```
Asian Aeronautics: Technology Acquisition Drives Industry Development
(Letter Report, 05/04/94, GAO/NSIAD-94-140).

In recent years, American industries that once enjoyed worldwide
preeminence have come under increasing economic pressure from abroad. In
response, much attention has been paid to ways in which other countries
create new technologies and bring them to market. Recent
developments--notably the emergence of aircraft manufacturing companies
in Europe and Japan--have focused this attention on the U.S. aeronautics
industry. This report provides information on (1) the approaches that
Asian nations have taken to develop their aeronautics industries, (2)
the level of aeronautics development each country has achieved, and (3)
the implications of this development for the U.S. aeronautics industry.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-94-140
     TITLE:  Asian Aeronautics: Technology Acquisition Drives Industry 
             Development
      DATE:  05/04/94
   SUBJECT:  Aerospace engineering
             Aerospace research
             Aerospace industry
             Aircraft industry
             Defense industry
             International relations
             Foreign military sales
             Research and development
             International trade
             Technology transfer
IDENTIFIER:  Asia
             Europe
             Japan
             China
             Indonesia
             Taiwan
             Boeing 767 Aircraft
             Boeing 777 Aircraft
             Boeing 737 Aircraft
             France
             Germany
             United Kingdom
             Spain
             Hong Kong
             Singapore
             F-15 Aircraft
             
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Cover
================================================================ COVER

Report to Congressional Requesters

May 1994

ASIAN AERONAUTICS - TECHNOLOGY
ACQUISITION DRIVES INDUSTRY
DEVELOPMENT

GAO/NSIAD-94-140

Asian Aeronautics

Abbreviations
=============================================================== ABBREV

  AVIC - Aviation Industries China
  AVMARK - U.S.  aviation consultants
  GATT - General Agreement on Tariffs and Trade
  IPTN - Industri Pesawat Terbang Nusantara
  MITI - Ministry of International Trade and Industry
  NASA - National Aeronautics and Space Administration
  R&D - research and development
  TAC - Taiwan Aerospace Corporation

Letter
=============================================================== LETTER

B-256707

May 4, 1994

The Honorable Tim Valentine, Chairman
The Honorable Tom Lewis, Ranking Minority Member
Subcommittee on Technology, Environment, and Aviation
Committee on Science, Space, and Technology
House of Representatives

In recent years, American industries that once enjoyed worldwide
preeminence have come under increasing competitive pressure from
abroad.  In response, a great deal of attention has been paid to
identifying the means by which other nations create new technologies
and bring them to market.  Recent developments--notably the emergence
of aircraft manufacturing companies in Europe and Japan--have focused
this attention on the U.S.  aeronautics industry. 

This report responds to your request that we review the aeronautics
research and development (R&D) activities of Asian countries.  More
specifically, we are providing information on (1) the approaches
these Asian nations use to develop their aeronautics industries, (2)
the level of aeronautics development each country has achieved, and
(3) the implications of this development for the U.S.  aeronautics
industry.  This report represents an amalgamation of many pieces of
data obtained from dozens of U.S.  and foreign sources.  However,
because of the nature of much of the data, we were unable to verify
its accuracy or make an independent assessment of the extent and
progress of each country's R&D efforts. 

   BACKGROUND
------------------------------------------------------------ Letter :1

The aeronautics industry is diverse, ranging from large airframe and
engine manufacturers to numerous producers of avionics, smaller
aircraft, and parts.  All segments are affected by changes in the
worldwide aviation market.  Due to continuing defense cuts and a weak
global economy, orders for American military and civil aircraft are
decreasing.  In the large civilian aircraft market, lower demand for
the major U.S.  producers--Boeing and McDonnell Douglas--is made more
severe by competition with the European-based Airbus Industrie, which
reportedly holds about one-third of the current world backlog of firm
orders.  The Department of Commerce has reported that suppliers of
aircraft structures, systems, and components are undergoing
unprecedented consolidation and that many companies will leave the
industry for good. 

