The loss of American knowhow

The media keeps a constant parade of items before us
to occupy our minds and attract out attention,
telling us that these are what constitute “news”
and are the issues which should concern us.
In general, the political system responds to that agenda.
(I say “in general”,
because there are a few issues with very active constituencies, such as those coming from the social conservatives,
which the media would not push but which have such a constituency that
the political system supports them anyhow.)

This post is about an issue which I think clearly
is pretty well off the media’s radar screen,
but which I think is far more important than most of those issues on that screen.
The issue is that stated in the title of this post,
“The loss of American knowhow.”

What does that mean?
The media ceaselessly tells us that
American universities are the best in the world,
that Americans still do quite well at winning Nobel prizes
and other international awards.
So what else is there? What else is there to know, that is worth knowing?

Well, take a look at any of the electronic gadgets that are important to you,
whether the latest gizmo from Steve Jobs, or a smartphone,
or some game-playing device.
Where was that made?
Almost certainly the answer is: Asia.
And who knows how it was made,
what very sophisticated components went into it,
how they were processed and refined,
and how they were assembled into such a compact and sturdy package?
The Asians, of course.
Does that knowledge exist in America?
From my reading, the answer is “No.”

An interlude:
As I mentioned initially, these ideas are hardly prevalent in the media.
But rather than being a figment of my imagination,
these ideas are drawn from
the writings of Eamonn Fingleton and Clyde Prestowitz,
in particular, their books
The assertion that the knowledge either never existed in America
or did once and has now been lost
is especially emphasized in the last article,
especially in Going, going, gone!.

Does any of this knowledge exist in America’s much-vaunted universities?
I believe the answer is “No.”
Do the universities, professors, or their board of trustees care?
Again, “No.”
That is not their responsibility.

What is the significance of this lack of knowledge?
Right now, the dollar is strong relative to the Asian currencies,
and the Asian countries are quite happy to sell us their products at a low price.
But one thing is for sure:
That is not an immutable situation,
and in fact is absolutely sure to change in the future
(that last is my opinion).
The time will come when other nations get tired of
subsidizing the American consumer
at the expense of their own citizens,
and they will devise an alternative to the dollar as the world reserve currency.
When that happens, the dollar plummets,
and for anything America wishes to buy,
it will have to find something
the country from which we want to buy the goods
will accept in return.
when the Chinese and Japanese tire of
accumulating dollars in their currency reserves,
what does the U.S. have to offer them in return
for the goods we want from them?
(Come on, you smart guys such as Friedman and Krugman.)

Further, beyond the strictly economic issue, the manufacturing countries may,
and, I think, almost sure will,
declare at some point the high-tech products as dual-use strategic goods.
Either off-the-shelf, or with customization,
such gadgets can provide effective communications between war-fighters.
And strategic goods are usually barred from sale to potential enemies.
Can you imagine a future where foreign armies
are equipped with high-tech communication devices
while our troops have only second-rate devices?
I certainly can.
We really have sold out America’s future for the sake of
low prices for today’s consumers and high corporate profits.

Miscellaneous Articles

True Innovation
New York Times Sunday Review, 2012-02-26

[This article is not about the loss of American knowhow,
but rather about how we once generated new knowhow,
but now have thrown away (in large part) that model.
Here is the beginning of the article:]

“INNOVATION is what America has always been about,”
President Obama remarked in his recent State of the Union address.
It’s hard to disagree, isn’t it?
We live in a world dominated by innovative American companies
like Apple, Microsoft, Google and Facebook.
And even in the face of a recession,
Silicon Valley’s relentless entrepreneurs
have continued to churn out start-up companies
with outsize, world-changing ambitions.

But we idealize America’s present culture of innovation too much.
In fact, our trailblazing digital firms
may not be the hothouse environments for creativity we might think.
I find myself arriving at these doubts
after spending five years looking at the innovative process at Bell Labs,
the onetime research and development organization
of the country’s formerly monopolistic telephone company, AT&T.

