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Retaining jobs and expanding economic opportunity is vital to the economy of Washington State, and to the Nation. This proposed venture, which appears would be subsidized by the Government of Taiwan, will create an unfair advantage for the McDonnell Douglas/Taiwan consortium.
It is essential that we continue to expand economic opportunities and not hinder competitiveness by creating an unfair advantage by allowing foreign government subsidies to bolster development and sales.
The proposed joint venture would have serious ramifications for the Boeing Co. and for America's balance of trade. This is a very serious issue and one I have taken all the way to President Bush.
Mr. President, I ask to place the testimony of Mr. Daniel Hartley, president of the Seattle Professional Engineering Employees Association, and Larry Clarkson, vice president of the Boeing Co. that they delivered to the Joint Economic Committee last week in the Record at this point.
The testimony follows:
Statement of Mr. Daniel B. Hartley
My name is Daniel B. (Dan) Hartley. I am an engineer . . . who has worked in the trenches of engineering for over 35 years. I speak from the viewpoint of the working engineer, one who has also been chosen by my peers for my position as President of the 46-year old Seattle Professional Engineering Employees Association (SPEEA). Although I work full time at Boeing, my views are my own and may or may not agree with any Boeing testimony. I am not trying to sell any particular product to the government. I am not requesting money. I'm not asking for some special favors. To me it seems like everyone who comes here is always saying how to cut the pie. We engineers want to tell how to make the pie bigger.
SPEEA is the bargaining agent, the union, for 29,000 Boeing engineers, primarily in Seattle and the Puget Sound Area, but also in several other (but not all) Boeing locations around the country. We are far and away the largest concentration of engineers in the world, and also one of the largest independent local unions. We are the people who design the Boeing airplanes. Currently about 80% of us work on commercial airplanes, with the remainder working on government programs, space and military mostly. I wrestle with the problems of aerospace engineers daily.
I address my union's opposition to the McDonnell Douglas sale of the Douglas commercial aircraft manufacturing operation to a Taiwanese consortium that will eventually be foreign controlled. The impact on the aerospace industry in our country will be irreversible, given our lack of any positive industrial policy.
The issue is technology transfer that will quickly result in major job loss for many areas in our country.
To allow the sale of Douglas to Taiwan is to encourage export of cutting-edge technology. The ability of America's remaining aerospace companies to sell in the world market will be dramatically reduced.
What are the stakes? Typically, American aerospace exports perhaps 20 to 30 billion yearly. Boeing has been building airplanes for 75 years; Boeing currently has about 60% of the world market for large commercial jet airliners. Boeing is the largest manufacturing exporter in the world, the largest exporter in our country and the second largest exporter in the world.
It is not generally known that Boeing sub-contracts about 60 to 65% of the manufacturing of our airplane, but we're effectively responsible for all of the design. Boeing's 37,000 commercial airplane manufacturing workers represent 35% of the airplane, so our engineering supports perhaps 100,000 direct aerospace manufacturing jobs, the majority actually being outside of Boeing. These 100,000 plus our 20,000 would equate to 360,000 indirect jobs using the economists' 3 to 1 factor, for a total of half-a-million jobs driven by SPEEA's people, alone . . . and we are just a portion of aerospace. I recollect that Boeing alone, typically has about 4,000 subcontractors for each of our 4 major airplane types, in about every state. My 5,000 compatriots at Douglas are good engineers and proportionally productive.
To understand my opposition of this proposed wholesale job export, I state the following well known truths lest we don't communicate:
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1. To create our accustomed level of wealth we must convert natural resources into useful manufactured products. The know-how to do this is technology.
2. The engineer is the person who knows how to do this, who has this technology. Without competent engineering, designs that are worthwhile to manufacture cannot be created.
3. The heart of America's long-term strength, both economic and military, ultimately resides in the ability of our engineers (yes, yours and mine, ours) to turn this technology into manufactured products.
4. If our country continues to encourage helter-skelter technology export without apparent regard for replacement with new technology, our children and grandchildren will revert to third-world status as hunters and gatherers.
To me and my fellow engineers these realities pose a dilemma:
Our society doesn't seem to have any cultural or religious taboos to retard the advancement of this technology. We want the materialistic benefits of technology. We say we want the jobs that technology creates.
Paradoxically, our country seems to be on an almost deliberate course to deny you and me the benefits of our technology. Is this lack of leadership or, possibly, is this the deliberate path of our leadership?
The proposed sale of the Douglas commercial airplane manufacturing and design functions to a consortium financed and partially owned by Taiwan is just the latest milestone in this headlong plunge.
My average engineer is 39 years old and has perhaps 14 or 15 years of engineering experience, with 10 of those years at Boeing. This means we have some new-hires and some with 30 to 40 years of experience. To be competitive in the current global market we need this mix. Few who are not in technology understand that this typical engineer committed to an engineering career perhaps 18 or 20 years ago. The experience of the engineer is far and away the pacing factor in evaluating the disastrous effects of injudicious technology transfer. Aerospace technology is this experience. It is not a factory or accounting procedure, or organization chart or even governmental ideology. If you want to start a competitive aerospace industry it is a lot quicker and a lot less expensive to buy in to an existing technology base than to try to develop one from scratch, ask Airbus. Likewise, loss of this experience base costs our country a lot more than some short term profit and loss exercise or election tally may indicate. This knowledge and skill in the heads of our country's engineers takes a long time to acquire but can be lost in a flash.
