Free Trade and the Aerospace Industry

Ronald Goodall

Daedalus started it all years ago when he fashioned those wings of wax for himself and his son Icarus to use for escape from Minos. Icarus flew too close to the sun but at least Daedalus made it to Greece in safety.

The idea of jet-propelled travel was conceived 382 years ago this day, November 5, 1605, when Guy Fawkes placed all that gunpowder beneath the House of Lords in London intending to give those parliamentarians a short flight. Sometimes I wonder if Guy Fawkes' theories may yet be tested on another upper house this time in Ottawa.

In 1783, the Montgolfier brothers in France invented the first practical balloon, a large linen bag inflated with heated air, which flew for 10 minutes.

These inventions and ideas were put together by engineers and the jumbo jet was invented.

That's not really true, of course. We accountants do sometimes get things a little mixed up. But many of us readily connect the name The Boeing Company with jumbo jets, although today some of us will be remembering Boeing's Flying Fortresses in World War 11.

The Boeing Company is one of the oldest and largest aerospace companies in the world. Revenues exceed $16 billion and result from sales of jetliners with the familiar names of 737, 757, 767, the omnipresent 747, and now, with the acquisition of de Havilland Aircraft of Canada, the Dash 7, Dash 8, and the Twin Otter.

The company participates in military and space programs which include the all-service V22 tilt-rotor aircraft, the hard mobile launcher for the small ICBM, the short-range attack missile, airborne early warning systems and the U.S. air force advanced tactical fighter.

Revenues come also from computing services and electronics systems used in the development of an advanced solid state digital flight data

recorder and of innovative applications employing artificial intelligence, exploration of robotics, voice recognition and machine vision systems. The Boeing Company certainly appears to be a company which knows its business, excels at it, and in its community endeavours is a good corporate citizen.

Frank Shrontz was born and raised in Boise, Idaho. He earned a Bachelor of Laws degree at the University of Idaho and an M.B.A. degree from the Harvard Graduate School of Business Administration. He was also a Sloan Fellow at the Stanford Graduate School of Business Administration.

Mr. Shrontz joined Boeing in 1958. In 1973 he entered the United States government service and was appointed assistant secretary of the air force for installations and logistics. In 1976 he became assistant secretary of defence. Mr. Shrontz rejoined Boeing in 1977 as corporate vice-president in charge of contract administration and planning and for the next four years was vice-president/general manager of the 707/727/737 division of Boeing Commercial Airplane Company. He became vice-president, sales, and then served as president of that company until he became President of The Boeing Company in 1985. He was elected Chief Executive Officer of The Boeing Company in April 1986. We understand from The New York Times that Mr. Shrontz is to become chairman of the board at year end. Mr. Shrontz is a member of the boards of directors of Citicorp and The Business Council. He is active in a number of civic and charitable organizations.

He and his wife, Harriet, have three sons.

Ladies and gentlemen, it gives me great pleasure to introduce to you Frank Shrontz, President and Chief Executive Officer of The Boeing Company, who will address us on "Free Trade and the Aerospace Industry:"

Frank Shrontz

I'm indeed honoured to have been offered the opportunity to address this distinguished group. I admit to being somewhat taken aback when I learned that you had heard from Barber Conable, Clayton Yeutter, and Simon Reisman ... all in the past month. That is intimidating company, and it clearly demonstrates the esteem The Empire Club of Canada has won over its long history.

This afternoon I would like to offer some thoughts on the issue of free trade as it applies to my area of expertise, the aerospace industry.

In the broader context, however, I must emphasize that we at Boeing are firm supporters of the landmark trade agreement between our two nations, an agreement we hope will be ratified to become the prototype for a world largely free from trade and tariff barriers. The concessions from both sides of the border that made this agreement possible demonstrate the ground swell of a growing understanding that the United States and Canada are merely two parts of an immensely complex and competitive world economy. To thrive, we need access-equal and unrestrained access-to each other's markets.

For we could be on the verge of creating the world's largest free market-$135 billion in goods and services, 75 per cent of it tariff free, crossed our common border last year alone-a market larger and in some ways freer than the 12-nation European Community.

Now I admit to bringing a distinct perspective to this subject. Manufacturers of commercial airplanes traditionally have relied on open international markets. Over the past five years, for example, roughly 63 per cent of Boeing jetliner sales have been outside the United States. Between now and the turn of the century, about $125 billion worth of business will involve customers outside the U.S.

