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:: August 2005 Letter ::

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Dear Fellow Armchair Industrial Strategists,

Feeling old? Me too. Here’s consolation. You understand market cyclicality if you live through enough cycles. At 42, I’m old enough to see several booms and busts, in both the defense and commercial markets. But there’s one market condition I didn’t think was cyclical. Asiaphobia. It’s baaaaack!

The late 1980s and early 1990s were a great time to be scared of Asian aerospace dominance. Foolish Americans, with their obsolete free market system, low savings rate, and complacent government technology policies would be left in the dust by the emerging aerospace powerhouses, with their sophisticated government industrial roadmaps. Japan would leverage its FS-X fighter, 777 role, space program, and broad defense industry capabilities to replace the US as the dominant aerospace power in the world. Indonesia would take the 50/150-seat airliner segment. Malaysia and South Korea would be regional aircraft players. Taiwan would buy Douglas Aircraft, and build its own 747 competitor. And China? By 2010 they’d be the center of an Asian Airbus. If you were an engineer, you might as well quit your job and learn Mandarin. There was no future back home.

It was all nonsense, of course. Asia’s aerospace investments merely absorbed cash that was better left to the private sector. Indonesia imploded. China retreated, abandoning its jetliner ambitions for an underwhelming component role (about $120 million annually in Boeing and Airbus work). South Korea abandoned its commercial projects but is still hard at work on the military side, re-inventing the wheel. Taiwan is hoping for 3% of the next Cessna. And Japan? Well, the FS-X became the F-2, an F-16C with a flimsy plastic wing and an F/A-22 price tag. It’s tough for Japan’s Government to admit it, but the next step is backwards—a JSF workshare, perhaps.

As an artifact of the bad old days, I recommend Jeff Shear’s The Keys to the Kingdom: The FS-X Deal and the Selling of America’s Future to Japan. I helped Shear with advice, all the while feeling like the conscientious dog in Davey And Goliath (“gee, I dunno, Davey…”). Shear, an otherwise superb writer, was with the Asiaphobes, and like the dead people in Sixth Sense, they saw what they wanted to see.

During America’s 1995-2001 boom, Asia fears vanished. Discredited Asiaphobic pundits lost TV airtime to money-crazed day traders and the Pets.com sock puppet spokesdog. The US economy is less confident now, with uncertain indicators and burgeoning deficits. So, the nervous Asia nellies are back. Their new focus is China: the prospective Unocal and Maytag acquisitions, an overvalued yuan, and another “sucking sound” of jobs going offshore. And in the aerospace world:

1. The QRS-11 chip incident. The State Department wants to punish Boeing for past China jetliner (with embedded QRS-11) sales, even though it’s now legal. Is this: (1) An effort to stop jetliner sales to China? (2) An effort to permit only dumbed-down jetliner sales to China? (3) Bureaucratic self-aggrandizement coupled with shameless pandering to the anti-China lobby? Hmmm….

2. DoD’s China report (http://www.defenselink.mil/news/Jul2005/d20050719china.pdf). China should be studied as a potential adversary. But China recently ended license production of the Su-27 fighter, a major retreat from expectations. In the interest of a balanced threat appraisal, shouldn’t an important DoD study mention this crucial development? Remember when the sky was going to turn dark with Chinese-built Sukhois? No longer. Except, perhaps, at DoD.

3. Noted Japanophobe and serious FS-X worrywart Clyde Prestowitz, author of 1988’s quickly obsolete Trading Places: How We Are Giving Our Future to Japan and How to Reclaim It is back with a new book. With Three Billion Capitalists: The Great Shift of Wealth and Power to the East he’s focused on China this time, perhaps because getting worked up about Japan’s imminent supremacy is now a total non-starter. “Trading Places”? “Great Shift”? Is everything a zero-sum game to this crowd?

But Japan still occupies a big place in Asiaphobe hearts, so there’s the 787. Once again, Japan’s government will provide taxpayer money to acquire jobs and technology. Once again, as with the 767, MD-11, and 777, jetliner manufacturing jobs will go abroad. There’s no coherent industry roadmap; Japan’s 787 work has more to do with bureaucrats and engineers gone wild. That’s great for Boeing, and it says nothing but terrible things about the Japanese economy (it’s tough to maintain 0% growth).

Japan’s 787 role is easily overstated. They’re getting 35% of the airframe, or about 17% of the total aircraft (the airframe is 40-50% of the plane’s value). Yet even The Economist reported, “At least 70% of it will be built outside America, mostly in Japan.” (June 25th 2005, page 78.) When a highly respected pro-trade magazine writes breathless gibberish like this, you know Asiaphobia is back. Et tu, Economist?

Yet the US industrial future might resemble the iPod. There’s a $5 billion a year market catering to yuppies like me seeking to archive their Gang Of Four collection. Apple’s iPod is doing great, smashing Sony’s Walkman (if you predicted this in 1990, the Japanophobes would have laughed). Apple invented the iPod, markets it, sells it, supports it, and integrated the whole concept. But they don’t care about building it. With the 787, Boeing is moving in Apple’s direction. Touch labor is gradually moving to the Third World, or to Asian countries with pointless industrial strategies. When Boeing sold its Wichita facility, the unions wisely gave ground to the new owners. They could read the handwriting on the thrust reverser.

Where’s the new Asiaphobia heading? I’ve seen enough in my 42 years to guess. Japan will continue to coast. China will be hit by a banking crisis, or something that will make the US’s troubles look insignificant. The US system, warts and all, will look pretty good. But in ten years, there’ll be another crisis of US confidence, and another round of books about Mongolia’s coming industrial supremacy, or something like that.

On a related note, I’m delighted to announce that Joel Johnson, recently retired International VP at the Aerospace Industries Association, is affiliating with Teal as Executive Director, International. Joel has lived through one or two more cycles than I have; yet he maintains a calm Zen-like perspective. We can all learn from that. And, August’s aircraft reports cover the Russian jetliners, plus the F/A-22, A-4, F-117, AB.139, SJ30, and AS.350/EC 130. Enjoy.

Yours, Until My Nepalese iPod Overloads,

Richard Aboulafia

 

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