Boeing exported 5 different airplane types in 1991. The first flight of these types occurred an average of 20 years. Engineering design started 23 years ago, on average, with design of the 707 (the last two have been built and will be delivered shortly) starting 40 years. Our largest airplane has some 8 million parts. Commercial airplanes represent our country's highest level of technology because there are so many parts from such a wide range of technologies and because the standards of safety are so demanding. Each type may represent 5 years of design investigation, then 5 years of detailed design, manufacturing and testing, before being approved for passengers. This takes a lot of agonizing the working together and as you know such a massive job is hard to coordinate. Its all
too easy to lose a bit in translation at each step. It is also a heck of a leadership job that few can hack. To break up a team would send commercial costs to the realm of that all too common in many of our governmental programs, we'd be priced out of the world market. Our airplanes are the best example of technology in production. Our next design will be better, and if we can keep our team together the one following that will be better yet.
This problem of teamwork also extends to our sub-contractors. Often, personal relationships of trust and confidence develop that span many years and several companies. (Military programs usually preclude these practices, hence progress is excruciatingly slow and expensive.) These expediencies are necessary to make the American aerospace machine work. There is absolutely no differentiation between the technical nature of military and commercial work. The only difference is how the management structure works, not the way the technology functions.
Our airplanes re expensive . . . they deserve to be. When I started flying (I'm a 37-year aviator, too), the automobile was safer than the airplane. Automobile safety has improved considerably. I hear that airplane travel is now 1100 times safer than the auto . . . and, the price of air travel has gone down dramatically all the while. Wages, in general, are among the highest because the skills required are high (of course, we all know our union engineers are underpaid.). Wouldn't you agree that we American aerospace engineers have done a pretty fair job? Technology doesn't cost. It pays! Why else would this new Asian version of Airbus be touted? (The same discipline was demonstrated by our weaponry; performance in the Gulf War said a lot about the quality of our aerospace technology.)
I think it is fair to ask who really owns this technology that McDonnell is trying to sell. Most of our American engineers represent a large public investment in education and experience. Back in the days before technology bashing was in vogue, the G.I. Bill started hundreds of thousands of my fellow engineers on the road to careers in technology. Many others were helped by loan guarantees and other government incentives and society's encouragement. Technology wasn't some dirty word. Early education praised it. The maturity of experience of the many engineers pumped into the economy by WWII and the GI Bill was a major, if not the main ingredient, in our current technology advantage, in the moon landings and other glitsy aerospace accomplishments. But our WWII folks are all but gone and the Korean War bulge is rapidly thinning. You and I should view Douglas and Boeing and every other high-tech company as a national economic asset. After all, you and I paid for it.
The following broad question is being asked: What are the likely consequences of the proposed equity sale of Douglas from the standpoint of our national interest?
I answer this question from my knothole as the working engineer in technology. To understand my answers, one must understand some nuts and bolts fundamentals of aerospace manufacturing. The capital required to put several million parts together is tremendous. Consequently, the industry's manufacturing is spread over a broad base. The `brand name' manufacturers only make a small portion of each airplane. In Boeing's case, for the next generation airplanes, it is about a third. However, we Boeing engineers are responsible for the design of virtually all of it. How can we exist? . . . sub-contractors. There is no industry that is so dependent on the sub-contractor base. These sub-contractors may be producing for Boeing alone or for Douglas alone, or both. They may be working on a military project or a commercial plane. We may also have several subs building the same part and in some cases we may have several subs building different parts for the same use. For example, we may use different pumps from several manufacturers in a hydraulic system.
These subs (vendors) are often run by the originating entrepreneurs who are quite efficient and innovative. We design such that they can respond to change much more rapidly than large organizations. Even though many subs are run on a financial shoestring that would alarm the high finance community, their work is excellent. Remember, these are the people who create most of the new jobs and handle an untold amount of the shop skill training in America. They're good people and we engineers like 'em. On the selfish side, they also help the Boeings maintain a much more stable work force. I'm not a macroeconomist but I would suspect that the two major reasons that have forced the 3 billion a year subsidy of Airbus are the superiority of our technology and subcontractor base and recognition that our American engineers are 3 billion a year better than their engineers.
The proposed sale will inflict a serious wound on the American aerospace industry in such ways as:
1. Loss of high value-added jobs in prime manufacturing and particularly at high-tech subcontractors who craft 2/3 rds of the airplane. We must realize
this base is already being devastated by the head-long plunge in military programs.
2. As American sub-contractors bite the dust it will raise costs for the remaining players. This increase in prices will undoubtedly decrease business.
3. Considerable worsening of balance of payments.
4. Overall decrease in the confidence of investors in the viability of our aerospace industry. It will force a turning to foreign sources for capital for future projects. Again, more technology transfer will follow. Simply stated, it will make inevitable future foreign technology acquisitions cheaper.
