```
European Aeronautics: Strong Government Presence in Industry Structure
and Research and Development Support (Letter Report, 03/23/94,
GAO/NSIAD-94-71).

U.S. leadership in aeronautics is being challenged by Europe. During the
last decade, European manufacturers have, with the support of their
governments, boosted their share of the global civil aircraft market to
more than 30 percent.  This report provides information on (1) the
structure of the aeronautics industries of France, Germany, and the
United Kingdom; (2) the support that these countries' governments give
to aeronautical research and development; and (3) the organization of
the countries' aeronautical research and development establishments. GAO
also obtained information on other aeronautical research and development
efforts sponsored by the European Community and its member nations.

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

 REPORTNUM:  NSIAD-94-71
     TITLE:  European Aeronautics: Strong Government Presence in 
             Industry Structure and Research and Development Support
      DATE:  03/23/94
   SUBJECT:  Aircraft
             International relations
             Aerospace industry
             International agreements
             Military coproduction agreements
             Research and development
             Aerospace research
             Research and development contracts
             Foreign governments
             Aerospace contracts
IDENTIFIER:  Europe
             European Community
             France
             Germany
             United Kingdom
             World War II
             Noordoostpolder (Netherlands)
             Cologne (Germany)
             European Fighter Aircraft Program
             Italy
             European Transonic Wind Tunnel
             
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Cover
================================================================ COVER

Report to Congressional Requesters

March 1994

EUROPEAN AERONAUTICS - STRONG
GOVERNMENT PRESENCE IN INDUSTRY
STRUCTURE AND RESEARCH AND
DEVELOPMENT SUPPORT

GAO/NSIAD-94-71

European Aeronautics

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

  BAe - British Aerospace
  BMW - Bayerische Motorenwerke
  BRITE - Basic Research in Industrial Technology for Europe
  CASA - Construcciones Aeronautics S.A. 
  DASA - Deutsche Aerospace A.G.  (German Aerospace)
  DGA - Delegation General pour l'Armement (Defense Procurement
     Office)
  DLR - Deutsche Forschungsanstalt fuer Luft-und Raumfahrt
     Gesellschaft (German Aerospace Research Establishment)
  DPAC - Direction des Programes Aeronautiques Civils (Office of
     Civil Aeronautics Programs)
  DRA - Defence Research Agency
  EC - European Community
  EURAM - European Research on Advanced Materials
  EUREKA - European Research Coordination Agency
  EUROMART - European Cooperative Measures for Aeronautical Research
     and Technology
  GARTEUR - Group for Aeronautical Research Technology
  GE - General Electric Company
  ONERA - Office National d'Etudes et de Recherches Aerospatiales
     (National Institute for Aerospace Research and Studies)
  MBB - Messerschmitt-Boelkow-Blohm
  MTU - Motoren und Turbinen Union
  NASA - National Aeronautics and Space Administration
  R&D - Research and Development
  SNECMA - Societe Nationale d'Etude et de Construction de Moteurs
     d'Aviation-Partenaires (National Company for the Study and
     Manufacture of Aircraft Engines)
  TST - Telefunken Systemtechnik
  VFW - Vereinigte Flugtechnische Werke (Unified Aeronautics
     Companies)

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

B-255687

March 23, 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

U.S.  preeminence in aeronautics is being challenged by Europe.  Over
the last decade, European manufacturers have, with the support of
their governments, increased their share of the global civil aircraft
market to over 30 percent. 

In response to your request, we have developed information on (1) the
structure of the aeronautics\1 industries of France, Germany, and the
United Kingdom; (2) the support that these countries' respective
governments give to aeronautical research and development (R&D); and
(3) the organization of the countries' respective aeronautical R&D
establishments.\2 We also obtained information on other aeronautical
R&D efforts sponsored by the European Community and its member
nations. 

--------------------
\1 In this report the term "aeronautics" excludes space- and
missile-related activities.  When such activities are included, the
report refers to them as aerospace activities. 

\2 Senator Barbara M.  Boxer, Chair of the former Subcommittee on
Government Activities, House Committee on Government Operations, was
also an original requester of this report. 

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

The aeronautics industry is a major contributor to national security,
commerce, and transportation.  The industry is considered a
technology driver that leads to spin-offs of advanced technology
products that support other sectors of the national economy.  The
aeronautics industry comprises three major sectors--airframe, engine,
and equipment.  This report focuses on the airframe and engine
sectors.  The airframe sector usually includes final assembly of the
aircraft. 

In 1992, manufacturers in France, Germany, and the United Kingdom
sold aeronautics products valued at about $52 billion.  Civil and
military aeronautics products contributed roughly equally to that
amount, except for Germany, where civil products accounted for about
61 percent of sales.  The countries exported aerospace products worth
about $31 billion, roughly a $10-billion increase over 1989. 
Aeronautics products for France and the United Kingdom made up over
89 percent of their countries' aerospace export totals.  Although
1992 data were not available for Germany, 1991 statistics show the
total to be in excess of 90 percent.  In the three countries, about
310,000 people worked in aeronautics-related activities.  As a point
of reference, the aeronautics industry in the United States had sales
of about $74 billion, exported about $44 billion, and employed about
611,000 people in 1992.  Table 1 provides additional details, by
country, on aerospace and aeronautics sales, exports, and employment. 

                           Table 1
           
               Aerospace and Aeronautics Sales,
              Exports, and Employment in France,
            Germany, and the United Kingdom During
                             1992

                    (Dollars in billions)

                  Export  Employme          Export  Employme
Country    Sales       s        nt   Sales       s        nt
--------  ------  ------  --------  ------  ------  --------
France     $22.7   $10.6   111,700   $19.3    $9.4   102,400
Germany     15.6     6.4    78,500    13.9      \a    61,400
U.K.        18.8    13.5   148,000    18.6    13.3   146,000
============================================================
Total      $57.1   $30.5   338,200   $51.8   $22.7   309,800
------------------------------------------------------------
\a Not available. 

Source:  Compiled by GAO from data provided by each country. 

The major large civil transport aircraft manufacturers in the U.S. 
are Boeing and McDonnell Douglas, and their principal foreign
competitor in the global market for such aircraft is the Airbus
consortium (established in 1969).  Airbus is a consortium of the
major civil aircraft manufacturers in France, Germany, the United
Kingdom, and Spain.  Recently, Airbus has replaced McDonnell Douglas
as the second-largest supplier in the global market for commercial
jet transport aircraft\3 (Boeing is the largest supplier).  This
market, according to one forecast, may be worth almost
$2 trillion through the year 2030.  In addition, European aircraft
manufacturers have made major inroads in the markets for short-haul
aircraft--commuter aircraft, rotorcraft, and general aviation
airplanes.  In fact, European manufacturers dominate the commuter
aircraft market and have about one-third of the business aircraft
market. 

R&D of aeronautical technologies, for potential military and
commercial applications, plays a key role in maintaining a
competitive aeronautics industry.  In the past, R&D performed for
military use frequently contributed to the advancement of
technologies for civil aircraft.  This trend has changed somewhat. 
Since the beginning of the jet age, there has been an increasing
divergence of military and civil performance, cost, and maintenance
requirements.  However, there are still some spillovers between
military and commercial work, usually at the aircraft subsystem level
(for example, engines, avionics, and instruments), in materials and
in manufacturing process technology. 

This report groups R&D activities into two general categories: 
technology R&D (basic and applied research and technology validation
and demonstration activities) and product R&D (activities targeted to
a specific product and the preparation for its production). 

--------------------
\3 Jet transport aircraft are those that weigh over 33,000 pounds and
generally hold 150 or more passengers. 

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

The aeronautics industry in the three European countries we studied
has consolidated to a point that there is only one major
assembler/airframe manufacturer of large civil transport aircraft in
each country.  Similarly, each country has only one or two large
civil aircraft engine manufacturers.  Although consolidation has so
far occurred mainly within national boundaries, each manufacturer is
also involved in international collaborative efforts.  However, these
collaborative efforts generally do not involve joint research or
information sharing on aeronautical technologies because of national
security concerns and the companies' unwillingness to share
competitively sensitive data. 

The three European national governments support aeronautical R&D by
funding (1) technology and product R&D for national security; (2)
product R&D as launch aid for civil aircraft and engine
manufacturers,\4 generally in the form of success-dependent,
repayable loans; (3) civil technology R&D to enhance the national
technology base; and (4) technology and product R&D for civil public
interest objectives, such as safety and the environment.  In the
aggregate, the governments have provided about $9.7 billion in R&D
support for 1991 and 1992, with most of it going to the first two R&D
categories.  The European Community and its other member countries
also provided some support. 

Each of the three European countries has a major,
government-supported research establishment that maintains various
facilities to conduct military and civil aeronautical R&D.  In the
past, government accounts were set up to fund these establishments. 
However, each establishment now relies extensively on contracts from
government and industry customers for its funding.  Most of the
contracts come from government organizations.  Reliance on contracts
has two consequences.  First, the research establishments are more
customer focused.  Second, the type and amount of data disseminated
to the public domain are reduced. 

--------------------
\4 Launch aid helps companies cover the high costs of bringing a new,
expensive aeronautics product from development into production.  It
is not intended to support existing products. 

   STRUCTURE OF THE EUROPEAN
   AERONAUTICS INDUSTRY
------------------------------------------------------------ Letter :3

Efforts by the European governments to shape the structure of their
aeronautics industries have been aimed at consolidation and
international collaboration since the end of World War II.  The
numerous aircraft and engine manufacturers that existed during the
1940s and 1950s in France, Germany, and the United Kingdom had been
narrowed down to five major civil aircraft and engine manufacturers
by the early 1990s through mergers, takeovers, and bankruptcies.\5

Table 2 summarizes information on each of the major civil aircraft
and engine manufacturers in France, Germany, and the United Kingdom. 

                           Table 2
           
               Major Civil Aircraft and Engine
            Manufacturers in France, Germany, and
                      the United Kingdom

                (In billions of 1992 dollars)

                                                     Company
                                                         R&D
                                                  (percentag
                                Total  Aeronauti        e of
Manufacturer     Ownership      sales   cs sales    sales)\a
---------------  ------------  ------  ---------  ----------
Aircraft
Aerospatiale     80 percent      $9.9     $6.7\b          24
 [France]         government-
                  owned
Deutsche         private         11.1      4.8\c          30
 Aerospace
 (DASA)
 [Germany]
British          private         18.2        9.6           5
 Aerospace
 (BAe)
 [United
 Kingdom]
Engine
SNECMA           97 percent       4.3        2.6          33
 [France]         government-
                  owned
DASA             private           \d        2.3          \f
 [Germany]
Rolls Royce\e    private          6.2        3.8          14
 [United
 Kingdom]
------------------------------------------------------------
Note:  All sales figures are approximations. 

\a Figures are based on total sales, except for SNECMA. 

\b Includes aircraft, helicopter, and avionics sales. 

\c Does not include sales from the defense and systems group that
could contribute to aeronautics sales. 

\d Figure is contained in the $11.1 billion DASA total sales figure. 

\e Rolls Royce also has a joint venture with BMW that competes with
DASA engines. 

\f Figure is included in the DASA R&D total. 

Source:  Compiled by GAO from data provided by each company. 

Currently, the majority of the European companies' aeronautics sales
come from international collaborative efforts.  These efforts have
generally involved a division of R&D and manufacturing
responsibilities between partners, with limited sharing of
proprietary technical information.  The Airbus arrangement represents
perhaps the most well-known example of this type of collaborative
effort and accounts for most of the European civil aeronautic sales. 
Aerospatiale and DASA each own a 37.9-percent share in the Airbus
consortium, BAe owns a 20-percent share, and Construcciones
Aeronautics S.A.(CASA) of Spain owns a 4.2-percent share.  In
general, each of the four partners has provided a section of the
aircraft.  BAe has generally researched, developed, and manufactured
the wing section; Aerospatiale, the cockpit; DASA, the fuselage; and
CASA, the horizontal tail pieces.  Each partner pursues
subcontracting and R&D arrangements on its own. 

