Cablegate: Airbus: Fears of Defense Trade Controls Hurt U.S. Exports

DE RUEHFR #1078/01 1571554
R 051554Z JUN 08





E.O. 12958: N/A


This is the second of two cables on Airbus and U.S. interests. It
was drafted by APP Toulouse with support from Paris and represents
the Consul's farewell report at the conclusion of a three-year
assignment. A previous message focused on Airbus' structure and

1. (SBU) SUMMARY: In spite of significant efforts to accelerate
processing of export control licenses at the State Department, U.S.
and European aerospace companies continue to be sharply critical of
the USG export control system. Their perception affects a major
American export industry -- U.S. aviation exports (excluding Boeing
airplanes) reached USD 42.6 billion in 2007. Competitive in terms
of quality and price, U.S. companies assert that they are informally
excluded from contract discussions due to fears about U.S. export
controls. The standard view in Toulouse is that the U.S. export
control licensing process is time-consuming, bureaucratic,
unpredictable, and opaque rather than a tool for preventing
proliferation and safeguarding national interests. This perception
damages American firms and the U.S. balance of payments. A more
aggressive outreach and transparency program could help change
perceptions. END SUMMARY.

2. (SBU) Several high profile cases in recent years have increased
fears and created the perception among European corporations that
U.S. export controls are costly, complex, and unpredictable. In
March 2006, the USG fined Boeing USD 15 million, L-3 Communications
USD 2 million, and Goodrich USD 1.25 million, in connection with the
sale of civilian aircraft to China that included a gyro microchip
(QRS-11). In 2004, Northrop Grumman's use of an inertial sensor in
a navigation system disrupted aircraft production at Airbus during
three weeks while the USG determined whether the item required a
license from State or Commerce. Assembly of eight A320 and A340
aircraft was halted (i.e. thirty percent of the assembly line) until
Airbus replaced the twenty-four Northrop Grumman sensors with a
Honeywell product. Had the delay lasted longer, or had it also
affected Honeywell, which at the time was the only other supplier
for this product, it could have completely stopped production at
Airbus. Airbus officials and suppliers continue to recall vividly
this experience. They emerged from it convinced that U.S. export
controls were characterized by unclear jurisdictions and
unpredictable and potentially costly administrative processes.

3. (SBU) More recently, the case of the flight safety qualification
of Northrop Grumman's new inertial sensor has reinforced this view.
The European Aviation Safety Agency (EASA) is conducting
certification of the sensor, which contains International Traffic in
Arms Regulations (ITAR)-controlled data. Northrop Grumman's
interpretation of its Commerce license precludes it from sharing
such information with EASA without a Technical Assistance Agreement
(TAA), or signature of a bilateral safety agreement between the FAA
and EASA that would resolve the issue since it specifically
addresses the question of disclosing ITAR-controlled data for
certification purposes. Signature of the agreement has been
repeatedly held up since June 2007 due to unrelated issues.

4. (SBU) U.S. suppliers frequently assert that their European
competitors willingly play on European manufacturers' belief that
the U.S. export control system is complicated and arbitrary in order
to win contracts. They cite Airbus' recent decision to award Thales
a sole source contract for the inertial system on its latest
aircraft -- the A350. According to sources from two firms
knowledgeable about A350 contract negotiations, Airbus rejected more
technologically advanced options from American firms due to fear the
USG would decide the item should fall under ITAR. The loss of this
particular contract amounts to approximately USD 480 million over
the life of the A350 program. U.S. companies worry however that
they eventually will lose the entire Airbus market, estimated at USD
160 million per year, if Thales develops a competitive product not
subject to ITAR controls.

5. (SBU) The inertial sensor issue first caused disruptions at
Airbus as the company geared up for its first military product --
the A400M. Even though Airbus sought to use as many commercial
components as possible to minimize the export control burden, this
military program included a significant number of ITAR-controlled
items and necessitated Airbus' first global approach to U.S. export
controls. To address these issues, Airbus hired an Amcit as Vice
President in charge of export controls. It then adopted a model TAA
for use throughout the company and sought regular consultations with
the State Department on pending applications. By all accounts,
Airbus' applications for export licenses are now more consistent and
better prepared. High-level sources at several companies involved
with controlled items have noted the improved atmosphere, and in
particular the positive impact of periodic Airbus-organized meetings
in Washington between aerospace companies working on A400M export

6. (SBU) In spite of this progress, several U.S. suppliers close to
Airbus have told the Consul they believe Airbus will avoid American
products on future military programs - the A330 tanker excluded --
due the company's belief that addressing U.S. export controls on the
A400M has been too long, costly and complicated. Airbus and its
suppliers complain that licenses take months to process, and that
each modification of the original request requires additional
delays. They trade horror stories such as that recounted by one
representative of a large American aeronautic systems company, who
recently told the Consul his firm has not received an answer to TAA
amendments requested in July 2007.