5. Forcing Boeing to respond by increasing foreign participation much more ... accelerating the American aerospace downfall. If Boeing cut prices, it would insure that neither Boeing nor this Asian equivalent of Airbus will make money. The effect of this will be to force Taiwan to pump in more billions to protect the money already there. It is obvious this will not occur without transfer of ownership of more equity and technology. Boeing would have no money to continue to launch new, highly competitive products. This new `Asian Airbus' should overjoy European Airbus.
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6. Perhaps the most important impact (in view of our 100-year policy of a de facto industrial policy ranging from benign neglect, increasingly to moderate antagonism) will be to discourage our more responsible younger people from entering cutting edge technical careers, of which aerospace is the most highly visible. I must have bright new people coming into our profession ... (to pay my social security if nothing else).
If I am to believe that McDonnell Douglas and Taiwan Aerospace people are saying, then this sale will result in the loss of about 10,000 high-tech jobs; this translates to 1/4 million new aerospace jobs for Taiwan. I'm only an engineer who has vast experience on a team that has competed successfully despite our self-imposed obstacles. Taiwan's and our trade experts both want the deal. I'm not a trade expert, but it occurs to me that their trade experts have accumulated 70 billion of foreign exchange while ours have lost hundreds of billions ... whose experts would you bet on?
The positive:
I cannot speak with any expertise on the positive effects. They appear to center on some ethereal philosophical reasons that don't pass my engineering muster. Several who support the sale have talked to me and sent me material. For the life of me I cannot follow their logic but I have no reason to believe they are not honorable. I just can't put my heart into most of what I read as being positive. Engineers just need stronger arguments that the ones I hear.
It could result in some short term employment for engineers at Douglas.
I read that the supporters of the proposed sale say multinationalizing a corporation promotes peace and prosperity. Somehow America's current aerospace led is supposed to be economically destabilizing. Maybe this is why so much military technology must be transferred. I have read where multinationals are stabilizing because operations can easily be hidden from governmental interference by any one country. This secrecy promotes business profitability which elevates monetary control above our nationalistic political processes. This is supposed to be good for me, or somebody.
I cannot speak with factual information but the scuttlebutt in the industry is that McDonnell family members hold very high percentages of company stock. If so, a 2 billion reduction in debt should give these folks a fair near term windfall.
There is one indirect positive effect of the proposed sale. If something like this is the straw that broke the camel's back, if it is the act that makes us wake up and force our so-called leadership off their dead behinds, then it would be positive. Unfortunately, our innocents will be forced to bleed because of the job loss ... but this is strictly opinion.
Now, let's look at what I have recently been told are the major points of the memorandum of understanding between McDonnell Douglas and Taiwan Aerospace Company (TAC) as told to Douglas employees. I had not seen this before my December written testimony. I suspect it is generally true. The words are theirs; highlighting is mine:
Douglas separates commercial and government segments to form the new company.
The new company headquarters will be in Long Beach, California with two primary operations, U.S. and Asian.
Taiwan is offered up to 40% ownership in Douglas commercial business for $2 billion.
Taiwan is to produce the MD-12 wing and fuselage in a new production facility at Taichung, Taiwan.
Next steps: Conduct due diligence and negotiate definitive agreement; Objective-conclude definitive agreement by Jan. 31, 1992; and Requisite government approvals.
McDonnell Douglas states their strategic alliance benefits are:
Financial Strength:
Cash from MD-80 and MD-11 for US `green field', risk sharing;
Make MD-12 Development cash neutral for McDonnell Douglas;
Substantial portion of equity investment available to reduce McDonnell Douglas debt; and
New Company will start debt-free.
Low Cost World Class Production Capability:
Major structural assemblies;
Feeds MD-12 `green field' final assembly facility; and
Market Presence.
Pacific Rim largest growth market:
Passenger traffic to double in next 7 years; and
Will be roughly equal (93%) to U.S. domestic market by 2010 (currently 26%).
Market penetration:
38 to 40% of market in which we compete (MD-80/90 and MD-11);
Now participate in 44% of the total commercial market; and
With MD-12 and 100 passenger airplane Douglas will compete in 75% of total market by end of 1992.
TAIWAN AEROSPACE CORPORATION OVERVIEW
Private company with strong government support 29% government/71% private.
Previous aerospace experience:
Principals in Taiwan have many years of U.S. aerospace experience.
Dr. David Huang, Chairman & CEO, 22 years of U.S. Space program with Rockwell, PhD from MIT;
Dr. Denny Ko, President, Engineering degree from Cal Tech & Berkeley; and
Dr. Sing Chu, Engineering VP, Engineering PhD from MIT; worked at NASA Ames Research Center.
Benefits to ROC:
Development of commercial aviation industry in Taiwan;
Helps to transition Taiwan's labor intensive industrial base to a technology/capital intensive base;
Allows Taiwan to leapfrog industry entry barriers;
Avoids the 20 years of start-up effort normally required; and
Instant world-wide name recognition of Douglas.
ISSUES
Technology transfer: Commercial aircraft technology not unique to U.S., i.e., Airbus Fokker and Boeing alliance with Japanese on 777.
Military/defense connection: Complete separation of commercial and government. No involvement with government programs.