There are other examples of collaboration among European countries. 
In January 1992, for example, Aerospatiale and DASA merged their
helicopter operations into a company called Eurocopter, which is now
the world's second-largest helicopter manufacturer.\6 Eurocopter
represents the first time that aeronautics companies from different
European countries combined R&D and production capabilities. 

Collaborative efforts have also taken place in the aeronautics
facilities arena.  For example, the about $400-million European
Transonic Wind Tunnel, currently under construction near Cologne,
Germany, will be operated by an independent international company
that has France, Germany, the United Kingdom, and the Netherlands as
shareholders.  Similarly, the wind tunnel in Noordoostpolder,
Netherlands, considered by many to be a state-of-the-art aircraft
noise research facility, is a joint venture between Germany and the
Netherlands.  Each partner in these collaborative efforts provided
funding to pay for development and an initial operation subsidy. 

--------------------
\5 According to a recent book by Laura Tyson, currently Chair of the
Council of Economic Advisors, that reviewed the civil aircraft
industry, the technical and financial risks associated with the
development of new commercial aircraft are so great that, without
government support, the industry would be driven to a natural
monopoly with a single producer dominating the global market.  See
Who's Bashing Whom:  Trade Conflict in High-Technology Industries,
Washington, D.C.:  Institute for International Economics, (Nov. 
1992), p.  156. 

\6 The U.S.  company Sikorsky is the world's largest helicopter
manufacturer. 

   EUROPEAN GOVERNMENTS' SUPPORT
   OF AERONAUTICAL R&D
------------------------------------------------------------ Letter :4

The European aeronautics industry has had a long history of
government assistance and, in some cases, ownership.  Government
assistance has typically included aid for both technology and product
R&D conducted by the aeronautics industry and major aeronautics
research establishments.  In table 3, we show the total amount of
aeronautical support provided by the governments of France, Germany,
and the United Kingdom in 1991 and 1992.  Table 4 lists the types of
aeronautical R&D support provided and the ministries that provide
each type. 

                           Table 3
           
            Government Aeronautical R&D Support in
           France, Germany, and the United Kingdom
                          (1991-92)

                    (Dollars in billions)

Country                             1991                1992
--------------------  ------------------  ------------------
France                              $1.8                $1.8
Germany                              1.5                 1.5
United Kingdom                       1.6                 1.5
============================================================
Total                               $4.9                $4.8
------------------------------------------------------------
Note:  All figures are rounded to the nearest $100 million. 

Source:  Compiled by GAO from data provided by each country. 

                           Table 4
           
            Government Aeronautical R&D Support in
           France, Germany, and the United Kingdom
                         by Ministry

Government                                     United
funding          France         Germany        Kingdom
---------------  -------------  -------------  -------------
Technology and   Ministry of    Ministry of    Ministry of
product R&D for  Defense        Defense        Defence
national
security

Product R&D for  Ministry of    Ministry of    Department of
civil aircraft   Transportatio  Economics      Trade and
                 n                             Industry

Civil            Ministry of    Ministry of    Department of
technology R&D   Transportatio  Research and   Trade and
to enhance the   n              Technology     Industry
national
technology base

Technology and   Ministry of    Ministry of    Department of
product R&D for  Transportatio  Transportatio  Transport
civil public     n              n
interest
------------------------------------------------------------

      FUNDING TECHNOLOGY AND
      PRODUCT R&D FOR NATIONAL
      SECURITY
---------------------------------------------------------- Letter :4.1

The largest part of government-funded aeronautical R&D in the three
European countries is targeted to military needs.  For example, the
Ministry of Defense provided 64 percent of about $1.5 billion in 1992
funding for the German federal government's aeronautical research and
hypersonic technology promotion area.  Governments generally pay most
or all of the cost of defense-oriented R&D.  Most of the new
generation of European military aircraft were developed and produced
by international consortia.  For example, a consortium formed in 1985
by Germany, Italy, Spain, and the United Kingdom is developing the
European Fighter Aircraft. 

      FUNDING PRODUCT R&D FOR
      CIVIL AIRCRAFT
---------------------------------------------------------- Letter :4.2

Investment in product R&D for civil aircraft and aircraft engines
generally takes the form of repayable loans called launch aid. 
Repayment of these loans is "success-dependent"; that is, once an
established number of aircraft or engines is sold, a percentage of
the profit from sales above that number is used to repay the loan. 
According to a study commissioned by the U.S.  Department of
Commerce,\7 by 1990 the governments in France, Germany, and the
United Kingdom had invested approximately $13.5 billion in direct
support of Airbus products.  At that time, less than $500 million of
that total had been repaid.  As of August 1993, the total amount
repaid is estimated to have increased to about $3.5 billion. 

--------------------
\7 An Economic and Financial Review of Airbus Industries, Gellman
Research Associates, Inc., (Sept.  4, 1990), pp.  2-3. 

      FUNDING CIVIL TECHNOLOGY R&D
      TO ENHANCE THE NATIONAL
      TECHNOLOGY BASE
---------------------------------------------------------- Letter :4.3

The three European national governments share with industry the cost
of civil technology R&D to enhance the commercial technology base. 
The three European national governments generally contribute a share
of this R&D cost (usually not more than 50 percent), if industry will
agree to pay the remaining cost.  This practice is intended to ensure
that the R&D investment is considered sufficiently worthwhile by
industry.  France's Ministry of Transportation funds civil
aeronautical technology R&D within the context of its transportation
responsibilities.  Germany's Ministry of Research and Technology and
the U.K.  Department of Trade and Industry fund technology R&D across
a broad spectrum of industry sectors, including aeronautics. 

In 1992, the German Ministry of Research and Technology provided
about $133 million for technology R&D and facilities supporting the
aeronautics industry.  The U.K.'s Department of Trade and Industry
provided about $46 million for similar purposes.  In addition, the
European Community funds aeronautical technology R&D under its Basic
Research in Industrial Technology for Europe/European Research on
Advanced Materials program.  From 1990 to 1994, the European
Community will have provided about $67 million for aeronautical
technology R&D. 

Government funding to support the civil technology R&D base also
includes funding to construct major test facilities.  Construction
costs for such facilities are considered too high for industry to
undertake on its own.  For example, governments of the three
countries reviewed, along with the Netherlands, shared the about
$400-million total cost to construct the European Transonic Wind
Tunnel in Cologne, Germany.  (The wind tunnel is scheduled to open in
1994.) Operational cost shortfalls for this tunnel will be fully
supported by the governments until 1997, at which time the facility
is expected to be self-sustaining through user fees. 

      FUNDING TECHNOLOGY AND
      PRODUCT R&D FOR CIVIL PUBLIC
      INTEREST
---------------------------------------------------------- Letter :4.4

All three European national governments provide modest funding for
technology and product R&D for civil public interest objectives, such
as improving aeronautical safety, reducing noise, and resolving
environmental concerns.  In 1992, for example, Germany's Ministry of
Transportation provided between $1.3 million and $1.6 million on such
R&D, and the U.K.'s Department of Transport provided about $7
million.  In France, the Ministry of Transportation's Office of Civil
Aeronautics Programs provides funds for technology R&D and facilities
related to improving aeronautical efficiency, reliability, safety,
and addressing environmental concerns.  Available data indicate that
about $2.7 million was spent in 1992 to study issues related to
public interest objectives. 

   MAJOR EUROPEAN RESEARCH
   ESTABLISHMENTS THAT CONDUCT
   AERONAUTICAL R&D
------------------------------------------------------------ Letter :5

In addition to supporting industry technology and product R&D through
funding obtained from various government ministries, each of the
three countries supports a major research establishment that works on
a wide range of civil and military aeronautical technologies at
various research centers.  This work is focused primarily on
long-term technology R&D for the next generation of aircraft.  The
research also includes near-term technology and product R&D, often in
close association with industry, and R&D in support of government
responsibilities for national security, safety, and environmental
issues.  Table 5 summarizes information on each country's major
research establishment that conducts aeronautical R&D. 

                                     Table 5
                     
                         1992 Data for the Major Research
                      Establishments in France, Germany, and
                                the United Kingdom

                              (Dollars in millions)

Resear
ch                     Percentage of                Aeronautical
establ   Approximate    employees in                         R&D   Percentage of
ishmen     number of    aeronautical      Annual  (percentage of   budget funded
t          employees           R&D\a      budget         budget)  from contracts
------  ------------  --------------  ----------  --------------  --------------
ONERA          2,200              36        $265              43              71
 [Fran
 ce]
DLR            3,200              40         503              23              45
 [Germ
 any]
DRA\b         10,500               8       1,396              16           100\c
 [Unit
 ed
 Kingd
 om]
--------------------------------------------------------------------------------
Note:  ONERA--Office National d'Etudes et de Recherches Aerospatiales
DLR--Deutsche Forschungsanstalt fuer Luft-und Raumfahrt
DRA--Defence Research Agency

\a Figures represent a percentage of permanent technical and
scientific staff only.  Contract or administrative personnel are not
included. 

\b Unlike research at ONERA and DLR, which is focused primarily on
aerospace, aerospace activities account for only about 20 percent of
DRA's activities. 

\c Since the government owns DRA and cannot contract with itself, the
work DRA does for the government is controlled through business
agreements that are treated the same as formal contracts. 

Source:  GAO compilation of research establishment data. 

ONERA, DLR, and DRA conduct both military and civil aeronautical R&D. 
According to government and industry officials, this arrangement has
increased the potential for greater spin-off technology benefits and
financial savings, because many of the same scientists and engineers
work on military and civil research projects interchangeably. 

As indicated in table 5, major research establishments of the three
European countries we studied rely extensively on contracts for their
funding.  Most of these contracts are with government agencies as
opposed to industry.  For example, in 1992, government contracts
represented about 90 percent of the research conducted by ONERA, 69
percent of DLR's research, and almost all of DRA's efforts. 
Additional funding is also provided by the government to support
basic operations, including self-initiated R&D. 

The dissemination of research results by these national
establishments to the public domain is not a routine occurrence; the
extent of dissemination depends on the terms of the contracts.  The
identification and subsequent protection of competitively sensitive
information is left to the research establishments' industry and
government customers. 

All three research establishments have company-like structures:  DLR
and ONERA are nonprofit companies rather than government agencies,
have executive boards, and do not employ civil servants.  Although
DRA is a government agency, it functions as a commercial organization
by funding investment through borrowing or through its reserves,
which consist primarily of revenues from its customers. 

According to European research establishment officials, the
establishments' company-like structures and dependence on contract
funding contribute to a commercial orientation.  Government and
industry are viewed as customers, and the research establishments are
oriented toward meeting customers' technology needs.  However,
because industry tends to emphasize R&D activities with near-term
commercial application potential, some research establishment
officials expressed concern that excessive reliance on contract
funding could impair their ability to maintain a stable pool of
qualified personnel and lead to an emphasis on shorter-term,
quantifiable R&D at the expense of longer-term, higher-risk R&D. 

Appendices I through IV provide more detailed information on country-
and European Community-specific topics. 

   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

In commenting on a draft of this report, the National Aeronautics and
Space Administration (NASA) concurred with its contents.  NASA stated
that the report provided an excellent overview of European
Aeronautics.  NASA's comments are reprinted in their entirety in
appendix V. 

   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To obtain information for this report, we interviewed officials and
reviewed materials at NASA, the Departments of Commerce and State,
the Office of Technology Assessment, the Aerospace Industries
Association of America, the American Institute of Aeronautics and
Astronautics, the Delegation of the Commission of the European
Communities, and the Washington-based embassies for France and the
United Kingdom.  We also met with the Washington representative for
Germany's DASA, and visited officials at NASA's Langley Research
Center in Hampton, Virginia. 

