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U.S.-Japan Fighter Aircraft: Agreement on F-2 Production (Letter Report, 02/11/97, GAO/NSIAD-97-76).

Pursuant to a congressional request and a legislative requirement, GAO
reviewed the status of the F-2 fighter aircraft program, focusing on
the: (1) proportion of production work that will be done in the United
States and how the U.S. workshare will be calculated and monitored; (2)
status of technology transfers from Japan to the United States and
whether these technologies are of interest to the U.S. government and
industry; and (3) program's potential contributions to Japan's future
aerospace plans.

GAO found that: (1) under the F-2 production agreements, U.S. industry
is expected to receive approximately a 40-percent workshare, currently
estimated at $4.1 billion if the Japanese fully implement the planned
production of 130 aircraft; (2) the agreements specify the items to be
procured by Japan from U.S. industry, which provide for a 40-percent
workshare based on estimates of the production costs at the time the
agreements were signed; (3) the Air Force plans to verify that contracts
for the items identified are awarded to U.S. companies; (4) the value of
payment amounts will not be tracked and a workshare percentage will no
longer be recalculated based on actual payment amounts as had occurred
during the development phase; (5) as a result, the Air Force will not
have the means to determine whether this approach enabled U.S. companies
to receive approximately 40 percent of the production work over the
course of the program; (6) technology transfers from Japan to the United
States have generally been in accordance with the development phase
agreements, but some issues remain unresolved; (7) in 1993, Japan
requested that 12 items be recategorized as Japanese indigenous
technologies, i.e., not essentially derived from F-16 technical data;
(8) the United States is to receive free and automatic flowback of F-2
technologies that are derived from U.S. technical data while access to
non-derived or indigenous technologies is more limited; (9) in 1994, the
United States agreed to reclassify 4 of the 12 items as non-derived or
Japanese indigenous technologies, however, at the time of this review,
the United States and Japan had not resolved the classification issue;
(10) while this issue is unresolved, the United States is not receiving
free and automatic access to these technologies; (11) the United States
conducted several visits to explore the potential benefits of F-2
technologies; (12) two technologies that were initially of interest to
the U.S. Air Force and to Department of Defense contractors, the
co-cured composite wing and the active phased array radar, are now
generally considered too costly to produce; (13) however, Lockheed
Martin officials indicated that tooling techniques from the F-2 program
are being applied to the Joint Advanced Strike Technology program; (14)
the F-2 program enhances Japan's military aircraft industry by improving
its overall systems integration capability, according to experts; and (*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-97-76
     TITLE:  U.S.-Japan Fighter Aircraft: Agreement on F-2 Production
      DATE:  02/11/97
   SUBJECT:  Fighter aircraft
             Military coproduction agreements
             International cooperation
             Technology transfer
             Manufacturing contracts
             Contract administration
             Export regulation
             Aerospace industry
IDENTIFIER:  F-2 Aircraft
             FS-X Aircraft
             F-16C/D Aircraft
             Falcon Aircraft
             F110-129 Engine
             F-15J Aircraft
             Eagle Aircraft
             F-22 Aircraft
             Advanced Tactical Fighter Aircraft
             DOD Joint Advanced Strike Aircraft Technology Program
             
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Cover
================================================================ COVER


Report to Congressional Requesters

February 1997

U.S.-JAPAN FIGHTER AIRCRAFT -
AGREEMENT ON F-2 PRODUCTION

GAO/NSIAD-97-76

U.S.-Japan Fighter Aircraft

(707233)


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  DTIC - Defense Technology Information Center

Letter
=============================================================== LETTER


B-272541

February 11, 1997

The Honorable Strom Thurmond
President Pro Tempore
United States Senate

The Honorable Newt Gingrich
Speaker of the House of Representatives

The Honorable Richard Gephardt
Minority Leader
House of Representatives

The FS-X fighter aircraft program, now the F-2,\1 is the first
U.S.-Japan joint development and production of a weapon system,
marking a significant departure from previous licensed production
agreements between the United States and Japan.  The early stages of
the program were characterized by strong congressional concerns
regarding the terms of the codevelopment agreements.  In particular,
Congress was concerned about the enhancement of Japan's aerospace
industry through the transfers of U.S.  technology to Japan, and the
value of Japanese technologies to be transferred to the United
States. 

This is an unclassified version of our 1997 classified report.  This
report examines the status of the F-2 fighter aircraft program as
development nears completion and provides information on the
agreements signed on July 30, 1996, by the two countries for the
production phase of the program.  Specifically, we address the
following issues:  (1) the proportion of production work that will be
done in the United States and how the U.S.  workshare will be
calculated and monitored, (2) the status of technology transfers from
Japan to the United States and whether these technologies are of
interest to the U.S.  government and industry, and (3) the program's
potential contributions to Japan's future aerospace plans. 

This report responds to a requirement that we periodically review the
F-2 program.  This requirement is part of the conference report for
the fiscal year 1990 appropriations act for the Departments of
Commerce, Justice, and State; the Judiciary; and related agencies. 
It also responds to a request from the House Minority Leader that we
examine aspects of the production phase agreements signed by the two
countries. 


--------------------
\1 The production phase agreements renamed the FS-X program to the
F-2 program.  For clarity and consistency, we refer to the program as
the F-2 throughout the report, regardless of which program phase is
discussed. 