Job Loss: Without strategic alliance, Douglas will remain a niche player in commercial aviation and there would be a steady erosion of jobs at Douglas. This alliance will strengthen McDonnell and enable growth.
Douglas Employee concerns:
Pay and benefits will remain essentially the same;
All existing union contracts will be honored; and
We have the best employees in the industry and want the company to continue to grow and prosper for our customers, employees and stockholders.
TAIWAN AEROSPACE CORPORATION (TAC) BACKGROUND
TAC formed as a focal point for Taiwan's efforts in international aerospace activity. Its basic mission is the furtherance of the development of aeronautics and space industries and relevant parts and components industries with an aim towards stimulating parallel development of associated industries to
effect a full scale upgrade of Taiwan's domestic technology level.
Formation announced in July 1990. Official opening June 1991 Initial funding/capitalization of $400 million.
Capital contributors:
Executive Yuan Develop. Fund
24
China Steel
10
Bank of Communications
5
Finance companies
4
Consortium of 15 manufacturers
57
Chairman: Dr. David Huang. Background MIT Ph.D., Rocketdyne Program Manager, Acting President, Chung Shan Institute of Science and Technology (AIDC).
Proposed factor site: 148 acres adjacent to Taichung Harbor, for fabrication sub-assembly work. Initially processes (chem milling, anodizing, heat treat) would be undertaken at AIDC (nearby military aircraft factory).
Basic Taiwan Data Republic of China provided to Douglas:
Area, 13,900 square miles.
Population, 20 million.
Language, Mandarin Chinese (English required in High School and College).
Gross Domestic production (Billion $) Foreign Trade (Billion $).
Export Import
1989 135 66.2 52.3
1990 160 67.2 54.7
Defense % of GNP, 5%.
Defense % of Budget, 35.5%.
Current foreign reserves, 78 billion (greater than Japan).
Current public debt, less than 400 million.
Labor escalation, 10-11% last 5 years, 8-10%/year forecast.
Inflation rate has been 4-6% per year and projected to stay same through 1997.
GNP growth rate was 5.2% in 1990; projections for balance of this decade is 6% per year.
Transportation: Near seaport and major military airport.
Workforce: Commerce/service, 35%; manufacturing, 33%; agriculture/fishing, 17%.
Unemployment negligible (1.4%), if anything, workforce shortage 3-5% average annual turnover nationally; Union situation-not a significant problem to date.
Taiwan National Priority: Taiwan believes it requires a new industry to sustain economic growth which must be based on high value-added industries.
A three year search for other alternatives has brought Taiwan to aerospace.
Training and Education: 116 universities and colleges total enrollment, 535,000; engineering/science, 180,000; annual graduates, 35,000.
13 government sponsored training programs train 20,000 each year. 1990 government passed `Aeronautics and Space Industries Development Program.' Plan is to train 5,000 to 7,000 technicians annually.
Douglas is telling their customers that the proposed MD-12 will be the newest, highest-tech airplane on the horizon (and my fellow engineers at Douglas can design good planes and have for 71 years). McDonnell executives then say there is no technology transfer. If true, I am hard pressed to see that this `deal' is the straightforward conventional investment as touted by Douglas executives in earlier testimony. What is the message this sends, not only to my very competent fellow aerospace engineers at Douglas but to all of us in American aerospace technology?
Am I concerned because I think the deal would cause more competition? No, it is in my interest to have the strong, healthy American aerospace industry that this deal doesn't promote. I want a competitive Douglas.
I oppose the sale. It is a one-way street. A prompt Congressional injunction on several grounds is in order. Even McDonnell acknowledges, above, that there are governmental skids to grease to approve the deal. I am not a lawyer but it seems that they wouldn't be concerned about this if they didn't think technology transfer were occurring. Likewise, why are they scurrying around lining up political heavyweights if the deal is so pure and obviously straightforward?
I don't have the calm, genteel graces so evident before committees, so I'll tell you what an engineer sees. The problem at McDonnell Douglas is bad management, almost any aerospace engineer will acknowledge that. How are the interests of America going to be served by exporting the technology and the manufacturing base, to compete with American business, while keeping McDonnell Douglas' management so they can sell to the U.S. government, their only remaining customer when the commercial business evaporates? This looks to me like a double loss for our side.
This brings me around to the inevitable question that every one seems afraid to ask. Those of us on the firing lines of technology need to have answers if we are to continue to try to compete: Do we need to investigate developing a positive U.S. industrial policy?
What does our current policy look like to an engineer?
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1. Antiquated anti-trust laws. The whole driver in antitrust was to prevent monopolies' tendency toward economic blackmail. In the global marketplace we are encouraging it.
2. Tort laws, as they affect technology, stifle innovation and reward non-value-added litigants at the expense of technology. I'd be interested to know how disputes would avoid Taiwanese courts that constantly flaunt U.S. law? Within the month Piper Aircraft and its 1000 jobs, was sold to a foreign group for moving out of the U.S. It wasn't a question of market: they had a 1300-plane backlog. The reason was to get away from U.S. liability laws. These are a thousand jobs that could have been sub-contracting for us.
