Atlantic Council

Defense Industrialist

Yes, but there are hard ways and easy ways for an army to stand up new capabilities.

 

The question of coastal artillery was all over the trade press last week, starting with a speech by Defense Secretary Hagel at the AUSA meeting. Hagel noted that for a century after 1812, the US Army protected American ports with a long series of fortresses with heavy guns. The service could again today "broaden its role by leveraging its current suite of long-range precision-guided missiles, rockets, artillery and air defense systems.” Congressman Randy Forbes agreed, sending a letter on the subject to Army Chief of Staff General Ray Odierno. Commander Salamander disagreed, but unconvincingly, with a diatribe about fixed fortifications. For as James Holmes observed for The Diplomat, neither Forbes nor Hagel are looking to protect Hampton Roads.

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Jean Tirole’s award in economics reminds us that defense procurement is a deeply challenging business problem.

 

For me, it’s a great week when a procurement theorist wins a Nobel Prize. Fairly, Jean Tirole of the University of Toulouse won the 2014 Prize in Economic Sciences mostly for his extensive and wide-ranging work in regulatory affairs. He is, for that matter, the first to win in that field since George Stigler of the University of Chicago, way back in 1982. But his work on organizational purchasing as a principle-agent problem is most revealing for anyone interested in defense. (His 1993 book from the MIT Press with Jean-Jacques Laffront, A Theory of Incentives in Regulation and Procurement, is a good place to start.) On Monday, Tyler Cowen of George Mason University wrote about Tirole’s work on the essential incompleteness of contracts, and thus, their inherent re-negotiability:

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Major Mariam al Mansouri’s exploits are an unintended benefit of a looser arms export regime.

 

Arms sales bear a bad reputation for mortgaging global political sensibilities to domestic economic interests. But as a diplomat in Washington reminded me over dinner last week, to have influence, one must be willing to talk. As sociologist Ori Swed of the University of Texas once speculated to me, French and American arms sales to the Tunisian and Egyptian Armies provided those military organizations a more Western sense of political-military relations. Later, this led to at least some restraint during the Arab Spring. The contrast with the Soviet-trained Syrian and Libyan Armies remains remarkable.

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Big defense contractors’ reactions to start-ups may be more proactive than we suppose.

 

In a speech at the Air Force Association (AFA) meeting in Maryland last month, Chris Chadwick, CEO of Boeing Defense & Space, spoke of his company’s enthusiasm for incorporating innovative ideas into old products. In effect, he endorsed—as a CEO from Boeing just might—Admiral Jonathan Greenert’s enthusiasm for payloads-over-platforms. What Chadwick added was a nuanced definition of innovation. “Rather than just relying on innovation alone,” he asked, "what if we had another way to get new value out of existing platforms? What if we could bring new leaps in capability, not just by spending more, but by thinking differently?”

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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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