Why study Bell Labs?
It offers a number of lessons about how our country’s technology companies —
and our country’s longstanding innovative edge —
actually came about.
Yet Bell Labs also presents
a more encompassing and ambitious approach to innovation
than what prevails today.
Its staff worked on the incremental improvements
necessary for a complex national communications network
while simultaneously thinking far ahead,
toward the most revolutionary inventions imaginable.


A Nation That’s Losing Its Toolbox
New York Times, 2012-07-22


This isn’t a lament — or not merely a lament — for bygone times.
It’s a social and cultural issue, as well as an economic one.
The Home Depot approach to craftsmanship —
simplify it, dumb it down, hire a contractor —
is one signal that
mastering tools and working with one’s hands
is receding in America

as a hobby, as a valued skill,
as a cultural influence that shaped thinking and behavior
in vast sections of the country.


The Obama administration does worry publicly about manufacturing,
a first cousin of craftsmanship....
Ask the administration or the Republicans or most academics
why America needs more manufacturing, and they respond that
manufacturing spawns innovation,
brings down the trade deficit, strengthens the dollar,
generates jobs, arms the military
and kindles a recovery from recession.
But rarely, if ever, do they publicly take the argument a step further,
asserting that a growing manufacturing sector encourages craftsmanship
and that craftsmanship is, if not a birthright,
then a vital ingredient of the American self-image
as a can-do, inventive, we-can-make-anything people.

[He's got that wrong.
That was indeed a vital ingredient in the self-image of gentile American men.
Not so much of American women.
I remember the standard image of the 1950s household:
Dad had his workbench and tools, while
Mom certainly did much of the household upkeep,
but not so much with making things.
You want an example?
Remember the old Dagwood and Blondie comic strip,
where Dagwood's neighbor Herb was always "borrowing" a tool from Dagwood,
never to return it.
And, in a bid for honesty and clarity, if not making all Jews happy,
let us consider the Jew/gentile gap on this issue.
What, you deny there is one?
Silly person.
The fact is that Jews have valued themselves principally
as working with their brains, not their hands.
That was left to the (inferior, as well as unclean) goyim.
One sees this both in what Jews do and in what they say
(at least in unguarded moments).
Of course there were skilled Jewish craftsmen and artisans,
who produced works of fine craftsmanship.
One can find examples of this at, for example, the Sackler Gallery.
But one may wonder if the reason pre-enlightenment Jews often went into crafts
was that the anti-Semitism of those earlier times
restricted them from the more intellectual professions.
In any case, is it not clear that Jews since, say, 1800
have moved away from those crafts?
I don't know how telling this detail is,
but perhaps it is worth noting that
Brandeis University, with its explicit Jewish heritage,
seems not to have a school of engineering,
while it certainly does have a
"Heller Schools of Social Policy."
From my experience at Brandeis (I was a graduate student there circa 1970),
that seems to reflect quite accurately the orientation of the place.
{As a side note on the interests of Jews,
there were two running jokes I noticed there.
One was about the number of commemorative plaques honoring donors.
My undergraduate university named buildings after donors;
Brandeis went some steps further and named classrooms, faculty offices, and even hallways after them.
(I personally see nothing wrong with this.
Why not commemorate those who provide funds,
even if on a not-so-grand scale?)
The other was about Jewish mothers
(evidently a standard target among Jewish men at least back then,
cf. Portnoy's Complaint).
The joke was that every Jewish mother wanted her son to be doctor:
"My son, the doctor."}]

That self-image is deteriorating.
And the symptoms go far beyond Home Depot.
They show up in the wistful popularity of
books like “Shop Class as Soulcraft,” by Matthew B. Crawford,
in TV cooking classes featuring the craftsmanship of celebrity chefs,
and in shows like “This Old House.”