We also reviewed relevant studies, reports, and other documents and
interviewed officials at U.S.  embassies, European government
ministries, aeronautics companies, industry associations, higher
education establishments, the European Community Commission in
Brussels, and national aeronautics research establishments in France,
Germany, and the United Kingdom.  We were unable to independently
verify the accuracy of some 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 a
comprehensive 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 VI. 

We provided detailed country summaries on the results of our reviews
to appropriate government and industry officials in each country we
visited and incorporated their comments in this report where
appropriate. 

We used annual average exchange rates to convert foreign currencies
into U.S.  dollars.  We conducted our review between April 1992 and
October 1993 in accordance with generally accepted government
auditing standards. 

---------------------------------------------------------- Letter :7.1

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, Commerce, and Defense; the Administrators of
the Office of Federal Procurement Policy and General Services
Administration; 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 VII.

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

FRANCE
=========================================================== Appendix I

This appendix describes (1) the structure of the French aeronautics
industry, (2) the support that the French government gives to
aeronautical R&D, and (3) the organization of France's major
aeronautical research establishment. 

   CONSOLIDATION AND INTERNATIONAL
   COLLABORATION IN THE
   AERONAUTICS INDUSTRY
--------------------------------------------------------- Appendix I:1

      CONSOLIDATION
------------------------------------------------------- Appendix I:1.1

Before World War II, the French aeronautics industry comprised many
small aircraft and engine companies.  Since the early 1970s,
government-approved mergers have reduced the number of French
aircraft and engine companies to three key players:  Aerospatiale,
France's largest civil aircraft manufacturer; Dassault,\1 France's
only military fighter aircraft manufacturer; and the Societe
Nationale d'Etude et de Construction de Moteurs
d'Aviation-Partenaires (SNECMA), France's largest aircraft engine
manufacturer.  The French government owns 80 percent of
Aerospatiale,\2 46.7 percent of Dassault (and holds 54.7 percent of
the voting rights), and 97 percent of SNECMA. 

In 1992, Aerospatiale and SNECMA contributed about half of the French
aeronautics industry's $19.3 billion in sales, of which about 49
percent were exports.  At the end of 1992, Aerospatiale employed
about 46,100 persons.\3 Its aeronautics-related activities achieved
sales of about $6.7 billion.  Exports made up about 76 percent of
these sales.  At the end of 1992, SNECMA employed about 13,400
persons in aircraft engine activities and achieved sales of about
$2.6 billion.  Exports made up about 78 percent of these sales. 

Created in 1970 when the French government approved the merger
between the Sud-Aviation, Nord-Aviation, and Sereb companies,
Aerospatiale manufactures products ranging from light utility and
business aircraft to large commercial civil transport aircraft and
from light helicopters to heavy-lift, multi-engine helicopters. 
SNECMA was created in 1945 to design and manufacture aircraft engines
for France.  SNECMA is a key player in the global engine market for
military and civil aircraft with more than 100 seats.  According to
its annual report, SNECMA had achieved a 17.5-percent share of this
global engine market (excluding the countries of the former Soviet
Union) by 1991.  General Electric (GE) had about a 36.5-percent
share; Pratt and Whitney, a 30-percent share; and Rolls-Royce, a
13-percent share. 

Further consolidation of the French aeronautics industry is possible,
if Aerospatiale and Dassault were to merge.  In the past, repeated
attempts by the French government to combine the two companies
failed.  However, current weaknesses in the military and commercial
aircraft business have increased the pressure for more collaboration
between the two companies, and possibly a future merger.\4

--------------------
\1 We did not include Dassault in our review because it does not
manufacture large civil transport aircraft or engines. 

\2 In 1993, the French government announced that Aerospatiale and
SNECMA are among several French companies currently being considered
for privatization.  As of February 1993, final decisions on how to
proceed if the companies are privatized and the role the government
will play in any new company structure had not been made. 

\3 The number involved specifically with aeronautics-related
activities could not be determined. 

\4 According to recent news articles, the two companies plan to
develop a common R&D program and cooperate on such activities as
aircraft design, long-term planning, and issuing work to
subcontractors.  However, each of the companies is to retain its own
corporate identity. 

      INTERNATIONAL COLLABORATIVE
      EFFORTS
------------------------------------------------------- Appendix I:1.2

The trend toward aeronautics industry consolidation is not limited by
national borders.  Cross-border collaboration is a primary strategy
used to share the technical and financial risks associated with
researching and developing new aeronautics products such as aircraft
and engines, as well as to gain access to new markets.\5 In typical
international collaborative efforts, two or more companies negotiate
to divide R&D and manufacturing responsibilities for components that
make that product. 

All of Aerospatiale's civil aircraft products in 1992 (42 percent of
total sales) were manufactured under international collaborative
efforts, either by the Airbus consortium or through a regional jet
transport aircraft venture called ATR.  Aerospatiale estimates that,
during the 1990s, products produced in this fashion will represent 80
percent of its total sales.  SNECMA's international efforts accounted
for about 70 percent of its aircraft engine sales in 1992. 

The following are examples of Aerospatiale's and SNECMA's respective
international collaborative efforts: 

  Aerospatiale and DASA (Germany's only aircraft manufacturer) merged
     their helicopter divisions in 1992 to form Eurocopter, the
     second-largest global helicopter company.  Eurocopter represents
     Europe's first merger across national borders in the aeronautics
     industry. 

  Aerospatiale has a 37.9-percent share in the Airbus program.  This
     four-country consortium is a major manufacturer of large civil
     aircraft in the 150- to 350-seat passenger category.  Other
     participants are Germany's DASA, which owns a 37.9-percent
     share; the U.K.'s British Aerospace, which owns a 20-percent
     share; and Spain's CASA, which owns a 4.2-percent share. 

  Aerospatiale has a 50-percent share in the regional transport
     aircraft called ATR.  This joint venture manufactures regional
     commuter aircraft in the 50- to 70-seat passenger category. 
     Italy's Alenia owns the other 50-percent share. 

  SNECMA has a 50-percent share in CFM International, which produces
     the CFM-56 family of aircraft engines.  This joint venture with
     GE has been in place since 1974 and is SNECMA's longest-standing
     international collaborative effort.  The SNECMA-GE relationship
     is not limited to CFM International.  SNECMA has a smaller
     ownership percentage in other GE engine programs, such as the
     CF6-80 (20 percent) and the GE36 (35 percent). 

  SNECMA has a 25-percent share in the GE-led GE90 program--a
     development program for heavy-thrust engines for the new
     generation of wide-bodied commercial aircraft, such as the B777. 
     Other shareholders are Japan, which has a 10-percent share in
     the program, and Italy's Fiat, which has an 8-percent share. 

In all but one of these international collaborative efforts, the
respective companies divide R&D and manufacturing responsibilities. 
Joint research and information sharing on aeronautical technologies
has been limited, in part because of national security concerns and
companies' unwillingness to share competitively sensitive data.  In
SNECMA and GE's CFM venture, for example, each company researched and
developed the engine components for which it was responsible. 
Because the components were based on relatively mature technologies,
SNECMA and GE shared information on some process technologies but
avoided sharing proprietary strategic information. 

Increasing R&D costs associated with certain strategic technologies
have caused companies to consider future collaborative R&D efforts
that might involve sharing more proprietary strategic information. 
GE, for example, is considering sharing research facilities and
research results in future collaborative efforts with SNECMA.  A GE
aircraft engine manager, however, told us that the extent to which
the respective national governments would allow the sharing of such
information is unclear.  The concern is that certain engine
technologies are similar in the military and civil versions.  Thus,
sharing this strategic R&D information could have potential national
security implications. 

Eurocopter is the only example we found of a collaborative effort in
which two aeronautics companies, Aerospatiale and DASA, merged
operations across national borders to conduct joint R&D and
production of specific aeronautic products. 

Aerospatiale and SNECMA officials believe that an increase in
cross-border collaboration will likely continue to take place.  They
consider such joint activities critical to cope with growing R&D
costs, increased international competition, and diminished market
opportunities. 

--------------------
\5 The European Aeronautics Industry Association reports that in some
cases the costs to launch a new aircraft or engine product could be
greater than the net worth of a company. 

   GOVERNMENT SUPPORT OF
   AERONAUTICAL R&D
--------------------------------------------------------- Appendix I:2

The French government has two key ministries that support R&D for the
aeronautics industry:  the Ministry of Defense and the Ministry of
Transportation (see table I.1 for the amount of aeronautical R&D
support these ministries provided in 1991 and 1992).  In addition,
the Ministry of Higher Education and Research funds R&D conducted at
higher education and research institutions.  This R&D, although not
immediately identifiable as aeronautical R&D, could have potential
aeronautical applications. 

                          Table I.1
           
           Aeronautical R&D Support Provided by the
               French Ministries of Defense and
                   Transportation (1991-92)

                    (Dollars in billions)

Government Ministry                 1991                1992
--------------------  ------------------  ------------------
Ministry of Defense               $1.3\a              $1.4\a
Ministry of                           .5                  .4
 Transportation
============================================================
Total                               $1.8                $1.8
------------------------------------------------------------
Note:  Dollar amounts were rounded to the nearest $100 million. 

\a Computed from government officials' estimates.  Ministry of
Defense would not provide actual figures. 

Source:  Compiled by GAO from French government-provided data. 

The French government supports aeronautical R&D by funding (1)
technology and product R&D in the interest of national security, (2)
product R&D for civil aircraft and engine manufacturers, (3) civil
technology R&D and facilities to enhance the national technology
base, and (4) technology and product R&D for civil public interest
objectives (such as public and environmental safety).  Much of the
funding provided by the government ministries is used directly or
indirectly to support the research activities conducted at the Office
National d'Etudes et de Recherches Aerospatiales (ONERA), France's
major aeronautics research establishment. 

      FUNDING TECHNOLOGY AND
      PRODUCT R&D FOR NATIONAL
      SECURITY INTERESTS
------------------------------------------------------- Appendix I:2.1

The Ministry of Defense's Delegation General pour l'Armement (DGA) is
responsible for funding military technology and product R&D for
national security.  It generally pays most of the cost of such R&D;
however, industry and civil government agencies share the cost for
R&D that has dual-use applications.  In 1992, the DGA expended about
$1.4 billion to fund aeronautical R&D.  Of that amount, about $238
million was for technology R&D, and about $1.2 billion was for
product R&D. 

The DGA, which specifies and develops all materials and systems
needed to meet the requirements of France's military services, has
two main directorates that support aeronautical R&D.  The Directorate
of Research and Technical Studies coordinates DGA's technology R&D
and is responsible for transferring technology to potential users. 
This directorate also sponsors ONERA.  The Directorate of
Aeronautical Construction coordinates DGA's product R&D and is
responsible for the design, development, testing, and manufacturing
of military equipment.  It also provides design, development,
testing, and manufacturing services to the Ministry of Transportation
and lends its expertise to the Ministry when it contracts with
industry. 

The Directorate of Aeronautical Construction operates three test
centers for military and civil use:  an engine test center, a flight
test center, and a center for aeronautic testing.  The aeronautic
testing center, located in Toulouse, France, employs about 900
persons and specializes in product-oriented ground tests of all types
of airframes and aeronautical equipment.  About two-thirds of the
center's work is military, and about 20 percent of its contracts come
directly from industry. 

      FUNDING PRODUCT R&D FOR
      CIVIL AIRCRAFT
------------------------------------------------------- Appendix I:2.2

The Ministry of Transportation's Civil Aeronautics Program Office
(DPAC) funds product R&D for civil aeronautics programs.  In 1992,
DPAC provided about $318 million to the aeronautics industry.  About
$257 million of that amount was for the Airbus program and SNECMA's
CFM 56 and GE 90 engine programs; the remaining $61 million was for
other programs, such as the Falcon 2000 business jet and equipment
for small- and medium-sized manufacturers. 

