February 1, 2007  

Trans-Atlantic trade challenges

Defense cooperation among allies, whether programmatically or intellectually, is critical. As the saying goes, “No one’s got a monopoly on good ideas.” And treasuries worldwide want to curb spending. That means doing more with less, which theoretically should fuel closer cooperation and an aligning of national, diplomatic, financial and political interests to ensure success. The nature and the scope of the current conflict and looming challenges demand nothing less.

Realizing that cooperation, however, can be difficult. There are many obstacles to greater defense cooperation — nationalism, chauvinism, budget pressures, shortsighted industrial self-interest, “Buy American” strictures (which, in many ways, are more of an intellectual irritant than a practical impediment — the Berry Amendment excluded, of course), outmoded export-control regulations that complicate cooperation, pandering politicians, demands for greater work share, job-loss fears and, of course, added costs as work is gerrymandered across several nations. Any one of these factors could derail cooperation. A combination of them can be devastating.

A good example of chauvinism came in 1999 when Boeing rejected BAE System’s novel BROACH warhead as the penetrating system for the Air Force conventionally launched cruise missile, picking Lockheed Martin’s AUP-3 warhead instead. The AUP, developed by the Pentagon, was essentially a pointy piece of metal that used kinetic energy to punch through its target. It was significantly more effective than the current penetrating warhead that was chosen to convert nuclear cruise missiles to a conventional penetrating capability. The more sophisticated BROACH had a greater penetrating power thanks to its shaped cursor charge that on impact would bore a pilot hole for a 1,000-pound-or-more bomb to follow. Sources at the time said the British weapon was superior, but Boeing opted for the Lockheed approach — which was evidently the Air Force’s preferred national solution. As one official told me at the time, he’d be damned if the Air Force’s premier weapon was going to be tipped by a British warhead. Hans Mark, at the time the Pentagon’s director of defense research and development, thought the decision was ludicrous, and the BROACH was adopted for a version of the Joint Standoff Weapon.

Today, the outlook is somewhat rosier. America is buying quite a lot of kit from offshore suppliers. On the Joint Strike Fighter, the world’s leading cooperative program, partner nations are signing up for the production phase of the effort. That includes even Britain, despite Britain’s deep concerns about technology transfer. The outlook for Europe could prove particularly positive when you consider that after JSF, the Medium Extended Air Defense System and so many other cooperative processes, the focus will shift to homeland security; counterterrorism; networks; command, control, communications, computers, intelligence, surveillance and reconnaissance; and other technologies in which Europe has some great and highly marketable capabilities.

To this end, it depends on whether governments are willing to buy what is best and live with the industrial consequences, or continue to buy what their national suppliers have to sell and so try to save them from an inevitable doom. The trouble is that companies are, in one way or another, beholden to their national governments and the political processes that are more often governed by job-security concerns than military-capability ones. Countries and companies, like people, tend to cooperate only when they have to — a particular truism when it comes to defense programs and the national prestige associated with them.

The defense industry is very much the Hephaestus who forges the lightning bolts for the state’s Zeus. As with the gods in Greek mythology, governments’ attachments to national suppliers are very emotional and tied intimately to how nations view themselves. Britain and the U.S. may be the closest of nuclear-deterrent partners, sharing the Trident missile and the systems that go with it, but Britain tips these missiles with its own warheads, underscoring its dominance, or mastery, over the atomic genie.

This is also an industry of deep paradoxes. Rampant protectionism coexists with intricate globalization. Remember, the lumber for Lord Nelson’s ships came to Royal Navy dockyards from the Baltics. Such intricate trade even happened as the U.S. and Russia were at the height of the Cold War — whether in ball-bearing machines or strategic materials. The world is globalizing in every industry, and governments have to figure out what that means for defense.

The emotional element of the industry can best be characterized by the worldwide glut in small-arms manufacturing. A Greek expert once told me that nations don’t want to give up their bullet plants because they constitute the absolute last line of national defense. And if you think about it, he’s right. Once an enemy invades your territory, you can at least gun them down in the streets.

Governments exert enormous direct control over critical industries, even in the free market U.S. We don’t have shareholding demands, national stakes or golden shares, but we have a Committee on Foreign Investment in the U.S. and stringent merger review processes that can accomplish similar ends.