In this environment, U.S.  companies are searching overseas for new
customers and partners.  Increasingly, they are turning to Asia, a
region with great growth potential for aviation.  In the next two
decades, air traffic to, from, and within Asia is expected to account
for more than 50 percent of the world market.  Asian orders for
commercial aircraft are also expected to rise significantly, with
Japan and China leading in purchases of passenger jets.  Access to
Asian markets has become a primary business objective of U.S.  and
European aircraft manufacturers, and Asian aircraft buyers have
responded by demanding a measure of technology transfer with each
purchase.  This has enabled some Asian companies to become competent
in newer and more advanced technologies without incurring all of the
risks of development and has allowed U.S.  companies to share
development costs. 

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The four Asian nations we visited--Japan, China, Indonesia, and
Taiwan--appear intent on developing their own aeronautics industries. 
These nations are acquiring technologies developed in the West,
building aeronautics products based upon them at lower cost, and
trying to improve those products over time.  In addition, these
countries are attempting to build domestic R&D infrastructures in
order to enhance acquired technologies.  Carefully applied, this
approach allows Asian nations to develop industrial and technological
capabilities in a fraction of the time needed to cultivate them from
scratch. 

Each of the Asian nations we surveyed is employing a similar method
of developing its indigenous aeronautics industry.  Essentially, this
method is characterized by (1) strong government support; (2)
importation of technologies; (3) a strong emphasis on applied--as
opposed to theoretical or basic--research; and (4) direct,
synergistic links between military and civilian aeronautics projects. 

Despite the similarity of methods they apply, Asian countries'
aeronautics industries are not equally developed and can be expected
to continue to develop at varying rates because of differences in
their political and economic environments. 

In the immediate future, it appears unlikely that Asian aeronautics
companies will compete directly with American aircraft builders. 
Some form of cooperation is more likely because (1) U.S.  companies
claim to zealously guard their critical technologies, even from
transfer to their Asian "partners;" (2) Japan is the only Asian
nation capable of designing and producing jet aircraft, but Japan
appears unlikely to initiate a new aircraft program without the
cooperation of Western companies; and (3) in the large commercial
aircraft sector, development costs are so steep that any new programs
are likely to require partnership arrangements.  Nevertheless, some
industry observers are concerned that, in the long term, cooperative
aeronautics technology transfer to Asia could help create a new
competitor for the U.S.  aeronautics industry. 

   COMMON STRATEGY FOR INDUSTRY
   DEVELOPMENT EMPLOYED
------------------------------------------------------------ Letter :3

Four principal features typically characterize the state of the Asian
aeronautics industries:  (1) the national government strongly
supports--and sometimes initiates--industry development; (2) Asian
countries usually import product and process technologies, instead of
developing such technologies indigenously; (3) Asian nations
emphasize applied R&D activities over theoretical research, and
almost all research activity is expected to yield downstream
commercial benefits; and (4) the countries use acquired technologies
interchangeably on military and civilian aeronautics projects. 
Application of these features has enabled some Asian countries to
become active and competitive in some segments of the worldwide
commercial aircraft market.  Although the focus of the Asian effort
is currently on manufacturing aircraft parts, some countries--notably
Japan and Indonesia--have acquired the technology and expertise to
manufacture short-haul passenger aircraft. 

      GOVERNMENT SUPPORT
---------------------------------------------------------- Letter :3.1

In Asia, national governments drive and support the process of
developing aeronautics industries.  Government offices are
established to draw up timetables and to facilitate cooperation
between, and award contracts to, manufacturing corporations.  In some
cases, the enterprises that import technology and design and build
aircraft are owned in part or outright by the government.  Funding to
support these ventures flows from national governments to aeronautics
projects via a number of mechanisms that are often difficult to
track.  Examples of how Asian governments support their aeronautics
industries include the following: 

  The Japan Ministry of International Trade and Industry (MITI)
     continues to plan--and in some ways direct--the means by which
     Japan's largest aeronautics companies proceed in their
     development.  MITI brokers agreements between those companies
     when they seek to build the same components for aircraft.  MITI
     also arranges collective corporate agreements and favorable
     financial provisions that reduce the companies' financial risk. 