3. Lack of investment policy reform, Glass-Steagall, etc. We've got to quit rewarding the short-sighted and start encouraging the long-term thinkers. I don't know the best answer to this; I'm an engineer . . . but this hurts technology.
4. Indifference toward rampant foreign industrial espionage occurring in our targeted technologies. Again, I'm an engineer, not a lawyer. The legal community is quick to tout `justice' in tort defense but can't come up with some fairness here.
5. Inequities in patent, copyright and intellectual property laws. Anyone who has ever been to Taiwan knows this.
6. Regressive environmental laws that seem to cause more of the very pollution they supposedly reduce. They surely now allow the foreigners to sell us back (in the form of products made in their polluting, OSHA-less factories) the pollution we were trying to reduce. There's no way that I will tolerate an employer harming health or safety but we've gotten ridiculous. If my readings are correct, then Taiwan's main interest in the environment is in exporting pollution processing machinery to America. I will concede that our aerospace is considerably cleaner than most of Taiwan's industries.
7. Apathy in NASA. As an engineer it bothers me to see that only perhaps 6% of the NASA budget supports research in aeronautics that supports tens of billions in American sales and hundreds of thousands of American jobs . . . plus enough taxes to support all their other programs. To add insult to injury the research NASA or that Boeing does in a NASA facility is made available to our foreign competitors under `freedom of information.' This may be partly why Douglas hurts now. What kind of a message is this sending to my fellow engineers?
8. FAA's impediments to our aeronautical innovation. To a working aerospace engineer all I see is an FAA that trips all over itself to see that Russian and French airplanes are certified in the U.S. so they can be sold here but is the epitome of slow deliberation when it comes to common sense certification rules that will promote American foreign sales. From my vantage a good many rules that the FAA lays on our manufacturers are not driven by law but are extraneous promotion of political agendas of bureaucracy run amok.
9. Lack of appreciation for research and development. The heavyweights in the government will talk up basic research but get bored when it comes to the bill-paying industrial phase of the development. We research, create, they manufacture.
10. Failure to appreciate the value of education in preparing a skilled, competitive workforce. I'm no education expert but daily I see the lessening skills of our entry-level workers. I just have to have bright young engineers to replace my highly skilled retirees. It may not be apparent but my engineers are often forced into a less competitive design because our designs must be safe and also buildable by an inadequately trained
workforce. There is scant interest up high in opportunity for continuing education to allow updating technical skills of our current workforce. Is it ironic that these Taiwan executives were trained in the U.S. using American taxpayer-subsidized schools and employment while we working, taxpaying engineers are effectively locked out of the education establishment? We engineers are essentially denied post-graduate education. However, 40% of the graduate students in science and technology in our subsidized universities are foreign, mostly on non-reimbursable foreign stipend.
11. Arrogant indifference to the realities of global competition. Arguably, we have about 1 1/4 million engineers and the number is shrinking. We are not going to keep competing with a shrinking in both percentage and actual numbers of working engineers in the economy. That is about one engineer for each 100 jobs. I'm no expert, but it strikes me as strange that I cannot find any working engineers on any of these so-called competitiveness committees and `technology' committees. Do we have bad breath or what?
12. Arcane rules to address labor/management problems as they relate to competition. Let me mention an area where I am a world-class expert. There is a great prejudice against unions in the annals of government (and industry). It is beyond many of these people's comprehension to think that an engineer could be in a union . . . the deepest of degradations. I see instance after instance where this attitude defeats well-meaning efforts toward effective use of the engineering force we still have.
13. Tax structure that is tilted against technology. Again, I'm not a tax expert but it would seem wise to run some of the tax discussions past us working engineers to see disincentives not obvious to the experts. Even income tax rules hurt us.
14. Our historical tradition of massive military program changes without regard to the technological impact. If you were one of the engineers recently laid-off from one of our military projects, what would you be thinking seeing our government courting engineers in Russia and offering your tax money to provide them alternate employment? I have even seen plans to eliminate many of our career engineers from active military service: my, how shortsighted. We are quick to recognize that the engineer is the key to military technology for the other country but not in ours. We worry about their end-run when a dozen good aerospace engineers could make a producible conventional missile much akin to those that we used so effectively in the Gulf War. Nuclear warheads could be produced by half-a-dozen of our disgruntled engineers using modern manufacturing machinery. We better wake up!
In conclusion, everyone . . . but everyone who has done a recent study says the problem isn't so much in America's design process as in our appreciation of manufacturing technology, the bill-payer of our designers. This deal is a double whammy because it exports our manufacturing base . . . and exports our design technology, too. In the end, it is an issue of jobs and the economy. How anyone could suggest this deal makes good economic sense for America is beyond me. That people in high places do, is plenty of reason to take the mystery out of why the world is eating our lunch on automobiles, consumer electronics, optics and so many outer products that require attention to the creative input of engineering and other technology.
I accept that one may argue with the individual numbers and percentages and dollar figures I suggest. I solicit difference with my conclusions, an open discussion, the light of day does not worry me. If due deliberations show my generalities do not support a particular conclusion, then I will stand corrected. Feel free to copy, distribute and quote what is written here. Open discussion promotes better understandings. I would be happy to expand on any of these brief replies at your pleasure.