Intuitively, the reasons to cooperate are compelling. You get economies of scale by pooling orders to lower unit cost. You can avoid costs by not reinventing the wheel. You can spread development expenses across many partners. You can improve your interoperability through common equipment and doctrine. You can benefit from new thinking and technology sharing. However, an important ingredient in this complex brew is national suppliers that wield enormous influence over their national governments — some sentimental, some with the promise of future employment, and some directly by mobilizing powerful politicians to do their bidding.

Let’s assume for a minute that MBDA’s Meteor missile is the best air-to-air weapon ever to be made. Would the Pentagon buy Meteor over the objections of its national missile champion Raytheon? Unlikely. Rather, the Pentagon is more apt to issue a contract to develop a superior missile to ensure that its forces — and yes, its national monopoly supplier — remain competitive on global battlefields for future markets. Unless, hypothetically, the A400M became Europe’s new air lifter, not because it was better than the C-17 but because it created jobs at home as part of an industrial strategy to “Boeingize” Airbus and give it military work to offset a potential future cooling of commercial jet orders. Remember, Boeing merged with McDonnell Douglas to broaden its defense base to reduce its reliance on the cyclical commercial jet market.

A key issue that needs ironing out early in any cooperative effort is how to handle technology-related competitive issues among partner companies. If you’re a leading company that strikes a cooperative venture with a foreign firm, how do you protect those key technologies that could make that foreign firm a more potent future competitor? How can you be sure that the cooperation is being struck to pursue a given contract, and not as a mere ruse to juice you of either your technology or your key processes? One potential approach could be the “don’t ask, don’t tell” foundation of the CFM-56 engine deal. That venture, among the most successful in all of aerospace, is an alliance between France’s now Snecma and General Electric — a decades-long and lucrative commercial partnership in which neither company has shared any proprietary technologies or processes with the other. Each is willing to live with the situation where neither can build the engine without the other.

National interests

Obviously, governments support what they consider to be in their immediate national interest. To some, it’s about paying more for a given capability to protect national suppliers that are seen as critical to national security. I’d put the French in that category. Others, like Britain, contend that military procurement must be as open as possible to ensure the best capability at the most economic price. It’s a truly enlightened idea from the land of Adam Smith. That is not to say that Britain is a totally open market — given that the Defence Industrial Strategy has marked off areas that will remain the purview of British industry. But at least London has laid out some clear rules of the road. Other nations should follow suit to take the guesswork out of both cooperation and competition.

The U.S., too, appears to consider such cooperation in its interest, both in overseas products being bought or considered for purchase by the Pentagon or the sheer multitude of major cooperative development programs being advanced by the Defense Department — including JSF, MEADS, missile defense, each one of which link large groups of like-minded nations in high-tech ventures.

While many consider America a closed market, it has actually relied on foreign systems throughout its history. French cannon fought the British during the revolution and defended Fort McHenry two decades later. During World War I, America turned to its oldest ally yet again for its artillery, aircraft and tanks that eventually formed the center for a nascent tank corps. Britain also allowed U.S. firms to build both aircraft and aero engines under license, and early in the next world war supplied Washington with cutting-edge British technology on radar, sonar and the jet engine that gave America a critical edge in the conflict and the Cold War that followed. Over subsequent decades, America has embraced as its own Canberra bombers, Harrier jump jets, Hawk and Texan trainers, British howitzers, French phone systems such as RITA and helicopters like the Dolphin, and even propulsor technology from Britain that has made the more-than-somewhat chauvinistic American nuclear submarine force quieter than ever.

Years ago, defense analyst Loren Thompson quipped that the likelihood of an American president landing on the White House lawn in an EH101 was about as high as French president Jacques Chirac pulling up to the Elysee Palace in a Cadillac. I can’t speak to Chirac’s next car, but the next U.S. president in 2009 is going to be flying on a 101.

The story doesn’t end there. Eurocopter will furnish the Army with the next successor to its legendary Huey. Both the competitors in the Army-Air Force Joint Cargo Aircraft program for at least 70 aircraft are European — one Spanish and the other Italian.

