Size, Global Dominance Don’t Ensure Job Security

The Boeing Co.’s planned acquisition of McDonnell Douglas Corp. is certainly good business. But over the next five to 10 years, the deal could eliminate many jobs in the United States and accelerate the transfer of technology to foreign competitors, undermining U.S. leadership in the commercial-airliner industry. And, strange as it may seem, given Boeing’s dominance of the global market for commercial aircraft, the merger could ultimately lead to a recurrence of what happened to U.S. television production. In the 1950s, U.S. companies acquiesced to the Japanese demand that they license critical black-and-white television technologies in exchange for access to Japan’s rapidly growing domestic market. Within 10 years, Japan became the leading producer of all types of TVs; today, no sets are made in America by U.S.-based firms.

Once the merger is blessed by the federal government--a near certainty--there will be only two competing commercial-aircraft firms, Boeing and Airbus Industrie, the European consortium. As a result, most analysts expect that airliner prices will firm up, leading to higher profits. But this is not the only possible outcome.

Governments in Europe are much more willing to subsidize research and development than is the United States. In the next cycle of aircraft design, this could put Boeing at a significant disadvantage. In addition, subsidies could spill over into current sales and lead to a pricing war. The United States will never be able to compete with the willingness or ability of European governments to buy sales with subsidies.

Ironically, Boeing’s dominance of the market could also be a source of future weakness. Together, Boeing and McDonnell manufactured 69% of all commercial airliners sold this year, with Airbus getting the remainder. Some airlines may increase their purchases of Airbus planes simply to constrain Boeing’s hand. This is especially true of airlines in such countries as Japan and Singapore. They would seek to avoid dependency on a single supplier to obviate the risk of future price increases.

Price wars and lost sales to Airbus could, over time, eat into Boeing’s market share, leading to falling output, employment and U.S. exports. But any such effects would not occur for years, because aircraft production involves long lead times and sales are currently robust. Any increase in Airbus’ market share would not immediately reduce employment, either. The current recovery obscures such risks.

But the merger could accelerate losses already occurring in industries that make aircraft parts. Offsets are export-sales agreements that require a firm to perform a certain amount of work in the purchasing country. In recent years, they have resulted in a rise in parts imports and a transfer of production to foreign markets, especially in Asia. The Boeing-McDonnell merger could reinforce and promote this trend.

The sales deals often include technology transfers, which require U.S. companies to share proprietary information with foreign firms and help them learn to use it. These “performance requirements” are increasingly common in defense and commercial aerospace production. Combined with the general tendency to outsource production, they have definite consequences: almost 30% of the new Boeing 777 is composed of foreign-made parts and components.

China has aggressively sought offsets. It has used the huge appetites of its national airlines to entice Airbus and Boeing into bidding wars, which have cost jobs and critical technologies. The terms of the competition, however, are not limited to jobs and technology transfers. The companies are urged to lobby their own governments to adopt various trade and foreign policies. Last spring in China, Boeing’s board met and held conversations with Chinese Premier Li Peng. Afterward, Boeing’s chief executive officer, Philip M. Condit, endorsed the premier’s views on U.S. trade policy.

Offsets are hollowing out U.S. supplier industries. Imports of parts are rising rapidly and constitute a growing share of commercial-aircraft production. If past trends continue, the import share of domestic output could rise from 11% in 1994 to 14% in the year 2000. Up to 25,000 jobs in aircraft parts could be eliminated if these trends continue.

The Boeing deal probably will accelerate the outsourcing problem as well. Intensified competition with Airbus may pressure Boeing to make greater concessions to the Chinese to ensure sales; other countries may demand more offsets, too. The Long Beach commercial plant could also face closure, unless Boeing makes investments needed to boost its efficiency.

So, while some jobs may be preserved at some existing plants, such as McDonnell’s Long Beach facility, many others in associated small- and medium-sized businesses may disappear. Corporations such as General Electric, which makes aircraft engines, and Bendix, which makes brakes, may face new pressures from Boeing to move production overseas and set up joint ventures in China and other countries that demand offsets.

Overall, at least 250,000 jobs are at risk in the aerospace and related industries in the next four years as a consequence of these trends. The jobs could disappear outright if Airbus captures a bigger share of the world market and imports continue to grow.

Such a gloomy prospect demands that we take a broader look at public policy connected to the aerospace industry. The costs of entry into the commercial-aircraft market are escalating. Boeing invested $7 billion in developing its 777 aircraft; Airbus is now considering an $8-billion-to-$15-billion investment to build a new jumbo jet.

In today’s global economy, in which governments intervene and corporations themselves are major political players, new approaches are thus needed.

For starters, U.S. policy must recognize a national interest in maintaining high-wage jobs and technology that may differ from Boeing’s interest in short-term profits. Then, a permanent office or working group to develop and implement an integrated national aerospace policy should be created. At the moment, there are too many separate--sometimes conflicting--policies governing this sector. Agencies from the Export-Import Bank to the National Aeronautical and Space Administration develop policies to achieve their own goals, but no one is responsible for protecting or even thinking about the overall national interest in this critical industry. The window of opportunity for such a thoroughgoing review and debate is now.*