DPAC support of product R&D generally takes the form of
"success-dependent repayable loans." Specifically, once a loan
recipient sells an established number of products, a percentage of
the profit on sales above that number is used to repay the loan.  For
the Airbus program, DPAC provided about $2.8 billion in loans,
primarily to Aerospatiale between 1974 and 1991.  As of June 1991,
less than 23 percent, or about $678 million, had been repaid. 
Updated collection data on amounts repaid since 1991 could not be
obtained.  However, since that time Airbus has received another $0.6
billion in loans for which repayment is not yet due. 

The July 1992 bilateral aircraft agreement between the United States
and the European Community limits the amount of direct government
support to 33 percent of a product's total new development costs.  In
addition, a European Community regulation limits government indirect
product support for a single company to 25 percent of the cost of the
basic R&D. 

      FUNDING CIVIL TECHNOLOGY R&D
      AND FACILITIES TO ENHANCE
      THE NATIONAL TECHNOLOGY BASE
------------------------------------------------------- Appendix I:2.3

In 1992, the Ministry of Transportation's DPAC provided about $81
million to fund activities in support of civil technology R&D.  These
nonprogram-specific activities ranged from R&D contracts with
industry and the national research establishment to the provision of
funds to construct the European Transonic Wind Tunnel in Germany.\6
Contracts with industry accounted for about 61 percent of the civil
technology R&D funding.  Specific project data could not be provided. 
The amount DPAC will fund when it contracts with industry is
determined case by case; however, DPAC generally contributes no more
than 50 percent of the technology R&D costs, with industry paying the
remaining costs.  This arrangement is intended to ensure that the R&D
investment is considered sufficiently worthwhile by industry and,
therefore, is supportive of commercial industry objectives.  When
DPAC shares R&D costs with the national research establishment, it
generally funds between 80 percent and 100 percent of these "public
good" costs. 

--------------------
\6 The tunnel is a major European R&D test facility located in Koeln,
Germany, and funded through cooperation by four shareholders. 
France, Germany, and the United Kingdom each has a 31-percent share
and the Netherlands, a 7-percent share. 

      FUNDING TECHNOLOGY AND
      PRODUCT R&D FOR CIVIL PUBLIC
      INTEREST OBJECTIVES
------------------------------------------------------- Appendix I:2.4

The Ministry of Transportation funds R&D activities intended to serve
the civil public interest.  Examples of such activities are efforts
to improve air traffic safety and minimize noise and environmental
pollution.  The Ministry decides which R&D activities are needed,
and, therefore, pays most or all of the R&D costs.  Ministry of
Defense officials often monitor the contracts for R&D activities in
this category.  We could not determine the specific technology R&D
efforts under contract or the R&D expenditure levels.  However, for
studies of selected aeronautics research topics alone, about $2.7
million was spent in 1992. 

   MAJOR AERONAUTICS RESEARCH
   ESTABLISHMENT
--------------------------------------------------------- Appendix I:3

About 12 percent of the government's aeronautical R&D support funds
are channeled into France's major government-supported aeronautics
research establishment.  This establishment, the Office National
d'Etudes et de Recherches Aerospatiales (ONERA), was created in 1946
as a public research institute for aeronautics.  In 1963, ONERA
activities were expanded to include space research.  Figure I.1 shows
the location of ONERA's headquarters and facilities. 

   Figure I.1 ONERA Headquarters
   and Major Research Facilities

   (See figure in printed
   edition.)

ONERA's largest testing centers are in Modane-Avrieux,
Chalais-Meudon, and Fauga-Mauzac.  These centers contain seven large
wind tunnels covering the full range of subsonic, supersonic, and
hypersonic airspeeds.\7 In addition, ONERA runs (1) the Toulouse
Research Center, which is attached to France's National School of
Higher Education in Aeronautics and Space, and (2) the Lille Fluid
Mechanics Institute.  In 1992, ONERA employed a total of about 2,200
permanent employees.\8

ONERA is a nonprofit company, governed by a board appointed by the
French government.  It is sponsored by the Ministry of Defense's
Directorate of Research and Technical Studies and gives priority to
military programs.  However, ONERA is not a government agency, and
its employees are not civil servants.  Legally and financially, ONERA
is an autonomous public institute.  It is similar to a French
nationalized company but does not have shareholders (since the only
capital investment owner is the French government). 

--------------------
\7 Subsonic is a range of speed below the speed of sound in air
(761.5 mph at sea level), supersonic is one to five times the speed
of sound, and hypersonic is in excess of five times the speed of
sound. 

\8 For data on the centers' technical capabilities and points of
contact, see Aerospace Technology:  Technical Data and Information on
Foreign Test Facilities, (GAO/NSIAD-90-71FS, June 22, 1990). 

      ONERA SETS R&D PRIORITIES IN
      RESPONSE TO GOVERNMENT AND
      INDUSTRY NEEDS
------------------------------------------------------- Appendix I:3.1

ONERA serves as a link between scientific research and aerospace
manufacturers in the design and production of civil and military
aircraft.  ONERA's first priority is military aeronautical R&D.  Its
primary emphasis is subsonic and supersonic technologies; however,
some research is also conducted in hypersonic technologies.  In
addition, ONERA provides technical assistance to industry through
contracts that make its testing facilities available, and studies
problems encountered during product development or operations. 

ONERA's research priorities are established by its Board of
Directors, based on consultation with representatives from government
and industry.  According to ONERA officials, the ultimate
responsibility for reconciling any disagreement concerning ONERA's
R&D priorities rests with ONERA's Board of Directors.  The Board's
members are appointed by the Ministry of Defense.  The Board
comprises ministry officials (mainly from the Ministry of Defense),
aerospace experts from industry and elsewhere, and aerospace
employees from industry and government.  The ONERA officials stated
that disagreement at the level of the Board of Directors does not
generally occur because ONERA determines its R&D agenda from lower
levels upward in consultation with industry and government. 
According to the officials, consensus has always been reached well
before the issues were raised to the level of the Board of the
Directors. 

      MOST OF ONERA'S FUNDING
      COMES FROM CONTRACTS
------------------------------------------------------- Appendix I:3.2

About two-thirds of ONERA's funding comes from contracts with
government and industry; the remaining one-third comes from
government agencies and is classified as institutional support. 
Industry contracts with ONERA can be grouped into two categories: 
(1) contracts that industry pays for with its own funds and (2)
contracts that industry pays for with funds it received from a
government agency, usually the Ministry of Defense.  Institutional
support is funding for ONERA's basic operations, including the
resources that are relatively permanent and not dependent on contract
funding.  In 1992, ONERA's total operating budget was about $265
million.  Of that amount, about $189 million came from contracts and
about $76 million came from institutional support funding. 

When firms contract with ONERA, the amount they pay for the R&D
generally depends on the extent to which they exploit the resulting
technology benefits at the exclusion of other firms.  If other firms
could share the technology benefits, ONERA or the appropriate
government ministry generally pays a greater portion of the R&D
costs.  The extent to which R&D results will be publicly disseminated
is negotiated in the contract.  Of ONERA's 1992 contract funding,
about 10 percent was paid by industry.  ONERA does not keep track of
whether industry pays for contracts using its own funds or with funds
originating from a government agency.  With respect to government
contract funding, about 78 percent ($132 million) was provided by the
Ministry of Defense; about 9 percent ($16 million) by the Ministry of
Transportation; and about 13 percent ($22 million) by the Ministry of
Space. 

ONERA typically initiates the R&D paid for with institutional support
funds.  Of the institutional support funding that ONERA received in
1992, all of it (about $76 million) was provided by the Ministry of
Defense. 

ONERA officials stated that in the 1970s ONERA received about 70
percent of its total budget from government institutional support. 
By 1992, this amount had decreased to about one-third.  ONERA
officials believe the decrease has contributed to an organizational
culture that views government and industry as customers and focuses
on meeting their technology needs.  A SNECMA management official told
us that when ONERA relied more on institutional support, its R&D did
not always meet industry's commercial needs.  The reduction in
institutional funding in favor of contract funding has caused ONERA
to be more responsive to industry's needs. 

An ONERA official told us that, although ONERA strives to meet
contract customer needs, its low institutional funding level could
result in difficulties absorbing staff during periods of low contract
work.  This, in turn, could affect ONERA's ability to maintain smooth
operations.  Another ONERA official stated that limited institutional
funding reduces ONERA's ability to undertake original and highly
innovative and risky, longer-term research.  This official said that
limited institutional funding causes research scheduling problems. 

GERMANY
========================================================== Appendix II

This appendix describes (1) the structure of Germany's aeronautics
industry, (2) the support that the German government gives to
aeronautical R&D, and (3) the organization of Germany's main
aeronautical R&D establishment. 

   CONSOLIDATION AND INTERNATIONAL
   COLLABORATION IN THE
   AERONAUTICS INDUSTRY
-------------------------------------------------------- Appendix II:1

      CONSOLIDATION
------------------------------------------------------ Appendix II:1.1

Germany was not allowed to engage in aeronautical R&D after World War
II until 1955.  Shortly thereafter, several companies, many
family-owned, returned to aircraft manufacturing.  By 1969, mergers
had reduced the number of German airframe and engine companies from
20 to 4:  (1) 3 airframe companies--Messerschmitt-Boelkow-Blohm
(MBB), Dornier, and the German-Dutch Vereinigte Flugtechnische Werke
(VFW)-Fokker and (2) a single aeroengine company--Motoren und
Turbinen Union (MTU).  VFW broke with Fokker in 1979 and merged with
MBB in the late 1980s. 

In 1989, Germany's largest industrial firm, Daimler-Benz, established
Deutsche Aerospace (DASA) as one of its four major corporate units by
merging MBB, Dornier, MTU, and the electronic company Telefunken
Systemtechnik (TST).\1 By 1990, DASA managers had settled antitrust
and monopoly issues with the German federal government and completed
the basic organizational structure for DASA.  This new structure in
Germany's aerospace sector represents a departure from the mix of
small- and medium-sized firms that characterizes most of Germany's
industrial structure. 

As of the fall of 1992, both the TST and MBB identities were defunct
because DASA had achieved full takeover of both.  Although DASA has
also achieved full takeover of MTU, whose activities are those of
DASA's Propulsion Group, MTU's name is being preserved because DASA
is attempting to exchange MTU shares with Pratt & Whitney as part of
its cooperative agreement on aircraft engine programs.  Dornier's
identity is being continued because family members still control
42.45 percent of Dornier's shares.  DASA is now Germany's only large
civil aircraft manufacturer and is also Germany's largest aircraft
engine manufacturer.\2

In 1992, DASA was responsible for about $7 billion of Germany's $13.9
billion aeronautics sales.  We did not include DASA's defense and
civil systems group's sales in DASA's aeronautics sales figure
because we could not determine how much this group contributed to
aeronautics sales.  However, it is possible that some of the group's
$2.3 billion sales could add to the $7 billion.  DASA spent about
$3.3 billion, or about 30 percent of its total 1992 sales revenue, on
R&D.  (We could not obtain data on what portion of that amount was
spent on aeronautical R&D.) DASA's aircraft and propulsion groups
employed at least 55,700 of Germany's estimated 61,400
aeronautics-related employees.  A portion of DASA defense and civil
systems group's employees may also be involved in aeronautics work. 

According to a senior DASA official, the European aircraft industry
will no longer be internationally competitive in 5 years unless
Europe further reorganizes its civil aircraft industry.  He believes
that military cooperative programs, such as the European Fighter
Aircraft and Tornado, have triggered a general merger trend and that
European industry must further merge and eliminate excess capacity if
it is to remain competitive. 

--------------------
\1 The other three major corporate units are Mercedes-Benz, AEG (an
electronics firm), and DEBIS (a software firm that manages such
activities as car leasing). 

\2 The German company Bayerische Motorenwerke (BMW) has a joint
aero-engine venture with Rolls-Royce, which competes with DASA in
some engine markets. 