Here in Toronto, de Havilland has been even more dependent on open markets, selling some 90 per cent of its airplanes outside Canada. That percentage recently has dropped into the 50 per cent range as Canadian carriers snap up the new Dash 8 model, but in the future we expect to see foreign customers again account for the great majority of de Havilland's sales.

Our specific situation in commercial aircraft manufacturing also may be unusual because free trade between our two nations has been a fact of life in the aerospace industry. We are to a great extent compatible and not competitive.

Our Boeing jetliners, for example, do not compete with Canadian products, while your Canadian companies compete quite successfully against other potential suppliers to provide major components for our airplanes. Moreover, de Havilland and Boeing of Canada are full partners in our entire engineering process-technology is transferred both ways quickly and productively.

In these respects, I recognize, aerospace differs from certain other industries-wood products, petroleum, or banking, for instance. But the chill emanating from the world's stock markets over the past few weeks has given us all a clear and immediate indication of our worldwide interdependence.

In this context, a few perceptive observers have reminded us that one major contributor in transforming the market crash of 1929 into the Depression of the 1930s was the wave of protectionism touched off by our American Smoot-Hawley Tariff. The last thing we need today is a repetition of that terrible spiral from market turmoil through protectionism to recession. Especially in these difficult times we must look beyond individual, short-term advantage to the long-term, widespread benefits made possible by our mutual trade agreement.

Another, perhaps equally profound, revolution is taking place in Canada today. I'm referring, of course, to the move toward privatization that we at Boeing have played a small role in moving forward.

Boeing's role, of course, centres on de Havilland. A few comments might be appropriate on why we felt a merger of interests between de Havilland and Boeing would be mutually beneficial.

De Havilland of Canada has always had a proud tradition of quality products. The first examination we made in considering the acquisition of this company was the design standards employed in developing the DHC-8 turboprop. Boeing was very pleased with what our experts found in the performance, safety and reliability of this and the other de Havilland airplanes. We are also proud of our technical achievements, and so our cultures are very compatible in that respect.

Second, Boeing does not manufacture an airliner with fewer than 100-plus seats. The de Havilland Dash 8 series at between 30 and 60 passengers fits well into an integrated product line. Further, there is a growing affiliation of the commuter airlines in much of the world-which operate de Havilland airplanes-with the larger trunk carriers which represent the customers for Boeing jetliners. Accordingly, an integrated strategy can benefit both of us for what appear to be substantial market opportunities. Clearly, to realize these mutual benefits, cost competitiveness is crucial.

In line with your government's privatization goals, we expect de Havilland to become a competitive enterprise and a substantial contributor to the Canadian economy, not a drain on public-sector resources.

A key step in that process came in September when we reached agreement with the Canadian Auto Workers on a new three-year contract. That settlement will allow us to work more productively, and established the basis for better working relationships between the organized employees and de Havilland management. Based on my reading of your local papers, however, I am led to believe that we did not entirely succeed during these negotiations in convincing Mr. White of the benefits of free trade.

We are committed to helping make de Havilland a fully competitive member of the international aerospace industry. De Havilland products, particularly the Dash 8 turboprop, are superb-our challenge is to produce them at a cost that will enable de Havilland to compete profitably. At this point, we believe that is possible, and we are backing our belief with substantial investments.

There have been allegations that in this endeavour Boeing plans to install "U.S.-style" management systems and processes at de Havilland-and the assumption seems to be that this would be bad and Canadian workers would suffer. To transpose intact the large and complicated control systems for jet aircraft manufacture to a smaller operation in a different country would be suicide-and we don't intend to do that. Boeing does plan to install some of the design and production techniques that have worked well for us, those which we believe will help increase de Havilland efficiency. We will make these improvements with every regard for the pride and well-being of the de Havilland work force.

I might add that we are learning from our Canadian partners as well and that further productivity improvements on both sides of the border are key to our mutual success and survival. Our international competitors in the world market are certainly making cost improvements at a fast pace, and improved efficiency is absolutely crucial to preserving the way of life as we've known it all across this great North American continent.