Statement of Larry Clarkson
Good morning, I am Larry Clarkson. Boeing Vice President for Planning and International Development. I wish to commend the Committee for holding these important hearings and for inviting Boeing to participate.
Let me state at the outset that Boeing does not oppose investment in McDonnell Douglas Corporation [MDC] by the Taiwan Aerospace Company [TAC] provided that the new structure assures there can be no subsidies by the Taiwan government, and that there are provisions to require disclosure sufficient to monitor and verify compliance with this requirement.
Our testimony today is based on the belief that, if their proposed arrangement is consummated under terms currently reported in the media, it will create another subsidized airplane manufacturer, and Asian Airbus--leaving Boeing as the only remaining major civil aircraft manufacturer bound by traditional open-market, profit and loss constraints.
Published reports indicate McDonnell Douglas Corporation [MDC] proposes to sell 40% of its commercial airplane operation to Taiwan Aerospace Company [TAC] for about $2.0 billion (USD). Another 9% will be sold to other Asian countries, with MDC retaining just over 50% ownership and, we would note, no room left to raise additional funds through the sale of equity, without relinquishing that control. MDC indicates $1.5 billion of the TAC investment will be used to pay down current debt.
Launch of the MD-12 trijet will target a market niche between Boeing's new 777 twinjet (which delivers beginning in 1995) and the 747-400 (4-jet, which is being delivered today). Though smaller, the Airbus A330 (twinjet) and A340 (4-jet) will also be competitors which deliver beginning in 1993. The MD-12 is currently scheduled to deliver beginning in 1997.
The current global market slowdown for commercial aircraft is likely to continue for several years. According to Wall Street analysts, total annual demand for new aircraft deliveries (based on projected air traffic passenger growth and replacement of aging aircraft is not traffic passenger growth and replacement of aging aircraft) is not likely to exceed 600 airplanes per year for the next decade. Boeing generally agrees with this assessment. Current world production capacity is already about 1,000 airplanes per year, and climbing, with the end of both the Gulf War and the Cold War, and the significant reduction of military budgets virtually world-wide, the aerospace industry is trying wherever possible to shift its emphasis from military to commercial aircraft. By decade end this trend is only going to add to the world's excess capacity. It is in just this market environment that we would expect a subsidized competitor to employ sales incentives (which undermine realistic pricing), to secure increased market share at the expense of its American competitors.
Yet for Boeing and the American commercial airplane industry, an open global marketplace, free of such trade distortions, is crucial for continued success. Such foreign subsidies and other market-inhibiting policies not only introduce unwanted economic and trade distortions, but make us less competitive in the process, even when we've become more efficient. Clearly this is a Boeing perspective, driven by our worldwide market outlook. And, while it would be naive to expect trade protections (including those in our own country) to all disappear overnight. I believe it's worthwhile exploring the impacts on our industry when trade is artificially distorted.
The mechanisms by which subsidies and other protectionist measures artificially alter market activity are relatively well understood. Subsidized ventures tend to lack the fiscal imperative which leads to sound commercial decisions, instead often introducing products to win market position, rather than earn a profit. They can remain in money-losing markets when it is, economically, poor business. They can inhibit the entry of a non-subsidized competitor into a market, or worse, split a market so that no one can earn a profit. Subsidy can also take the form of government support in the sale process. A manufacturer which can rely on government backed financing at favorable rates is in a much stronger position than a company which must rely solely upon private sector resources. This is particularly true in a recession (such as the current one) when the typical cash-shy customer seeks any assistance available and may be forced to make purchasing decisions based on financial incentives.
For the commercial airplane manufacturing industry, subsidies and other government interference in the market place also have long lasting effects. The decision to buy a particular airplane model typically commits the buyer to a relationship with the manufacturer for 10 or 20 years. And, given its large investment in inventory and training, coupled with the value of commonality, the airplane is likely to give that manufacturer an edge when more or different airplanes are needed. Thus, even a small sale can be perpetuated into a long-term fleet decision, a legacy of the original decision.
Commerical airplane programs require the manufacturer to make an enormous front-end investment. And they recover that investment and make a profit, if any, only after a long period. American manufacturers have traditionally been required to finance such multi-billion dollar airplane programs out of internally generated profits, or from available commercial market sources. Furthermore, a family of such airplane programs is today essential to succeed in the marketplace. So, it is in this context, that direct government subsidies in airplane development and financing may be seen to exert such powerful distortions, not only in our industry, but upon our nation's trade balance as well.
MDC indicate they intend to use about $1.5 billion of the `initial Taiwanese downpayment' for debt service with the remainder to be devoted to the MD-12 program. And, we are told that, effective January 1, 1992, MDC has separated their commercial aircraft business from all military programs in response to concerns over military security and technology transfer.
The media report MDC estimates of total required investment for the MD-12 program in the $4.0 to $5.4 billion USD range, while industry analysts estimate that requirement in the $7.0 to $10.0 billion range. While accurate estimates cannot be pinned down until the MD-12X is fully defined, we are nevertheless able to make `educated estimates' which correlate well with that of the analysts. A major aircraft program of this type requires significant up-front investments in training, facilities (U.S. and overseas), tooling equipment, inventory buildup and, of course, design and development. Total program cumulative negative cash-flow, for a typical aircraft program of this size, would likely be on the order of $10.0 billion or more around the fifth year after go-ahead. And this assumes a typically successful program. Were market conditions to deteriorate, those numbers could easily increase. Obviously large cash supports or subsidies will then be required. And where will they come from? And, under what terms and conditions?
