April 1, 2008  

Hedging strategies

UCAVs, budgets and improbable threats

Unmanned air vehicle development has sharply accelerated in recent years principally because UAVs can overcome a major shortcoming of manned aircraft — limited persistence — while offering better range, payload and stealth performance.

Improved capabilities, though, are important only if they are strategically relevant and affordable. For the foreseeable future, the major strategic drivers appear to be winning the long struggle against global terrorism and hedging against the re-emergence of a major state-based threat. Although unmanned combat air vehicles (UCAVs) are relevant to both circumstances, this article discusses the strategic, budgetary and technological case when considering hedging against a future peer competitor.

The 2006 Quadrennial Defense Review (QDR) contends that the strategic choices made by today’s major and emerging powers — China, India, Russia and others — will affect the strategic position and the freedom of action of the U.S., its allies and partners. While actively working to shape the choices such nations make toward positive goals, the QDR notes that the “United States must also hedge against the possibility that a major or emerging power could choose a hostile path in the future.” Although the threat of a conflict with a major power presently appears improbable, this may change in the future. Moreover, the capabilities developed for such an improbable worse-case scenario would allow the U.S. to manage any other state-based threats that develop with ease.

Force planning against improbable threats is by no means uncommon. The U.S. planned for wars against Britain before both World Wars and then was closely allied with Britain in both. In the interwar years, improbable threats to the continental U.S. formed the justification for acquiring new military equipment such as the B-17. This four-engine bomber was originally designed as an offshore anti-shipping bomber for coastal defense tasks and was ordered in small numbers, but with the outbreak of World War II the aircraft was available for mass production as a long-range strategic bomber and proved invaluable as the famed Flying Fortress. This example of a hedging strategy has relevance today.

Hedging strategies are appropriate during times of strategic uncertainty. During the Cold War the adversary was known and the force could be structured accordingly, with well-understood qualitative and quantitative benchmarks. Now, however, it is not necessarily evident that there will be a major conventional war in the near or medium future. Instead, the concern is that equipment acquired in large numbers today for such an improbable situation may draw funding and resources away from preparing for the type of operations that are much more likely. Worse, by the time a major conventional threat reappears — if it ever does — the equipment acquired may be obsolescent given the rapid pace of technological change.

The use of hedging strategies gives a force the ability and the processes to develop to meet new circumstances as they emerge. Hedging strategies aim to minimize expenditures and long-term commitments, spending limited funds and resources until the direction the future is evolving toward becomes more certain. When evidence accumulates that the international system is developing in worrying ways, then the overall force development strategy can be modified to counter this — by either expanding or contracting particular hedging substrategies as appropriate.

A hedging strategy is a compromise between cost and warning time. Hedging would be unsuitable if there were short warning times of major conflict, such as during the Cold War. For such situations, large, costly and readily available military forces are necessary. Today’s much longer warning times allow hedging to be a practical option for managing the improbable threat of major conventional war while allowing scarce resources to be spent on forces appropriate for more immediate and pressing threats.

Importantly, a hedging strategy is dynamic, not static, and requires constant monitoring of the strategic environment for changes in the international system. A robust package of hedging substrategies should be considered a portfolio of real options and just as with financial options, the greater the uncertainty, the greater their value. However, hedging is not free and some expenditure may ultimately prove unnecessary as not all hedges will prove useful as events evolve.

Hedging is particularly appropriate when budgets are constrained. Limitless defense expenditure would allow very large force structures to be sustained that can counter all possible circumstances. However, national security and national prosperity are interdependent. A sophisticated approach is needed to ensure sufficient defense capabilities and capacities to meet ongoing operational demands, while not adversely affecting long-term economic growth and the nation’s fiscal strength. Wider economic and security interests are best served by a force structure that is able to prevail, but that is affordable over the longer term.

Since World War II there have been four noticeable defense budget peaks: the Korean War, the Vietnam War, the Reagan defense buildup and today. Unlike earlier defense budget peaks, the current defense budget peak is attempting to fund a defense buildup and fight a war simultaneously. Accordingly, the 2008 fiscal year defense budget request is the highest in constant dollars since the end of World War II. The defense baseline budget is now above the average spending of the Reagan defense buildup, the previous defense spending high-water mark, while the war against global terrorism funded by emergency supplementals is now more costly than the Korean War or the Vietnam War. This historically high defense budget level may prove unsustainable.