Traditional vocational training in public high schools is gradually declining
["Gradually"? Ha!
When I went to high school back in the early 1960s,
all boys were required to take a semester of shop,
while girls had to take a semester of home ec.
Those requirements have long not been seen
in the public schools in many other areas.
I would like to know the history of this change,
but have not found such.]

stranding thousands of young people who seek training for a craft without going to college.
Colleges, for their part, have since 1985 graduated fewer
chemical, mechanical, industrial and metallurgical engineers,
partly in response to the reduced role of manufacturing,
a big employer of them.

The decline started in the 1950s,
when manufacturing generated
a hefty 28 percent of the national income, or gross domestic product,
and employed one-third of the work force.
Today, factory output generates just 12 percent of G.D.P.
and employs barely 9 percent of the nation’s workers.


In Shift of Jobs, Apple Will Make Some Macs in U.S.
New York Times, 2012-12-07


Some analysts are hopeful that
the move by a big, innovative company like Apple
could inspire a broader renaissance in American manufacturing,
but a number of experts remain skeptical.

“I find it hard to see how
the supply chains that drive manufacturing
are going to move back here,”

said Andre Sharon, a professor at Boston University
and director of the Fraunhofer Center for Manufacturing Innovation.
“So much of the know-how has been lost to Asia,
and there’s no compelling reason for it to return.
It’s great when a company says they want to create American jobs —
but it only really helps the country if those are jobs that belong here,
if it starts a chain reaction or is part of a bigger economic shift.”



Boeing Goes to Pieces
Aerospace execs sell their industry to Japan­—one part at a time.
By Eamonn Fingleton
theamericanconservative.com, 2014-01-08

[This is a masterful article on an incredibly important topic,
one which tragically and shamefully
has been all but ignored by the chattering classes,
other than a very few like Fingleton.
In the following, the emphasis has been added by the author of this blog.]

At a welcoming banquet in Japan in the 1980s,
Ford Motor chairman Philip Caldwell
received a memorably double-edged compliment.
“There is no secret about how we learned to do what we do, Mr. Caldwell,”
said the head of Toyota Motor, Eiji Toyoda.
“We learned it at the Rouge.”

Toyoda was referring to
Ford’s fabled River Rouge production complex in Dearborn, Michigan.
In the early days of Japan’s rise,
Ford and other American auto companies had been famously helpful
to information-gathering Japanese engineers.
Know-how gleaned at the Rouge evidently proved particularly valuable.

Similar stories can be told about the complacency of other U.S. industries
in the face of emerging Japanese competition.
Where Japanese industrial “targeting” is concerned,
America never seems to learn.

Now another industry is being targeted—
America’s last remaining crown jewel, aerospace.
The Boeing Company in particular has long been in Japan’s crosshairs.
in what amounts to one of the most outrageous sellouts in modern business history,
the U.S. industry is consciously cooperating in its own demise.
Swayed by stock options,
top U.S. aerospace executives are increasingly prioritizing short-term profits
over the long-term health of their industry.

Japan is arguably already the world’s largest aerospace player.
Certainly it is the ultimate source of a vastly larger share
of the industry’s most sophisticated parts and materials
than a reading of the English-language press would suggest.
And given that Boeing now subsumes
most of the erstwhile independent companies that put Neil Armstrong on the moon,
its eclipse constitutes a major part of a larger story of American decline.

In return for transfers
of American technology and manufacturing know-how,

the Japanese low-ball their prices

for supplying an ever widening and more advanced
array of components and materials.
In many cases, Japan’s state-controlled airlines further sweeten the pot
by paying top dollar for U.S. airframes and jet engines.

All this boosts the American industry’s short-term
For the Japanese the seemingly steep upfront costs are a steal
given the enormous amount of learning-by-doing that would otherwise be required
to reinvent American production techniques.
As for the American national interest,
the most obvious consequence is
an endless stream of layoffs of American blue-collar workers.

Less obviously but equally debilitating,
the U.S. aerospace industry’s dependence on Japanese and other foreign suppliers
has greatly exacerbated U.S. trade imbalances.
By extension, the U.S. Treasury has become ever more dependent on East Asia
to fund the trade deficits.
(Trade is the key to the real Japan—
as opposed to the “basket case” presented in the media.
Judged by the current account, the most meaningful measure of its trade,
Japan’s surpluses have generally risen from
the famously high levels they reached in the late 1980s.)