At this point, Taiwan Aerospace is a newly-formed Taiwanese corporation `waiting for a role'. The extent of government investment in, and control over, TAC is unclear at this time, since only a small portion of total expected funding is yet in place or committed. Original announcements of the proposed arrangement indicated TAC comprised 29% government ownership and 71% private-sector ownership. However, industry analysts have since pointed out that the private sector is `holding back', and they now estimate eventual government investment in the 60% to 85% range.
We do know, however, that the Taiwan government has announced its intent to establish a commercial aerospace industry where none now exists, and to support it through funding, tax benefits, and other forms of subsidy. Further, Taiwanese foreign currency reserves, much of it from trade with the USA, were recently reported as $82.0 billion [USD]. This provides them with adequate currency resources to `bankroll' a new commercial aerospace industry should it become necessary.
In August of 1990, the Taiwan government announced its CASID (China Aeronautics & Space Industries Development) Program. The objectives of the program are to further the development of aeronautics and space industries, and relevant parts and components industries, to stimulate parallel development of associated industries, to upgrade the domestic technology levels, and to integrate `with national defense industries in order to establish an integral aeronautics and space industry in the Republic of China'.
Thus the aviation industry has been identified and targeted as one of the key industries by the Taiwanese government to: One, upgrade the overall Taiwanese industrial base; Two, build a high quality work force for high value added products; and Three conform to the trend of globalization.
Published August 15, 1990 by the Ministry of Economic Affairs, per its Public Notice No. Ching (79) Kung 040484.
In pursuing these objectives Taiwan will emphasize international cooperation through government support. One of its explicit development strategies is `to make effective use of reciprocal amenity terms and conditions in connection with industrial cooperation arrangements in encouraging prominent foreign aeronautics and space companies and parts manufacturers to make a presence in the ROC through participation in cooperative projects, so as to facilitate the transfer of advanced technologies into this country, as well as expand the export of the products'. So, in this context, it is quite clear that technology transfer is a goal of their program.
As we look further at the Taiwanese plan of implementation, we can identify at least five components which might prove potentially troublesome:
First, the Ministry of National Defense `will be authorized to use its operation funds, technical personnel, technology and equipment without jeopardizing principal missions, to assist government-owned and private-owned enterprises in the development and research of the manufacturing techniques of aeronautics and space products and their associated equipment so as to help those enterprises to upgrade the level of their technical capability in the field of aerospace industries' (Section IV.4 (1)).
Second, the Ministry of Economic Affairs has committed to `work out a plan for establishing an aeronautics and space industrial park at an appropriate place to provide industrial land and necessary facilities required for the development of aeronautics and space industries' (Section IV.6).
Third, investment in aeronautics and space industries `may be designated by the Government as important technology-based enterprises, and thus eligible for tax benefits' (Section IV.9 (1)).
Fourth, `the Development fund of the Executive Yuan, the Bank of Communications and/or other designated financial institutions may formulate a budget for participation in, or providing low interest credit facilities to such investment plans' (Section IV.9 (2)).
Finally, Taiwan has incentivized the airlines to request offsets of up to 20 percent of the value of a procurement through the offer of preferential financing linked to the level of offset.
The Plan outlines a wide range of means whereby their new commercial aeorspace industry could be supported--going well beyond what some might define as a traditional subsidy. But international and domestic law in this area is quite clear. A subsidy can take many forms, ranging from government guarantees that allow funds to be allocated to firms and industries that are not `creditworthy' or `equityworthy', to government-directed credit allocation policies that funnel `private' resources into sectors or industries designated by that government as having high priority.
We would also take note of recent public comments by Taiwan Aerospace executives which tends to confirm and support our concerns. Among these are the following:
From Dr. Denny Ko, President of Taiwan Aerospace Company: `We can continue to go back to government related banks or institutions for financing help if a proposed project is attractive' (Wall Street Journal-November 18, 1992); `Taiwan Aerospace is aiming to become the linchpin between local industry, ROC government programs and foriegn aerospace companies, to service the needs of both global and domestic markets' (Flight International December 4-10, 1991). `This will be the Airbus of Asia. Airbus has taken care of Europe, but there is no Asian entity' (Flight International December 4-10, 1991).
From Dr. David Huang, Chairman of Taiwan Aerospace Company, who was quoted in a speech given in late December, 1991 as saying:
The Taiwan Government would `continue to invest in TAC until it makes a profit' (Far Eastern Economic Review: February 13, 1992).
The latter quote has reportedly angered Taiwanese legislators to the extent that they are now demanding final say over any investment in the MDC-TAC venture that the government decides to make.
In assessing the proposed arrangement then, Boeing's concern is not that McDonnell Douglas will continue as a competitor, or that other commercially funded and managed companies join them in competing in the marketplace.