     For example, the business plan for the Japan Research
     Development Corporation, the consortium of Japanese aircraft
     companies that make parts for the Boeing 767 jet, states that
     the break-even point for the entire consortium shall be the
     point at which all of the members are profitable.  In addition,
     some $350 million of Japanese companies' development costs on
     the Boeing 777 project are eligible for MITI support.  MITI has
     also proposed a $750-million initial allocation in its 1994
     budget request to the consortium for development of a jet engine
     to be used on their regional jet aircraft project. 

  Taiwan Aerospace Corporation (TAC) is owned in part by the Taiwan
     government.  The government claims the ability to summon enough
     public and private capital to support the corporation's
     ambitious aeronautics design and production agendas.  Public
     subsidies, low-interest loans, and tax credits totaling up to 50
     percent of total costs have already been provided to aeronautics
     projects in Taiwan. 

  In Indonesia, the aeronautics company is state-owned.  It has
     relied on funding from the national budget for every aspect of
     its operations and development, including extensive consulting
     arrangements with Western aircraft manufacturers. 

Government support of the aeronautics industry may be affected by
changes in international trade agreements.  As part of the recently
concluded Uruguay Round of the General Agreement on Tariffs and Trade
(GATT), a new Subsidies Code, which covers civil aircraft, could
restrict governments' ability to subsidize industry, if adopted by
GATT members. 

      TECHNOLOGY ACQUIRED OVERSEAS
---------------------------------------------------------- Letter :3.2

All of the Asian countries we reviewed acquire product and process
technologies from the United States and Europe.  The transfer of
technology is often stipulated by Asian organizations when they
negotiate to purchase Western equipment, and can be accomplished via
a number of cooperative programs, including subcontracting, licensed
production, and codevelopment.  Because the quality assurance and
quality control processes inherent in aeronautics manufacturing are
so detailed and rigorous, all forms of cooperative agreements between
Asian and Western companies are likely to result, at the very least,
in the transfer of important process technology from West to East. 
Once acquired, these technologies can be honed and improved upon. 
Consequently, what starts as a subcontract to produce latches on
cargo doors, for example, develops over time into fuselage, wing, and
avionics manufacturing.  Examples of technology transfers follow: 

  Japan has demonstrated consistent improvement in its aircraft
     component-building capabilities, after years of subcontracting
     from Western manufacturers.  Japan's work share on Boeing jets
     has increased markedly, from the 737 to the 767 to the 777. 
     Furthermore, Boeing and the Japanese aircraft makers may be
     planning a regional jet project in which Boeing for the first
     time may play a subordinate role to its Japanese partners. 

  Indonesia now produces a regional aircraft it co-designed with a
     Spanish partner.  The design experience gained in this exercise
     is being put to use on a follow-on aircraft, to be designed and
     built within Indonesia. 

  U.S.  aviation companies have promised to allow Taiwan to build
     aircraft and engine parts, acquire U.S.  technology, and receive
     training and other support for its developing aeronautics
     industry.  These credits, totaling some $700 million, were
     granted in exchange for Taiwan's purchase of American aircraft
     and engines.  The People's Republic of China also has obtained
     such agreements when it has negotiated with Western aircraft
     makers for the purchase of passenger planes.  Typically, China
     has received the right to build parts equal to 20 percent of the
     total value of purchased aircraft. 

  TAC has tried to buy aircraft production capability outright.  The
     company has attempted to purchase substantial stakes in British
     Aerospace and McDonnell Douglas in the last 2 years. 

  The People's Republic of China is currently in the process of
     upgrading its existing aeronautics technology base by acquiring
     advanced machinery and tooling from Western nations.  China has
     entered into a number of coproduction agreements with Boeing and
     McDonnell Douglas, including licensed final assembly of
     passenger jets for McDonnell Douglas. 

  Over 80 percent of the aeronautics faculty of the National Cheng
     Kung University, in Taiwan, were educated at Western
     universities.  Other Western-educated students have returned to
     lead high-technology projects in their home countries.  For
     example, the minister-level head of Indonesia's aircraft
     company, and the top executives of TAC, received engineering
     degrees in Germany and the United States, respectively. 

