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Japan's Aerospace Industry

Part 2. Determinants of National Competitive Advantage - Japanese Aerospace Industry

Porter identifies four determinants of national competitive advantage: factor conditions; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry (1990, 69-130). This essay section discusses these determinants of national advantage in relation to the Japanese aerospace industry.

Nations are most likely to succeed in those industries where the determinants as a system are favorable. Within an industry, a nation's circumstances favor competing in particular segments and with certain competitive strategies. A company's home nation shapes where and how it is likely to succeed in global competition (Porter 1990, 72, 598, 599). After discussing the structure of the Japanese aerospace industry in Section 3 of this essay, Japan's strategies to succeed in the global aerospace industry are analyzed in Sections 4 and 5.

Factor Conditions
Although aerospace companies compete on a global basis, they almost always carry out production in their home countries and export their products, which makes domestic factor conditions very significant. Factor conditions relate to the factors of production such as human resources, capital resources, physical resources, knowledge resources, and infrastructure.

Japan's highly educated population and its very high number of engineering graduates per capita provide Japan a strong advantage. However, competitiveness in the aerospace industry requires significant R&D investments over many years to obtain the required advanced and specialized factors in knowledge and human resources. Japan has one of the highest levels of R&D spending of any nation, but almost all of the spending is directed to non-defense areas. A high level of military R&D spending in aerospace can lead to many direct and indirect benefits for commercial aerospace projects. For example, the Boeing 747 aircraft, the world's most popular long-range plane, was originally a military aircraft design that lost in a U.S. Government competition for a large military transport plane (Porter 1990, 96). Over many years, Japan has developed its advanced and specialized factors in commercial aerospace through licensed production of U.S. military aircraft and components and through its strengths in manufacturing process technologies.

Demand Conditions
Porter's discussion of demand conditions focuses on home country demand conditions for the industry product (Porter 1990, 86-100), and he argues that effectively competing in home country markets builds international competitiveness for firms in the industry. Not only is the nature of domestic demand important, the size of the market is critical to national competitive advantage for industries, such as aerospace, that have significant economies of scale and learning curves.

Unlike the huge, extremely competitive Japanese home market for autos, steel, and computers, Japan does not have a large enough domestic market to support an all-Japanese commercial aircraft. Although Japanese airlines have built one of the world's largest fleets of long-range passenger jets and have many planes supporting a well-developed domestic commercial air system, the Japanese market is still much too small to recover the significant investments required for the development of new airplanes and engines. Although domestic defense-related demand has provided much impetus to Japanese aerospace over the last four decades, Japanese firms have been greatly restricted since 1967 by the government's ban on military product exports.

In contrast to Japan, the U.S. dominates aerospace because of very favorable home country demand conditions since the end of World War II. While Japan had a ban on aircraft production from 1945 to 1952, U.S. firms moved early to meet the huge military and commercial aerospace demand. The large demand encouraged U.S. firms to make investments in technology development, large-scale manufacturing facilities, and productivity improvements. The American aerospace industry made significant R&D investments over many years to meet the stringent demands for overseas flights of American international airlines and to meet the demanding performance specifications of the U.S. military.

The relatively small domestic market forces Japanese aerospace companies to seek export activities. Since Japan does not produce any indigenous commercial aircraft or engines, the aerospace firms must participate in the worldwide industry as a supplier of components and subsystems.

Related and Supporting Industries
This determinant of national advantage relates to the presence in a country of supplier industries or related industries that are internationally competitive. A few large Japanese firms make up most direct sales to foreign prime contractors, but these firms have well-developed networks of internationally competitive small- and medium-sized subcontractors and suppliers. The Japanese are extremely strong in certain related industries that have many aerospace applications, such as electronics, advanced materials, and machine tools. This strong base of suppliers and related industries allow Japanese aerospace firms to gain ready access to technological innovations. One area where Japanese firms have little competitive strength is the overhaul and repair of aircraft and engines.

Japan's aerospace trade association, the Society of Japanese Aerospace Companies (SJAC), plays an active role in promoting links between firms involved in aerospace, including defense and space as well as commercial. SJAC sponsors, with assistance from government funds, numerous collaborative projects to promote R&D in propulsion, airframe manufacturing, controls systems, and other basic aerospace technologies (Samuels 1994, 285, 316-318).

Firm Strategy, Structure, and Rivalry
This fourth determinant of national competitive advantage relates to how firms are created, organized, and managed as well as the nature of domestic rivalry. Porter believes that perhaps the single greatest determinant of Japanese international success in certain industries is the presence of a number of fierce domestic rivals. This intense domestic competition creates pressure to improve and innovate in ways that will create and sustain competitive advantage, both at home and in international markets. (1990, 411-415).

An intense level of domestic competition is notably lacking in the Japanese aerospace industry. Even though Japanese aerospace companies compete against each other for government contracts and support and for commercial contracts, the overall level of competition between Japanese aerospace firms is not high. The Japanese government encourages collaborative research projects and joint participation of Japanese companies in international collaboration agreements. The government nurtures the aerospace industry to develop its international competitiveness, to ensure its ability to autonomously meet the nation's defense needs, and to promote technological benefits for related industries. Although Porter's theory of intense domestic competition may not be applicable to the Japanese aerospace industry, the fierceness of competition in the worldwide aerospace industry serves the same purpose to create pressure on Japanese companies to improve and innovate.

Role of Government
Porter considers government's role in national competitive advantage is in influencing the four determinants previously discussed, rather than government being the fifth determinant of national competitive advantage. The important role of government in Japanese aerospace is discussed throughout this essay, including the previous sections on the four determinants of national competitive advantage.

The Japanese government plays two key roles in the aerospace industry: the primary buyer of aircraft and the source of financial subsidies. Japan's Defense Agency provides most of the current aerospace demand, even though defense budgets have been shrinking in recent years. This defense demand for aircraft and engines assists in the development of skills and experience that can be applied to commercial projects. The government also provides significant financial support to the aerospace industry. Much of the support is funneled through the International Aircraft Development Fund (IADF), made up of Japan's four largest aerospace firms with the Ministry of International Trade and Industry (MITI) as a silent partner (Samuels 1994, 253). The IADF primarily distributes support to organizations involved in international collaboration projects, such as the Japan Aircraft Development Corporation (JADC) for the Boeing 777 project and the Japanese Aero Engines Corporation (JAEC) for the V2500 engine project.

Porter mentions that efforts by the Japanese government to develop the aerospace industry have largely failed to produce true international competitors, because Japan brought no other advantages to the industry (1990, 414). While it is true that Japan has had few advantages in the aerospace industry in comparison to the U.S. and some European countries, I disagree with Porter's characterization that the government efforts have 'largely failed'. After analyzing the structure of the Japanese aerospace industry in the next section, the remainder of the paper will discuss Japan's strategies for successfully competing in the worldwide aerospace industry.

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Introduction | Part 1 | Part 2 | Part 3
Part 4 | Part 5 | Part 6 and Bibliography
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