Airbus Industrie

Text A

A. Introduction to the problem

CASE STUDY

Text 3

Skim the text and find the following information:

1. Location of IFM.

2. Goals of IFM.

3. USA contribution to the fund.

The International Monetary Fund is like a central bank for the world’s central banks. It is headquartered in Washington, D.C., has 184 member nations, and cooperates closely with the World bank, which we discuss in Chapter 19. The IMF has a board of governors consisting of one representative from each member nation. The board of governors elects a 20-member executive board to conduct regular operations.

The goals of the IMF are to promote world trade, stable exchange rates, and orderly correction of balance of payments problems. One important part of this is preventing situations in which a nation devalues its currency purely to promote its exports. That kind of devaluation is often considered unfairly competitive if underlying issues, such as poor fiscal and monetary policies, are not addressed by the nation.

Member nations maintain funds in the form of currency reserve units called Special Drawing Rights (SDRs) on deposit with the IMF. (This is a bit like the federal funds that. commercial banks keep on deposit with the Central Bank reserve.) The value of SDRs is reassigned every five years. SDRs are held in the accounts of IMF nations in proportion to their contribution to the fund. (The United States is the largest contributor, accounting for about 25 percent of the fund.) Participating nations agree to accept SDRs in exchange for reserve currencies – that is, foreign exchange currencies – in settling international accounts. All IMF accounting is done in SDRs, and commercial banks accept SDR-denominateddeposits. By using SDRs as the unit of value, the IMF simplifies its own and its member nations’ payment and accounting procedures.

1. What do you know about Boeing and Airbus companies?

2. Do you know any other aircraft producers?

3. When you fly, are you aware of the company producing the airplane?

4. Should you be aware? Give your reasons.

B. Scanning for Information

Work in pairs. Each person should scan one of the two articles on Airbus Industrie and the Boeing Company and fill in the table after the texts in the appropriate section. Then, share information so that partner has the same data and can fill in Airbus Industrie and the Boeing Company table.

In 1970, four European nations created Airbus Industrie to offset a decline in the airframe industry and challenge U.S. dominance in the global commercial aircraft market. Airbus is a four-country international consortium: In this unusual business structure, the four partners are both owners and suppliers, the common language of business is English, and all sales are transacted in U.S. dollars.

In the early years, Airbus Industrie was clearly the underdog, lagging far behind the U.S. companies of Boeing and McDonnell Douglas, which had dominated the industry for years. Since the consortium had no track record on safety or maintenance, airlines were reluctant to purchase the new aircraft. Through favourable pricing, generous maintenance contracts, and other competitive offers, the company was able to attract a number of carriers, including some in the United States. As a result, in less than twenty years, Airbus was able to produce a full family of airplanes and, with over 100 customers, it moved into the number two spot in the global aircraft industry.

Airbus succeeds because civil aircraft manufacturers from four nations pool their financial and technological resources in a true multinational partnership. It also succeeds because officials in these countries believe that European industry must be supported and protected by a strong industrial policy. For Airbus Industrie (the largest single industrial undertaking in the EC) support takes the form of an estimated $26 billion in subsidies. As a result of this financial backing Airbus has been able to recover from 70 to 100 percent of its product development costs, which are enormous in the industry. It can easily take four to six years, for example, for a plane to move from the design stage to actual production. During this time, the project yields no profits.

Airbus officials defend subsidies as a way to help level the playing field. They are quick to point out that Boeing and McDonnell Douglas receive millions of dollars in contracts to build military aircraft and spacecraft for the U.S. government, which is clearly a form of subsidy. It is hypocritical, say Airbus executives, to argue that the market is or can be completely free from government intervention.

Airbus officials point out that the consortium is a source of pride for the European Community, a model of international cooperation that can inspire future economic development in the area. Moreover, high quality Airbus products provide a viable alternative to U.S. airframes, assuring customers all over the world of the benefits of industrial competition.

With 30 percent of the global airframe market already, Airbus officials are gunning for at least 40 percent over the next several years. Predictions of increasing worldwide air traffic are fuelling Airbus’s growth. The consortium is already anticipating the need for airplanes that are quieter, more fuel efficient, and more comfortable for air travellers on long trips. According to company literature, “Airbus Industrie looks forward to lasting financial success well into the twenty-first century.”

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