March 2003 Newsletter

Dear Fellow Airport Lounge Enthusiasts,

Seven AM, Narita Airport, ANA Business Lounge. Wandering around, feeling like a piece of unclaimed baggage at the luggage carousel, I notice a funny looking machine on the refreshments counter. It’s got all kinds of weird chrome doohickeys and digital readouts. The attendant, noticing my jet-lagged, slack-jawed bafflement, proudly tells me it’s a beer dispenser. I put a glass on the holder. Beer, indeed, comes out. Better than that, the holder automatically positions the glass at the right angle to avoid too much foam. An IR sensor kicks in, slowly directing the glass back upright to give it a head, no doubt using some of that fuzzy logic that made headlines a few years ago. When that maneuver doesn’t quite give the beer the exact requisite 18 mm head, additional foam is automatically injected. The beer tastes great. Yeah, it’s seven AM, but I’m having another beer. Just to watch this thing work.

That beer dispenser is the essence of Japan. Brilliant engineers sat down and thunk it up. Nobody cared about market demand. Amortization of non-recurring costs? Total non-issue. Engineers wanted to build the world’s best beer dispenser. No dweeb from Accounting told them that they would never sell enough $8,000 beer dispensers to earn a profit. No jumped-up fund manager told them to stop wasting their company’s time and money. US industry cares about profits for shareholders. Europe cares about market share and jobs, as with the A380. Japan cares about market share and jobs too, but it regards cool technology as the best way to get there. Japan is a nation of brilliant engineering and chronic, almost heroic, misinvestment.

The result is there to see: a decade of seriously unimpressive 0% growth, accompanied by incredibly cool Hello Kitty-branded cell phones. It’s hard to imagine, but this was once the system that was going to vanquish the US’s free market approach, back when “government industrial policy” wasn’t some joke economists told at conventions. To be fair, some of Japan’s misinvestment took the form of real estate speculation gone horribly wrong, and it resulted from dismal banking practices, but the technology part tells an instructive story. And Japan’s aviation sector is rife with great examples.

Take, for example, the Mitsubishi F-2. Please. The former FS-X fighter is actually quite amazing—those composite wings are ahead of anything the US has deployed, and that active array radar is just coming on line over here. But the F-2 is only marginally more effective than an F-16 Block 50. Non-recurring costs came to about $5 billion, which would have been better spent fed to some money-eating anaconda in the Tokyo Zoo. Unit costs are around $100 million, over three times the cost of an F-16—hardly surprising given the nine-per-year production rate.

Then there is the commercial sector. The 777 fuselage turned into a good investment for Japanese industry. But it didn’t matter—the government helped fund this investment anyway, and there are numerous examples of less successful aerostructures investment decisions, like the MD-11. The Government either funds these projects directly, or provides incredibly great tax advantages for new developments. MITI, now METI, should be called MORFRJ, The Ministry Of Random and Futile Regional Jet development projects. Various RJ projects have been underway for several decades now, despite the facts that (a) Japanese industry already has a position on the CRJ series, and (b) Japan has almost no need for RJs.

Going to Japan is a bit like industrial archaeology. Aviation is still in the hands of inventors, just like the US in the ‘60s. Jim Madewell, a retired Lockheed executive, once told me “I didn’t hear the phrase ‘profit and loss’ until I was 46.” That would certainly help explain the over-engineered and under-demanded L-1011 (one of my favorites, by the way). But in the ‘80s and ‘90s, the US changed. Is this change good? Yep, in a lot of ways. Has the US gone too far? Ask me again if Boeing doesn’t go ahead with the 7E7.

Will Japan change? Not likely, at least in the short run. They seem to prefer slow, relative decline to the pain of drastic reform. People assumed Prime Minister Koizumi was reform-minded because he was divorced, has a cool haircut, and likes Karaoke and Elvis. The only change may be a bit of belt tightening—the proposed P-X/C-X combined maritime patrol/military transport aircraft sounds way too ambitious, even by Japan’s aviation standards—spending $10 billion to devise a next generation P-3/Electra is monumentally foolhardy.

A more intriguing question is whether Europe will change, a question that has always intrigued me. The dreaded Anglo-American model has made only modest inroads, and some economists actually think Germany’s damaged economy has a lot in common with Japan’s. If Europe does change, it will have a huge impact on the continent’s aviation industries. But big economic thinking is way above my pay grade.

In conclusion, I’m busy drawing dubious economic generalizations from a beer dispenser while there’s a war on. I should be doing my job, telling clients about the impact of events on the industry (you can follow the progress of this war with stock market reports as much as you can with battle maps). But then again, there is nothing I can write now that wouldn’t be overtaken by events six hours later. Suffice to say that as this is written, there is still a chance we’ll get a best-case scenario: fast victory and clean aftermath. This scenario is basically necessary to avoid a commercial aviation market meltdown. As events unfold, I would urge clients to ask for the latest production forecast numbers. They change at least every two weeks.

Regarding this supplement, it covers a wide variety of programs—A320, E-2, AV-8B Harrier, CN-235/C-295, S-76, and both renamed Gulfstream families. April will see a major Business Jet Overview update, along with the Eurofighter, Gripen, V-22, EA-6B, 737, T-45, and Bell 206/407. Let’s hope for a quick return to peace.

Yours, ‘Til I Get That IR-Equipped Beer Dispenser For Christmas,

Richard Aboulafia
(703) 385-1992 ext. 103 (office)
raboulafia@tealgroup.com
www.richardaboulafia.com