      FOCUS ON APPLIED RESEARCH
---------------------------------------------------------- Letter :3.3

One of the most prominent features of aeronautics R&D in Asia is its
emphasis on commercial application.  At almost all of the research
institutes we visited, the emphasis was on applied technological
research with direct commercial or military applications.  Examples
include the following: 

  The entire research budget of Taiwan's Industrial Technology
     Research Institute, and the majority of research funding for the
     Taiwan National Science Council, are devoted to applied
     research. 

  According to scientists in the People's Republic of China, requests
     for basic research funding must now describe how such projects
     ultimately will yield marketable products.  This development
     marks a change from the past, when projects were funded for
     longer terms and usually had no stated commercial goals. 

  The research arm of the Japan Defense Agency provides funding--up
     to 20 percent of total costs in some cases--to research projects
     identified as critical by Japan's private sector corporations. 
     In this way, Japanese companies are assisted in bringing their
     technologies to market, and the Japanese military is readily
     able to incorporate technological innovations into its weapon
     systems. 

      MILITARY/CIVILIAN SYNERGIES
---------------------------------------------------------- Letter :3.4

Asian nations do not strictly separate the manufacturing operations
of their military and civilian aeronautics projects.  The ability to
shift machines, tooling, and trained personnel from military to civil
production provides a measure of flexibility to Asian aircraft
manufacturers.  Examples from the countries we visited include the
following: 

  The plants of Japan's large aeronautics companies often house
     military and civil assembly lines side by side.  Workers trained
     on one line are often shifted to another.  Expensive
     composite-material processing equipment, purchased by the
     government for military projects, is subsequently used to
     process parts for civil aircraft. 

  TAC plans to use Taiwan's principal military aircraft facility to
     manufacture regional jetliners.  This facility, the Aeronautical
     Industry Development Center, is regarded by experts as one of
     the most complete and sophisticated aircraft production shops in
     Asia.  Although it currently produces only fighter planes,
     Taiwan authorities told us that it could readily be converted to
     regional passenger plane manufacture. 

  In the People's Republic of China, sophisticated manufacturing
     technologies acquired through cooperative programs with the West
     are being adapted for Chinese military use.  For example,
     flush-mounted riveting, once observed in China only on aircraft
     jointly manufactured with the West, is now seen on Chinese
     fighter planes that previously lacked this degree of
     sophistication. 

   ASIAN COUNTRIES DIFFER IN THEIR
   LEVELS OF AERONAUTICS
   DEVELOPMENT
------------------------------------------------------------ Letter :4

Despite their similar approaches, the Asian countries we reviewed do
not have equally developed aeronautics industries.  For instance,
Japan, which began systematically importing aeronautics technology in
the 1970s, now leads Asia in the sophistication of its R&D
infrastructure and the capacity of its industrial base.  Indonesia,
which also embarked on its aeronautics program in the 1970s, is
designing and producing passenger aircraft now, but has not developed
the R&D infrastructure or manufacturing capacity evident in Japan. 
The authorities in Taiwan, which only recently began its foray into
aeronautics, have indicated that they are prepared to commit billions
of dollars to carry out an ambitious agenda of aeronautics industry
development.  And the People's Republic of China is embarking on a
plan to modernize its aeronautics industry, but it most likely will
need financial and technological help from other nations to
eventually succeed in supplying jet transports for its own growing
aviation market. 

      JAPAN
---------------------------------------------------------- Letter :4.1

Japan is now among world leaders in aeronautics subsystem
manufacturing, and appears to have the capability to design and build
passenger aircraft on its own.  This is the result of systematically
importing Western aeronautical technology after failing to
successfully market an indigenously designed and produced airplane,
the YS-11.  For years Japanese aircraft companies have acted as
subordinate partners to American companies, particularly Boeing.  The
Japanese work share on Western planes has increased markedly over the
years.  Japan is currently negotiating to lead the development of a
regional jet, with either Boeing, China, or European entities acting
as subordinates.  Some industry observers told us that such an
arrangement would mark the emergence of Japan as an aeronautical
competitor against the United States. 