Already Japan’s successes reach into the aerospace industry’s every nook and cranny.
A few examples:
  • [1.9.1]
    Jet engines.
    Both Pratt & Whitney and GE Aviation
    now rely heavily on Japan for engine components.
    A key supplier is Ishikawajima Harima Heavy Industries (IHI),
    a little-known Tokyo-based corporation that today ranks as
    one of the world’s most advanced aerospace players.
    (In common with several other leading Japanese aerospace companies,
    IHI got its start in shipbuilding.
    Hence the seemingly incongruous reference to “heavy industries” in its name.)
  • [1.9.2]
    This is the term of art for a huge panoply of
    sensors, controls, flight-deck instruments and displays,
    and communications equipment
    essential to modern aviation.
    The field used to be the preserve of U.S. companies
    like Honeywell, Hughes, and Raytheon
    but increasingly the serious manufacturing is done in Japan
    by corporations like Panasonic, Sony, and Toshiba.
    The Japanese have also assumed leadership in critical avionics materials.
    An example is gallium arsenide,
    a superfast semiconducting material vital in advanced computer chips.
    Japanese companies like Hitachi Cable and Furukawa Electric
    dominate the supply of gallium arsenide.
  • [1.9.3]
    Aircraft wings.
    Companies like Kawasaki Heavy Industries and Mitsubishi Heavy Industries
    are now world leaders in wing-making,
    a specialty long considered
    one of the aircraft industry’s greatest manufacturing challenges.
    In partnership with the world’s top carbon-fiber producer,
    Tokyo-based Toray,
    Mitsubishi has pioneered the manufacture of
    carbon-fiber wings for passenger planes.
    Such wings reduce fuel consumption by up to 20 percent per seat-mile.

To be sure, the Japanese have so far
confined themselves almost entirely to components and materials,
leaving Americans and Europeans to affix their logos
to completed engines and airframes.
But precedent suggests the Japanese
may not be content to play second fiddle forever.
Mitsubishi is already working on
a 90-seat regional jet scheduled to enter commercial service in 2017.
Although this plane will not present much direct competition
for the American airframe industry,
it will stand in much the same position to that industry as, say,
the Honda Accord did to the U.S. auto industry in the 1970s—
the thin edge of a wedge.


As Robert Scott of the Economic Policy Institute points out,
a little more than a generation ago
Boeing planes were still almost entirely American-made.

In the 1980s, however, Boeing came under increasing pressure
[From whom? Or where?]
to enter into “work-share” agreements
with various technology-hungry foreign partners,
most notably the Japanese.

The trend intensified as Boeing planned the 777, which entered service in 1995.
According to Boeing’s numbers,
various Japanese companies took on, in aggregate,
about 21 percent of the 777’s airframe—
up from about 16 percent for the Boeing 767, which had been launched in 1982.
Boeing allocated much of the 777’s fuselage
to a government-led Japanese consortium.

Then came the 787, Boeing’s newest passenger plane,
which entered commercial service in 2011 in the livery of All Nippon Airways.
For several reasons the 787 constitutes a watershed not only for Boeing
but for the entire global aerospace industry.
Otherwise known as the Dreamliner,
it is the most technologically advanced passenger jet ever built.

It is also the first progeny of
a portentously redefined relationship between Boeing and Japan.
On the company’s own figures,
the Japanese account for a stunning 35 percent of the 787’s overall manufacture,
and that may be an underestimate.
Much of the rest of the plane is also made abroad,
not least in Italy, Germany, South Korea, France, and the United Kingdom.

The 787 story began more than a decade ago when,
in the manner of a man undergoing a mid-life crisis,
Boeing suddenly embraced a New Age redefinition of itself:
it aspired to be primarily a “systems integrator,”
not a manufacturer.

