial aircraft. Foreign content of American aircraft is growing quickly, including not only Japanese kitchens but also Canadian wings, Korean wingtips, Italian radar domes, Japanese computer displays, Spanish flaps and Australian rudders.

And as goes the commercial aircraft business, so goes much of the rest of the U.S. aerospace and defense industry. In the weapons business, American producers are part of foreign strategic alliances for a myriad of advanced gear, including laser weapons, missiles, advanced microchips, high temperature materials, jet fighters and even spacecraft.

With its foreign linkups--the latest being McDonnell Douglas’ $2-billion preliminary agreement Tuesday to sell 40% of its commercial aircraft business to Taiwanese investors--the U.S. aerospace industry is flying at top speed into uncharted territory, hoping to retain the position of world dominance it has held for more than five decades. That is anything but assured.

The deals come at a time when competitors are mounting their most concerted assault on U.S. firms, and there is rising concern that internationalization by the Americans will prove to be the first backward steps of retreat. However the developments are interpreted, this is a new era for one of America’s premier industries.

“What you are seeing is a pragmatic realization on the part of the United States that the game is changing,” said Bruce Gerding, international vice president at TRW’s space and defense sector, which just formed a “strategic alliance” with the Japanese electronics firm Hitachi Ltd. “The amount of talent offshore is growing. Cost pressure in the U.S. is growing. You can’t remain static.”

Internationalization has received scant attention in Washington--until now. McDonnell Douglas’ deal with the Taiwanese marks the boldest step yet and is likely to prompt a deeper examination of where the U.S. industry is headed. Already, 30 senators have asked President Bush to intercede and arrange for alternative U.S. investors in the deal.

While many foreign nations have formal industrial policies to gain leadership in aerospace--and regard joint ventures as a way to get there--the United States has forsworn any national policy to protect its industry’s position. As a result, U.S. firms are left to their own devices and, experts say, a deal that benefits one firm may harm the overall industry.

The Defense Department has embraced the new international flavor. Defense Secretary Dick Cheney, though expressing some concerns, said in a recent interview that, “Given the extent to which the rest of our economy is being internationalized, you don’t want to restrain the Defense Department from taking advantage of the kinds of technology or manufacturing processes that are available on the world market.”

But critics say the United States comes out on the losing end, particularly because American technology is often sold on the cheap. American defense firms have issued 140 licenses over the past three decades to foreign nations to produce major U.S. defense systems--representing a majority of domestic military aircraft programs.

In the last two years, the pace of these deals has picked up even though evidence seems to show they have fortified the competition facing U.S. industry today, according to William Keller, an analyst at the U.S. Office of Technology Assessment. Earlier this year, for example, South Korea created a bidding competition between McDonnell and General Dynamics to see who would transfer the most valuable jet fighter technology at the lowest price.

“There is an attitude in the U.S. aerospace industry that everything is yesterday’s technology and isn’t worth anything,” said Keller, who has authored a recent report on international aerospace. “We are coming from a position of extreme manufacturing and technical strength in aerospace, but because of declining markets we have a tendency to give away too much, and that is a weakness.”

But many aerospace executives argue that withholding U.S. technology will not help the domestic industry because equivalent technology is widely available on the world market from Europe and the Soviet Union.

“We can put a moat around us and put archers up in the castle to shoot anybody that comes near us, but you can’t hide technology for very long,” said Ben Cosgrove, Boeing senior vice president for engineering. “You better invent it faster and run faster than the competition.”

Nonetheless, the United States has been responsible for single-handedly creating aerospace industries in such nations as Japan, South Korea, Taiwan and Turkey, as well as many European nations, by teaching them how to build sophisticated U.S. jets and other weapons in recent decades. The U.S. government policy after World War II was to arm its allies and teach them how to arm themselves.

When these countries try to go it alone, though, the results are often horrendous. Taiwan, for example, attempted to build its own jet fighter a few years ago--only to suffer embarrassment when a malfunction disabled it on the runway as dignitaries awaited the maiden flight.

Many of these nations are in a strong position to demand a share of both military and commercial aircraft programs by leveling an implied threat that their markets will be closed to the United States. Despite its technological leadership, U.S. aerospace is often forced to comply. And domestic firms, facing declining Pentagon business, are less able to operate autonomously than in the past.

If U.S. firms do not consent to foreign participation in commercial programs, Boeing Executive Vice President Phil Condit asserts, potential partners will strike up deals with others. In the worst case, Condit said, elite Japanese firms will team up with the European outfits, adding to Boeing’s competitive pressures.

