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.
Oshkosh brought its Light Combat Tactical All-Terrain Vehicle, or L-ATV, clearly named to evoke the success of its 9,000-vehicle M-ATV (MRAP All-Terrain Vehicle) program. The vehicle on display, however, featured tinted windows, locked doors, and a shrouded suspension. (I asked for a peak; they wouldn’t show me.) The company has put a lot of stock in its TAK-4 suspension over the past decade, and this latest TAK-4i version is said to be improved. The secrecy just indicates the seriousness with which it’s treating the competition. Oshkosh is doing fine financially; the challenging days of 2008 and its low-ball winning bid in the Family of Medium Tactical Vehicles (FMTV) re-compeition are well in the past. In bidding, it too would presumably like to avoid a repeat of that experience, and this time make money. In any case, the JLTV isn’t a must-win, for the company isn’t just a defense contractor: selling trucks to military forces amounts to only about 40 percent of revenues today.
Lockheed Martin did display an armored vehicle—an 8×8 Armored Modular Vehicle (AMV), built by Finland’s Patria, and on loan from the Croatian Army. That vehicle is aimed at the probably forthcoming Marine Personnel Carrier competition (BAE Systems similarly brought its modification of the 8×8 SuperAv from Italy’s Iveco). But against the JLTV requirement, Lockheed brought nothing for show-and-tell. The company does have an entry, designed in cooperation with the now-shuttered division of BAE in Sealy, Texas. Lockheed generally doesn’t build trucks, much less in high volumes, so it has generally been considered the dark horse of the competition. But as one observer at the show warned me, Lockheed has deep pockets: buying the business in JLTV, as Oshkosh did with FMTV, would hardly be material to results.
How will the bidding unfold? AM General’s owners may have an agency problem: while they’d rather sell a shell of a company than buy into profitless business, their managers have incentive to bid as low as they can, just to preserve their jobs. If AM General doesn’t win JLTV, the factory will probably close, leaving behind a slowly unwinding parts business, and a fundamentally altered industry structure. The government, of course, has no problem accepting money-losing bids, as long as they don’t threaten the financial stability of the bidders; it’s actually better they exit the market before selling than after. For its part, Oshkosh shouldn’t low-ball, and needn’t, for it’s not leaving the business anytime soon. In any case, the company proved sufficiently efficient in the M-ATV program to bid low and make money. Finally, Lockheed could turn its back on trucks, and years from now, potential customers would hardly remember. On the other hand, a win by Lockheed would increase the number of competitors in the business at a time when consolidation has been widely presumed inevitable.
All this reminds us that defense is not a collection of homogenous economic entities. When competing for contracts, it’s obvious that understanding the details of the other companies is essential, because the structure of the industry comprises firms with quite different objectives, systems, and strategies. The details are also essential to assessing the long-term impact of changes in that structure. In particular, the government, which is both customer and regulator, cannot treat the problem as an abstraction, whether in evaluating mergers, writing procurement policy, or just managing its supply chain. Attachment to individual firms is sometimes taken too far, even if a hand on the scale is sometimes difficult to affect within procurement regulation and law. But even if source-selection authorities ignore such concerns, their decisions should anticipate the profound changes that generational contract awards invariably precipitate. With JLTV, someone will likely either exit or enter the market, and that will mean a great deal the next time around.
James Hasik is a non-resident senior fellow at the Brent Scowcroft Center on International Security.