Defense Industrialist

In the long run, military requirements and funding may matter more than trade disputes.

In a 574-page report last week, the World Trade Organization ruled that the European Union and several of its member states had failed to adjust their behavior on their subsidies to Airbus, after its last mammoth ruling on their subsidies to Airbus. Perhaps it’s not shocking that “Airbus scoffs, Boeing crows” was the headline from the Seattle Times. While the WTO didn’t rule exclusively in favor of the plaintiff, “destroyed US jobs, stole market share” was the headline in Forbes from publicist Loren Thompson. But no matter. As the Wall Street Journal more sagely observed, “the battle appears far from over,” for the WTO is expected to release a similar finding against the United States, perhaps early next year. Whatever happens with this endless meddling in the markets, though, the military business of both Airbus and Boeing may depend much more on how the US Air Force thinks about its future requirements, and whether it can actually fund them.

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Restricting US military aid may affect more than Israeli industry and the IDF.

As has been widely reported, the United States and Israeli governments have come to a new ten-year understanding of how the former will subsidize the latter's military spending. The new amount that the Obama Administration promises to submit annually to the US Congress will be $3.8 billion, up from $3.0 billion in the previous agreement. After inflation, this is actually not much of an increase. More notably, though, the deal phases out by 2019 an earlier clause that has allowed the Israeli government to spend some of that money in Israel; most other American military assistance worldwide mandates buying American. The first-order impact on the Israeli arms industry will be a notable drop in revenues. The second-order effects of substitution will eventually change the equipage of the Israeli Defense Forces (IDF). What’s less appreciated is how there may also be an adverse effect on American military innovation too.

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Lockheed Martin’s recent quality problem reminds us how challenging massively multinational development and production programs can be.

Almost a squadron’s worth of Joint Strike Fighters, Courtney Albon wrote for Inside Defense, “may not fly for months.” As Colin Clark wrote for Breaking Defense, the US Air Force and the Royal Norwegian Air Force have suspended flight operations for fifteen F-35As—thirteen American and two Norwegian—after finding “peeling and crumbling insulation in avionics cooling lines inside the fuel tanks.” As Lara Seligman of Aerospace Daily & Defense Report wrote, Lieutenant General Chris Bogdan, the program director, explained that the residue could clog the filter between the wing tank and fuselage tank. That’s annoying, if not necessarily flight-ending. Defense News quoted Lockheed Martin’s spokesman Mike Rein as saying that the problem was first noted this summer “during depot maintenance of an F-35A being prepared for initial operational capability.” Tracing the problem indicated that it may also affect another 42 aircraft currently on the production line. So how big an issue is this really? And just what else does it say about the program?

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Unquestionably, the Air Force needs to retain experienced operators if the service hopes to remain the most powerful Air Force on the planet.  The question of how to best do this surfaces in many areas.  How to retain more women and minorities?  How to retain more fighter pilots?  Earlier this week, Defense Industrialist editor James Hasik asked the same regarding the Air Force’s remotely-piloted aircraft (RPA) pilot force.  He penned an article decrying the Air Force’s three-pronged approach of pay, pool, and potential.

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The economics of intellectual property rights in weapon systems make for challenging managerial problems, and mandate some detailed legal work.

Who owns the intellectual property rights to weapon systems? Who should? In a notable essay in Foreign Affairs on “The End of the Military Industrial Complex,” former Deputy Defense Secretary Bill Lynn once wrote of how “a number of software developers have refused defense work because they fear they would have to relinquish the intellectual property rights to whatever they produce.” The fix was straightforward, he asserted: “the Pentagon can attract companies such as Google [in part] by loosening its stringent intellectual property rules”. This week, Lieutenant General Chris Bogdan, head of the Joint Strike Fighter program, says that he is “playing catch-up now every which way I turn when it comes to intellectual property rights”. On Defense-Aerospace.com, Giovanni de Briganti predictably called this yet another reason never to buy F-35s. So what’s the real story? Unfortunately for anyone who would like to pillory either government or industry, the answer is not so simple.

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With enthusiastic recruits, from all corners, and with a lot of cash. 

In the New York Times this past Tuesday, Michael Schmidt wrote of how the the US Air Force, “Running Low on Drone Pilots,” is turning to contractors to reconnoitre battlefields. Many of these are “former drone or fighter pilots who are making double or triple their military salaries.” Speaking to the Times, Fred Roggero, a retired Air Force general who’s now a drone consultant, thinks that the military will continue to train, and pilots will continue to exit. Thus, the “critical manning shortfalls” about which the Government Accountability Office (GAO) complained in its recent report may not get better fast. Indeed, the problem could get worse: plans for more, cheaper drones will require yet more pilots, unless the drones can be taught to operate more autonomously—and that bears along its own problems. So what should work cheaper than not? And what would work better than not?

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Do the compensation schemes for top management teams in the defense industry incentivize the right goals?

Federal contracts lawyer Jim McAleese recently covered the briefing by Phebe Novakovic, CEO of General Dynamics, at the Jefferies Investors Conference on 9 August. His first point: “General Dynamics’ senior team is paid based on ‘earnings and cash,’ which fund robust share repurchases.” That’s clearly a compensation strategy, and as I wrote back in 2013, GD is using all that cash for “something with an incentive behind it.” But more broadly, do the compensation schemes for top management teams in the defense industry incentivize goals that its customers should favor too?

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If software is making the world indecipherable, how can the military manage its development?

Psibernetix, it seems, has built an artificial intelligence smarter than a fighter pilot. As I mentioned here at the beginning of the month, the company hatched at the University of Cincinnati has developed software for a Raspberry Pi machine that has defeated at least one retired USAF fighter pilot in simulated combat. Yes, there’s something inherently scary about that. But before the RAAF and every other air force get too excited about drones that could turn on us, we might consider what “inelegant messes” dwell at the heart of the software suites that enable their capabilities. Samuel Arbesman, scientist-in-residence at Lux Capital and a senior fellow at the University of Colorado, argues in his new book Overcomplicated: Technology at the Limits of Comprehension (Current, 2016) that engineers’ endlessly adding to software without understanding the underlying code is “making the world indecipherable.” The question is what can be done about it.

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Defense innovation requires the impulse of investors, not consumers.

In what may be his last act to shape defense authorizations, the chairman of the Senate Armed Services Committee (SASC) is pulling out all the stops to remake the Pentagon. Senator John McCain (R-Ariz.) is advancing a National Defense Authorization Act for 2017 that would make changes to the Department of Defense more sweeping than any since the 1986 Goldwater-Nichols Act, which imposed “joint-ness” across the command structure of the US military and concentrated authority over major defense acquisition programs in the Office of the Secretary of Defense.

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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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