   BACKGROUND
------------------------------------------------------------ Letter :1

In the mid-1980s, Japan was interested in developing an indigenous
fighter aircraft to replace its aging F-1 fighter.  On the other
hand, the United States preferred that Japan purchase an
off-the-shelf U.S.  fighter.  As a compromise, in November 1988, the
United States and Japan agreed to cooperatively develop a fighter
aircraft, with all funding to be provided by the government of Japan. 
The development phase,\2 which began in 1989 and will end in the year
2000, included the development and manufacture of six prototype
aircraft incorporating major Japanese modifications to the F-16C/D
Block 40.\3 According to Department of Defense (DOD) officials, the
F-2 program was expected to enhance the bilateral security
relationship with Japan.  In addition, the United States was to
receive free and automatic flowback of improvements to F-16
technologies and have access to Japanese indigenous technologies
developed for this program.  Also, U.S.  industry was to receive 40
percent of the development work. 

The F-2 is a multi-role, single engine, fighter aircraft based on the
F-16C/D Block 40 and tailored to Japan's requirements.  (See fig. 
1.) The F-16 and the F-2 are both multi-role fighters with air-to-air
and air-to-surface capability, but the F-2 places more emphasis on
the air-to-surface capability because its primary mission is sea-lane
protection.  Since one of the F-2's operational requirements included
extended range and shorter take-off and landing capability, Japan
selected the co-cured composite wing to maximize strength while
minimizing weight.  The F-2 wings are about 25 percent larger than
the F-16's, increasing fuel capacity and allowing for more weapon
stores stations--11 as compared to 9 on the F-16.  Also, the F-2's
fuselage has been stretched to increase fuel capacity and accommodate
the larger wings. 

   Figure 1:  The F-2 Prototype

   (See figure in printed
   edition.)

Shortly after the codevelopment agreements were signed, Congress
became concerned about the merits of the agreements, especially the
transfers of U.S.  aerospace technology to Japan and the
contributions this would make to the development of Japan's aerospace
industry.  Congress was also concerned about U.S.  access to and the
potential value of Japanese-developed technologies.  As a result, we
were tasked to periodically review the status of the program.  Since
November 1989, we have issued a number of reports dealing with the
F-2 program.\4 In general, these reports concluded that during the
development stage: 

  -- the United States was adequately controlling the release of F-16
     related technical data to Japan, but U.S.  government agencies
     were not adequately sharing licensing information;

  -- the value of technology transfers from Japan to the United
     States was uncertain; and

  -- the program had helped to enhance Japan's aerospace industry. 

Our August 1995 report\5 noted that program officials believed that
the United States and Japan should clearly define U.S.  workshare in
the production agreement and include a specific list of items to be
manufactured by U.S.  industry. 

During the development phase, the United States provided the F-16
technical data package on which the F-2 design was based and U.S. 
industry received about 40 percent of development phase work
(approximately $1.2 billion). 

In 1995, Japan conducted the initial flight of the first prototype
aircraft and the Japanese cabinet approved the production of 130 F-2
aircraft over the next 15 years at an average estimated procurement
cost of about $80 million per aircraft.\6 Mitsubishi officially
turned the first prototype over to the Japan Defense Agency in March
1996 to begin government testing.  In May 1996, the Japanese
parliament approved about $1.3 billion for production of 11 aircraft
commencing in fiscal year 1996.\7 Finally, on July 30, 1996, the
United States and Japan signed a memorandum of understanding to
produce 130 F-2 aircraft for Japan's Air Self Defense Force. 


--------------------
\2 The development program has been implemented almost exclusively
through commercial contracts.  Mitsubishi Heavy Industries was the
prime contractor; other Japanese contractors included Fuji Heavy
Industries, Kawasaki Heavy Industries, and Ishikawajima-Harima Heavy
Industries.  Lockheed Martin and General Electric were the principal
U.S subcontractors. 

\3 The block number refers to a specific stage of the F-16's
development. 

\4 See the list of our related products at the end of this report. 

\5 U.S.-Japan Cooperative Development:  Progress on the FS-X Program
Enhances Japanese Aerospace Capabilities (GAO/NSIAD-95-145, Aug.  11,
1995). 

\6 The $80 million per aircraft average is in constant 1996 dollars
at 110 yen per dollar.  Japan Defense Agency budgets will be slightly
higher as they will include Japanese taxes and will reflect
adjustments for inflation.  Japan is funding the entire F-2 program
at a cost of about $14 billion, including both development and
production phases. 

\7 Japan's fiscal year 1996 began on April 1, 1996. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Under the F-2 production agreements, U.S.  industry is expected to
receive approximately 40-percent workshare, currently estimated at
$4.1 billion if the Japanese fully implement the planned production
of 130 aircraft.  The agreements specify the items to be procured by
Japan from U.S.  industry, which provide for a 40-percent workshare
based on estimates of the production costs at the time the agreements
were signed.  A constant exchange rate of 110 yen to the dollar was
used to estimate the value of the U.S.  workshare and this rate will
remain constant throughout the life of the program. 

The U.S.  Air Force plans to verify that contracts for the items
identified in the production agreements are awarded to U.S. 
companies.\8

The value of payment amounts will not be tracked and a workshare
percentage will no longer be recalculated based on actual payment
amounts as had occurred during the development phase.  As a result,
the Air Force will not have the means to determine whether this
approach in fact enabled U.S.  companies to receive approximately 40
percent of the production work over the course of the program. 

