Going Global? US Government Policy and the Defense Aerospace Industry

247 Pages·2002·2 MB·English

Going
Global ?
U.S. GOVERNMENT POLICY
and the DEFENSE AEROSPACE
INDUSTRY
Mark A.Lorell Julia Lowell Richard M. Moore
• •
Victoria Greenfield Katia Vlachos
•
Prepared for the United States Air Force
Approved for public release; distribution unlimited
R
Project AIRFORCE
The research reported here was sponsored by the United States Air
Force under Contract F49642-01-C-0003. Further information may
be obtained from the Strategic Planning Division, Directorate of
Plans, Hq USAF.
Library of Congress Cataloging-in-Publication Data
Lorell, Mark A., 1947–
Going global: U.S. government policy and the defense aerospace industry /
Mark A. Lorell, Julia Lowell, Richard M. Moore.
p. cm.
“MR-1537.”
Includes bibliographical references.
ISBN 0-8330-3193-7
1. Aerospace industries. 2. International division of labor. 3. International trade.
I. Lowell, Julia, 1961– II. Moore, Richard M.
HD9711.5.A2 L674 2002
338.4'76291—dc21
2002075151
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PREFACE
This report presents an overview of Phase I research conducted for
the RAND Project AIR FORCE research effort entitled “Gaining from
Globalization: Enhancing Air Force Management of an Increasingly
Globalized Aerospace Industrial Base.” The goal of this research is to
develop evidence, information, and analysis so that the Air Force can
provide assessments to the Office of the Secretary of Defense and
Congress on the effects of industry changes, new procurements, and
proposed laws and regulations that affect the industrial base. In ad-
dition, it is intended to assist the Air Force in developing new strate-
gies and policies that will help the Air Force exploit potential oppor-
tunities and mitigate potential problems that may arise from
structural changes and increasing globalization of the industrial
base.
This report provides an introductory survey of issues and trends re-
lated to the emergence of a variety of new forms of cross-border
business relationships and activities that are increasingly character-
istic of the U.S. defense aerospace industrial base. Examining a
broad spectrum of case studies of innovative cross-border relation-
ships, it establishes a framework for analysis and presents initial
findings. Economic data are also analyzed to identify trends in the
globalization of the U.S. aerospace industry. A survey of the complex
U.S. regulatory environment that influences cross-border business
relationships in the defense industry is also presented. The report
identifies gaps in the findings and suggests follow-on research ap-
proaches to fill those gaps during Phase II of the project. Most of the
data and other information on which this analysis is based were col-
lected from a wide variety of open published sources, supplemented
iii
iv U.S. Government Policy and the Defense Aerospace Industry
with interviews with U.S. and foreign government and industry offi-
cials. The data collection cutoff point for this document was
September 2001.
This research is sponsored by the Office of the Assistant Secretary of
the Air Force (Acquisition). It is conducted in the Resource
Management Program of RAND’s Project AIR FORCE.
PROJECT AIR FORCE
Project AIR FORCE, a division of RAND, is the Air Force federally
funded research and development center (FFRDC) for studies and
analysis. It provides the Air Force with independent analyses of pol-
icy alternatives affecting the development, employment, combat
readiness, and support of current and future aerospace forces.
Research is performed in four programs: Aerospace Force
Development; Manpower, Personnel, and Training; Resource
Management; and Strategy and Doctrine.