The counterargument is that today’s defense budgets, as a percentage of gross domestic product, are less than in earlier years, meaning higher levels of defense spending can be afforded because they have been previously. As an example, in 1985, during the Reagan buildup, the defense budget was 6.1 percent of GDP; the fiscal 2008 defense budget is an estimated 4.2 percent of GDP. The fiscal 2008 defense baseline budget is larger in constant dollar terms than it was in 1985, because economic growth has allowed more to be spent on defense with less economic impact. However, in the present strategic circumstances, there seems little enthusiasm to raise taxes, cut existing programs and entitlements, or significantly further increase deficit financing to so markedly raise defense expenditures.

Defense spending instead seems more likely to remain within the relatively narrow band of recent years. Since 1994, the defense baseline budget as a percentage of federal outlays has been comparatively stable, oscillating between about 16.2 percent and 19.9 percent. In fiscal 2007 the defense baseline budget was 16.9 percent of federal outlays; fiscal 2012 is planned to be similar. Oscillations within this range can be significant, however, giving cause for concern. The defense budget troughs after the Korean War, the Vietnam War and the Reagan buildup were remarkably similar at about $360 billion (fiscal 2008 dollars). History suggests that the present defense baseline budget could fall by about $100 billion by the middle of the next decade.

A potentially declining baseline budget is of real concern when considering funding a large-scale, high-technology force structure suitable for improbable major interstate wars while fighting a protracted war against global terrorism. Funding the necessary full-rate procurement of new weapons systems to sustain the large force structure needed to handle both situations simultaneously appears increasingly problematic. Firstly, the Congressional Budget Office estimates that implementing the current modernization plan to recapitalize today’s Cold War-era legacy force for a future major interstate conflict may require increasing annual procurement funding by $140 billion (fiscal 2008 dollars) over the current defense baseline budget peak. Secondly, the planned increase of the Army and Marine Corps permanent end strength by 92,000 personnel to meet likely operational “small wars” demands will increase costs; the initial implementation over the next six years could cost more than $100 billion. Lastly, current budget plans envisage changing the balance between research and development and procurement, but as Steven Koziak of the Center for Strategic and Budgetary Assessment cautions: “There has been no sustained period over the past 50 years during which R&D funding has been cut, while funding for procurement has been increased.”

Living with constrained budgets

A constrained defense budget has quite limited “optional” funding to be redirected as costs increase because the major areas of personnel and operations and maintenance spending cannot be easily reduced. Often the only way to generate savings is to cut the numbers of new weapon systems being acquired. In this regard, fighting the global war on terrorism is not an optional activity, whereas acquiring large numbers of new high-end conventional weapon systems absent a major state-based threat may be an option.

Given defense budget concerns and the uncertainty of when (and if) a peer competitor will emerge, a hedging strategy would emphasize maintaining the development of leading-edge technology that outclasses potential adversaries, while also acquiring relatively small operational fleets of this new equipment. The switch in budget priorities from fighting the global war on terrorism to funding large-scale procurement of such equipment would only be made when a significant state-based threat clearly emerged. Until then, the numbers of new high-technology weapon systems acquired would be more driven by the limited funding available than by sustaining a specified force size. When necessary, a larger force structure best suited to the circumstances could be quickly acquired based on the array of developed alternatives. A necessary component of this strategy is therefore the capacity to switch quickly to timely large-scale manufacture.

NETWORKed systems

The technology of UCAVs makes them particularly suitable as an element of such a hedging strategy. UCAVs operate as a part of a networked system — sometimes termed an unmanned combat air system — comprising air vehicles, a ground segment, and a command, control and communications infrastructure.

In the hedging strategy envisaged, new UCAVs would be continually developed and fielded in small numbers to operate within an established, overarching communications architecture. The command-and-control network could be progressively enhanced through continuous improvements to surface, air and space-based elements. While this network may be expensive, the component that goes in harm’s way — the UCAV — can be kept comparatively low-cost by being a relatively simple vehicle that uses off-board remote sensors, weapons, targeting and control systems accessed through the network.

In the Predator UAV, a simple, almost primitive, air vehicle operates within a complex global command, control and communications network. The rudimentary Predator is individually low-cost and, while not considered expendable, if it is lost during combat operations, the implications are minor and the UAV can easily be replaced. Its simplicity of manufacture also allows larger numbers to be acquired quickly as strategic circumstances dictate. The system as a whole is readily scalable to meet emerging operational requirements and can be expanded more quickly then a system reliant on manned aircraft requiring long lead time aircrew. By comparison, the Global Hawk UAV uses a complex air vehicle and sensors; Global Hawk’s costs approach that of a manned aircraft, although there are still advantages in persistence, range and payload.