Technology transfers from Japan to the United States have generally
been in accordance with the development phase agreements, but some
issues remain unresolved.  In 1993, Japan requested that 12 items be
recategorized as Japanese indigenous technologies (i.e., not
essentially derived from F-16 technical data).  The United States is
to receive free and automatic flowback of F-2 technologies that are
derived from U.S.  technical data while access to non-derived or
indigenous technologies is more limited.  In 1994, the United States
agreed to reclassify 4 of the 12 items as non-derived or Japanese
indigenous technologies.  However, at the time of this review, the
United States and Japan had not resolved the classification issue. 
As we reported in August 1995, while this issue is unresolved, the
United States is not receiving free and automatic access to these
technologies. 

The United States conducted several visits to explore the potential
benefits of F-2 technologies.  Two technologies that were initially
of interest to the U.S.  Air Force and to DOD contractors--the
co-cured composite wing and the active phased array radar--are now
generally considered too costly to produce.  However, Lockheed
officials indicated that tooling techniques from the F-2 program are
being applied to the Joint Advanced Strike Technology program. 

The F-2 program enhances Japan's military aircraft industry by
improving its overall systems integration capability, according to
experts.  However, Japan's exports of military technology and
equipment continue to be constrained by the country's policy
prohibiting exports of weapon systems or exclusively military
technology. 


--------------------
\8 The agreements include the Memorandum of Understanding, the
Implementing Arrangement to the Memorandum of Understanding, the
Exchange of Notes, and the Memorandum of Implementation for the
Transfer of Japanese Military Technologies. 


   U.S.  WORKSHARE IS EXPECTED TO
   BE APPROXIMATELY 40 PERCENT
------------------------------------------------------------ Letter :3

The F-2 production agreements specify that U.S.  industry is to
receive approximately 40-percent workshare.  If the Japanese fully
implement the program,\9 the U.S.  workshare will be an estimated
$4.1 billion over the life of the program.  The agreements identify
the contents of U.S.  workshare and provide for a 40-percent
workshare based on estimates of production costs at the time the
agreements were signed. 

A constant exchange rate of 110 yen to the dollar was used to avoid
the effect of exchange rate fluctuations on the respective
workshares.  According to DOD officials, unlike during the
development phase, U.S.  workshare will not be recalculated
throughout the program.  These new provisions will change the method
of verifying U.S.  workshare from checking payments to U.S. 
companies to checking that U.S.  companies have received contracts
for the items that constitute U.S.  workshare.  The value of
contracts and actual payments to U.S.  companies will not be tracked. 


--------------------
\9 In constant 1996 dollars converted at an exchange rate of 110 yen
to the dollar. 


      PRODUCTION COST ESTIMATES
      PROVIDE BASIS FOR U.S. 
      WORKSHARE
---------------------------------------------------------- Letter :3.1

The production agreements provide that U.S.  industry will receive
approximately 40 percent of the total value of production over the
life of the F-2 program.  The total value of production for 130
aircraft consists of the flyaway aircraft costs plus initial spares,
less certain agreed to deductions.  The Japan Defense Agency
estimates the total value of production will be about $10.3 billion. 
This total does not include the purchase of follow-on spare parts,
which Japan is expected to purchase from U.S.  industry. 

Actual program costs and U.S.  revenue are likely to vary from
current estimates.  The 40-percent U.S.  workshare is based on the
Japan Defense Agency's estimates of total production costs, adjusted
for inflation.  The Japan Defense Agency obtained inputs from prime
contractor Mitsubishi and other Japanese companies when developing
its estimated production budget.  These companies' estimates were
based on the development phase experience and incorporated cost
estimates from U.S.  companies, according to DOD officials.  U.S. 
Air Force officials estimated U.S.  workshare by obtaining data from
U.S.  companies and extrapolating from experience with the F-16
program. 


      PRODUCTION PHASE WORKSHARE
      CALCULATION METHODOLOGY
      DIFFERS FROM THE DEVELOPMENT
      PHASE
---------------------------------------------------------- Letter :3.2

During the development phase, U.S.  workshare was vulnerable to
exchange rate fluctuations.  If the yen appreciated against the
dollar, thus requiring fewer yen to pay for each dollar, more work
would be required for U.S.  companies to achieve a 40-percent
workshare.\10 Conversely, if the yen depreciated against the dollar,
work would have to shift from U.S.  to Japanese companies to maintain
the 40/60 workshare split because more yen would be required to meet
payments to U.S.  companies. 

The semi-annual workshare recalculations showed changes in the
percentage of U.S.  workshare as the development phase progressed. 
For example, in 1994, U.S.  workshare was calculated to be 42.4
percent; 1 year later, U.S.  workshare decreased to 40.7 percent as
companies were paid at a lower yen/dollar rate.  U.S.  and Japanese
officials attribute this change primarily to exchange rate
fluctuations, which were significant during the development phase. 
From 1988 to 1995, the average annual exchange rate ranged between
145 yen to the dollar and 88 yen to the dollar. 