Our review indicates that Japan, with strong government support, has
created the best-developed aeronautical research, development, and
production infrastructure in Asia.  U.S.  industry representatives
told us that Japan's manufactured components for American passenger
airplanes are the best in the world.  Japan has heavily invested in
its infrastructure and has made enough advancements in other areas to
be recognized as a world leader in several technological fields
critical to developing new aircraft.  Examples include the following: 

  Japanese companies have a 23-percent share of a joint international
     effort to produce a high-performance, low-noise, low-pollution
     fanjet engine (the V2500) for a 150-passenger transport.  The
     same companies also have work shares on the General Electric 90,
     Pratt & Whitney 4000, and Trent 800 engines that will be used to
     power large commercial passenger jets such as the Boeing 777. 

  Japanese companies will invest $226 million in new and/or upgraded
     facilities for their work associated with the Boeing 777
     program. 

  Mitsubishi Heavy Industries is developing a new aircraft power
     plant, the hypersonic Liquid Air Cycle Engine.  Basic design and
     ground tests are scheduled to begin in 1995. 

Japan's current economic recession has slowed the development of the
aeronautics industry, according to Japanese industry representatives. 
The government of Japan continues to support this industry and shield
it from a measure of financial risk, but according to Japanese
government officials, the recent change in ruling political parties
in Japan may indicate an impending change in the relationship between
government and industry there. 

In addition, Japan's sophistication and industrial capacity are
perhaps mitigated by its complex relationship with the United States. 
The need to keep trade imbalances in check, and the stated aversion
of the Japanese to compete directly against Boeing, may temporarily
keep Japan from designing and building passenger jets.  However,
according to U.S.  government officials, Japan may be able to address
these issues and proceed toward indigenous capability by taking
Boeing on as a major partner in a Japanese aircraft-design project. 
This sort of arrangement reportedly is being discussed by
representatives of Boeing and the Japanese aeronautics companies. 

      INDONESIA
---------------------------------------------------------- Letter :4.2

Indonesia has collaborated extensively with European and American
aircraft manufacturers since the 1970s, and has developed a
sophisticated regional aircraft R&D and production infrastructure as
a result.  Industri Pesawat Terbang Nusantara (IPTN), Indonesia's
state-owned aeronautics company, is planning to produce a 64-seat
turboprop aircraft in 1995, and plans to embark on a 100-seat
commuter jet program thereafter.  Officials at IPTN told us that this
progress would not have been possible without the partnerships IPTN
established with Western companies.  Although IPTN's products do not
compete directly against any U.S.-manufactured aircraft, the company
is notable for the pace at which it has developed and the cooperation
with Western companies that has facilitated that development. 

In 1990, Indonesia spent $1 billion to upgrade the IPTN facility. 
IPTN manufactures a variety of aircraft components and sections,
ranging from wing trailing flaps for Boeing's 737 aircraft to
cockpits, fuselage, and fin connections for Airbus\1 aircraft.  IPTN
also produces (under licensing agreements) the 35-seat CASA CN-235
aircraft and a variety of helicopters, including the Bell 412,
Eurocopter B0105, and the NES-332 Superpuma.  The licensed production
of the CN-235 was instrumental in providing Indonesia the design and
production technology capability needed to proceed with the
development of the larger, 64 seater due out in 1995.  Total program
costs for this aircraft, the N-250, are estimated at $1.2 billion,
and the per aircraft cost is expected to be $10 million to $11
million.  IPTN has taken tentative orders for 157 N-250s, and
recently opened an office in Seattle to promote sales of the aircraft
in the United States.  Indonesia has developed an aircraft engine
overhaul and repair facility at IPTN.  In addition, IPTN's Universal
Maintenance Center is rapidly becoming a major competitor in the
southeast Asian engine overhaul and repair business. 

For now, political and economic conditions in Indonesia appear
favorable for continued progress toward IPTN's goals of designing and
building aircraft indigenously. 

--------------------
\1 Airbus is a consortium of the major civil aircraft manufacturers
in France, Germany, the United Kingdom, and Spain. 

      TAIWAN
---------------------------------------------------------- Letter :4.3

Taiwan plans to develop its aeronautical industry in two ways:  (1)
manufacturing and testing of components and (2) airframe
manufacturing.  Authorities in Taiwan believe they can raise the
capital needed for these ventures from the island's privately held
foreign reserves. 

