Atlantic Council

Defense Industrialist

 

The defense industry may not be headed for another merger wave, but something much more interesting.

 

Bankers, lawyers, and other business advisors have been waiting for years for that coming wave of mergers amongst military contractors. As one consultant told me recently, his firm was founded on the notion that some post-post-Cold War consolidation would eventually make the partners rich. Of late, however, most of what they’ve been seeing is what David Benoit of the Wall Street Journal called (18 February) the "New Push to Throw Assets Overboard”. Sure, the WSJ headlined this week that "Engility, TASC to Merge in $1.1 Billion All-Stock Deal” (28 October). But the two firms only got to that point because Northrop Grumman unloaded TASC back in 2009. The larger enterprise was seeking to avoid the organizational conflict-of-interest inherent in owning a subsidiary that advised the government on how to deal with the parent company. Back in 2001, Northrop’s management thought buying TASC was a great idea. So what accounts for these shifting sensibilities?

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The CDC and the DoD wisely funded an air transport technology for Ebola patients—just not enough of it.

 

In Tuesday’s Washington Post, Josh Hicks observes that Phoenix Air, a jet-charter service based in Georgia, is the only airline flying Ebola patients from West Africa to hospitals in Europe and North America. Help, however, is on the way. The US Air Force is now starting a process for equipping some of its C-17 jet and C-130 turboprop transports with flying isolation wards, and expects to have the first aircraft available by January. Hicks observes that whatever the timeline, this will be a great improvement, for "the military transports would have greater capacity. Phoenix Air can fly only one infected individual at a time, whereas the military’s isolation units will hold up to twelve patients."
 
On the one hand, Phoenix, the Centers for Disease Control, and the Defense Department should be commended for working together back in 2011 to create this capability, just in case an Ebola outbreak managed to infect some American aid workers. Atlanta provided the scientific expertise, and the Pentagon provided advice on how to manufacture the special materials needed. But the CDC and the DoD might reasonably be asked what sort of capacity they had in mind when they only funded Phoenix to create three single-patient wards.
 
Quantity, goes the line sometimes attributed to Stalin, can have a quality all its own. "Two atomic bombs,” whatever John Foster Dulles’ offer to Georges Bidault, might not have saved Dien Bien Phu. Four decent battalions of Ukrainian troops may or may not have mattered in Crimea. Six German Eurofighters in the Baltics are intended to convince Vladimir Putin that NATO is Serious. But three flying hospital beds would hardly contain a pandemic.
 
Perhaps we should call this effort a pilot program. Probably we should not unduly criticize the two agencies, which have many other priorities to fund. We could just be thankful that someone thought of this at all. And yet, that small number three is a reminder that there is a difference, as today’s popular planning construct holds, between capability and capacity. Being able to do something at all is not always being able to do enough.
 
James Hasík is a senior fellow at the Brent Scowcroft Center on International Security.

 

In defense acquisitions, privileges reserved for urgent needs should be extended to a broader set of systems.

 

A sense of urgency can bring out the best in us; the US Defense Department's acquisitions community is no exception. Once the decision was made, it took just 27 months to develop and deploy fully today’s fleet of Mine-Resistant Ambush Protected vehicles (MRAPs). The solutions out of the Joint Improvised Explosive Device Defeat Organization (JIEDDO) have been known to make it to the battlefield in as little as 3-4 months. The PackBot— a robot system that assisted soldiers in eliminating irregular threats from the caves of Afghanistan—took less than 30 days to get to the warfighter’s side.

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Unmanned surface vessels could supplement navies in peace and war.

 

General Sverker Göransson, the Swedish chief of defense, is rather upset that a presumably Russian submarine can waltz into, and then out of, the Stockholm archipelago unchallenged. Before we complain about the previous government’s paying-off the Navy’s sub-hunting CH-46 helicopters before securing their NH-90 replacements, we should acknowledge the challenge of the task. The waters off the Swedish capital have some of the most complex hydrography for sub-hunting in the world. Even with its fleet of six corvettes pinging away for days with sonars, there was only so much that could be done. It’s not as though Swedish coastal waters are continuously patrolled.

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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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