During government-to-government negotiations for the production
phase, workshare calculation methodology was a major issue.  A
constant exchange rate of 110 yen to the dollar was used to estimate
the value of U.S.  workshare.  The constant exchange rate for the
production phase will be useful not only in establishing U.S. 
workshare at the beginning of the program, but also in the event of
changes during the course of the program.  For example, if U.S. 
workshare were to be adjusted in response to changes in F-2
configuration items, the 110 yen to the dollar exchange rate would be
used to factor in these adjustments to U.S.  workshare. 

The production phase negotiations also resulted in identification of
the items that will constitute U.S.  workshare.  Our August 1995
report noted that U.S.  program officials favored defining the
elements that comprise production phase workshare to avoid delays,
confusion, and subsequent disagreements. 

In conjunction with the constant 110 yen to the dollar exchange rate,
identification of the items to be produced by U.S.  suppliers helps
stabilize U.S.  workshare for the life of the program.  This will
avoid the risk of shifting work from U.S.  to Japanese companies,
according to the DOD officials.  Shifting work is not practical
because of its potential impact on cost and schedule. 


--------------------
\10 For example, a $100,000 contract would equal 13 million yen at an
exchange of 130 yen to the dollar, whereas it would equal 11 million
yen at an exchange rate of 110 yen to the dollar. 


      PRODUCTION WORKSHARE
      MONITORING PROCEDURES ALSO
      CHANGED FROM THE DEVELOPMENT
      PHASE
---------------------------------------------------------- Letter :3.3

The removal of the effects of exchange rate fluctuations on workshare
and identification of specific work to be performed by U.S. 
companies have resulted in changes to the methodology for verifying
U.S.  workshare from that used during the development phase.  During
development, U.S.  workshare was recalculated and reported to the
Technical Steering Committee twice each year by the Japan Defense
Agency.  The U.S.  Air Force then verified the workshare data by
contacting U.S.  companies to determine the value of F-2 contract
payments.  According to one Air Force official, verifying U.S. 
workshare was time consuming and company reporting of Japanese
payments for the purpose of verifying workshare is voluntary. 

For the production phase, U.S.  workshare will be monitored through
verifying that Japan has awarded contracts to U.S.  companies for the
items agreed to in the production agreements, rather than through
verifying actual payments.  Monitoring implementation of the
workshare agreement will be the responsibility of a joint production
coordination group, the successor to the Technical Steering
Committee.  However, the exact responsibilities of this committee
have yet to be determined. 

DOD intends to ensure that agreed parts and items are indeed
purchased from U.S.  companies.  The Air Force will periodically
contact U.S.  companies to verify that the contracts they receive for
F-2 production are in fact consistent with the production agreements. 
However, the value of the contracts will not be tracked and a
workshare percentage will not be calculated based on actual payments. 
As a result, the Air Force will not have the means to determine
whether this approach in fact enabled U.S.  companies to receive
approximately 40 percent of the production work over the course of
the program. 


      U.S.  INDUSTRY EXPECTS
      REVENUE OF ABOUT
      $4.1 BILLION
---------------------------------------------------------- Letter :3.4

U.S.  workshare, currently expected to be about $4.1 billion over the
life of the program,\11 is represented by the flow of revenue to U.S. 
companies, rather than the percentage of actual work performed. 
Thus, U.S.  workshare will include parts and components manufactured
in the United States as well as royalties and licensing fees paid by
Japan to U.S.  companies.  Royalties and licensing fees account for
about 5.2 percent of the $4.1 billion U.S.  workshare.  Figure 2
shows the major components of U.S.  workshare. 

   Figure 2:  Major Components of
   U.S.  Workshare

   (See figure in printed
   edition.)

   Notes:  * Phased-in licensing
   arrangement
   ** 8 of every 10 left-hand
   wings

   (See figure in printed
   edition.)

   Source:  Defense Security
   Assistance Agency.

   (See figure in printed
   edition.)

Lockheed Martin Tactical Aircraft Systems and General Electric
Aircraft Engines are expected to receive about 70 percent of the U.S. 
workshare (excluding initial spare parts the two companies will
produce).  About 200 other U.S.  companies will also receive F-2
contracts directly from Japan, as specified in the production
agreements.  Lockheed Martin will produce 80 percent of the left-hand
wings, as well as the aft fuselage, leading edge flaps, avionics
support equipment, and stores management set.\12 The percentage of
left-hand wings Lockheed Martin will produce is an increase over the
57 percent produced during the development phase. 

General Electric is entering into a licensed production arrangement
with Japanese engine manufacturer Ishikawajima-Harima Heavy
Industries.  General Electric will allow Ishikawajima-Harima to
produce up to 76 percent of the engine under license in a phased
arrangement.  Over the life of the program, Ishikawajima-Harima's
licensed production of the engine will average 60 percent.  However,
in accordance with U.S.  restrictions on transfers of leading edge
technologies, critical engine technologies are not being licensed to
Japan as part of this program.\13

Workshare will be accounted for by contracts awarded to the major
subcontractors, such as Lockheed Martin and General Electric, and to
the 200 or so smaller U.S.  companies that will contract directly
with Japan.  We have identified several parts and components that
will be procured from third countries; however, these parts account
for less than 1 percent of U.S.  workshare.  For example, Lockheed
will buy airframe harnesses from Mexico at an estimated total cost of
$6 million, or about 0.15 percent of U.S.  workshare.  Similarly,
General Electric will purchase certain parts from its subcontractors
in Canada, the Netherlands, and Turkey at an estimated total cost of
about $19 million, or about 0.5 percent of U.S.  workshare.  These
are parts that U.S.  contractors typically buy from third countries
to build these engines for the U.S.  Air Force. 