According to one online dictionary, the term systems integrator connotes
“an individual or company that specializes in building complete computer systems
by putting together components from different vendors.”
As the commentator Mark Tatge has pointed out,
the term suggests a largely service-oriented role
similar to that of Dell Computer in the PC industry.
(Dell confines itself to the design and marketing of
products assembled in East Asia
from components supplied under contract by countless independent manufacturers.)

Wearying of trying to stay ahead of Airbus, already then in the passing lane,
Boeing would henceforth delegate
many of its most technologically challenging manufacturing tasks
to a consortium of three Japanese “Heavies”:
Mitsubishi Heavy Industries, Kawasaki Heavy Industries, and Fuji Heavy Industries.
[Key questions are:
“Why did Boeing make this move?
Why did it redefine itself?
What pressured it into this?”
It sure seems to me that this may be good for Boeing's profits,
but most certainly cannot be good for America.]

These rank first among equals as Boeing’s so-called Tier 1 suppliers
and have been the recipients of much of Boeing’s most advanced know-how.

Boeing’s changing view of itself dovetailed with Tokyo’s agenda.
For decades Japan had identified aerospace as
one of its most crucial industrial targets.
At a stroke Boeing’s transition to systems integration
put the prize of global leadership in aerospace within Japan’s grasp.

On the surface, Boeing’s strategy seems like any other case of outsourcing,
and to mainstream economists—if not to blue-collar American workers—
outsourcing is a good thing that helps nations allocate their capabilities more efficiently.
[Oh yeah, the economists.
All too often unable to see anything beyond monetary gain.
Like the feminists:
Unable to see anything beyond what they perceive to be women's gains.]

There is, however, another side to this story, as Ralph Gomory points out.
A former director of research at IBM who is better known these days
for his mathematical debunking of the traditional case for free trade,
Gomory observes,
“If the world economy were working in textbook fashion,
Boeing’s technology transfer policy would not make sense.
The Dreamliner story illustrates in high relief
a fundamental, hitherto generally unnoticed, flaw
in the theoretical case for globalism.”

For a start, in contrast to the standard case for outsourcing,
Boeing’s increasing reliance on Japan
can’t be explained as a search for cheap labor.
Japanese wages are high—
probably, when all is said and done, higher than American levels.
Labor costs in several other nations where key Boeing suppliers hang their hats—
Germany, France, and South Korea, for instance—are also high.

Even more anomalous is
Boeing’s acquiescence in other nations’ requests for technology transfers.
Gomory argues
there is no place for such transfers in the standard case for free trade.
After all,
if American corporations have a comparative advantage in plane-making,
they should keep it.

By transferring production know-how to overseas partners,
the American aerospace industry is cutting its own throat,
and why would anyone do that?

Dick Nolan, an emeritus professor of Harvard Business School, notes that
Boeing’s traditional policy had been to use foreign suppliers
merely for what’s called “build-to-print”:
they supplied components and subcomponents
made to Boeing’s detailed specifications,
an arrangement that enabled Boeing to keep to itself
much if not all of its serious know-how.

Even before Boeing redefined itself as a systems integrator,
keen observers had noticed a weakening in
its resolve to resist Japanese pressure for technology transfers.
As recorded by the British author Karl Sabbagh,
by the early 1990s
Boeing’s willingness to reveal closely held manufacturing secrets to the Japanese
became so notorious that
Boeing employees vulgarly referred to it as the “open kimono” policy.

Today, not the least surprising thing about the Dreamliner’s work-share arrangements is that
the foreign-made sections arrive in Boeing’s final assembly plant in Seattle
not only fully “stuffed” with systems and sub-components—
a radical departure from previous arrangements—
but already certified and tested.
Certification and testing had previously been considered core functions
that should never be delegated to foreign partners.

In a Harvard Business Review blog, Nolan acerbically commented,
“Boeing effectively gave Tier 1 suppliers a large part of its proprietary manual,
‘How to Build a Commercial Airplane,’
a book that its aeronautical engineers have been writing over the last 50 years.”