And we can’t ignore the elephant in the room — the contract that could prove one of the biggest defense awards in history, to supply the U.S. Air Force with several hundred new aerial tankers. Boeing, the U.S. national champion, some would argue, is going against EADS, a Franco-German-Spanish construct, allied with Northrop Grumman, for the decades-long contract to replace the Air Force’s 500-plane-plus KC-135 fleet. If a decade ago you had said that the Air Force would even consider allowing Airbus to compete, much less giving it odds of beating Boeing, people would have deemed you to be completely out of your mind. I wonder whether France will be equally open when it comes to launching its own KC-135 replacement program.

European industry has also made inroads in other markets, notably naval systems, as Lockheed’s Littoral Combat Ship attests. Nearly half of the ship’s components will be sourced from overseas on a buy-what’s-best approach.

America’s interest in good products, combined with a willingness to admit new competitors to ranks thinned by furious consolidation may be why so many overseas firms are so eager to grow their U.S. presence — and so access to Pentagon coffers. Willie Sutton said it best. When asked why he robbed banks, Sutton replied, “Because that’s where the money is.”

Of Europe’s firms, BAE has proven to be the most successful, growing its U.S. operation as the nation’s No. 6 Pentagon contractor, with plans for further expansion. EADS, Finmeccanica, Thales have all pledged to follow suit. A multitude of overseas companies also do robust business supplying the Pentagon with mundane goods critical to its day-to-day operations, whether batteries or air filters.

Interestingly — for protectionists who charge that the U.S. can’t rely on its allies — France, Greece and other nations that loudly disagreed with America’s Iraq war continued supplying the Pentagon with the very articles needed to prosecute that campaign. France, had it wanted to, could have undermined the U.S. war effort by halting spare parts deliveries, which would have grounded the Air Force’s tanker fleet that is powered almost uniformly by the CFM-56 engine.

So there is reason for optimism here as long as you don’t set your expectations too high. It could be argued that the Pentagon has been willing to go with the buy-what’s-best approach because it has been spending so much money with its national firms that it can afford to throw some bones to foreign industry. In helicopters, Sikorsky has plenty of work on Black Hawk upgrades and new-build, not to mention S-92, CH-53X efforts. Bell is also busy and is a key V-22 partner as that program comes online. Boeing is racing to upgrade war-worn Apaches and Chinooks.

Will the European market, so long open to U.S. industry, finally start closing, given that EDA has harnessed some of the continent’s most brilliant technocrats, not to pay for a brave new cooperative future but to use the levers of power at its disposal to compel member states to buy from within the European Union? Conventional wisdom holds that dropping budgets combined with the need to field capable forces will drive greater cooperation. My fear, however, is that dropping budgets could force the opposite reaction — that governments will move to prop up weakening national suppliers by awarding them work. Such moves are both damaging to capability and merely forestall the inevitable demise of uncompetitive concerns. But that hasn’t stopped politicians from adopting similar measures in the past.

Will the U.S. or EU governments be willing to allow their national companies to strike trans-Atlantic mergers of true scale that could serve as true cooperative conduits, fostering even closer industrial collaboration? Such moves are about ceding control, a concept governments don’t easily embrace.

Europe, for its part, has a singularly important question that it must answer. Afghanistan is proving that some NATO nations don’t want their troops to be in the line of fire — yet they participate in a war zone, content to take part in a two-tier mission. Combat operations make militaries better. They identify shortcomings in thinking and equipment. But if you don’t have a willingness to fight, you’ve got to question the need for a capable military. And if you don’t need a capable military, then you certainly don’t need a capable defense industry. So what are the long-range industrial ramifications of an unwillingness to fight as part of a future NATO or EU mission? Will Europe someday be defended by a relatively tiny military, operating either under the NATO cross or, more likely, under the EU mantle, manned by member nations using pooled equipment for defensive purposes only in extremis. If so, what does that mean industrially?


Of the programs that have been launched over the past decade, the JSF is the best example of both the promise and pitfalls of cooperation. It’s an interoperable aircraft for the future that stands to revolutionize aerial and nodal warfare as a strike and intelligence, surveillance and reconnaissance asset. But getting so many moving parts and countervailing interests moving in the same direction is difficult, to put it mildly. Consider the challenges. Chief among them that some in the Pentagon regard the effort, said to be the largest defense program ever, as a gigantic piggy bank that can be raided once the fatty supplementals, on which the Pentagon has survived these many years, go away. Ensuring the JSF enters service will take constant vigilance on the part of present and future Pentagon leaders, given that two of the three U.S. services slated to use the new plane sometimes appear to be reluctant partners, at best. Some in the Air Force have made it perfectly clear that they would be happy to trade their JSFs for more F-22s. Some in the Navy would trade JSF for more F/A-18s, however shortsighted that may be. So that leaves the Marines to be America’s JSF stalwarts, but given the small scale of their order, it’s fallen to the current deputy defense secretary, Gordon England, to support the airplane. Still, you could stay up nights wondering what the future of the program is.