--------------------
\11 In constant 1996 dollars converted at an exchange rate of 110 yen
to the dollar. 

\12 The stores management set is a computer system that contains
weapon delivery software.  This system interacts and communicates
with all weapon systems on the aircraft. 

\13 The engine licensed production rate for the Japanese side is
approximately 60 percent on average through the F-2 production
period, and reaching up to 76 percent at the end of the F-2
production period. 


   TRANSFERS OF TECHNOLOGY FROM
   JAPAN IMPROVE BUT SOME
   UNRESOLVED ISSUES REMAIN
------------------------------------------------------------ Letter :4

Transfers of technology from Japan to the United States have been in
accordance with the development agreements but some issues remain
unresolved.  In 1993, Japan requested that 12 items be recategorized
as Japanese indigenous technologies.  The United States is to receive
free and automatic flowback of F-2 technologies that are derived from
U.S.  technical data.  In 1994, the United States agreed to
reclassify 4 of the
12 items as non-derived or Japanese indigenous technologies. 
However, as our August 1995 report indicated, while this issue is
unresolved, the United States is not receiving free and automatic
access to these technologies.\14

We also stated in our August 1995 report that the U.S.  Department of
Commerce wanted to develop opportunities for U.S.  companies
interested in Japanese FS-X technology by organizing industry visits
to Japan to examine non-derived technologies.  Since then, the
Commerce Department and DOD have sponsored 17 U.S.  government and
industry visits.  Industry participants reported that they generally
benefited from learning about Japanese methods and also from making
contacts with Japanese companies; however, DOD officials and industry
participants indicate that there is limited interest in those
technologies. 


--------------------
\14 Further details on this case have been classified by DOD and
excluded from this report. 


      JAPAN LIMITS U.S.  ACCESS TO
      CERTAIN TECHNOLOGIES PENDING
      RESOLUTION OF
      RECLASSIFICATION REQUEST
---------------------------------------------------------- Letter :4.1

The F-2 development phase agreements provide for flowback of
technologies to the United States that are essentially developed from
U.S.  technical data.  These so-called "derived" technologies are
those based in whole or in part upon U.S.  technical data provided to
Japan as part of this agreement.  The provision entitles the United
States to receive all the technical data and know-how required to
replicate the item on a free and automatic basis. 

The United States also has access to Japanese indigenous or
"non-derived" technologies.  Japan is to provide technical outlines
on non-derived technologies with sufficient information to enable the
United States to determine their value and usefulness.  Those in the
United States who wish to use the technology can obtain it through a
licensing agreement from the originating Japanese company. 

The production phase agreements contain similar provisions regarding
flowback of derived technologies and access to non-derived
technologies. 

The development agreements identified four major F-2 components--the
active phased array radar, the integrated electronic warfare system,
the inertial reference/navigation system, and the mission
computer--as Japanese indigenous or non-derived technologies.  There
is also a provision granting Japan the option to request a change in
technology classification from derived to non-derived, provided it
can demonstrate that the technology was developed with insignificant
or no U.S.  input.  In 1993, the United States agreed to reclassify
radar absorbing material to non-derived status, increasing the number
of recognized Japanese indigenous or non-derived technologies to
five. 

Japan later submitted 12 items as candidates for reclassification to
non-derived status.  The U.S.  government evaluated the 12 to
determine if Japan developed them with minimal or insignificant U.S. 
input, as Japan claimed.  In 1994, the U.S.  government told Japan
that the United States would agree to reclassify 4 of the 12 items. 
Reclassification of the remaining eight items remains unresolved. 
However, as we stated in our August 1995 report, the United States
was not receiving automatic flowback of these technologies because
the Japan Defense Agency was reluctant to transfer candidate
technologies before the U.S.  evaluation was complete.  Japan
believes that these technologies are not essentially developed from
U.S.  technology.  On the other hand, U.S.  officials contend that
all F-2 technology is derived until classified otherwise and that
Japan is obligated to transfer data until classification negotiations
end.  At the time of this review, the United States and Japan had not
resolved the classification status of the remaining eight
technologies. 

According to program officials, Japan has generally complied with the
flowback provisions for derived technologies and U.S.  officials told
us that about 40,000 technical documents have been transferred to
date.  Generally, compliance with the memorandum of understanding's
requirement to submit outlines of non-derived items has been
satisfactory.  For example, in the February 1996 working subcommittee
meeting, Japan provided technical outlines of the four items that
were recategorized from derived to non-derived status and included
updates of the original five non-derived items. 


      U.S.  ACCESS TO WING
      TECHNOLOGY DATA IMPROVES
---------------------------------------------------------- Letter :4.2

The co-cured composite technology used by both countries to produce
the F-2 wings, including materials, process specifications, and
tooling was designed by Mitsubishi and transferred to Lockheed
Martin.  For the development phase, Lockheed fabricated five
left-hand wing box assemblies using Japanese materials and processing
techniques. 

The F-2 wings differ from the traditional F-16 aluminum wings in
several respects, but the most significant feature is the use of
co-curing technology whereby composite parts are bonded together
without conventional metal fasteners.  In terms of performance, the
significantly lighter F-2 wings are expected to be more durable,
provide higher strength, and reduce flutter problems. 

