Atlantic Council

Defense Industrialist

Russian threats and US economizing may be driving the business north and east.

 

Earlier this month, investors’ website the Motley Fool called the recently-announced alliance between France’s Nexter and Germany’s KMW the possible “birth of a European tank-building superpower” and “General Dynamics’ new challenger”. All the same, in a recent essay for the Lexington Institute, Dan Gouré argues that General Dynamics Land Systems (GDLS) and BAE Systems Land & Armaments (L&A) will “remain at the forefront of the armored vehicle market” for at least the next few years. His concluding sentence was unmistakable: “while this is a difficult time for vehicle makers everywhere, the best of breed will survive and eventually prosper. Both General Dynamics and BAE Systems are certain to be among the winners.” Will they? And in which countries? And will that matter, on either side of the Atlantic?

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Rosa DeLauro’s HR 5581 is a very bad bill indeed.

 

Last week, the Wall Street Journal carried a long story—"German Firms Go on U.S. Buying Spree”—about the $70 billion they have spent this year acquiring businesses in the United States. That figure is second only to Canadian activity–another $77 billion so far—and indicates just how economies on both sides of the Atlantic are drawing closer. The benefits are clear. When the acquisitions are for stock, most of those shares flow to now-American owners of foreign companies. When the acquisitions are for cash, most of of that money flows straight to Americans, who can reinvest it in what they will. Ideas flow back-and-forth across borders, and in the business of defense, that cross-pollination can produce innovative equipment that no single country could have produced on its own.

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Different displays of similar vehicles reveal the structural heterogeneity of the defense industry.

 

At this week’s Modern Day Marine show at Quantico, the three companies vying for the US Army and Marine Corps’ Joint Light Tactical Vehicle (JLTV) contract brought splashy displays. Walking the floor and reading the brochures, it was easy to see how all three prospective JLTVs are aimed at the same requirement. All three have four wheels, four-wheel-drive, four seats, and comparable armor for warding off bullets, mines, and rocket grenades. But that similarity belies an unseen asymmetry: the lines and engineering details of the three JLTVs have much more in common than do the three companies offering them. In turn, that heterogeneity shows the challenge of setting strategy in the industry, both for the firms and the customers in government.

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The GAO’s review of the 2005 BRAC sharply indicts consolidation for consolidation’s sake.

 

Almost everywhere but in Congress—and in the towns around the gates of garrisons—interest in another Base Realignment and Closure (BRAC) round remains high. Former Defense Secretary Leon Panetta wanted a round in 2013. In his valedictory interview this year with Defense News, Pentagon Comptroller Robert Hale insisted that the right time for another BRAC was now. The Army and the Air Force definitely agree. If the Navy isn’t completely convinced, it is only because it so thoroughly consolidated its facilities in the 1990s. For as Breaking Defense observed in June, almost all objective analysts agree that another round of base closures is essential for reducing the Defense Department’s back-office costs. 

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A Better Business Model for Transnational Armaments Cooperation

The business model of transnational cooperation in armaments development and production is not working. Though founded on the promise of achieving economies of scale, especially through long production runs, the political allocation of work share tends to undermine this proposition. In its place, we propose an alternative model organized around the promise of achieving innovation in development among a small core of customers who share a compelling military-technical challenge. Because the resulting business model of transnational cooperation is a more coherent expression of how firms can ally across borders to make money and sustain profitability, it is also more likely to realize material solutions and options that show a fair return on defense ministries’ investments in these ventures.

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Sometimes it’s what you spend, and sometimes it’s where and how you spend it.

 

With a few announcements of new spending around the NATO Summit, the alliance is a little closer, but only a little, to its “2-20” goals: that every member state will devote 2 percent of its GDP to its military, and 20 percent of that spending to investment. But why those figures? That is, why spend less or more, and on troops or equipment? To know whether these 2-20 numbers are important, we should ask whether there are theoretical bases for demanding them—or any thresholds, for that matter.

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Congress should be removing barriers to innovation, not erecting barriers to competition.

 

Today in Wales, the 2014 NATO Summit gets underway, dominated by discussions of wars in Ukraine, Iraq, and Syria. But this afternoon back in Virginia, as Politico Morning Defense reports, several congressmen are meeting with officials at the Pentagon to talk about something more important to them: running shoes. Led by Representative Niki Tsongas of Massachusetts, they’ll be complaining that the Defense Department shouldn’t be allowing troops to choose their own athletic shoes on a government allowance, but should instead be requiring them to wear shoes made in the United States. 

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Scotland will free-ride in the Atlantic without sustained investment, but Catalonian maritime specialization would be welcome in the Mediterranean.

On 18 September, Scotland votes on the question of independence from the United Kingdom, and the polling strongly suggests a vote of no. On 9 November, Catalonia could be voting on the same issue vis-à-vis Spain, but the polling slightly suggests a yes—if the Spanish Constitutional Court allows the vote to take place. NATO members should treat neither case lightly, but the independence of Catalonia would pose fewer military problems for the alliance than that of Scotland.

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It’s much easier to kill an arms exporting franchise than to build one.


The armaments export policies of Germany and Japan seem to be crossing paths this month. His recent approval of the export of a whole tank factory to Algeria notwithstanding, German Economy Minister Sigmar Gabriel is said to have been piling up license requests on his desk, content to do nothing, save to tell German arms makers to find other work. At the same time, Japanese Prime Minister Abe has declared, at least in principal, the entire Japanese arms industry open for business globally. This could produce submarines for Australia, and even a new fighter jet.

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The MRAP experience still shows how military requirements need to hew to the state of the art in attainable technologies.

 

Early this month, the US Army’s Research, Development and Engineering Command held a conference at the Aberdeen Proving Grounds in Maryland to discuss ways to reduce the weight of armored vehicles by 40 percent, but without reducing protection. The story is worth reading, as it highlights the Army's angst, dating to at least 1999, of missing the next fight that the Navy and the  Air Force may charge into. The trouble, of course, is that heavy armor takes too long to deploy, and dispatching paratroopers without backup has historically induced disasters. So, Colonel Chris Cross, director of the science & technology division at the Army’s Capabilities Integration Center, commented for the press release that he’s working on this project because

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