      INTERNATIONAL COLLABORATIVE
      EFFORTS
------------------------------------------------------ Appendix II:1.2

The majority of the German aeronautics industry's market is outside
of Germany, and DASA is typically a partner in international efforts
to build aircraft.  According to DASA's 1992 Annual Report, about 72
percent of DASA's aircraft group sales represent exports.  One of
DASA's most successful cooperative ventures is its 37.9-percent share
in the Airbus program.  Other key DASA cooperative ventures include
the following: 

  DASA has a 40-percent share in Eurocopter, the company formed by
     DASA's 1991 merger with Aerospatiale's helicopter operations. 

  DASA has a 51-percent share in the Dutch Fokker aircraft group
     (acquired in 1993).  According to a February 1993 Aviation Week
     & Space Technology article, Fokker products include aircraft in
     the 50- to 58-seat twin-turboprop category to compete with
     similar products produced by France's Aerospatiale.  According
     to DASA, this acquisition makes it possible for the company to
     set up an internationally competitive European structure in
     regional aircraft manufacturing, in which it hopes to include
     Aerospatiale and other partners. 

  DASA collaborates with Pratt & Whitney on engines for commercial
     and executive aircraft.  Since 1991, a partnership has existed
     between DASA's MTU and Pratt & Whitney.  MTU is the preferred
     partner in all current and future Pratt & Whitney engine
     programs. 

  DASA participates in a joint study with Boeing and other aircraft
     manufacturers to assess the feasibility of developing a new
     generation super-jumbo aircraft with a potential range of 600 to
     800 seats. 

In addition to international industry collaboration, the German
government cooperates with other countries in funding two key wind
tunnels for aeronautical R&D.  The German-Dutch Wind Tunnel, located
in the Netherlands, has been in operation since the early 1980s.  The
$63-million, low-speed wind tunnel is the largest of its kind in
Europe.  It is jointly owned by the national aeronautics research
establishments in Germany and the Netherlands. 

The European Transonic Wind Tunnel, located in Cologne, Germany, is
estimated to cost about $400 million.  It is currently under
construction, and initial operation is planned for 1994.  This tunnel
is significantly more complex than the German-Dutch tunnel and will
use pressurized nitrogen to achieve more accurate testing results at
transonic speeds.\3 Four countries are shareholders in the nonprofit
company that is constructing and will operate the tunnel.  France,
Germany, and the United Kingdom each have a 31-percent share; the
Netherlands has a 7-percent share.\4

--------------------
\3 Transonic speed is a range of speed between about 0.8 and 1.2
times the speed of sound in air.  The European Transonic Wind Tunnel
will operate from 0.15 to 1.3 times the speed of sound in air. 

\4 Because the European Transonic Wind Tunnel is being constructed in
Germany, thereby providing Germany the benefit of the majority of the
construction jobs, Germany is funding 38 percent of the construction
cost.  France and the United Kingdom are funding 28 percent each, and
the Netherlands is funding 6 percent. 

   GOVERNMENT SUPPORT OF
   AERONAUTICAL R&D
-------------------------------------------------------- Appendix II:2

The German government has grouped federal R&D funding into almost 20
areas, 1 of which is the aeronautical research and hypersonic
technology.  Four government ministries fund R&D in this area:  the
Ministry of Defense, the Ministry of Economics, the Ministry of
Research and Technology, and the Ministry of Transportation (see
table II.1 for the amount of aeronautical R&D support these
ministries provided in 1991 and 1992). 

                          Table II.1
           
              German Government Aeronautical R&D
                      Support (1991-92)

                    (Dollars in millions)

Government agencies                    1991             1992
--------------------------  ---------------  ---------------
Ministry of Defense                    $945             $923
Ministry of Economics                   387              397
Ministry of Research and                132              132
 Technology
Ministry of Transportation                1                1
============================================================
Total                                $1,465           $1,453
------------------------------------------------------------
Note:  Dollar amounts were rounded to the nearest million dollar. 

Source:  Compiled by GAO from German government-provided data. 

The German national government supports aeronautical R&D in the
following four ways: 

      FUNDING TECHNOLOGY AND
      PRODUCT R&D FOR NATIONAL
      SECURITY INTERESTS
------------------------------------------------------ Appendix II:2.1

The Ministry of Defense is responsible for funding military
technology and product R&D for national security.  It generally pays
most or all of the cost of such R&D.  It funds basic R&D only if such
R&D is not being conducted on the civil side and is judged of
potential importance for future national defense or security needs. 
In 1992, the Ministry of Defense spent about $923 million to fund
aeronautical R&D.  Of that amount, $91 million was for technology
R&D, and the remaining $832 million was for product R&D. 

In part because the German postwar constitution and public opinion
have resisted military influence over national research policy, the
Ministry of Defense has no in-house facilities for conducting
aeronautical R&D.  To accomplish this R&D, the Ministry uses the
national aeronautics research establishment (DLR) and contractor
research facilities. 

      FUNDING PRODUCT R&D FOR
      CIVIL AIRCRAFT
------------------------------------------------------ Appendix II:2.2

The Ministry of Economics provides product R&D funding for civil
commercial aircraft, in particular Airbus, as part of the Ministry's
larger objective of ensuring an adequate German industrial
structure.\5 These funds generally take the form of
"success-dependent repayable loans." Once the sale of an established
number of products is reached, a percentage of the profit on sales
above that number is used to repay the loan.  Although in the past
this funding has amounted to over $350 million a year, it fell from
about $387 million in 1991 to $232 million in 1993.  Of the latter
amount, the ministry planned to spend about $204 million for Airbus
programs and about $28 million for other aircraft programs, such as
the Dornier 328 commuter aircraft. 

The July 1992 bilateral aircraft agreement between the United States
and the European Community limits direct government support for
product R&D of civil aircraft to 33 percent of a product's total new
development costs.  In addition, a European Community regulation
limits indirect government product R&D support for a single company
to 25 percent of the cost of the basic R&D.  As a result of these new
developments, a German government and DASA official stated that some
technology validation and demonstration activities, currently
conducted as part of product R&D activities, may be conducted as part
of technology R&D activities in the future.  This would ensure
continued government support of these activities. 

--------------------
\5 This is accomplished by the Office of the Coordinator of German
Aerospace Policy, who is a member of the German Parliament.  The
office coordinates government industrial policy to prevent unfair
distortions in global aeronautics competition, and provides support
for Airbus. 

      FUNDING CIVIL TECHNOLOGY R&D
      AND FACILITIES TO ENHANCE
      THE NATIONAL TECHNOLOGY BASE
------------------------------------------------------ Appendix II:2.3

The Ministry of Research and Technology funds R&D and support
facilities across a broad spectrum of industry sectors, including
aeronautics, to enhance the national technology base.  Its support
for aeronautical research and hypersonic technology is intended to
(1) support Germany's national aeronautics research establishment to
improve the technology base for future projects; (2) improve civil
aircraft critical components, in part through demonstration and
validation of aeronautic technologies; (3) improve avionic and flight
guidance/flight safety technologies; and (4) support planning and
construction of major R&D test facilities. 

The Ministry of Research and Technology's 1992 R&D budget was about
$5.9 billion.  Of this amount, about $133 million was targeted to the
federal government's aeronautical research and hypersonic technology
area.  Figure II.1 identifies how these funds were allocated. 

   Figure II.1:  Aeronautical R&D
   Support by the German Ministry
   of Research and Technology in
   1992

   (See figure in printed
   edition.)

\a Total 1992 DLR institutional funding from the Ministry of Research
and Technology was about $204 million.  The remaining funds were for
DLR's space and energy activities. 

Source:  Compiled by GAO from German government-provided data. 

Contracts with industry for aeronautical technology R&D, excluding
those under the Saenger hypersonic technology program, accounted for
less than 4 percent of the ministry's funding for civil aeronautical
technology R&D and facilities in 1992.  The Ministry of Research and
Technology generally contributes not more than 50 percent of the R&D
costs for these contracts,\6 with industry paying the remaining cost. 
This is intended to ensure that the R&D investment is considered
sufficiently worthwhile by industry and, therefore, supportive of
commercial industry objectives.  Activities funded are typically
demonstration and validation of technologies and often involve
development of a generic component for use in tests.  For example,
the Ministry of Research and Technology has funded development and
performance testing of a generic carbon fiber fin. 

The Ministry for Research and Technology also helps facilitate
technology transfer by supporting practical application of research
findings.  It has established demonstration centers where smaller
companies can obtain information about the latest technological
developments in areas such as computer use for production purposes. 
Such demonstration centers are typically intended for broad
application with potential benefit to several industry sectors,
rather than to a specific industry sector such as aeronautics. 

--------------------
\6 The Saenger hypersonic technology program is generally for R&D
with longer-term, relatively uncertain payback.  Therefore, the
Ministry pays about 80 percent of its costs, with industry paying the
remaining 20 percent.  Also, when the Ministry funds technology R&D
conducted by a university, it can pay 100 percent of the university's
project costs. 

      FUNDING TECHNOLOGY AND
      PRODUCT R&D FOR CIVIL PUBLIC
      INTERESTS
------------------------------------------------------ Appendix II:2.4

The Ministry of Transportation annually provides between $1.3 million
and $1.6 million (using the average 1992 exchange rate) for R&D
activities intended to serve the civil public interest.  Examples of
civil public interest R&D activities include efforts to improve
aircraft certification criteria, air traffic and airplane safety, and
to reduce noise and environmental pollution. 

The Ministry of Transportation's aeronautical R&D projects are
intended to support a solution benefiting the general public. 
Because the government decides which R&D activities are needed, the
ministry generally contracts out to industry and universities and
pays most or all the R&D cost. 

   MAJOR AERONAUTICS RESEARCH
   ESTABLISHMENT
-------------------------------------------------------- Appendix II:3

Germany's major government-supported aeronautics research
establishment is the Deutsche Forschungsanstalt fuer Luft-und
Raumfahrt (DLR).  DLR is the only one of the 16 large German research
establishments that conducts aerospace R&D.  Figure II.2 shows the
location of DLR's headquarters and its major aeronautics research
facilities. 

   Figure II.2 DLR Headquarters
   and Major Aeronautics Research
   Facilities

   (See figure in printed
   edition.)

The DLR has its major aeronautics research facilities located in
Braunschweig, Goettingen, Koeln-Porz, and Berlin.  The first three
locations contain about 22 wind tunnels and testing facilities
covering the full range of subsonic-, supersonic-, and
hypersonic-related technologies.  Koeln-Porz is also the location of
the European Transonic Wind Tunnel.\7 In 1992, DLR employed a total
of 4,135 persons, of whom about 3,200 were permanent staff.  About 40
percent of DLR's staff were engaged in aeronautics-related
activities.\8

DLR has a matrix organization with technical competence allocated to
five research departments and applications to three program sectors: 
aeronautics, space, and energy technology.  DLR's five research
departments are (1) flight mechanics/guidance and control, (2) fluid
mechanics, (3) materials and structures, (4) telecommunications
technology and remote sensing, and (5) energetics.  Each department
has 4 or 5 institutes, making up a total of 23 institutes, each
employing about 150 to 200 people. 

DLR is a nonprofit company.  It reports to the Ministry of Research
and Technology and receives over two-thirds of its funding from
federal and state government.  However, DLR is not a government
agency, and its employees are not civil servants. 

--------------------
\7 Our report entitled Aerospace Technology:  Technical Data and
Information on Foreign Test Facilities, (GAO/NSIAD-90-71FS, June 22,
1990) provides information on the technical capabilities and
programs. 

\8 About 50 percent of DLR's employees worked on space-related
activities and about 10 percent worked on energy-related activities. 

      DLR SETS R&D PRIORITIES IN
      RESPONSE TO GOVERNMENT AND
      INDUSTRY NEEDS
------------------------------------------------------ Appendix II:3.1

DLR serves as a link between scientific research and industry by
conducting technology R&D for long- and medium-term applications and
providing technical assistance activities for industry.  DLR's
primary mission is to conduct applied longer-term technology R&D to
enhance Germany's technology base for the development and use of
future aircraft and spacecraft.  In addition, DLR conducts
shorter-term generic R&D not yet targeted to specific aeronautics
products.  It also conducts some product R&D, in particular when
under contract from industry. 