CONTENTS
Preface ......................................... iii
Figures ......................................... ix
Tables. ......................................... xi
Summary ....................................... xiii
Acknowledgments. ................................ xxv
Acronyms ....................................... xxvii
Chapter One
INTRODUCTION .............................. 1
Overview. .................................... 2
Consolidation and Globalization ................. 2
DoD’s Position on Defense Industry Consolidation .... 5
The Globalization Strategy ...................... 8
Research Goals and Organization of This Report ....... 10
Chapter Two
THE U.S. DEFENSE AEROSPACE INDUSTRY: HOW
GLOBALIZED IS IT? ......................... 15
Introduction .................................. 15
Defense Aerospace Globalization: Data Sources and
Terminology .............................. 17
Defense Aerospace Trade ....................... 17
Defense Aerospace Investment .................. 21
A Typology of Defense Aerospace Activities and
Relationships. ............................. 25
v
vi U.S. Government Policy and the Defense Aerospace Industry
U.S. Trade in Aerospace and Arms: Statistical Evidence .. 31
Trade in Aerospace Products: A Statistical Snapshot ... 31
Trade in Conventional Arms: A Statistical Snapshot ... 35
International Investment Involving U.S. Firms:
Statistical Evidence ......................... 39
Broad Trends in International Investment Activity .... 39
International Investment in Defense-Related
Industries ................................ 43
Summary of Statistical Evidence ................... 48
Defense Aerospace Globalization: Historical Trends .... 50
Trends in U.S. Defense Aerospace Exports .......... 50
Trends in U.S. Defense Aerospace Imports .......... 55
Conclusion ................................... 58
Chapter Three
THE GLOBALIZING AEROSPACE INDUSTRY:
OPPORTUNITIES AND CHALLENGES ........... 61
Introduction .................................. 61
Economic Dimensions of Defense Aerospace
Globalization .............................. 64
International Trade ........................... 65
International Investment and Business
Relationships. ............................. 69
Political-Military Dimensions of Defense Aerospace
Globalization .............................. 72
National Security Dimensions of Defense Aerospace
Globalization .............................. 77
International Trade ........................... 78
International Investment and Business Relationships .. 80
Conclusion ................................... 82
Chapter Four
THE LEGAL, REGULATORY, AND POLICY FRAMEWORK
FOR AEROSPACE INDUSTRY GLOBALIZATION .... 85
Introduction .................................. 85
Equipping Air Force Warfighters with Superior, Affordable
Weapon Systems ........................... 86
Promoting Competition Within the U.S. Domestic
Industrial Base ............................ 87
Competition Policy and the Role of Foreign Industry ... 90
Contents vii
Preparing for Coalition Warfare .................... 94
International Armaments Cooperation ............. 95
Security Assistance ........................... 99
Protecting the National Security ................... 102
Overview of Policies Toward Technology Transfer ..... 102
Controls on Defense-Related Trade ............... 104
Restrictions on Foreign Direct Investment in the U.S.
Defense Industrial Base ...................... 109
National Security Policies: A Look Ahead ............. 118
Defense Capabilities Initiative ................... 120
Defense Trade Security Initiative ................. 121
Bilateral Discussion with a View Toward Country-Wide
ITAR Exemptions ........................... 124
Reauthorization of EAA 1979 .................... 126
Trends in Foreign Direct Investment and Industrial
Security Policies ........................... 129
Summary and a Look Ahead ..................... 131
Chapter Five
THE NEW CROSS-BORDER BUSINESS RELATIONSHIPS:
CASE STUDY FINDINGS AND PROPOSED
FUTURE RESEARCH ........................ 135
Introduction .................................. 135
Marketing Agreements .......................... 137
Lockheed/Rafael Popeye and Python .............. 138
Northrop Grumman/Rafael Litening II ............. 143
Boeing/Alenia Marconi Systems JDAM,
Hellfire/Brimstone ......................... 146
BAE Systems/Saab Gripen ...................... 147
Teaming for Cross-Border Cooperative Development of
New Systems .............................. 149