Taiwan's Center for Aviation and Space Technology is coordinating the
training and certification of companies that intend to produce
aircraft parts for Taiwan's aeronautics industry.  The Center
disseminates research results and is cooperating with Boeing on the
construction of a laboratory that will verify the quality of parts
produced in Taiwan.  TAC intends to build passenger jets using
Western technology.  TAC's plans include the purchase of Western
aircraft assembly lines and conversion of Taiwan's military aircraft
plants to civilian use.  To date, TAC has attempted to strike deals
with two foreign companies--McDonnell Douglas and British
Aerospace--but has not succeeded. 

According to U.S.  officials, the development of TAC appears to have
been aided by strong, one-party rule in Taiwan.  Recently, however,
opposition parties have been effective in blocking funding for large
technology infrastructure projects, such as high-speed rail.  The
emergence of viable opposition politics may presage a change in the
relationship between government and industry.  Consequently, time
frames once considered feasible may slip. 

Taiwan officials stated that their relative lack of experience in
civil aeronautical design and manufacture may also slow industry
development.  Although apparently capable of funding large projects,
Taiwan's plans require that a number of burdensome financial and
regulatory timetables be met.  Furthermore, without British Aerospace
or McDonnell Douglas, TAC will need a new business partner if it is
to develop rapidly. 

      CHINA
---------------------------------------------------------- Letter :4.4

The Chinese aviation industry, which operates under the central
control of Aviation Industries of China (AVIC), is marked by
overcapacity and comparatively lower technology.  To counter this,
AVIC is taking steps to modernize the industry to enable it to
operate in a market economy.  AVIC factories employ some 500,000
workers throughout China, but securing customers for AVIC's
aeronautical products and services is difficult.  To compensate for
this, roughly 70 percent of AVIC's industrial output is
non-aeronautical in nature, and includes automobiles, bicycles,
motorcycles, and motor parts.  AVIC's metal-forming, composite
materials, and aircraft assembly equipment are older and less
sophisticated than analogous equipment we observed elsewhere in Asia. 
Consequently, it appears that China may be the slowest among the
Asian nations we surveyed to develop an aeronautics industry
competitive with the United States. 

China's current condition notwithstanding, AVIC is taking significant
steps to develop an aircraft industry to help fulfill the needs of
China's growing air travel market.  These include a 3-year plan to
make AVIC financially self-supporting, and a number of ongoing and
planned cooperative ventures with Western aeronautics companies,
including Boeing, Aerospatiale, McDonnell Douglas, and General
Electric.  We observed wing components for Boeing and Aerospatiale
aircraft being manufactured, and McDonnell Douglas MD-82 aircraft
going through final assembly, in AVIC facilities. 

China may look beyond its borders not only for technology, but also
for financing as it develops its aeronautics industry.  Several
officials told us that China, Hong Kong, Singapore, and Taiwan could
pool their capital and manufacturing capacities to fund, design, and
build passenger aircraft for the Chinese market. 

The largely outmoded nature of China's aeronautical industrial
infrastructure, as well as political obstacles--notably the lack of
normalized relations between Taiwan and China--will most likely slow
the progress of China's aeronautics industry.  Still, because the
Chinese market for passenger aircraft is expected to grow rapidly in
the next 20 years, investments aimed at meeting demand at least in
part through domestic production probably will continue.  Although
the TAC-McDonnell and TAC-British Aerospace deals were never
completed, development capital earmarked for aeronautics continues to
flow into mainland China from Taiwan, Hong Kong, Singapore, and
elsewhere. 

   IMPLICATIONS FOR THE U.S. 
   AERONAUTICS INDUSTRY
------------------------------------------------------------ Letter :5

The aeronautics industry in the United States is immense, and
provides direct and indirect benefits throughout the entire economy. 
The industry employs roughly a million workers and is a key exporter. 
Furthermore, it acts as a technology driver, spinning off advanced
process and product technologies with applications to other
industrial sectors. 