According to a DLR official, DLR's aeronautic R&D focuses primarily
on high-risk, long-term technologies involving the subsonic,
supersonic, and hypersonic areas.  The official stated that, although
specific programs such as Germany's Saenger program for hypersonic
technologies may not continue, DLR will continue to conduct R&D of
hypersonic-related technologies.  In contrast to DLR, industry
primarily conducts R&D targeted to products, and therefore focuses
primarily in subsonic technology areas.  The Ministry of Defense, on
the other hand, funds R&D primarily in the supersonic area for
fighter aircraft, but also funds R&D in the subsonic area for
helicopters. 

DLR's research priorities are established by its four-person
Executive Board, based on consultation with representatives from
government and industry.  The Executive Board is advised by the
Supervisory Board, which is chaired by a representative from the
Ministry of Research and Technology and includes representatives from
industry, the Ministry of Defense, and other federal ministries. 
However, DLR decisions regarding its R&D agenda are typically formed
primarily by lower-level working circles that address various
technology areas such as helicopter technologies.  These working
circles comprise interested technical expert officials from research
establishments, government agencies, and industry. 

      SIGNIFICANT DLR FUNDING
      COMES FROM CONTRACTS
------------------------------------------------------ Appendix II:3.2

About 45 percent of DLR's funding comes from contracts with
government and industry; the remaining 55 percent comes from
government institutional support.  This support is funding for DLR's
basic operations, including R&D it self-initiates that is relatively
permanent and not dependent on contract funding.  Industry contracts
with DLR can be grouped into two categories:  (1) contracts that
industry pays for with its own funds and (2) contracts that industry
pays for with funds it received from a government agency, usually the
Ministry of Defense.  In 1992, DLR's total annual budget was about
$503 million.  Of that amount, $224 million came from contracts and
$279 million came from institutional support funding. 

Of DLR's $224 million in 1992 contract funding, industry contracts
represented about $42 million.  DLR does not keep track of whether
industry pays for contracts using its own funds or funds from a
government agency.  DLR also received about $154 million from German
federal and state government contracts, about $19 million from
international organizations such as the European Space Agency and the
European Community, and about $10 million from other sources. 

When firms contract with DLR, the amount they pay for R&D generally
depends on the extent to which they can appropriate the resulting
technology benefits to the exclusion of other firms.  If other firms
can share in the resulting technology benefits, DLR or the
appropriate government agency generally pays a share of the R&D cost. 
The extent to which R&D results will be publicly disseminated is
negotiated in the contract. 

DLR typically initiates R&D paid for with institutional support
funds.  Of the $278 million that DLR received in 1992 for
institutional support funding, $204 million was from the Ministry of
Research and Technology, $40 million was from the Ministry of
Defense, and $34 million was from German state governments. 

In the 1970s, DLR received about 90 percent of its total budget from
government institutional support funding.  By 1992, this amount had
decreased to about 55 percent.  DLR officials stated that this
decrease has contributed to an organizational culture that views
government and industry as customers and is oriented toward meeting
their technology needs.  However, according to DLR, the advantage of
closer orientation to customer needs through contract funding must be
weighed against the advantage of institutional support funding--that
of providing continuity for the basic R&D essential to maintaining
the country's aeronautical technology base for future generations of
aircraft.  According to a DLR official, an excessive amount of
institutional funding could jeopardize the institution's usefulness
to its industry and government customers.  On the other hand, an
excessive amount of contract funding could jeopardize the continuity
of basic R&D in support of the country's technology base.  It was his
opinion that a 50/50 mix would represent the most appropriate
tradeoff between contract and institutional support funding.  This
official said that DLR was probably heading toward that mix in the
future. 

      R&D ACTIVITIES OUTSIDE OF
      DLR
------------------------------------------------------ Appendix II:3.3

In addition to DLR's R&D activities, government agencies and state
governments fund R&D at higher education and other research
establishments.  This R&D, although not identifiable as aeronautical
R&D, can have potential aeronautical applications.  One such
establishment is the Fraunhofer Society for the Advancement of
Applied Research.  This establishment conducts commissioned projects
and technology R&D in its 45 research institutes. 

In 1992, the Fraunhofer Society had a budget of about $640 million
and employed about 7,600 people.  About 70 percent ($488 million) of
the budget was used for research, with more than two-thirds of the
budget funded by contracts from industry and state and federal
governments.  The R&D performed covered a broad spectrum of
technologies, including those relating to microelectronics, materials
and components, and production technologies.  The potential spin-off
benefits from this R&D to aeronautics applications cannot be measured
because the Society does not track the ultimate application of its
R&D. 

UNITED KINGDOM
========================================================= Appendix III

This appendix describes (1) the structure of the United Kingdom's
aeronautics industry, (2) the support that the United Kingdom's
government gives to aeronautical R&D, and (3) the organization of the
United Kingdom's major aeronautical research establishment. 

   CONSOLIDATION AND INTERNATIONAL
   COLLABORATION IN THE
   AERONAUTICS INDUSTRY
------------------------------------------------------- Appendix III:1

      CONSOLIDATION
----------------------------------------------------- Appendix III:1.1

After World War II, the United Kingdom's aeronautics industry
comprised about 70 aircraft manufacturers.  By the early 1960s, this
number had been reduced significantly through takeovers, mergers, and
bankruptcies.  For example, Bristol Aero Engines and
Armstrong-Siddeley Motors merged to form Bristol-Siddeley in 1958,
which then absorbed other engine companies in the 1960s.  In 1966,
Bristol-Siddeley was, in turn, bought by Rolls-Royce, which today is
the United Kingdom's only manufacturer of large civil aircraft
engines.  In addition, British Aerospace (BAe) was created in 1977 by
the merger and nationalization of the United Kingdom's two remaining
major airframe companies:  Hawker-Siddeley Aircraft and the British
Aircraft Corporation.  BAe was privatized in 1985 and is by far the
United Kingdom's largest civil aircraft manufacturer. 

In 1992, BAe and Rolls-Royce contributed over two-thirds of the
United Kingdom's aeronautics industry's $18.6 billion in sales, the
majority of which were exports.  At the end of 1992, BAe employed
about 63,000 persons in its aircraft group.  Its aircraft-related
activities achieved sales of about $9.6 billion. 

BAe exports the majority of its products, with about 64 percent of
its 1992 sales achieved overseas.  Rolls-Royce, the world's
third-largest aircraft engine manufacturer, employed about 29,500
persons in this capacity.  About 70 percent of Rolls-Royce's 1992
sales represented exports.\1

BAe is responsible for the majority of the United Kingdom's major
military and civil aircraft programs.  The company manufactures
aeronautics products ranging from combat aircraft to supersonic and
subsonic commercial aircraft and jet trainers.  Its major
aeronautics-related business divisions are defense (which includes
military aircraft) and commercial aircraft.\2

--------------------
\1 Rolls-Royce also has an industrial power group, which designs,
constructs, and installs power generation, transmission, and
distribution systems, and major equipment for mining and marine
propulsion.  In 1992 it employed about 22,300 persons and had sales
of about $2.5 billion. 

\2 Other BAe business divisions include motor vehicles, property and
construction, and space systems. 

      INTERNATIONAL COLLABORATIVE
      EFFORTS
----------------------------------------------------- Appendix III:1.2

BAe does not typically build aircraft alone but rather is usually a
partner in international efforts to build them.  The company is
currently in partnership with aeronautics companies from more than 20
countries.  One of its most successful collaborative efforts is its
involvement in Airbus, for which it designs and constructs the
aircraft's wings. 

Another key civil international collaborative effort is the joint
venture agreement between BAe and Taiwan Aerospace Corporation to
assemble and market the new RJ regional transport aircraft.  Under
this agreement, BAe and the Taiwan corporation are to be equal
partners in a company called Avro International Aerospace, which will
produce the RJ regional transport aircraft as the successor to the
BAe 146.  Pending finalization of this joint venture, the final
assembly of this aircraft will take place in Taiwan and the United
Kingdom.  According to BAe, the about $210-million joint venture will
enable the company to save thousands of U.K.  jobs that would
otherwise be lost. 

Rolls-Royce is involved in two other major international
collaborative efforts in civil aeronautics.  One such effort is
International Aero Engines, a joint venture with Pratt & Whitney of
the United States, Fiat Avio of Italy, DASA of Germany, and Japanese
Aero Engines to produce the V2500 engine designed for up to 200-seat
jet transport aircraft.  This engine is currently in service on the
Airbus A320 aircraft and has also been selected for Airbus A321 and
the McDonnell Douglas MD-90 aircraft.  In 1992, International Aero
won an order worth over $1 billion from United Airlines to provide
engines for up to 100 A320 aircraft. 

The other collaborative effort involves a joint venture with the
German company Bayerische Motorenwerke (BMW) to produce the BR700
series of engines for business aircraft.  According to Rolls- Royce,
an order from a U.S.  business aircraft jet company (Gulfstream) for
200 engines valued at about $500 million officially launched the
BMW/Rolls-Royce BR700 series of engines.  The first aircraft carrying
this new engine is scheduled for flight in late 1995. 

According to a British Aerospace official, collaboration between
European aerospace companies has been well-established over the last
30 years and is likely to increase in Europe and beyond.  They said
collaboration could take several forms, such as joint ventures,
partial mergers, or full mergers. 

   GOVERNMENT SUPPORT OF
   AERONAUTICAL R&D
------------------------------------------------------- Appendix III:2

The United Kingdom's government has three agencies that support
aeronautical R&D:  the Ministry of Defence; the Department of Trade
and Industry; and, to a lesser extent, the Department of Transport
(see table III.1.  for the amount of aeronautical R&D support these
ministries provided in 1991 and 1992).  In addition, government
agencies fund R&D conducted at higher education and research
establishments.  Although this R&D is specifically not identifiable
as aeronautical R&D, it can have potential aeronautical applications. 

                         Table III.1
           
           United Kingdom's Government Aeronautical
                    R&D Support (1991-92)

                    (Dollars in millions)

Government agencies                   1991              1992
------------------------  ----------------  ----------------
Ministry of Defence\a               $1,300            $1,400
Department of Trade and                248               101
 Industry
Department of Transport                  9                 7
============================================================
Total                               $1,557            $1,508
------------------------------------------------------------
Note:  All figures are rounded to the nearest million dollar. 

\a Relates to product development only.  We could not obtain funding
information on defense aeronautical technology R&D activities. 

Source:  Compiled by GAO from U.K.  government-provided data. 

The United Kingdom's government supports aeronautical R&D in the
following four ways: 

      FUNDING TECHNOLOGY AND
      PRODUCT R&D FOR NATIONAL
      SECURITY INTERESTS
----------------------------------------------------- Appendix III:2.1

The Ministry of Defence is responsible for funding military
technology and product R&D to meet the needs of the U.K.  armed
services.  This ministry is the United Kingdom's primary sponsor of
public aerospace R&D and test facilities for civil as well as
military use.  In 1992, the Ministry of Defence expended about $4.9
billion to fund R&D in all technology areas.  Of that amount, about
$1.4 billion was for aeronautical product development activities. 

The Ministry of Defence owns the Defence Research Agency (DRA) and
typically funds about 90 percent of the aeronautical R&D it conducts
annually.  In addition, the Ministry of Defence funds some
aeronautical R&D conducted by private industry and universities. 

      FUNDING PRODUCT R&D FOR
      CIVIL AIRCRAFT
----------------------------------------------------- Appendix III:2.2

The Department of Trade and Industry funds product R&D for civil
aeronautics programs.  These funds generally take the form of
success-dependent repayable loans.  Specifically, once the sale of an
established number of products is reached, a percentage of the profit
on sales above that number is used to repay the loan.  Although in
the past this funding has averaged to over $160 million a year (in
1992 dollars), it dropped to about $55 million in 1992.  Of the
latter amount, about $50 million was for Airbus products, and the
remaining about $5 million was for the EH101 helicopter program. 

