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:: September 2004 Letter ::

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Dear Fellow Armchair Strategists,

Fifty years ago, the French military decided to deal with their persistent Viet Minh insurgency. Reasoning that a climactic battle would finally win the war, in November 1953 they deployed a large force in a Vietnamese valley—Dien Bien Phu—well within the Viet Minh zone of control. This did not go well at all. The French were cut off by land, and aerial resupply efforts were dangerous and inadequate. They were gradually destroyed, with the final base surrendering in May 1954. France left Vietnam for good.

Climactic battles produce disparate results. The Venetians and their allies sought a conclusive battle with the Turks at Lepanto and won, solving their Turkish problem for a century. The British and German fleets both tried to deal with one another once and for all at Jutland, but with no victor nor vanquished the World War One stalemate persisted. The odds are generally stacked against anyone seeking quick military resolution; wars aren’t won in a single battle, and people who try to end them in a single battle are apt to be desperate, and vulnerable to counterattack.

Business, of course, is not a battlefield. But the two biggest aerospace companies are facing climactic battles. The intriguing aspect of the Aerial Common Sensor (ACS) program, won by Lockheed Martin in July, is that it uses Embraer jets. That’s 57 jets made in Brazil, by the reformed socialists of JungleJets. These damn foreigners ain’t even British. While Congress or DoD could mandate switching the sensor package to a business jet, LockMart made the low costs of a regional jet a central theme in its competition with Northrop Grumman/Gulfstream. There are no US-built regional jets.

This invokes the specter of protectionism from Congress’s Buy American lobby. So far, the battle over Buy American legislation has been inconclusive—nothing serious has gone through, but the advocates are still out there. There’s little doubt that Buy American would be a real black eye for the US abroad—the worst foreign policy disaster since they gave Ahmed Chalabi a work visa. And if you’re Lockheed Martin, you’ve really got to worry. L-Mart has led the way in internationalization—promoting the Anglo/Italian EH 101 and US/Italian C-27J for the US market, among other projects. But most of all, their F-35 JSF revolves around other countries. Buy American proposals have a negative effect on JSF international partners’ enthusiasm for this program.

If Lockheed were seeking a climactic fight over Buy American, ACS could do the trick. Yet it isn’t clear what can stop the pandering xenophobes behind Buy American. Placating the John Birch Society-gone-to-Community-College crowd is a tough goal. LockMart might find that a crucifix and wooden stake have no effect at all. And if the Embraer/ACS acquisition is stopped, the Buy American folks have won a major victory, with serious repercussions.

On the other hand, if the Army and Navy actually buy 57 imported Brazilian jets (“now with Florida content!”), it’s game over for the Buy American crowd. If they can’t stop this, they can’t stop anything. It’s like money in the JSF bank.

The other battle: Boeing V. the EU. This is far more ambiguous than LockMart’s fight, and more likely to result in a Jutland-like stalemate. Boeing, despite my earlier doubts, seems to be serious this time about renegotiating the jetliner development subsidy issue with Europe. The US-EU jetliner trade debate has been around for well over a decade, but a confluence of events has brought matters to a head:

1. It’s an Election Year. Catering to the working man is suddenly vital, at least for the next few months. Besides, Kerry gets to play a fun game of “I’m more anti-French than you” with Bush.

2. Peter Mandelson. He’s the British guy replacing Pascal Lamy, the fierce Frenchman currently serving as EU trade commissioner. Mandelson’s a Blair crony, very pro-“Special Relationship” with the US. Different trade negotiating styles: Lamy would man the barricades; Mandelson will offer a nice glass of dry sherry. Lamy, by the way, once said Britain risked being “drowned in Mid Atlantic” because of its US connections. An EU civil war in the offing?

3. Necessity. 7E7 industrial arrangements are still not in place. One possible reason is that partners and backers are concerned about a subsidized competing plane from Airbus, courtesy of the European taxpayer. Boeing’s interest in renegotiating Airbus launch aid could dispel this concern, giving the 7E7 business case the final push it needs.

Again, the likely outcome is a stalemate. In fact, as soon as the 7E7 backers sign up, and the presidential race is decided, you might just see the subsidy debate disappear. Then again, this battle might go easier than expected. The original reason to allow launch aid—Airbus was an infant industry, in need of protection—has disappeared. The cash flow has been on autopilot, courtesy of Europe’s cheerfully oblivious taxpayers. In other words, the wheel is spinning, but the hamster has died.

Yet if the ‘92 bilateral is cancelled and the EU doesn’t renegotiate a nice civilized follow-on bilateral, the ’94 WTO agreement is the default. If whoever’s President next year doesn’t keep this issue a priority, a Boeing WTO complaint might be toothless. The EU could also fire back, impacting Boeing’s public funding sources. Worse, we could wind up with a cycle of retaliatory tariffs, spilling over to related aerospace products.

The death toll at Dien Bien Phu was very high, although a handful of hardy men survived epic marches through the jungles of Laos and made it to French lines. Again, military analogies seldom mean much in the real world. But as Boeing and Lockheed’s Washington Warriors straggle back to the Ritz Carlton Pentagon City lobby bar, I think you’ll hear some interesting stories.

Stories make my job interesting. The reports we update are less thrilling. This month they include the C-17, F/A-22, ERJ 135/145, AH-1, Mirage F1, F-2, Tiger, Ching Kuo, ATR, and the Military Transport overview. Have a good month.

Yours, ‘Til Nader Wins Texas,

Richard Aboulafia

 

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