Development of Asian industries is linked to the acquisition of
Western technology, as American companies provide already developed
technology in return for Asian business.  Such technology transfer
has both benefits and drawbacks.  For example, by developing the
manufacturing capabilities of Asian companies, American jet builders
add to their stable of reliable suppliers.  Also, by creating close
links with Asian companies, U.S.  firms believe they stand a better
chance of selling their finished products--commercial jets in this
case--in the growing Asian market, where they face competition from
Airbus.  And finally, after the proficiency of new suppliers has
advanced sufficiently, U.S.  companies can actually save a measure of
new aircraft development costs by shifting design work overseas. 
Cooperative ventures involving U.S.  aeronautics companies exist
throughout Asia--from engine overhaul factories in Taiwan, to final
assembly plants in China, to sophisticated computer-aided design
facilities in Japan. 

This last example--saving money by sending work abroad--has potential
drawbacks.  First is the socio-economic and technology development
impact on U.S.  suppliers.  Foreign supplier competition has been a
contributing factor to the downsizing of the U.S.  supplier base. 
Such competition is forcing U.S.  suppliers to either become more
competitive--without direct government assistance--or go out of
business.  For example, a Japanese firm that received technical and
manufacturing assistance from a U.S.  firm to produce F-15
actuators,\2 won the contract for the actuators on the Boeing 777
over a U.S.  firm that had previously supplied the component for
Boeing aircraft. 

--------------------
\2 Actuators are mechanical devices for controlling movable surfaces
on an aircraft, such as flaps, ailerons, and landing gear. 

      NEAR-TERM COMPETITION FROM
      ASIA IS UNLIKELY
---------------------------------------------------------- Letter :5.1

For reasons of technological sophistication and politics, it appears
unlikely that any Asian aeronautics company will compete directly
against U.S.  passenger jet makers for at least several years. 
Indonesia, China, and Taiwan lack the necessary experience in jet
manufacturing to successfully compete directly with the United
States.  And although Japan may possess the needed experience and
sophistication to compete, Japanese officials have expressed their
desire to work cooperatively--and not competitively--with the West
for the foreseeable future.  Furthermore, Japan currently lacks the
marketing and repair infrastructure widely believed to be critical to
selling aircraft internationally. 

      LONG-TERM IMPLICATIONS OF
      ASIA'S EMERGENCE IN
      AERONAUTICS IS SUBJECT TO
      DEBATE
---------------------------------------------------------- Letter :5.2

The long-term implications of aeronautical technology transfer from
West to East are the subject of much debate.  Industry
representatives believe that global competition in aeronautics will
occur with or without U.S.-Asian cooperation, and that such
cooperation provides both market access and a competitive edge in
price to U.S.  companies.  Some U.S.  industry officials said that
they transfer technology primarily to ensure continued market access
in Asia, and noted that they do not transfer their most critical
process and product technologies, or "core competencies."

Others, however, claim that this process builds competitors in Asia
and that the short-term gains brought by technology transfers may be
outweighed by down-the-road losses in economic sectors that provide
thousands of jobs.  They suggest that the success of Japan's
technology drive shows that Asian nations will become competitive in
aeronautics even if so-called critical U.S.  technologies are
safeguarded.  That is, the development of domestic technology
infrastructure will allow Asian nations to become competitive, and
importing technology is merely the first, low-cost step in that
process. 

These observers also suggest that American aeronautics companies are
at a marked disadvantage because they must generate profits without
direct government assistance, which is not the case in Asia.  As
noted earlier, the new GATT agreement may alter a government's
ability to subsidize its industry.  Observers believe Asian forays
into aeronautics may not be motivated by profit in the near or
mid-term, but by the intention to increase a country's baseline
technology level and create jobs.  Despite the record of losses
incurred by large companies in civil aeronautics,\3 Asian countries
are nonetheless pushing into this sector.  Several industry observers
suggested to us that American companies could not afford the large
capital expenditures incurred by Asian companies for aeronautics
work.  The systematic way that Asian governments shield their
strategically important industries may protect Asian companies from
economic shocks--for example, slowdowns in growth or reductions in
military orders--that have resulted in thousands of lost jobs in the
United States. 