According to the Department, between 1990 and 1992, it disbursed
about $495 million (in 1992 dollars) in success-dependent repayable
loans for Airbus products.  The Department does not expect to provide
any additional loans for the Airbus program.  During the same time
period, the industry had repayed about $230 million. 

The July 1992 bilateral aircraft agreement between the United States
and the European Community limits direct government support for
product R&D of civil aircraft to 33 percent of a product's total new
development costs.  In addition, a European Community regulation
limits government indirect product R&D support for a single company
to 25 percent of the cost of the basic R&D. 

      FUNDING CIVIL TECHNOLOGY R&D
      AND FACILITIES TO ENHANCE
      THE NATIONAL TECHNOLOGY BASE
----------------------------------------------------- Appendix III:2.3

The Department of Trade and Industry also funds civil technology R&D
and research facilities to enhance the national aeronautical
technology base, primarily through its Civil Aircraft Research and
Demonstration program.  Established in 1990, the program is intended
to help key manufacturers within the U.K.  aircraft and engine
sectors by funding civil technology R&D. 

In 1992, the Department provided about $46 million for support of
aeronautical technology R&D and facilities.  Figure III.1 identifies
the support provided. 

   Figure III.1 Aeronautical R&D
   Support Provided by the U.K. 
   Department of Trade and
   Industry in 1992

   (See figure in printed
   edition.)

Source:  Compiled by GAO from U.K.  government-provided data. 

Grants to industry for research and technology demonstration
accounted for about 36 percent of the Department's total support for
aeronautical technology R&D and facilities.  Under the civil aircraft
program, the Department contributes no more than 50 percent of the
R&D cost, with industry paying the remaining cost.  This practice is
intended to ensure that the R&D investment is considered sufficiently
worthwhile by industry and, therefore, supportive of commercial
industry objectives.  Research program grants to industry include
funding of activities related to such technologies as aerodynamics,
propulsion systems, materials and structures, and avionics. 

The research program is part of the Department's Industrial
Innovation Program, which is intended to stimulate innovation across
a broad spectrum of industry sectors by encouraging research and
technology transfer and by creating closer links between business and
the science base. 

      FUNDING TECHNOLOGY AND
      PRODUCT R&D FOR CIVIL PUBLIC
      INTERESTS
----------------------------------------------------- Appendix III:2.4

The Department of Transport funds R&D activities intended to serve
the civil public interests.  Between 1990 and 1992 the Department of
Transport provided about $19.4 million to serve these interests. 
Examples of civil public interest R&D are efforts to improve
helicopter safety, reduce aircraft noise and environmental pollution
characteristics, and promote aviation security. 

The Department of Transport's funding for aeronautical R&D is not
solely intended to support commercial industry objectives, but rather
to support a solution benefiting the general public.  Because the
Department of Transport decides which R&D activities are needed, it
generally pays for most or all of the R&D cost.  It coordinates most
of the aeronautical R&D it funds with the U.K.  Civil Aviation
Authority. 

   MAJOR NATIONAL AERONAUTICS
   RESEARCH ESTABLISHMENT
------------------------------------------------------- Appendix III:3

The U.K.'s major government-supported aeronautics research
establishment, formerly the Royal Aerospace Establishment, is now
part of the DRA.  Established in 1991, DRA serves as the Ministry of
Defence's primary source of research and technical advice relating to
procurement in a wide range of technology and defense systems areas. 
Even though R&D in support of military commitments is DRA's primary
focus, it does conduct civil R&D for government and industry.  Unlike
the national aeronautics research establishments in Germany and
France, which focus on aerospace R&D, aeronautics and space together
account for about 20 percent of DRA's R&D activities.\3 In 1992, DRA
had total revenue of about $1.4 billion, of which about $233 million
was for aeronautical R&D-related activities.  Figure III.2 shows the
location of DRA's headquarters and major research facilities. 

   Figure III.2 DRA Headquarters
   and Major Research Facilities

   (See figure in printed
   edition.)

The DRA's testing facilities include 10 major wind tunnels covering a
range of subsonic- to high supersonic-related technologies but
generally not covering hypersonic-related technologies.  Its
low-speed subsonic wind tunnel in Farnborough is state-of-the-art and
used by industry worldwide.  In fiscal year 1992,\4 DRA employed a
total of about 11,000 persons, of whom less than 5 percent were
contract staff.  Of the permanent staff, about 800 persons were
employed in aeronautics-related R&D. 

Most DRA aeronautical R&D activities are conducted by its Aircraft
Systems Sector, which conducts R&D related to the full range of
aeronautics-related technologies.  These include flight systems,
materials, aerodynamics, and propulsion technologies. 

DRA is a government agency owned by the Ministry of Defence. 
However, DRA is considered a public corporation for the purposes of
public expenditure planning and control.  It has operated since April
1993 through a U.K.  government trading fund, which allows DRA to
function as a commercial organization by funding its investment
through borrowing or through its established reserves.  DRA's
reserves consist of revenues received from contracts with the
Ministry of Defence and other customers for its R&D services. 

--------------------
\3 DRA's primary activities focus on research and technical advice
related to weapons and defense equipment, international research
collaboration, and other operational matters. 

\4 DRA refers to this fiscal year as 1992-93.  It runs from Apr.  1,
1992, to Mar.  31, 1993. 

      DRA SETS R&D PRIORITIES IN
      RESPONSE TO GOVERNMENT AND
      INDUSTRY NEEDS
----------------------------------------------------- Appendix III:3.1

DRA serves as a link between scientific research and industry by
conducting technology R&D for long- and medium-term applications and
providing technical assistance to the Ministry of Defence and
industry.  In general, civil technology R&D projects account for
about 9 percent of DRA's activities.  DRA does on occasion conduct
civil product R&D, but such activity has to comply with guidelines
established by the Ministry of Defence. 

DRA does not receive direct oversight or funding from the U.K. 
national legislature.  Its research priorities are established
primarily by the Ministry of Defence, which has the ultimate
responsibility for determining DRA's R&D agenda.  As DRA's primary
customer, the Ministry of Defence acts on behalf of the U.K.  Defence
Secretary--in particular, the Deputy Chief of Defence Staff
(Systems), Deputy Chief Scientific Adviser, and the Chief of Defence
Procurement.  DRA is headed by a chief executive who is accountable
to the U.K.  Defence Secretary for the use of resources and
accounting and financial procedures. 

The Ministry of Defence established DRA to introduce more efficient
and effective management of defense research and to ensure better
value for DRA's customers.  Before operating through the government
trading fund, DRA received most of its funds directly from the
Ministry of Defence, which had also set a ceiling on the number of
staff DRA could employ.  Although DRA employees are still civil
servants, DRA no longer has an employment ceiling.  DRA may recruit
extra staff or pay for overtime during heavy workload periods. 

In line with the Ministry of Defence's expectations that DRA operate
as a commercial organization in a competitive environment, DRA has
introduced a new commercial accounting system, issued its first
annual report, and recently completed its first major customer
satisfaction survey.  Although we could not obtain the results of the
survey, officials stated that it was intended to aid in determining
whether DRA's R&D services were meeting customer needs. 

      ALL OF DRA'S FUNDING COMES
      FROM CONTRACTS
----------------------------------------------------- Appendix III:3.2

Unlike the research establishments in France and Germany, DRA does
not receive institutional support.  Instead, DRA receives all of its
income from contracts and does not conduct self-initiated R&D apart
from these contracts.\5 Of the total $1.4 billion DRA received in
1992, the vast majority (about $1.2 billion) was from the Ministry of
Defence; about $81 million was from other government ministries; and
about $39 million was from nongovernment organizations, which
includes industry. 

The Ministry of Defence expects DRA to seek contracts from industry
customers and to abide by its guidelines when bidding for industry
work.  DRA's industry contracts can be grouped into two categories: 
(1) contracts that industry pays for with its own funds and (2)
contracts that industry pays for with funds it received from a
government agency, usually the Ministry of Defence.\6

DRA generally does not transfer its R&D results to the public domain. 
When firms contract with DRA, the amount they pay for R&D generally
depends on the extent to which they can appropriate the resulting
technology benefits to the exclusion of other firms.  If other firms
can share in the resulting technology benefits, DRA or the
appropriate government agency generally pays a share of the R&D cost. 
The extent to which R&D results will be publicly disseminated is
negotiated in the contract. 

According to Ministry of Defence and industry officials, DRA competes
with industry for R&D contracts.  Although U.K.  aeronautics industry
officials did not identify any major concerns about competing with
DRA, a British Aerospace official stated that DRA staff have shown
more reluctance in the past few years to exchange information with
industry about work in which they may have a competitive advantage. 
However, both British Aerospace and Rolls-Royce also cooperate with
DRA in areas of mutual interest.  According to a Rolls-Royce
official, because DRA has a more comprehensive range of facilities
and technical expertise than private companies, competition is likely
to be limited. 

DRA officials believe that their dependence on contract funding has
contributed to an organizational culture that views government and
industry as customers and is oriented toward meeting their technology
needs.  However, they agree that there is a risk that DRA may
sacrifice the longer-term technology R&D essential to maintaining the
country's aeronautical technology base for future generations of
aircraft.  To minimize this risk, a DRA customer within the Ministry
of Defence--the Deputy Chief Scientific Adviser--has been assigned
responsibility for long- term strategic research.  Specifically, this
scientific adviser is responsible for justifying an appropriate
allocation of funding to longer-term research and managing the
Strategic Research Program. 

DRA officials also commented that they expect the new contracting
relationships to support DRA's longer-term technology R&D programs
better than in the past.  Previously, DRA tended to give highest
priority, in terms of funding, to activities that supported equipment
procurement and in-service trouble shooting.  Whatever resources
remained went to longer-term R&D.  As a result, such R&D was limited. 
Further, DRA expects the current, more formal contracting
relationships will better support DRA's applied technology R&D
program. 

According to the Director of DRA's Aircraft Sector, DRA expects to
see a reduction in scheduling problems under its new method of
operation.  Under the old system, Ministry of Defence customers
received free service from the research establishments, so there was
less incentive for them to plan their requests in advance.  Also,
there was no procedure for matching research establishment resources
precisely to customer needs.  He expects that DRA's new method of
operation will overcome these problems. 

--------------------
\5 According to DRA, the U.K.  government cannot contract with
itself.  However, the agreements under which DRA undertakes work for
the Ministry of Defence and other government departments are treated
by both parties as if they were formal contracts. 

\6 We could not determine whether the nongovernment contract funds
were directly from industry or subcontracts backed by government
funds. 

EUROPEAN COMMUNITY AND OTHER
COLLABORATIVE EUROPEAN
AERONAUTICAL R&D PROGRAMS
========================================================== Appendix IV

Aeronautical R&D in Europe is principally an enterprise of national
governments and industries.  The European Community (EC) is not
extensively involved in funding this type of research, and before
1989, was not involved at all.  Today, the EC funds a modest
aeronautical research effort designed to stimulate R&D cooperation
among community member countries and improve the Community's overall
aeronautical technology base.  The EC efforts complement other
parallel European collaborative aeronautical R&D efforts. 

   STRUCTURE OF THE EC'S
   AERONAUTICAL R&D PROGRAM
-------------------------------------------------------- Appendix IV:1

The EC's primary umbrella program for R&D cooperation between member
countries is the framework program.\1 In 1989, the EC modified the
framework program to include aeronautical R&D.  This decision
implemented recommendations of the 1988 EUROMART study.\2 The study
noted that the fragmented European technology R&D base could not
effectively support a globally competitive European aeronautics
industry.  EUROMART concluded that to develop and sustain such an
industry, the European community as a whole should financially
support aeronautical research.  Following this study, two existing
framework programs were consolidated and an aeronautical R&D
component was added.  The two programs are Basic Research in
Industrial Technologies for Europe (BRITE) and European Research on
Advanced Materials (EURAM).\3 The aeronautical R&D component ($67
million) is about 8 percent of BRITE/EURAM's funding and about 1
percent of the framework program's funding for the 1990-94 period. 