Perhaps the single most controversial aspect of Boeing’s partnership with Japan
is that
the 787 flies on Mitsubishi wings.
These are no ordinary wings:
they constitute the first extensive use of carbon fiber
in the wings of a full-size passenger plane.
In the view of many experts,
by outsourcing the wings Boeing has crossed a red line.
For a start, as Stan Sorscher points out,
the strategy has required the transfer to Mitsubishi
of much of Boeing’s invaluable wing-making technology.

“The value of the technology and know-how transferred is probably around $500 million—
that is what we call in the business a scientific wild-ass guess,”
says Sorscher, a former physicist at Boeing
and now an executive of Boeing’s main white-collar union.
“Boeing built the tooling for a full-scale prototype of the 787 wings in Seattle
and then gave all of that to Mitsubishi.
It was a huge boost to Mitsubishi.”

And that was only the beginning. “Boeing gave Mitsubishi the materials technology and the manufacturing processes—the layup processes, temperature and pressure conditions for the autoclaves, for instance,” says Sorscher.
“Boeing also transferred its tooling and assembly expertise, and there is a lot of expertise in assembling a wing.” Previously Boeing had regarded wing-making as its ultimate core competency.
By keeping the wings largely or totally in-house,
Boeing minimized the risk that the Japanese consortium could become a future competitor.

The assumption in the industry is that
carbon-fiber wings will be standard in forthcoming passenger jets.
By engaging the Japanese to lead the move to carbon-fiber,
Boeing may thus be committing the industrial equivalent of assisted suicide.
As Richard D’Aveni of Dartmouth’s Tuck School of Business observes,
the risk is not only that
Boeing will lose the ability to make state-of-the-art wings
but that, as it loses touch with manufacturing,
its ability even to conduct design and systems integration will atrophy.

His concerns seem to be being belatedly heeded inside Boeing.
In recent months, the company has indicated that
it wants to bring more manufacturing back in-house.
This is implied, for instance, in plans for the new so-called 777X,
a stretched version of the 777 which is expected to enter service around 2020.

The question is whether Boeing is closing the barn-door after the horse has bolted.
Certainly, as William Lazonick,
head of the University of Massachusetts Center for Industrial Competitiveness,
points out,
the Japanese are looking increasingly formidable.
He explains:
Japan’s competitive advantage is its deep expertise in machining,
its know-how with advanced materials, and its capital goods.
Where you are looking for very high-quality engineering,
and labor that maintains its capabilities over long periods,
the Japanese are superior.
This sort of work has been abandoned in the United States
because the Japanese are there to do.
They have tremendous expertise in precision engineering
using complex materials—materials
that have to be dealt with in a particular way
such as getting the weight down to a minimum.
They will low-ball their prices to get work
because they know they will keep it.
[Buying in.]

The problem for a systems integrator is that technological progress is very rapid.
“Once you fall behind in advanced manufacturing,
the costs of catch-up are just too great,
and a chief executive aiming to maintain quarterly earnings cannot afford to incur them,”
explains Richard McCormack, editor of Manufacturing & Technology News.

Why is wing-making so crucial?
For a start, wings have to pack the strength to withstand occasional extreme buffeting,
but at the same time they must be instantly and smoothly responsive in routine conditions—
and they have to do all this while weighing next to nothing.
If components don’t fit perfectly, this greatly increases wear
and can lead to catastrophic failures in flight.

Wings for large passenger jets pose unique challenges because the larger a part is
the greater the difficulty in machining its surfaces to required tolerances.
Given that some wing parts these days can be as long as 100 feet,
only a few factories in the world have the massively expensive machinery
and rich endowment of tacit knowledge
to meet the task.

In the case of carbon-fiber wings, the challenges are compounded
because carbon fiber is a notoriously fickle material.
Extremely strong in normal aeronautical use, it can be brittle if mishandled.
A few tiny cracks invisible to the naked eye can doom a plane.