In our August 1995 report, we stated that Lockheed was not at that
time receiving all of the wing data necessary to apply the composites
technology to other programs.  The U.S.  contractor and DOD program
officials have recently indicated that technology transfers from
Japan have been successful and continue to be effective and that
Lockheed is generally satisfied with the transfer of Japanese
technology.  Lockheed officials indicated that Lockheed now has had
sufficient access to Japan's ground tests and that they expect to
have access to the Japanese government's flight testing data as
government-led flight testing increases. 

Other DOD contractors, however, were unable to obtain access to the
wing technology until September 1995 when DOD and the Japan Defense
Agency agreed to grant DOD and DOD contractors access to the co-cured
composite wing technology. 

In terms of potential application to other programs, Lockheed
officials explained that some of the F-2 tooling techniques are of
interest to them.  In January 1996, for example, Lockheed Martin
announced that the company had combined technology derived from the
F-2 program with its own manufacturing processes to manufacture a
composite bulkhead.  The bulkhead is to be used in demonstration
tests for the Joint Advanced Strike Technology program for potential
cost-saving manufacturing options. 


      TECHNOLOGY VISITS TO
      EVALUATE F-2 TECHNOLOGIES
      RESULT IN LIMITED U.S. 
      GOVERNMENT AND INDUSTRY
      INTEREST
---------------------------------------------------------- Letter :4.3

Throughout the development phase of the program, DOD's F-16 program
office, in coordination with the Commerce Department, conducted a
series of technology visits to observe and evaluate Japanese
technology.  As a result of these visits, the program office prepared
Technology Assessment Reports for inclusion in Defense Technical
Information Center's (DTIC) database.  This database can be accessed
by U.S.  firms interested in learning about the technologies.\15

Technology visits were conducted for the five technologies
reclassified to non-derived,\16 and plans are currently underway to
determine whether to review the four additional technologies
recategorized to non-derived status in December of 1994.  Table 1
summarizes the technology visits conducted and the level of
participation by U.S.  industry. 



                                Table 1
                
                      Summary of Technology Visits

                                                    Number of U.S.
                                                    companies
Technology                      Date of visits      attending
------------------------------  ------------------  ------------------
Active phased array radar       May 1991            14
                                July 1993
                                November 1994

Mission computer                November 1991       DOD only
                                May 1993

Integrated electronic warfare   July 1993           10
system                          September 1994
                                December 1995

Inertial reference/navigation   November 1994       DOD only
system                          September 1994

Radar-absorbing materials       June 1995           DOD only

Co-cured composite wing         March 1996          13
(symposium)
----------------------------------------------------------------------
Key objectives of the technology visits were to allow DOD to evaluate
technologies of interest for its own potential use and to introduce
U.S.  companies to the F-2 technologies.  It would then be up to the
individual firms to decide whether or not to enter into contractual
or licensing arrangements with individual Japanese companies. 

Active Phased Array Radar System

To evaluate the F-2's active phased array radar system, the U.S.  Air
Force acquired five transmit/receive modules to test and evaluate at
its Wright Laboratory.  The radar was of interest to DOD because it
incorporates new technologies; however, some officials believe that
U.S.  radar technology being developed for the F-22 is a generation
ahead of Japanese technology.  Although there is limited commercial
application for a fire control radar, some of its parts could be of
interest to U.S.  companies and at least one U.S.  company expressed
interest.  In general, the U.S.  industry participants were favorably
impressed with the level of access to active phased array radar
technology during the visit but found that the technology was not
quite as advanced as expected.  Also, industry participants observed
that the approaches used by Japanese industry to package and seal the
radar modules are not a low-cost approach by U.S.  industry
standards. 

Mission Computer

According to program officials, the F-2's mission computer is very
similar in capability to the F-16's. 

Integrated Electronic Warfare System

Although the U.S.  visitors found the technology visit informative,
they found that additional detailed data was required before a
complete technology assessment could be made.  Some participants
commented that although details of the Japanese program were
provided, there was insufficient detail for U.S.  companies to make a
commercial decision.  Moreover, the overall quality of the system
will be determined during the test phase. 

Inertial Reference/Navigation System

The F-2's inertial reference/navigation system does not use any
significant advances in technology beyond those employed on the F-16. 
Moreover, the F-16 is also being equipped with the global positioning
system, also used by commercial airlines.  The F-2 will not use the
global positioning system and its navigation system does not provide
capabilities beyond that available in U.S.  systems.  Therefore,
neither U.S.  government nor industry officials expressed interest in
this technology. 

Radar-Absorbing Materials

A small government team conducted a technology visit in June 1995 to
discuss radar-absorbing materials.  The government officials found
that the visit was informative and responsive to U.S.  requests for
information, but did not see the technology as advanced as U.S. 
technology in this area.  Nevertheless, officials indicate that more
information on the electrical performance data of the radar-absorbing
material--not available at the time of the visit--will be needed in
order to determine whether the material would be valuable for U.S. 
industry. 

Co-cured Composite Wing

A symposium was held in March 1996 to provide an overview to U.S. 
industry participants of the wing in terms of materials, design,
processes, fabrication, and assembly.  DOD and Commerce officials
told us that the participating companies have not indicated any
further interest in obtaining technical documents.  The general
consensus among industry participants and U.S.  Air Force officials
is that it is extremely costly to produce the wing structure by the
co-curing process.  Lockheed Martin, however, has stated that the use
of tooling techniques from the F-2 program has contributed to
reducing the cost of manufacturing the composite bulkhead materials
for the Joint Advanced Strike Technology program. 