NATO Airborne Ground Surveillance .............. 151
ASTOR. .................................... 152
Later NATAR Developments ..................... 156
SOSTAR .................................... 157
Northrop Grumman/EADS Strategic Alliance ........ 158
Israel Aircraft Industries/EADS UAVs .............. 159
NATO Theater Missile Defense ................... 160
BVRAAM/Meteor ............................. 161
Boeing/Alenia Marconi Systems .................. 163
Joint Strike Fighter ............................ 164
viii U.S. Government Policy and the Defense Aerospace Industry
XM777 Ultralightweight Field Howitzer ............ 166
FSCS/TRACER ............................... 167
Joint Ventures ................................. 168
Medium Extended Air Defense System ............. 169
Thales Raytheon Systems ....................... 170
Parent/Subsidiary .............................. 172
Thomson-CSF/LTV Missiles (1992) ................ 173
Rolls-Royce/Allison (1995) ...................... 174
BAE Systems/LMAES (Sanders), LMCS (2000) ........ 175
Raytheon/Kollsman ........................... 177
ASM Lithography Holding/Silicon Valley Group
Inc. ..................................... 178
U.S. Firms and Foreign Subsidiaries ................. 178
United Defense/Bofors ........................ 179
TRW/Lucas Verity ............................ 180
Summary Overview and Future Research ............. 181
Chapter Six
CONCLUSIONS AND PROPOSED FUTURE RESEARCH .. 185
The Response of U.S. Industry to Globalization ........ 185
Implications of European Consolidation and Increased
Aerospace Globalization ..................... 187
Directions for Future Research .................... 190
Appendix
A. AIR FORCE GUIDANCE: A STATUTORY AND
REGULATORY FRAMEWORK ..................... 193
B. SEVENTEEN AGREED PROPOSALS OF THE DEFENSE
TRADE SECURITY INITIATIVE .................... 197
References ...................................... 201
FIGURES
2.1. Trade Shares of U.S. Consumption and Shipments for
Selected Manufacturing Industries (1997–1999
averages) ................................. 32
2.2. Trade Shares of U.S. Consumption and Shipments for
Six Aerospace Industry Subcategories (1997–1999
averages) ................................. 33
2.3. Trade Shares of U.S. Military and Civil Aircraft
Consumption and Shipments (1997–1999 averages) .. 34
2.4. U.S. Domestic and Cross-Border Mergers and
Acquisitions, 1990–2000 ...................... 41
2.5. Domestic and Cross-Border Mergers and
Acquisitions, Selected U.S. Manufacturing Industries
(1995–1999 averages) ........................ 42
2.6. Total and Defense-Related CFIUS Reviews,
1996–2000 ................................. 44
2.7. Shares of Defense-Related CFIUS Transactions for
Top Three Countries, 1996–2000 ................ 44
2.8. Country Shares of 75 FOCI Negation Measures ...... 45
2.9. Cross-Border Collaborative Activities of U.S. Firms in
Military Aircraft and Missiles ................... 46
2.10. Government-Initiated Versus Industry-Initiated U.S.
Participation in Cross-Border Aircraft and
Missile Programs ........................... 47
ix
TABLES
S.1. Case Studies of Cross-Border Strategic Market Sector
Collaboration .............................. xxi
1.1. Global Ranking of Aerospace and Defense
Companies, 1999 ........................... 6
2.1. Common Types of Activities Carried Out by U.S.
Aerospace Firms Involved in Cross-Border Business
Relationships .............................. 26
2.2. Common Types of Cross-Border Business
Relationships Within the Defense Aerospace
Industry .................................. 29
2.3. U.S. Trade Patterns in Aerospace, 1998 ........... 35
2.4. Leading Exporters of Conventional Arms According to
Three Data Sources ......................... 36
2.5. Leading Exporters and Importers of Selected
Manufactures, 1999 .......................... 37
2.6. Examples of Recent U.S. Military Aerospace
System Exports ............................. 53
2.7. Examples of Recent U.S. Military Aerospace
System Imports ............................. 57
4.1. Summary of Statutes, Regulations, and Other
Authoritative Guidance Affecting Defense-Related
Trade .................................... 106
4.2. Summary of Statutes, Regulations, and Other
Authoritative Guidance Affecting Foreign Acquisition
of U.S. Firms ............................... 110
5.1. Examples of International Marketing Agreements ... 139
5.2. Examples of Innovative Cross-Border Codevelopment
Teaming Arrangements ....................... 153
xi