CANADA-UNITED STATES TRADE CENTER OCCASIONAL PAPER NO. 26

The International Decentralization of

US Commercial Aircraft Production:

Implications for US Employment and Trade

The views presented in this paper are those of the authors, and are in no way policy statements

of the Canada-United States Trade Center or the State University of New York at Buffalo.

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The authors may be contacted at the Canada-United States Trade Center, Department of

Geography, University at Buffalo, Buffalo, NY 14261, USA (Tel 716-645-2283; Fax 716-645-

2329; e-mail geoadm@acsu.buffalo.edu). This research was based upon the second author's

PhD dissertation in Geography (University at Buffalo), which involved multiple site visits to

aircraft production plants in Russia, China, France, the UK and the US, as well as extensive

US commercial aircraft production. Particular attention is given to the manufacturing processes

involved in the design and assembly of large passenger jets (100 seats or more). It is argued that

the current geography of aircraft production at the global level has been shaped by a new

international distribution of input costs and technological capability. Specifically, low-cost

producers within several of the newly emerging markets (NEMs) have acquired front-end

manufacturing expertise as a direct result of industrial offset contracts and/or other forms of

technology transfer (e.g. international joint-ventures, imports of advanced machine tools). We

find that the growth of international offset agreements portend the transformation of Boeing from

an aircraft manufacturer to a systems integrator. The economic implications of this potential

reconfiguration of the US commercial aircraft industry are discussed in the context of several

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however, this sector has become increasingly import dependent, as evidenced by rising levels of

intra-industry trade (IIT). Recent research suggests that part of this import thrust can be traced to

industrial offset agreements that transfer significant portions of US aircraft production to

foreign companies [2]. In order to sell Boeing 747s to Air China, for example, at least part of

the final product must be manufactured or assembled inside China itself. Offset agreements

within the aircraft industry have become increasingly complex, such that, by now, major

producers like Boeing and Airbus operate with globally decentralized supply networks that are

not wholly shaped by cost, quality, or logistical factors [3]. We argue that many of these

priorities of foreign governments that control the purchasing decisions of their domestic airlines.

If this argument is correct, then the geography of input supply for a global company like Boeing

may not simply reflect issues such as unit costs, price-quality considerations, or input delivery

speeds. More simply, our argument is that big buyers can impose purchasing conditions that

aircraft suppliers cannot ignore.

This paper examines the role of industrial offset agreements in the global decentralization of US

commercial aircraft production. Three key arguments are advanced that point to a major

restructuring of the industry over the near future. First, it is argued that industrial offset

agreements act as conduits for international technology transfer. In simple terms, these

transfer of production skills from one nation to another [5, 6]. A second and related argument is

we contend that US compensatory trade agreements with Russia and China have created the

following a systems-integration strategy (i.e. buy components from overseas, and assemble

aircraft at home) [11]. Overall, our main thesis is that US commercial aircraft production faces

an uncertain future in terms of employment, exports, and long-run survival. While our analysis

is focused mainly upon the production of large passenger jets (i.e. aircraft that can seat at least

100 people), much of the discussion, which follows, is pertinent to the regional jet market as

well. As we show later, moreover, other US sectors have moved toward systems integration

and/or offset-related marketing over the last few years. In short, some of the arguments advanced

in this paper can be applied to a variety of US high-technology activities outside the aerospace

sector.

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Industrial offset can be defined as a form of compensatory or reciprocal trade where exporters

(sellers) grant concessions to importers (buyers). A direct offset usually involves some

form of production sharing (subcontracting), technology transfer, or worker training, whereas

these conditions, exporters can exploit offsets as a competitive tactic [2]. Other things

being equal, firms that offer the best-offset conditions win export contracts.

In the context of the commercial aircraft sector, the first industrial offsets that we are aware of

started in the 1960s when Douglas first subcontracted the wing and fuselage assemblies for the

fuselage sections went to Alenia in Italy. These transactions resulted in substantial sales of

with Japan in 1974, when Mitsubishi was given contracts to produce inboard flaps for the 747

(resulting in major sales of 747s to Japan). In virtually every case that has been documented, the

goal of an offset agreement is to secure a sale that would not take place in the absence of

compensatory provisions. Although Douglas is credited with the first batch of offsets, as we

short, current US policy regarding commercial offsets has been framed with respect to military

and/or national security issues rather than economic considerations (e.g. domestic job retention).

