Defense Industrialist

The Pentagon’s billion-dollar cash advance to Lockheed Martin is just a cost of doing business in a trillion-dollar program.

Lockheed Martin’s billion-dollar cash advance is by now big news—or not so big news against the backdrop of a bigger program. As Defense News and others reported over a week ago, the Pentagon recently sent its contractor the money it needed to keep the Joint Strike Fighter production line running—just without a signed contract and in advance of final terms and pricing. On Defense-Aerospace, Giovanni de Briganti was scandalized that the buyer would accede so quickly to financing its supplier, “as if managing contractor cash flow was a governmental responsibility.” After all, in 2015, Lockheed generated cash from operations of $1.5 billion, and this year the company admits that the reimbursed billion will mostly maintain its hefty dividends to shareholders. So why is this not so scandalous? The answer is that industry and government are joined inextricably in the economic enterprises of defense, so the long-term consequences of opportunistic behavior need repeated remediation.

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The ongoing sagas of the KC-46 and A400M are a reminder of how military-industrial hubris is bad for both business and government.

On Breaking Defense this morning, Colin Clark notes that Boeing has just won “$2.8 billion for KC-46 tanker low rate production”. That’s good news. As multiple reporters have written this year, the company has had to overcome one delay after another, with problems “more complex than realized,” and particularly with the aircraft’s refueling boom. Clark summarizes his article with a pair of questions and answers: “Will the aircraft make money for Boeing? Almost certainly. Will Boeing be able to produce it at the rate the Air Force expects, and will it perform as well as the service hopes? We’ll see.” I think, however, that he might have that backwards. For Boeing, like rival Airbus, will make its aircraft work regardless of how much money is lost along the way. At some point, though, it should stop that.

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The Pentagon’s “Superior Supplier” rankings need an overhaul

For Inside Defense, Jason Sherman wrote three articles at the beginning of the month about the “Superior Supplier” rankings at the Army, Navy, and Air Force Departments. The assessments are undertaken “on a contract-by-contract basis” by individuals acquiring the actual goods and services, and thus “reflect customer experience with a given contractor”. All such reports are aggregated into an overall assessment. What’s remarkable is the degree of churn in those rankings. To wit, the headlines:

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Whatever administration takes office, the US needs to better match its procurement plans to its operational strategies.

Writing this week for Chatham House, Julianne Smith, Rachel Rizzo and Adam Twardowski find that one military topic on which Donald Trump may offer views significantly differing from those of the other presidential candidates is procurement. In their "US Election Note: Defence Policy After 2016,” they observe that Trump wants stronger armed forces, but not obviously more money. In support, they cite Matthew Gault’s essay for Reuters on how "Donald Trump is right about defense spending.” Therein, he concludes that “it could take a populist strongman like Trump to deliver the harsh truth: when it comes to the military, the United States can do so much more with so much less.” What might this mean specifically? Trump has mostly complained about a perceived cost-for-quality gap in the Joint Strike Fighter and Littoral Combat Ship programs. But what if Trump’s ideas were broader? A colleague in Canada recently argued to me that The Donald’s plans could be akin to Lord Fisher’s intentions for remaking the Royal Navy over a century ago. If he truly brings a businessman’s instinct to capital investment, he may recoil at overfunding forces that don’t match the best strategies.

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There may be more to Lockheed’s Made-in-India deal than first meets the eye.

The US Air Force and those of other NATO countries are phasing out F-16s much sooner than anticipated. This implies that performance of F-35s has met expectations, and that there are no obvious show-stoppers to ramping up production as fast as budgets allow. The F-15, F-16, and F/A-18 production lines are all slated to close by 2020. But there is more to this deal, as it has the potential to alter the balance of power in South and Southeast Asia over the next decade.

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Early discussions between the military and industry are essential for finding financially sustainable ways of war.

It’s a pretty big mess when the service secretary hasn’t heard about the latest procurement programs—which means that they’re maybe not really procurement programs. They’re at best, as Deborah James recently said with that awkward Washingtonian word, “pre-decisional”. As she further argues, it’s “not at all clear” where the Air Force would find the money in its $166 billion budget request for 2017 to pay for some dedicated replacements for its fleet of A-10C attack jets. Deliberations, she noted to Defense News this past week, are still underway. All the same, finding some money today for some easier-operating aircraft will be important for cutting costs tomorrow, and early discussions with industry are important for finding the answers.

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The Polish Defense Minister’s interest in a trilateral development program is sound in many dimensions.

For Defense News today, Aaron Mehta, Pierre Tran and Jaroslaw Adamowski report how the Polish Army is edging closer to getting new tanks. During an interview back on 22 July, Polish Defense Minister Antoni Macierewicz told the reporters that his ministry was keen on closer military-industrial ties with other European countries. Specifically, his people were “talking about producing and manufacturing a new tank in cooperation with Germany and with France as another example of this cooperation.” Back in February, Deputy Defense Minister Bartosz Kownacki similarly told Defense News about a bilateral deal with the Czech Republic to develop and build new armored troop carriers. This latest decision may additionally disappointing to those who wanted a wholly Polish armored vehicle, but it’s a sensible and manageable stratagem for the important task of recapitalizing the Polish Army’s fleet.

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Historical perspective should inform the aims of the Pentagon’s Third Offset strategy. 

RAND has just released a public version of its study War with China: Thinking Through the Unthinkable (hat-tip to Council member Byron Callan for bringing that to my attention). For the Army, which sponsored and took in the report last year, authors David Gompert, Astrid Cevallos, and Cristina Garafola recommend sending mobile land-based missiles and more for air defenses to the western Pacific. Having argued for much the same, I am sympathetic. More broadly, they recommend “a purposeful long-term program to substitute more-survivable systems, at least for this region.” [p. 70] Specifically, from the Navy and Air Force, they want more missiles, submarines, drones, cyber-things, and anti-satellite weapons. But theirs is a highly conceptual and even breezy argument. Do they mean survivable, or just expendable? And as Andrew Davies and Malcolm Davis of the Australian Strategic Policy Institute recently asked about future fighting drones, are these three researchers advocating technological concepts altogether too soon?

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Several large contractors’ quarterly results may indicate a state change in their treatment of investable cash.

For about fifteen years now, defense contractors have been reliably generating piles of cash. What to do with all that money? Assuredly, as I wrote in 2013, something with an incentive behind it—and that hasn’t meant investment. Back then, defense contractors had already become targets of public opprobrium for plowing much, most, or even all of their free cash flow into share repurchases. Three years on, that long-standing condition may be passing.

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The USAF's plans for new close support aircraft show an unusual willingness to move out quickly.

Earlier this week, the Atlantic Council and other institutions around Washington were briefed on how the Air Force plans a two-phased approach to the recapitalization of its close air support (CAS) fleet. In the next two years, the USAF intends to procure an off-the-shelf observation-and-attack aircraft, deemed the "OA-X," for flying against lesser threats. Very likely, Air Force officials noted to us, this means either A-29 Super Tucanos from Embraer, or AT-6 Texan IIs from Beechcraft. In the next five years or so, for flying against somewhat stronger threats, the USAF intends to buy another aircraft, the "A-X2", possibly developed fresh, and possibly derived from an existing subsonic military jet. Plenty of options come to mind for the latter fleet; the Italian firm Leonardo was clearly thinking this way when it began designing its latest Aeromacchi trainer jet—pitched for the USAF's upcoming T-X competition—with modest ground attack capabilities available from flipping a switch.

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