Rather we are concerned that the government of Taiwan will undertake a significant role in this new enterprise and, that the result will reflect a commitment by Taiwan, a non-GATT signatory, to finance its entry into the world commercial aircraft industry on a non-commercial basis. In essence, a new, heavily subsidized Asian competitor will be in position to substitute its national imperative of developing factories and high value-added jobs, and acquiring high-technology to upgrade its industrial base, in place of the normal imperatives driven by sound product development and tight fiscal management.
While MDC has recently separated its military functions and products from its commercial airplane organization, we see no comparable separation of these functions in Taiwan Aerospace. As we understand it, both military and commercial functions will be encompassed within TAC and, while we assume that MDC will act responsibly to control and minimize technology transfer, we should not be naive regarding Taiwan's CASID program with its stated objective of acquiring technology transfer. Mr. David Huang, TAC's Chairman, once served as President of the Taiwan Military Research Laboratory, and is now an advisor to Taiwan's Premier, Hau Pei-tsun, himself a Taiwanese General and former chief of their General Staff as recently as 1989. This hardly describes a tidy separation of military and commercial ties.
What are the implications of the foregoing to Boeing and the aerospace industry infrastructure in the United States? The past 21 years have amply illustrated the impact that government subsidies and sales inducements can have on the commercial market. Purely commercial enterprises have suffered due to the market distortions caused by the impact of such subsidies and inducements. Airbus, a subsidized enterprise, has consistently gained market share against non-subsidized enterprises, most notably against McDonnell Douglas. If this were not the case, would we today be addressing a proposal whereby MDC will be essentially phasing out the manufacture of commercial aircraft--and transferring that function overseas? Yet, another subsidized manufacturer, located in Asia, will increase market distortions and significantly disadvantage companies like Boeing which must rely on traditional means of supporting development and sales.
The market for large commercial subsonic jet transports, over which the three present-day manufacturers are competing, is one in which Boeing has been successful, and which has made significant contribution and benefit to the United States. The manufacture of commercial airplanes supports some two million direct and indirect jobs nationwide. In 1990, the export of commercial jets amounted to about $17 billion USD. Boeing accounted for about 80% of that, making us America's leading exporter for the past two years. Obviously, both Boeing and America have much to lose if an Asian Airbus is allowed to enter the marketplace.
Mr. Chairman, as you are aware, Taiwan is not bound by trade disciplines that govern aerospace manufacture in the United States and abroad. Taiwan is not a member of the GATT and has not taken on the obligations of the GATT Civil Aircraft Agreement. Furthermore, it is not bound by those OECD rules limiting subsidized export financing. As a consequence, Taiwan could engaged in any number of trade distorting measures that could place us at a severe competitive disadvantage in U.S. and foreign markets.
In this context it is our view that the U.S. Government needs to act upon these matters. There are several approaches which we recommend be followed to assure that government subsidies, sales inducements and other means of governmental interference in the marketplace do not become part of the proposed MDC-Taiwan Aerospace business arrangement.
One option is that the U.S. government should negotiate now a bilateral agreement with Taiwan that would prevent the use of unchecked government subsidies and other trade-distorting measures to develop an aerospace industry. This agreement should include a provision for adequate transparency to ensure compliance with this agreement.
In conjunction with the CFIUS review process, the U.S. Government should examine the sources of funds and the ultimate financial requirements of the venture. The U.S.G. could condition its approval of the MDC-Taiwan venture under the CFIUS process on a commitment by MDC and Taiwan that the venture would not be subsidized or supported in a manner that contravenes international and domestic law governing aerospace trade. Again, appropriate transparency provisions are key to the successful monitoring and enforcement of such a commitment.
Finally, it is our view that the appropriate time for the U.S. Government to take the recommended action is now. Surely an undisciplined venture in the Far East will serve to jeopardize the USG's effort, to date only partially successful, of negotiating an agreement concerning Airbus Industrie subsidization practices.
Government subsidies are among the most serious long-term threats facing out jet transport industry today. The Airbus example is a clear demonstration of the damaging impact that subsidies have on the marketplace, and the extreme difficulty in addressing the problem once there has been a significant political and/or financial investment devoted to the creation of programs, facilities, equipment and jobs--and to the acquisition of technology. In the Taiwanese case, we are considering an arrangement with a country with which the U.S. had a $13.0 billion trade deficit in 1989, and a $11.2 billion deficit in 1990.
Further, unlike the situation with Airbus, once the MDC-TAC transaction is consummated, our ability to address subsidies and other trade distorting measures is extremely limited. Because the MDC-TAC venture is 50% American owned, we could not initiate a countervailing duty investigation, bring a GATT case, or file a section 301 case. So, in our view, the matter must be addressed, the ground-rules agreed, and the recommended provisions put in place at this time, not after it becomes `fait accompli'.
Mr. Chairman, this approach must be coupled with a redoubled effort to discipline Airbus subsidization policies. Twenty one years of subsidies--which has resulted in a dramatic increase in market share at the expense of U.S. manufacturers--is enough. Our ability to create high paying jobs, to sustain economic growth, and to develop and commercialize new products depends upon an environment free of subsidies across both the Atlantic and the Pacific.
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