Then add eight governments, each with its own political, budgetary and industrial dynamics, and you’ve got the makings of a monumental headache. Over the past year, partners have postured to garner as much work as possible on the program. The maneuverings have been largely optical, but there have been a few genuine scares. Unanswered in all of the noise is how these partner nations, each bent on extracting as much industrial benefit as possible from the program, will in the future part with work that will be doubtless demanded by customers — whether they are Israeli, Korean or Polish.

National governments have every right to maintain the national capabilities that they deem important. But you don’t get something for nothing and shouldn’t expect that another government will help keep you in the game if you yourself don’t want to spend. That is the single biggest problem with international cooperation, at least from an American perspective. If you don’t invest in keeping your military capability’s cutting edge, then you shouldn’t be surprised if you don’t have the ability to do the things that you once took for granted when you used to make that investment.

So if you want to help cooperation, here are some novel steps you might consider. First, standardize requirements whenever possible and stop using them to keep buggy-whip makers alive. Despite decades of efforts to standardize weapons among allies — and NATO has performed heroically on this front — we need a new system of requirements within NATO that are as simple as possible. Let’s take a page from the commercial airline industry. In the new 787, Boeing is offering only one clipboard option for the pilot, down from 14 on the 747. The company reasons that you just don’t need as much choice when it comes to that particular option, which only raises costs.

Requirements have always been used as a shameless lever to arrive at predetermined outcomes. On the Air Force’s tanker, Airbus supporters contend that the Air Force’s interest in a smaller plane is a ploy to favor Boeing. For their part, service officials contend that they need smaller planes to be able to pack more of them on a given ramp in a forward, austere airfield while surging to support global missions. If the competition, however, is little more than theater, then let’s just skip it and save everyone time, cost and effort. If, however, the requirement is legitimate, then governments must do a better job of clearly explaining why what they want is so important, so there aren’t any questions or confusion.

Again, nations cooperate or adopt foreign equipment when no other domestic options exist, or prove inordinately costly. The process must be as painless as possible to ensure that cooperation is as prevalent as possible. If you have a product you want to sell to a foreign country, you need a domestic partner. At minimum, this partner will help in marketing. At most, industry will have to replicate an entire assembly line under its banner at considerable cost. And that has always been part of the price of doing business.

What about returning to the oldest form of trade — a pure barter? Fairness dictates that I identify the man who first suggested the notion — Marc Perrin de Brichambaut, who used to be director for strategic affairs at the French Ministry of Defense. It’s a great idea that can help surmount some of the political and financial problems associated with international cooperation by eliminating costly and redundant assembly lines for products. For example, if the French Navy wants E-2 radar planes, it would simply ask the Pentagon, which would order them from Northrop tailored to French needs, and then pay the tab. Once completed, the planes would be delivered to the French. Perhaps a standing committee composed of officials from allied nations could serve as a sort of a clearinghouse that would coordinate such orders, calculating their total value and then compiling account information to ensure that everything adds up properly at the end of the day. If the radar-plane deal was calculated to cost $1 billion, that’s how much credit America would have with France. So when the U.S. Army wants CAESAR truck-mounted howitzers, instead of reinventing that particular wheel or going through enormous expense to replicate the exact same thing here on a licensing fee, what would be done is the French would order the CAESARs from Nexter — which used to be Giat — and then ship them to the U.S., and then the committee would deduct that total value from a billion-dollar credit line. It’s an approach that would help keep factories, and the jobs that go with them, at home. Some say the government would view this as an offset, which by policy and law it can’t participate in. Maybe — but I would submit that the approach is important enough to consider.

Vago Muradian is the editor of Defense News. This article is adapted from the keynote speech at the Hudson Intitute’s Defense Coalition Conference on Dec. 6 in Washington, D.C.