The commercial aircraft sector accounts for approximately 8% of the nation's industrial exports

($53 billion in 2000), almost 800 thousand jobs, and close to 10% of US industrial output [1].

Despite strong export performance over the last 40 years, evidence is mounting that this sector is

not nearly as healthy as it was in the 1960s or 70s. In 1960, for example, imports of aircraft and

parts amounted to only 5% of exports by value, compared to 45% today. In terms of global

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international subcontracting agreements [9]. By now, there is only one major US producer and

only two high-volume domestic parts manufacturers (contrast this with the 1970s, when there

were three large producers and over ten major parts suppliers). Foreign content has increased

dramatically over the past four decades. For example, the foreign content of a Boeing 727 was

only 2% in the 1960s, compared to nearly 30% for the Boeing 777 in the 1990s [10]. In the case

in aircraft production remains strong (Table 1). Whether or not the RCA index will remain

above unity over the long run is far from assured (discussed later).

The rapid growth of IIT owes much to the nature of competition within the global aerospace

sector. While Airbus and Boeing compete vigorously in terms of price, product quality,

well. Direct offset agreements between airlines and aircraft producers are designed to

737s contain Chinese parts (tail assemblies) because Air China negotiated offset production as a

condition of purchase. Not surprisingly, the proliferation of offset agreements has cut the

domestic supplier base for major aircraft companies such as Boeing. To an extent, then, part of

the recent employment trajectory for the US aircraft industry can be traced to offset-induced

Perhaps a more disturbing feature of Table 2 is that employment levels for aerospace R&D

scientists and engineers (S&Es) have been falling steadily for some time. Between 1970 and

2000, total aerospace S&E employment dropped from 573 thousand to 120 thousand (an 800%

decrease). Over the same period, S&E employment as a proportion of total aerospace

employment dropped from 30% to 15% (further cuts are widely anticipated in light of the

post-September 11 slowdown in air travel and aircraft orders). Thirty years ago, the US

aerospace sector held a 22% share of the nation's total S&E employment, compared to just over

6% today. When we factor in the fact that the aerospace workforce as a whole is aging, the

steady drop in S&E employment suggests that the industry will soon face a major human

capital shortage [12].

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served by this strategy. An issue of mounting concern is that offset agreements involve

technology transfer (i.e. advanced production capability is delivered to potential competitors). A

related concern is that most of the world's aircraft producers expect that future growth of revenue

passenger miles (RPMs) will be concentrated in the Asia-Pacific region. According to Boeing,

for instance, global air travel is expected to increase by 75% over the next 10 years, suggesting a

The evidence in support of a major shift in the geography of aircraft production at the global

level comes from three interlinked processes that have already gained significant momentum.

The first process concerns technology transfer via industrial offsets (which first started in

equipment (machine tools) by the NEMs (often linked to offsets). The third process concerns

threshold of launching their own aircraft programmes on the basis of production technologies

gained via offsets and/or imports of advanced capital goods.

The transfer of strategic technology from western to non-western producers can be rapid. For

of only 2 years, a nation with no prior production capability in key areas of airframe construction

became fully competitive as a result of two types of technology transfer (i.e. industrial offsets

and machine tool imports). While the trade literature is replete with similar examples involving

both Airbus and Boeing, the fundamental point is that offset agreements have increasingly

involved the transfer of core production capabilities that were once exclusively controlled by the

duopoly.

A second factor concerns the advanced manufacturing technology that NEMs can buy at arm's

length from US, Japanese, or European machine tool (MT) companies. MT products are critical

to aircraft assembly. Most of these products have life spans of 20-30 years (e.g. CNC riveting

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advantage over older companies (many of whom do not replace their machines until such

machines depreciate beyond repair). Of course, other things are rarely equal. A further

advantage for the NEMs is that labor costs are typically at least 50% lower than those that

prevail in Europe or North America.

certified aircraft as a matter of principle). Taken together, these three factors portend a global

restructuring of the commercial aircraft industry in terms of production locations, regional

markets, and, ultimately, jobs. The question thus arises: how strong is the evidence for all this?