In outsourcing so much of the Dreamliner,
Boeing has flouted the opinion of its own top engineers.
The company received a particularly well-argued caution
at an in-house conference back in 2001.
One of Boeing’s senior engineers, John Hart-Smith,
delivered a paper on the dangers of excessive reliance on outside partners.
Referring to the American aerospace industry’s ever increasing outsourcing, Hart-Smith asked,
“Is it really all that difficult to comprehend that,
along with the work involved,
the revenue and profit associated with it have also been outsourced?”
He added:
“One must be able to contribute in some way to products one sells
to avoid becoming merely a retailer of other people’s products.”

Hart-Smith’s views were probably shaped by the fact that
he had previously worked for McDonnell Douglas,
a once brilliant company that flamed out after decades of
increasing reliance on foreign partners.
It eventually succumbed to a merger with Boeing in 1997.
Hart-Smith had joined McDonnell Douglas at the height of its success in the 1960s,
when in many ways it still overshadowed Boeing.
He subsequently watched its commercial aircraft business outsource itself to death.
A key problem was that designers became so out of touch
that they no longer understood basic manufacturing realities.

Hart-Smith’s message should have packed a special significance
for Boeing’s future chief executive, Harry Stonecipher.
A classic “numbers guy” who had come out of Jack Welch’s General Electric,
Stonecipher had served as chairman of McDonnell Douglas
and presided over a particularly toxic outsourcing fiasco
involving technology transfer to China.
By 2004 he was CEO of Boeing and oversaw the early stages of the 787’s development.

How does Boeing justify its retreat from manufacturing?
The company refuses to comment and a spokesman declined even to confirm
information gleaned from independent sources.
He would not “fact-check” this article, he said.
(The defensiveness is not confined to Boeing.
One outspokenly pro-manufacturing U.S. Senator,
a Democrat from the Mid-West,
at first ignored this writer’s requests for comment
and then, after repeated reminders,
offered a few irrelevant platitudes that avoided criticizing Boeing.)
The company and its Washington surrogates
seem increasingly uncomfortable with well-informed questions.
The result,
in the words of the prominent Washington-based aerospace analyst Richard Aboulafia,
is that watching Boeing these days “resembles Kremlinology.”
The company does have some excuses, albeit weak ones.
A significant factor are so-called offsets,
which are requirements by foreign air forces and government-controlled foreign airlines
to favor their nations’ manufacturers in outsourcing aerospace contracts.
No nation has benefited more from offsets than Japan,
and the Tokyo’s ability to manipulate the U.S. aerospace industry is legendary.

But this does not mean that Boeing had to roll over.
At all stages it held the high ground.
In buying full-size passenger jets, the Japanese have had only two choices, Boeing or Airbus,
and Airbus, as a prime manifestation of German-French industrial policy,
has no inclination to transfer technology or jobs to Japan.
And as Matthew Lynn, author of Birds of Prey: Boeing vs. Airbus, has shown,
the Japanese have long been under a strong geopolitical obligation to buy from Boeing
to help reduce their nation’s chronically large bilateral surpluses with the United States.

[But see the October 2013 article
Airbus clinches landmark jet order with Japan Airlines.]

In the circumstances
it should have been easy for Boeing executives to hold the line.
Their failure to do so seems all the more surprising for the fact that
Japan’s work share in Boeing planes
has long been far greater than
the proportion of final sales accounted for by Japanese airlines.

As Barry Lynn, a senior fellow at the New America Foundation, points out,
Boeing’s policies appear to be at odds with its obligations to the American public.
“Much of the technology that Boeing has transferred abroad
was subsidized by the U.S. taxpayer

and it was entrusted to Boeing to look after,”
Lynn says.
“Instead Boeing has sold it off.
There has been a substantial amount of cashing out
and top executives have treated themselves extremely well.”

By one estimate, in the three decades to the mid-1980s
more than 70 percent of the U.S. aircraft industry’s development funding
came from Washington, D.C.,
mainly thanks to spinoffs from military and space projects.
More recently, Boeing benefited from low-interest finance from the U.S. government.
According to the industrial geographers David Pritchard and Alan MacPherson,
Boeing also received a $3.2 billion subsidy package from the state of Washington
in support of the Dreamliner program.