New Non-derived Technologies

According to program officials, of the four new non-derived
technologies--the digital flight control computer software, airborne
video tape recorder, cockpit television sensor, UHF/VHF radio--the
most likely candidate for a technology visit is the digital flight
control software.  The F-2 uses a tri-redundant architecture with an
analog back-up mode, while the F-16 uses a quad-redundant
architecture with a digital back-up mode.  With regard to the cockpit
television sensor and the UHF/VHF radio, program officials stated
that the U.S.  Air Force would not have an interest because there is
little technical innovation.  The airborne video tape recorder
currently used in the Air Force's F-16s is acquired from Japan,
obviating the need for additional evaluation of this system. 

In addition to the systems-specific technology visits, the program
office conducted two other technical visits.  First, in January 1996,
an avionics integration technology visit was conducted at Mitsubishi
to review software development and hardware integration processes. 
Second, a structures test meeting was conducted at Japan's Technology
Research and Development Institute structural test facility in April
1996.  The visit was part of an ongoing structural test dialogue
between F-16 and F-2 structural engineers. 


--------------------
\15 The DTIC provides scientific technical information principally to
DOD.  DTIC's resources are intended primarily for federal government
agencies and their contractors.  DOD contractors who are registered
DTIC users and are interested in F-2 technical abstracts can access
technical abstracts sorted in the following categories:  air vehicle,
airframe, landing gear, propulsion, fuel, environmental control,
crew, flight control, hydraulic, armament, weapons delivery,
avionics, electrical, instrumentation, operational software, inertial
reference/navigation system, integrated electronic warfare system,
mission computer, active phased array radar, and radar-absorbing
material. 

\16 As of February 1996, the program office did not plan additional
future visits for the technologies described above, but expected that
as the development phase reaches completion and test results become
available, the United States would consider additional technology
visits. 


   JAPANESE AEROSPACE INDUSTRY
   GAINS FROM F-2 PROGRAM BUT
   CONTINUES TO BE CONSTRAINED BY
   EXPORT RESTRICTIONS
------------------------------------------------------------ Letter :5

U.S.  program officials and industry experts indicate that Japan will
continue to gain experience and capability from the F-2 program,
although less capability than if it had pursued indigenous
development.  Specifically, DOD officials believe that the F-2
program will significantly enhance Japan's systems integration
capability--that is, incorporating subsystems and technologies into
the airframe. 

However, Japanese industry will not gain significant new capability
in engine production.  Because of the terms of the engine licensed
production agreement, Japanese industry will not be modifying the
General Electric F110-129 engine for the F-2.  Instead, it will
produce increasingly more parts along the course of the program. 
According to program officials, the engine technology that will be
released to Japan for this program is roughly equivalent to technical
data previously obtained from the United States as part of the
licensed production of the F-15J program.  Moreover, in accordance
with U.S.  restrictions on transfers of U.S.  leading edge
technologies, critical engine technology is not being licensed to
Japan. 

Although the F-2 program will enhance Japan's military aircraft
capability, exports of military technology continue to be constrained
by the country's long-standing restrictions on exports of military
weapon systems and exclusively military technology.  In 1967 Japan
adopted its Three Principles on arms exports, which, in effect,
banned arms exports.  These principles were reaffirmed in 1976 and
1981.  In 1983, Japan signed a bilateral agreement with the United
States to allow, on a limited basis, the transfer of Japanese
military technology to the United States.  The agreement recognized
the imbalance of technology flows between the two countries and
permits the transfer of Japanese military technology to the United
States on a case-by-case basis.  The agreement also reaffirmed
Japan's policy that, in principle, dual-use technology can freely
flow between the two countries.  Japanese technologies transferred to
the United States for the F-2 program are subject to this agreement. 

Japan's decreasing military procurement budget has led some industry
representatives to consider asking the Japanese government to relax
its ban on exporting military systems and components to the United
States.  For example, in 1995, the defense production committee of
Keidanren, Japan's largest industry association, released a statement
alluding to a desire to relax Japan's restrictions on military
exports to the United States.  Nonetheless, some experts believe that
the long-term goal of Japan's defense industry is to export
subcomponents to support U.S.  programs such as the F-22 aircraft,
but that public sentiment will likely prevent the Japanese government
from relaxing the ban. 


   RECOMMENDATION
------------------------------------------------------------ Letter :6

Current plans for monitoring implementation of the production
agreements do not provide a means to determine whether U.S. 
companies actually receive approximately 40 percent of the F-2
production work by the end of the program.  Therefore, we recommend
that the Secretary of Defense direct the Defense Security Assistance
Agency, as the lead U.S.  agency for the F-2 program, to collect
sufficient data to determine the value of production work received by
U.S.  companies at the end of the program.  This can be accomplished
by collecting data from Lockheed Martin, General Electric, and a
selection of the smaller contractors involved in this program. 
Collection of such data will allow the Defense Security Assistance
Agency to assess the soundness of the production phase approach to
workshare allocation and tracking for use in future cooperative
programs. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

DOD and the Departments of State and Commerce provided comments on a
draft of the classified version of this report.  DOD said it fully
concurred with the draft report.  (See app.  I.) In addition, DOD
provided minor technical comments that we have incorporated in the
text as appropriate.  The Commerce Department stated that it
generally agreed with the report's findings and conclusions.  (See
app.  II.) The Department of State orally concurred with the report. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

To examine the status of the F-2 program, we reviewed documentation
and interviewed officials from the Office of the Secretary of Defense
for International Security Affairs, the Office of the Deputy Under
Secretary of the Air Force for International Affairs, the F-16
program office at Wright-Patterson Air Force Base, the Defense
Security Assistance Agency, and the Defense Technology Security
Administration.  We also interviewed officials at the Departments of
Commerce and State. 