UCAVs for interstate warfare would be much more sophisticated than the Predator, although, by making prudent use of the network to provide data, information and intelligence from off-board systems, they potentially could be considerably lower cost than a manned aircraft. Even if the acquisition cost approaches that of a manned aircraft, the peacetime operating costs of a UCAV should be much lower. The crew of a manned aircraft requires 200-250 costly flying hours annually to maintain competency. UCAVs will need some limited end-to-end testing annually to verify system reliability but this would require much less annual flying then a manned aircraft crew requires. With the life cycle cost of a manned aircraft broadly split between 25 percent acquisition cost and 75 percent ongoing operations and maintenance costs, a major reduction in the latter could permit a larger overall force structure to be sustained.

UCAVs are well-suited to air power theorist Col. John A. Warden’s concept of a “technology offensive.” Under this approach, new systems are developed and rapidly fielded in small numbers sufficient to force potential enemies to devote significant efforts to developing new defensive systems, or even to abandon military competition altogether. The F-117 stealth fighter model shows what is possible: Only 60 aircraft were built, but this relatively low-cost program forced potential adversaries to make significant investments in new defensive systems. UCAV technology can make this approach even more effective because, by operating within the same command-and-control network, new types of UCAVs could be continually, rapidly fielded. If each type operated in a significantly different manner, the defenses developed against one would be ineffective against another. This approach is compatible with the 2006 QDR guidance that “the United States must constantly strive to minimize its own costs … while imposing unsustainable costs on its adversaries.”

Importantly, this continuous development of successive generations of UCAVs would sustain a strong and innovative industrial design and development base. New manned aircraft are now designed and built so rarely that the military aircraft industrial base has significantly declined over recent decades, leaving little depth of expertise or ability to meet new demands quickly. Continual UCAV development would keep the military aircraft industry vibrant, competitive and at the leading edge of technology.


With all strategies there are potential shortcomings that require careful management. Critically, such hedging strategies rely upon adequate warning of a major state-based threat developing to give time to expand the force sufficiently. In this regard, intelligence organizations and systems would need to be adequately resourced to focus over the long term on monitoring the force structures of major and emerging states. A marked shift in the capabilities these states were developing should trigger changes in the hedging strategy. Significant offensive capabilities would need to be fielded to challenge the U.S. and these should be highly visible, and more easily assessed by national technical means than intent.

The recent QDR advised: “The aim is to possess sufficient capability to convince any potential adversary that it cannot prevail in a conflict.” Given resource constraints, risks can be accepted in the force structure needed to counter improbable major conventional wars to allow the more pressing threats from global terrorism to be addressed. This risk management approach reflects the judgment that there is a large difference in costs between building a force structure that wins major wars quickly, and one that can deter an adversary through being manifestly able to stop him winning. The force structure for the latter can be significantly smaller, though still large enough for coercive diplomacy tasks such as striking a rogue state’s military command or nuclear weapon facilities.

In the hedging strategy, a small part of the force would employ the latest new-generation technology. This is a change from the current approach of acquiring large numbers of platforms through full-scale production of a design frozen at a technology level several years old. But having even a small force element that employs innovative, leading-edge technology can ensure the whole force wins convincingly. In the 1940 Battle of France, only 10 percent to 15 percent of the German Wehrmacht was mechanized and well-equipped. The remainder of the army relied on horse-drawn wagons and equipment reminiscent of World War I, but this was of no matter; the numerically small, technologically advanced mechanized units won the battles for the remainder to fill in behind.

Lastly, the hedging strategy relies on being able to switch to full-rate production in a timely manner. The UCAVs must be designed to allow prompt mass production. With many traditional weapon systems, though, having more equipment would be of little use without additional trained and skilled crews. However, three to four UCAVs can be controlled by a single operator. If the nonexpanded force structure is scaled under this hedging strategy to one operator per UCAV, a very rapid expansion could be achieved when necessary by quickly mass-producing an additional two to three UCAVs for each operator to control.

The uncertainty of both future strategic circumstances and defense budgets favors using a hedging strategy that makes the overall force structure adaptable and responsive to strategic changes while being able to meet contemporary challenges. However, hedging has risks and requiresthat the emerging strategic environment is monitored and force structures are adjusted as challenges arise; it is not a “set and forget” strategy. UCAVs offer considerable potential; they can provide significant operational capabilities that unbalance an adversary while being technologically compatible with a hedging strategy. UCAVs can meet contemporary strategic needs; they are an idea whose time has come.