--------------------
\3 Lockheed, for example, no longer makes regional or larger
passenger jets.  Furthermore, some studies have concluded that only
Boeing has produced aircraft that have been profitable. 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

To obtain information for this report, we interviewed officials and
reviewed materials at the U.S.  Departments of Commerce and State;
the National Aeronautics and Space Administration (NASA); the
Aerospace Industries Association; the National Science Foundation;
the American Institute in Taiwan; and the Washington-based embassies
for Japan, Indonesia, and the People's Republic of China.  We also
traveled to Japan, Indonesia, Taiwan, and the People's Republic of
China to interview government officials and industry representatives. 

We also reviewed relevant studies, reports, and other documents and
interviewed officials of U.S.  embassies, Asian government
ministries, aeronautics companies, industry associations, and higher
education establishments.  We were unable to independently verify the
accuracy of all the information.  We did not have access to pertinent
strategic planning information, contract data, and/or company
financial records.  As a result, we could not make an independent
assessment of the scope and relative priority of ongoing or planned
aeronautical R&D efforts in each of the countries.  The organizations
we interviewed are listed in appendix I. 

We conducted our review between January 1993 and February 1994 in
accordance with generally accepted government auditing standards.  We
did not obtain written comments on the report from U.S.  agencies. 
However, we provided detailed country summaries on the results of our
work to appropriate government and industry officials in each country
we visited and incorporated their comments in this report where
appropriate.  We also briefed NASA officials on the content of this
report. 

---------------------------------------------------------- Letter :6.1

Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 30 days after its issue date.  At
that time, we will send copies to the NASA Administrator, the
Secretaries of State and Commerce, and other appropriate
congressional committees.  Copies will also be made available to
other interested parties upon request. 

Please contact me on (202) 512-4587 if you or your staff have any
questions concerning this report.  Major contributors to this report
are listed in appendix II. 

David E.  Cooper
Director, Acquisition Policy, Technology,
 and Competitiveness Issues

ORGANIZATIONS CONTACTED DURING OUR
REVIEW
=========================================================== Appendix I

      UNITED STATES
------------------------------------------------------- Appendix I:0.1

Department of State
Department of Commerce
National Aeronautics and Space Administration
National Academy of Sciences
Aerospace Industries Association
National Science Foundation
American Institute in Taiwan, Virginia office
Japan Program, Massachusetts Institute of Technology
Kennedy School of Government, Harvard University
United Technologies - Pratt & Whitney
Morgan Stanley (aviation industry analysts)
Dow Jones (industry news reporters)
Embassies of the following nations: 

  Japan

  Indonesia

  People's Republic of China

      TAIWAN
------------------------------------------------------- Appendix I:0.2

Coordinating Committee for North American Activities
Taiwan Aerospace Corporation
Council for Aerospace Industry Development
Council for the Advancement of Science and Technology
Ministry of Economics
Taiwan National Science Council
Air China

      JAPAN
------------------------------------------------------- Appendix I:0.3

Ministry of International Trade and Industry
Japan Defense Agency
Science and Technology Agency
Mitsubishi Heavy Industries
Kawasaki Heavy Industries
Fuji Heavy Industries
Boeing Japan
Lockheed
General Electric
United Technologies - Pratt & Whitney
McDonnell Douglas
U.S.  Air Force

      THE PEOPLE'S REPUBLIC OF
      CHINA
------------------------------------------------------- Appendix I:0.4

Aviation Industries China: 

  Beijing headquarters

  Xian Aero Engine Company

  Xian Aircraft Company

  Harbin Aircraft Manufacturing Company

  Shanghai Aviation Industrial Company

Beijing Aerospace University
Beijing Aviation Materials Research Institute
China Aviation Administrative Committee
Air China

      HONG KONG
------------------------------------------------------- Appendix I:0.5

U.S.  Consulate General
AVMARK (U.S.  aviation consultants)
Morgan Stanley (aviation industry financial analysts)

      SINGAPORE
------------------------------------------------------- Appendix I:0.6

Ministry of Economics
Singapore Aerospace
Dowty-Haw Par Industries

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:1

James F.  Wiggins
George A.  Jahnigen
Katherine V.  Schinasi

   FAR EAST OFFICE, HONOLULU,
   HAWAII
-------------------------------------------------------- Appendix II:2

James L.  Morrison
Conor B.  O'Brien
Paula J.  Haurilesko

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