The EC, aeronautics associations, and national government officials
told us that while the EC's aeronautical research programs have
increased cooperation within the community, they so far have not been
particularly successful.  This is because (1) modest funding has kept
participation lower than desired, (2) large European companies focus
on product-related technologies that are outside the EC framework,
and (3) the costs of the EC bureaucracy are too high. 

--------------------
\1 The framework program provides the overall objectives, priorities,
and budget for the EC's technological R&D activities.  It is a
multiyear program covering either 4- or 5-year periods.  The proposed
fourth framework program (1994-98) is being reviewed by the European
Parliament. 

\2 The EUROMART (European Cooperative Measures for Aeronautical
Research and Technology) study was initiated in February 1987 by the
Commission of the EC and nine European aeronautics companies.  The
study was in response to a perceived resurgence in U.S.  aeronautical
R&D activities and the emergence of government-backed aeronautical
industries in newly industrialized countries.  The main study topics
were the status of, and future need for, technology R&D in the
European aeronautics industry. 

\3 BRITE/EURAM builds on experiences gained from the separate
programs and covers EC cost-shared research projects.  BRITE/EURAM
focuses on advanced materials technologies, design methodology, and
assurance for products and processes, application of manufacturing
technologies, and technologies for manufacturing processes. 

   EC SUPPORT OF AERONAUTICAL R&D
-------------------------------------------------------- Appendix IV:2

The EC supports aeronautical R&D primarily with shared-cost contracts
between itself, private industry, and member countries' research
facilities or universities.  Under this type of contract, the EC
typically pays for up to 50 percent of the R&D costs and, in some
cases, 100 percent of the administrative costs.  The other
participants in the contract provide the remaining costs.  The EC
requires that at least two research entities from two member
countries jointly participate in an R&D project as a precondition for
EC support.  Under the second framework program (1987-91), the EC
provided about 53 percent of the support for the program's 28
aeronautical research projects.  There was an average of
12 partners per project during this program. 

   THE EC'S AERONAUTICAL RESEARCH
   PROGRAM
-------------------------------------------------------- Appendix IV:3

The principal objective of the EC's overall R&D policy is to maintain
and strengthen the international competitiveness of European
high-technology industries.  This policy stresses (1) cross-border
cooperation, (2) coordination and mobility between industry and
science, (3) support for the research budgets of small- and
medium-sized enterprises, and (4) integration of research and
technology within the context of a single European market.\4

The R&D of aeronautical technologies within the EC's framework
program focuses on near- to mid-term technologies and manufacturing
processes prior to commercial development.  The EC seeks wide
dissemination of researched technologies to its member countries so
that they are applicable to more than one country or company, rather
than targeted to a specific product. 

In 1989, under the second framework program, the EC selected and
funded 28 projects from 112 proposals submitted by member countries. 
As shown in table IV.1, these projects fit in four program
categories. 

                          Table IV.1
           
                 Categories and Funding of EC
           Aeronautical R&D in the Second Framework
                      Program (1987-91)

              (of projects Dollars in millions)

Program category                 Program       Percentage of
(number of projects           category's  program category's
per category)                       cost  cost to total cost
--------------------  ------------------  ------------------
Aerodynamics (9)                   $32.8                  40
Acoustics (3)                       12.1                  15
Onboard systems and                 19.8                  24
 equipment (7)
Propulsion (9)                      17.1                  21
============================================================
Total                              $81.8                 100
------------------------------------------------------------
Source:  Compiled by GAO from data provided by the Commission of
European Communities. 

The largest single project ($12 million, 24 partners) is the European
Laminar Flow Investigation.\5 This four-phase project in the
aerodynamics program category, led by DASA, seeks to produce an
airfoil that would improve fuel consumption by 15 percent and reduce
pollution in subsonic and supersonic flight.  Other relatively large
programs studied the effects of future technologies on cockpits ($4.6
million, 14 partners), film sensors for aircraft engines ($2.1
million, 6 partners), and active noise control in aircraft ($4.5
million, 22 partners).  So far the EC has approved and funded 50
aeronautics research projects and authorized total funding of $111
million.  None of these programs has been completed. 

--------------------
\4 The single European market refers to efforts underway in Europe to
standardize international organizations and operations in order to
advance community objectives and cooperation. 

\5 Laminar flow is a measure of airflow over an airfoil (wing).  When
the airflow is smooth, it is laminar.  Turbulence occurs where the
airflow is no longer laminar.  This, in turn, increases drag, which
decreases fuel efficiency. 

   OTHER EUROPEAN COLLABORATIVE
   AERONAUTICAL R&D EFFORTS
-------------------------------------------------------- Appendix IV:4

In addition to the EC-led framework program of multinational
technology R&D, some of the EC member countries are involved in
aeronautical R&D through organizations and programs that, while not
EC-led, complement EC R&D initiatives.  Two of the more significant
efforts are the programs conducted by the European Industrial
Cooperation Initiative (EUREKA) and the Group for Aeronautical
Research Technology (GARTEUR). 

   EUREKA
-------------------------------------------------------- Appendix IV:5

EUREKA is an industry-led program designed to promote cross-border
cooperation in European R&D.  EUREKA, which was started in 1985, is
targeted on technology R&D for products and services that are
considered reasonably close to commercial use.  The program is
financially supported by the European Community Commission and 20
European countries. 

Whereas EC research is based on fixed institutional rules and
long-term goals agreed to by the member countries, EUREKA projects
arise spontaneously without detailed overall planning.  In the
aeronautical area, a key project is Eurofar, a 30-seat tilt-rotor
aircraft designed to serve regional routes, land in the cities, and
serve off-shore platforms. 

The project, initiated in 1987, will be accomplished in several
phases.  In phase 1 (1987 to 1992), the feasibility phase, a
multinational engineering staff determined that a fixed-wing,
fixed-engine tilt rotor design would best satisfy the project's goal
of a vertical takeoff and landing high-cruise-speed civil transport
plane.  Phase 1 cost about $38 million.  Phase 2 (1992 to 1996) will
be devoted to further research on the tilt rotor system and
preparation of a demonstrator vehicle.  Subsequent phases will
include production of a prototype aircraft and flight testing.  The
first certified aircraft is expected to fly in 2009. 

   GARTEUR
-------------------------------------------------------- Appendix IV:6

GARTEUR (created in 1973) was formally established in 1981 by a
signed memorandum of understanding between the governments of France,
Germany, the United Kingdom, and the Netherlands.  Sweden joined in
1991.  GARTEUR was started in 1973 as an information exchange and
limited cooperative program between major research establishment
experts.  The major aeronautics research establishments in each
country make up GARTEUR's current membership.  GARTEUR organizations
do not pool financial resources for a specified research agenda. 

GARTEUR's goal is to strengthen collaboration among EC member
countries through the exchange of technical and scientific
information, identification of gaps in technology and facilities, and
avoidance of duplicative efforts.  To accomplish this, GARTEUR has
brought together over 200 specialists from five major aeronautics
disciplines.  Research work conducted by GARTEUR is
applications-oriented technology R&D.  Major projects include
activities in aerodynamics, flight mechanics, helicopters, structures
and materials, and propulsion technology.  Information on specific
R&D projects within those technological areas could not be obtained;
however, the GARTEUR chairman provided the following example to
illustrate coordination among its members:  If two members were
conducting research of a technology for which expensive wind tunnel
tests were required, one would agree to pay for construction of the
demonstration model, while the other would fund use of the test
facility.  The participants would share the R&D results. 

After the memorandum of understanding was signed in 1981, industry
representatives within the GARTEUR member countries developed an
industry organization, the Collaboration on Aeronautical Research and
Technology, that on occasion provides input to GARTEUR.  The
organization consists of representatives from the major airframe
manufacturers in France, Germany, the Netherlands, and the United
Kingdom.  Organization members are primarily concerned with applied
research for fixed-wing aircraft and R&D management.  However, it
also represents helicopter interests through BAe and Aerospatiale. 
Like GARTEUR, the organization coordinates research efforts to
minimize duplication of technological research and product testing by
entering into agreements to pool research funds and share research
results.  We could not obtain information on the types of projects
being funded, because such information is considered proprietary. 

(See figure in printed edition.)Appendix V
COMMENTS FROM THE NATIONAL
AERONAUTICS AND SPACE
ADMINISTRATION
========================================================== Appendix IV

(See figure in printed edition.)

ORGANIZATIONS GAO CONTACTED
========================================================== Appendix VI

   UNITED STATES
-------------------------------------------------------- Appendix VI:1

Department of Commerce, Washington, D.C. 

Department of State

  U.S.  Embassy, Paris, France

  U.S.  Embassy, Bonn, Germany

  U.S.  Embassy, London, England

  U.S.  Mission to the European Communities, Brussels, Belgium

  U.S.  Mission to NATO, Brussels

National Aeronautics and Space Administration, Washington, D.C. 

National Science Foundation, Paris

Office of Defense Cooperation, Paris, Bonn, and London

Office of Technology Assessment, Washington, D.C. 

U.S.  Air Force Research and Development Liaison Office, Bonn

American Institute of Aeronautics and Astronautics, Washington, D.C. 

Aerospace Industries Association of America, Washington, D.C. 

   INTERNATIONAL ORGANIZATIONS
-------------------------------------------------------- Appendix VI:2

Commission of the European Communities, Brussels

Delegation of the Commission to the European Communities,
Washington, D.C. 

NATO Advisory Group for Aerospace Research and Development, Paris

   FRANCE
-------------------------------------------------------- Appendix VI:3

Aerospatiale, Paris and Toulouse

Association of French Aeronautical and Space Industries, Paris

French Auditors General, Paris

French Embassy, Washington, D.C. 

GE Aircraft Engines, Paris

Ministry of Defense, Paris

Ministry of Transportation, Paris

National Center for Scientific Research, Paris and Toulouse

National Higher School of Aeronautics and Space, Toulouse

National Institute for Aerospace Research and Studies, Toulouse

SNECMA, Paris

   GERMANY
-------------------------------------------------------- Appendix VI:4

Deutsche Aerospace, Washington, D.C., and Munich

Fraunhofer Society for Applied and Industrial Research, Munich

German Aerospace Industries Association, Bonn

German Aerospace Research Establishment, Koeln, Braunschweig, and
Goettingen

German Auditors General, Frankfurt

Hughes Aircraft, Bonn

McDonnell Douglas, Bonn

Ministry of Economics, Bonn

Ministry of Defense, Bonn

Ministry of Transportation, Bonn

Ministry of Research and Technology, Bonn

Technical University Braunschweig, Braunschweig

European Transonic Wind Tunnel Establishment, Koeln

   UNITED KINGDOM
-------------------------------------------------------- Appendix VI:5

British Aerospace, London

British Embassy, Washington, D.C. 

British National Audit Office

Defence Research Agency, Farnborough

Department of Trade and Industry, London

Imperial College of Science, Technology, and Medicine, London

Ministry of Defence, London

Rolls-Royce, London

Society of British Aerospace Companies, London

   BELGIUM
-------------------------------------------------------- Appendix VI:6

Martin Marietta International, Brussels

European Aerospace Industries Association, Brussels

MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

David E.  Cooper, Director
George A.  Jahnigen, Assistant Director
Mae Jones, Reports Analyst

EUROPEAN OFFICE, FRANKFURT,
GERMANY

Willie E.  Bailey, Evaluator-in-Charge
Mary R.  Offerdahl, Evaluator
Joanne Jurmu, Evaluator
David G.  Artadi, Evaluator
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