7. (SBU) In the recently announced KC-45 contract, Airbus has
structured production to minimize the impact of the licensing
process, serving as prime subcontractor under Northrup Grumman.
American business contacts have indicated that Northrop Grumman and
EADS North America have agreed to perform as much work as possible
in the U.S. with American citizens. Northrop Grumman will be solely
responsible for the aircraft's militarization. Other European
manufacturers with significant military business, such as Dassault
and Eurocopter, also have long avoided American products for both
their military and commercial programs. According to several
American aeronautic system suppliers, in those cases in which the
European business selected an American item for a commercial
program, they carefully consider the consequences of using the same
part number for a military product. They say that the companies
fear that its application on a military program will "contaminate"
it, rendering it ITAR-controlled and disrupting commercial

8. (SBU) In recent conversations, some American suppliers have
argued that only fundamental reform of the export licensing process
will change these attitudes. They advocate improving transparency,
consistency, and response times through a program-wide license.
Under such an approach, all exports of aviation parts for a given
project would be covered by a single license. Instead of each
American company applying for individual approval, the final
manufacturer would ask for and obtain an overall license which would
set the terms for all suppliers on the project. Whether or not this
is a realistic proposition, the call for wide-ranging reform shows
how negative attitudes toward U.S. export controls among large
manufacturers have spread throughout the aerospace supply chain,
even among American suppliers who are more familiar with the U.S.
system than their European competitors.

9. (SBU) Discussions between the Consul and procurement officials in
Toulouse over the past three years suggest the problem is especially
acute in small and medium-sized enterprises (SMEs). Because some
procurement officials believe ITAR applies to all U.S. aviation
products, they are reluctant to purchase anything "Made in the USA."
Having heard the "horror stories" and with limited exposure to the
actual U.S. system, they find it easiest to simply avoid American
alternatives. In one-on-one meetings held as part of an outreach
program last year, several European SMEs expressed their unfounded
concern that they would be subject to ITAR should they purchase in
the U.S. Since aircraft manufacturers increasingly are becoming
integrators, subcontracting large sections of new airplanes
(reftel), SME comprehension of the system is of growing importance
and merits additional attention on the part of the USG.

10. (SBU) COMMENT: Over the course of the past year, the Department
has made tremendous strides in response times, the area of greatest
frustration to the aviation industry. Contacts have indicated that
most TAAs and licenses now are returned within several months
instead of the previous waiting time of six months. The
Department's website indicates the average processing time is now 15
days compared to 35 days in March 2007. Because American suppliers
have said any delay on a TAA can threaten a contract negotiation,
they have strongly urged that State work to maintain this momentum,
which is helping to reduce frustration among both American suppliers
and European customers. More comprehensive reform, such as that
advocated by some U.S. suppliers, is a proposition of a different
order. While certainly meriting serious consideration, it would
require a thorough policy review and substantial interagency

11. (SBU) Despite the improvements, too many European-based aviation
representatives continue to see USG's export control licensing
process as a "black hole" in need of fundamental reform. Many
procurement officials in European companies also believe the USG
eventually will use export controls as an economic weapon. These
misunderstandings could be addressed by increasing USG export
control outreach in Europe and continuing to engage recipients of
American aviation technology regardless of nationality. Small and
medium-sized companies will never have the resources to engage staff
dedicated exclusively to this issue, but the USG could support U.S.
exports by demystifying the system whenever possible. Over the past
three years, the American Presence Post in Toulouse has organized
highly successful seminars on Defense Trade Controls in Toulouse and
at the Paris Air Show, as well as assisting with the planning of an
event at this year's Farnborough Air Show in the UK. Regular
Department participation in such conferences would greatly enhance
their value, spread the good news about recent improvements in
processing times, and help dispel some of the myths about trade
controls that are costly to U.S. business and damaging to our
legitimate interests in controlling the export of sensitive


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