What’s more, Condit and Cosgrove admit, the quality of parts from Japanese suppliers is often better than that from U.S. aerospace firms. So far, Boeing’s strategy is simple: Buy the best and cheapest parts, regardless of where they are made. That drove the decision to buy 20% of Boeing’s next generation 777 jet from Japanese industrial firms.

But if Boeing increasingly shuts out U.S. manufacturers from its programs, it could become an island in a distressed industry--a worrisome prospect to Boeing itself. “We would like to think we are pretty good, but we don’t have any magic,” Condit said. “If nobody else in the U.S. is competitive, then it throws into question whether we are.”

Boeing is a long way from suffering deep self-doubts. It has captured 60% of world orders so far this year, maintaining a solid grip on its dominance.

At McDonnell, it’s a different story. It has taken just 10% of overall world orders, compared to 28% for Airbus Industrie this year. Without a foreign partner, Douglas Aircraft can not afford to build its next generation jetliner, the MD-12, which will cost an estimated $4 billion.

“We don’t have that money, so we need financial partners,” Douglas Aircraft President Robert Hood said in an interview. In the McDonnell view, it is better for American aerospace to have an MD-12 assembled in the United States than no MD-12 program at all.

Hood would like Douglas to be the lowest-cost producer of aircraft by the end of the 1990s, which the company would achieve in part by moving production to low-wage Asian countries, such as Taiwan, China, Indonesia and Singapore. The MD-12 will have 70% of its airframe manufactured overseas, though the craft will be assembled in the United States.

Hood’s reading of the world market is that aircraft are becoming too expensive and that U.S. producers could price themselves out of the industry.

“If you look at the past 30 years, this has not been a great business,” Hood said. “If we can put ourselves in the position of being a low-cost manufacturer and get partners with low-cost manufacturing capability, then it is a good business deal on both sides.”

But in Congress, there is worry that the United States will cede a substantial share of the world market for the $2-billion cost of the McDonnell Douglas deal. By contrast, European nations have invested $26 billion to build up Airbus since 1970, and the subsidies show no sign of ending.

“I certainly do have concerns about this deal, but I am afraid it is the inevitable result of our country’s not having a sensible industrial policy,” House Majority Leader Richard A. Gephardt (D-Mo.) said.

The Bush Administration, for example, has declined to flex its muscle to assist the U.S. industry in competing with the Europeans. European nations have attempted to tie aircraft sales into lucrative landing rights on the Continent, something that the U.S. government has declined to do for Boeing and McDonnell Douglas. As a result, Airbus recently won an order from Singapore Airlines.

Although many of the foreign deals ensure American firms a lead role, they are certain to erode domestic employment and could reduce the positive trade balance from the U.S. aerospace industry, which rose 22% last year to $27 billion.

Despite increased foreign competition, the U.S. industry is widely regarded as the leader in technology and in its ability to integrate complex systems. Without U.S. help, most foreign countries outside of Europe would be hard-pressed to build competitive products. But with U.S. licenses, South Korea is building the F-16 jet fighter, Taiwan the F-5 fighter and Japan the F-15 fighter. During the Persian Gulf War, the Pentagon said it would allow Turkey to build F-16 fighters for export to Egypt.

U.S. experts agree that most nations aspiring to build aerospace industries face little prospect of turning a profit. Rather, these nations want aerospace as a matter of national policy to create jobs, fuel technology and assist in their general transportation industries.

“There is really not much reason for some of these countries to be building aircraft,” said Gen. Merrill McPeak, Air Force chief of staff. “It would easier for them to get out of manufacturing.”

That is unlikely. Moreover, if these nations succeed in developing aerospace industries, they are far less likely than the United States to share their technology. For example, the Keller report notes that “Japanese industry views the United States as competition, so the motivation to cooperate by transferring technology reciprocally is limited.”

As a result, some American experts fear that many international aerospace deals will ultimately work against U.S. interests.

“No one doubts that Boeing and McDonnell Douglas are the world’s premier aircraft manufacturers,” said Clyde Prestowitz Jr., an international economic analyst in Washington. “Dominance of that industry is an enormous plus for the U.S. It creates jobs, contributes to our balance of payments and creates a lot of technology. For all that to be sold at peanuts in comparison to the investment is a very poor return for the nation.”

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Growing Foreign Dependence

The Boeing 777, the firm’s nest-generation jetliner under development, will have 20% foreign content (excluding Canadian-built parts), mainly from three Japanese industrial firms building the fuselage.

Source: Boeing Co.