While de Havilland's size makes it the centrepiece of our present Canadian operations, Boeing and Canada have been linked for many years. Boeing of Canada is 27 years old. From a small facility at Arnprior near Ottawa with 67 employees and annual sales of less than a million dollars, it has grown to be the second-largest aerospace company in Canada with 7,000 workers.

Today Boeing of Canada's three operations-Arnprior, here in Toronto, and at Winnipeg-provide about three-quarters of a billion dollars a year to the Canadian economy. Its contracts with other Canadian enterprises provide additional jobs and income for this economy.

Last year Canada was among the major non-US. suppliers of goods and services to Boeing; close to 200 companies here are prime contractors, and hundreds of others subcontract to them. Over the past five years, Boeing has purchased nearly $370 million worth of goods and services from Canada, more than one-third of it from the province of Ontario.

We look forward to the possibility of increasing that figure , substantially when de Havilland is operating more efficiently and is able to take on work related to our jetliners in addition to expanding its own product line.

As you are no doubt aware, McDonnell Douglas also imports from Canada. Like Boeing, McDonnell Douglas and Airbus Industrie, the European consortium, draw on the best suppliers wherever they are found. In fact, we live in the era of the "global aircraft"-just as the market is international, so is the manufacturing process.

On average, about 14 per cent of the value of a Boeing jetliner is produced outside the United States, and in some cases-depending on the airframe and engine combination-that figure reaches nearly 30 per cent. The same is true for both McDonnell Douglas and Airbus.

I should note that this applies to de Havilland products as well, for they incorporate parts from as far away as Korea. About two-thirds of each Dash 8 is Canadian content.

I am convinced that this internationalization of the industry will increase, not decrease, in the future. Given the magnitude of the resources required to launch a commercial airliner, teaming arrangements probably will almost universally characterize new programs. These arrangements also are attractive in that they allow manufacturers to spread the market risk that attends each new model.

Thus free trade in our industry makes sound economic sense. But only when it is complemented by fair trade. Today, governments sometimes assist manufacturers by providing below-market-rate financing for customers. Thus buyers of airplanes, whether Dash 8s or 767s, often reach purchase decisions based on the financial inducements offered by the competing manufacturers and their government backers. We believe these purchase decisions should be made on the basis of the technical and long-term economic merit of the product itself.

So we'd like to see consistent financing procedures established worldwide. Progress is being made in this arena; but in the meantime it is vital that de Havilland can rely on the support of the Export Development Corporation to counter foreign competition.

Similarly, both Boeing and de Havilland compete on price with heavily supported manufacturers, commercial aircraft makers whose governments have committed far more national resources than we can command. Most of de Havilland's major competitors are government-owned or assisted, and we at Boeing face a jet aircraft competitor financed by several European treasuries.

We are not unalterably opposed to all forms of government support, particularly during periods of transition when an industry is attempting to cope with new and hostile environments or when trying to enter a new market.

Over the long term, open-ended support for the development of aircraft and other capital products distorts the market by allowing the subsidized manufacturer to price his products significantly below those of his competitors who must price their products to recoup development and production costs, support new product development, and provide a reasonable return for investors.

In fairness, therefore, we believe it's necessary to have market rules. As a private company we clearly would prefer the absence of government support. Given that subsidies do exist today, we would like to see the aircraft industry moving in a direction that will lead, ultimately, to a subsidy-free environment where innovation and enterprise determine success or failure.

In the past few weeks it would appear that some progress is being made on this issue.

Ambassador Yeutter and members of the European Community have established an agenda for further negotiations to "foster a more favorable environment for civil aircraft trade and to reduce trade tensions in this area." We hope that these continued negotiations will lead to the resolution of the difficult and long-standing differences on these issues.

Perhaps we can finally look forward to the fair trade that should accompany the relatively free trade in our industry. I think it is clear that free trade, even in a single industry, is not without its complexities and pitfalls. And that free trade brings with it the attendant challenge of competition. I do not believe, however, that over the long term any manufacturer, any industry, or any nation can avoid that challenge.

Our countries, through this remarkable trade agreement, have taken a major step toward meeting the demands of the future. Much remains to be done, and the next few months will be searching and trying times for both nations. But I believe we have embarked on a venture with incalculable long-term benefits for us all and I fervently hope for its success. Thank you again, President Goodall, for the opportunity to discuss these important issues in such a distinguished forum.

The appreciation of the audience was expressed by Catherine Chariton, a Past President of The Club.