And, when can we expect to see signs of a global shift of this type?

evidence. The first strand of evidence comes from the growth of US industrial offset agreements

strand of evidence concerns the accumulation of production capability in China and Russia.

Both of these nations already have the technological and production infrastructure to

manufacture passenger aircraft that can take off, fly, land, and navigate just as efficiently

as their western counterparts -- and at half the cost. Having acquired important production

A snapshot of the evolution of Boeing's industrial offset exposure is shown in Table 3, which

collates the 700-level product family alongside the company's sourcing strategy for airframe

components (foreign versus domestic). A striking feature of these data is that foreign sourcing

has expanded dramatically over time (compare the 727 with newer models such as the 767 and

777). In the case of the 767, industrial offsets have been used to source a number of critical

airframe components, including the inboard and outboard flaps, the front and centre fuselage, the

aft fuselage, the stabilizers, the dorsal and vertical fin (including the rudder), the elevators, and

all external doors. The foreign content of a Boeing 727 (which started production in the 1960s)

was only 2%, whereas the foreign content of the 777 (1990s) is close to 30% [11, 12]. The

upshot of all this is that Boeing operates with only two major domestic subcontractors today,

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Boeing's international offset agreements [12]. Presumably even more jobs were lost via

multiplier effects, especially among smaller subcontractors.

In contrast to Boeing, Airbus subcontracts internationally to support the production of its older

models only (e.g. the A300). Newer models are close to 100% European content [8]. A further

models suggests that the two companies are following radically different sourcing strategies.

Third, it would appear that Airbus has wider scope for offering indirect offsets than Boeing.

Another contrast between Boeing and Airbus concerns the vintage of the machine tools and

manufacturing processes that are used to assemble commercial aircraft. Evidence from

767 models were delivered to Boeing in the 1960s and early 1970s. Although these

on machine tools that are nearing the end of their life cycles. Airbus, in contrast, has been

moving away from riveting technologies to laser welding and composite materials (non-

metallic), necessitating multi-billion dollar investments in new generations of tools and

fixtures. Although Boeing's equipment for the assembly of 777s comes from the 1990s, the

systems for the Boeing 737 cannot be used on the 777 because of the size and configuration of

the 777's wing [12]. One consequence of this relative lack of flexibility is that the inherent

design of an aircraft lends itself to the use of dedicated assembly equipment over the life cycle of

the aircraft. For Boeing, this means that old systems are in place for the most part, if only

because Boeing's product family is old. A major problem with old capital equipment is that rates

of machine failure are high (downtime becomes an issue). A further problem is that machining

speeds and accuracy levels are low when compared to the high-speed machines of the 2000s.

With no new large aircraft programmes in place to compete with the emerging Airbus line of

products (including the A380), the technological gulf between Boeing and Airbus is expected

to widen [8]. At present, Boeing does not have any commercial aircraft that operate with fly-

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shown in the following section, moreover, non-western producers are beginning to emerge as

potential challengers as well.

corporation under the leadership of the State Council [15]. The Russian aerospace sector, in

contrast, has moved toward a joint stock company structure, with shares held by the Russian

government, the design bureaus (e.g. Tupelov and Ilyushin) and manufacturers (e.g. Aviastar).

The Russian/CIS industry has produced several western adapted aircraft over the last 10

years, while the Chinese industry is rapidly gaining launch capability as a result of western

by 2007 [16]. Given that this jet is expected to include western components and avionics,

Much of the impetus behind these developments can be traced to joint ventures that link China

and Russia with the western duopoly (Boeing in particular). For example, Boeing currently has

more than 30 joint projects in Russia, including a program with Ilyushin to redesign the Boeing

China to invest in state-of-the-art manufacturing equipment. For instance, the CIS aircraft

plants in Kazan and Ulyanovsk have invested heavily in automatic fastening equipment for

wing and fuselage production. Significantly, this type of equipment is not currently in place in

any of Boeing's factories.

At present, China’s AVIC employs 560,000 workers, while the Russian/CIS employment base is

estimated at around 600,000. There is widespread agreement that the employment trend is

curving upward for both players, while the trend for the US is distinctly downward [11]. More

important, perhaps, is the fact that S&E employment in the aerospace sectors of both nations

recently surpassed 8% (compared to 6% in the US). Notwithstanding the fact that