To examine the terms of the U.S.  workshare, we reviewed the
memorandum of understanding for the production phase and compared it
to the memorandum of understanding for the development phase.  We
also compared and contrasted other development phase implementing
agreements and similar production phase documents.  We sought and
obtained production phase cost estimates from General Electric and
from Lockheed Martin.  We reviewed and analyzed the methods DOD used
to calculate U.S.  workshare. 

To assess the status of technology flowback from Japan to the United
States and whether those technologies were of interest to the U.S. 
government and industry, we reviewed minutes of Technical Steering
Committee meetings, summaries of technology visits, and summaries of
participants' comments.  We interviewed cognizant program officials
to obtain their overall impressions of the visits and of the
technologies observed.  Additionally, to examine the status of
Japan's request for recategorization, we obtained and analyzed
documents describing criteria for each reviewer's conclusions.  We
also interviewed officials to confirm our interpretation of those
documents. 

We conducted our review between March 1996 and December 1996 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

We plan no further distribution of this report until 10 days from its
issue date.  At that time we will send copies of the report to other
interested congressional committees and to the Secretaries of State,
Commerce, and Defense.  Upon request, copies may also be made
available to others. 

This report was prepared under the guidance of Katherine V. 
Schinasi, who can be reached at (202) 512-4841 if you or your staff
have any questions.  Other major contributors to this report were
Karen S.  Zuckerstein, M.  Cristina Gobin, and Paula J.  Haurilesko. 

Henry L.  Hinton, Jr.
Assistant Comptroller General




(See figure in printed edition.)APPENDIX I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter 




(See figure in printed edition.)APPENDIX II
COMMENTS FROM THE DEPARTMENT OF
COMMERCE
============================================================== Letter 





RELATED GAO PRODUCTS
============================================================ Chapter 0

U.S.-Japan Cooperative Development:  Progress on the FS-X Program
Enhances Japanese Aerospace Capabilities (GAO/NSIAD-95-145, Aug.  11,
1995). 

Asian Aeronautics:  Technology Acquisition Drives Industry
Development (GAO/NSIAD-94-140, May 4, 1994). 

Foreign Technology:  Collection and Dissemination of Japanese
Information Can Be Improved (GAO/NSIAD-93-251, Sept.  30, 1993). 

Competitiveness Issues:  The Business Environment in the United
States, Japan, and Germany (GAO/GGD-93-124, Aug.  9, 1993). 

High Technology Competitiveness:  Trends in U.S.  and Foreign
Performance (GAO/NSIAD-92-236, Sept.  16, 1992). 

Technology Transfer:  Japanese Firms Involved in F-15 Coproduction
and Civil Aircraft Programs (GAO/NSIAD-92-178, June 10, 1992). 

Defense Technology Base:  Risks of Foreign Dependencies for Military
Unique Critical Technologies (GAO/NSIAD-92-231, June 5, 1992). 

U.S.-Japan Codevelopment:  Update of the FS-X Program
(GAO/NSIAD-92-165, June 5, 1992). 

Foreign Technology:  Federal Processes for Collection and
Dissemination (GAO/NSIAD-92-101, Mar.  23, 1992). 

Aerospace Plane Technology:  Research and Development Efforts in
Japan and Australia (GAO/NSIAD-92-5, Oct.  4, 1991). 

Commercialization of Technology by Japanese Companies
(GAO/T-NSIAD-91-32, Apr.  30, 1991). 

U.S-Japan Codevelopment:  Review of the FS-X Program
(GAO/NSIAD-90-77BR, Feb.  6, 1990). 

Investment in Foreign Aerospace Vehicle Research and Technological
Development Efforts (GAO/T-NSIAD-89-43, Aug.  2, 1989). 

U.S.-Japan FS-X Codevelopment Program (GAO/T-NSIAD-89-32, May 16,
1989). 

U.S.-Japan FS-X Codevelopment Program (GAO/T-NSIAD-89-31, May 11,
1989). 

U.S.  Military Aircraft Coproduction With Japan (GAO/T-NSIAD-89-6,
Feb.  23, 1989). 

Support for Development of Electronics and Materials Technologies by
the Governments of the United States, Japan, West Germany, France,
and the United Kingdom (GAO/RCED-85-63, Sept.  9, 1985). 

Industrial Policy:  Case Studies in the Japanese Experience
(GAO/ID-83-11, Oct.  20, 1982). 

Industrial Policy:  Japan's Flexible Approach (GAO/ID-82-32, June 23,
1982). 

U.S.  Military Coproduction Programs Assist Japan in Developing Its
Civil Aircraft Industry (GAO/ID-82-23, Mar.  18, 1982). 

*** End of document. ***

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