A factor often mentioned in mitigation of Boeing’s outsourcing is
a perceived need to enlist financial partners
who can help fund the development of new planes.
In the case of the Dreamliner,
the Japanese Heavies provided much of the funding.
But did Boeing need such help?
As William Lazonick observes, Boeing had plenty of in-house financial muscle.
It chose instead to use its cash to reward shareholders via rising dividends
and—even more irresponsibly—huge buybacks of its own shares.

“Most of the buybacks came in two periods,
first between 1998 and 2001,
and then between 2004 and 2008,”
says Lazonick.
“Boeing’s buybacks cost more than $20 billion in total.
And it is not as if they were not paying dividends.
They were paying substantial dividends.
I reckon between the beginning of 1996 and the end of 2007
their dividends totaled $8 billion.
When you add it all up,
buybacks plus dividend payments totaled $29 billion.”

“This is not atypical for major U.S. companies these days,” he adds.
“They are looking for every way
to cut what they spend on investment.

Boeing could have done all the investment they wanted.
Boeing’s buyback policy is a big difference with Japan.
Companies there do very little buying back of their stock.
They reinvest in their businesses.”

Boeing’s stock has done well.
Measured from the end of 1997, it is up more than 170 percent.
The rising stock price has in turn powerfully boosted executive stock options.
Thus, Boeing’s current chairman, Jim McNerney, made $27.5 million in 2012—
compared with a total of $1,725,000 for then chairman Phil Condit in 1997.


The Boeing story strongly suggests that America’s defense base has eroded.
It is further evidence of a trend identified in
a little-noticed 2005 report by the Defense Science Board.
The board’s focus was mainly on the electronics market,
and it found that even among suppliers
who mainly or solely served the U.S. defense industry
hollowing out had reached shocking levels.
According to the report:
There is no longer a diverse base of U.S. integrated circuit fabricators
capable of meeting trusted and classified chip needs.
From a U.S. national security view,
the potential effects of this restructuring are so perverse and far reaching
and have such opportunities for mischief that,
had the United States not significantly contributed to this migration,
it would have been considered a major triumph of
an adversary nation’s strategy to undermine U.S. military capabilities.

In discussions of the unintended consequences of globalism,
the transfer abroad of valuable production technology
is the elephant in the room.
It is consistently ignored
in all standard theoretical accounts of free trade.
In an era when information can move around the world at light speed,
this is an oversight of epochal importance.
Almost everyone assumes that
no matter how fast American industrial know-how leaks abroad,
an abundance of new production methods and new industries will keep bubbling up
to provide additional sources of prosperity.
[I certainly do not, and never did, make that assumption.
This certainly shows how far I am
from the "elite" circles Fingleton seems to be referring to.]

Not only do people not stop to consider whether this assumption is valid,
they don’t even realize they are making an assumption. [1]

Many of America’s most sophisticated competitors
do not run their trade policy on a free-market basis,
argues Ralph Gomory.
By intelligent use of trade barriers, among other things,
they can hope to finagle advanced production technologies out of the United States.
Employers in such nations are often under considerable pressure—
political, economic, and societal—
to keep their own most advanced production technologies at home
and well away from the risk of theft by foreign rivals.

A historic ratchet effect is at work.
With high-value jobs disappearing never to return,
America’s imports and current account deficits rise with
each succeeding economic cycle.
The deficits have to be financed—
and this means ever greater reliance on major creditor nations,
not least China and Japan, but also Saudi Arabia, Russia, and Germany.
On present policies, the United States is continuing down a spiral of indebtedness
similar to that of the late Ottoman Empire.
The tale can end only in bankruptcy—or a drastic change of course.

Eamonn Fingleton is the author of
In Praise of Hard Industries: Why Manufacturing, Not the Information Economy,
Is the Key to Future Prosperity.

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