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James D. Taiclet,
President, Chairman, and Chief Executive Officer, Lockheed Martin Corporation
National Security and Military Correspondent, NBC News
Paula J. Dobriansky
Vice Chair, Scowcroft Center for Strategy and Security, Atlantic Council; Senior Fellow, Future of Diplomacy Project, Harvard University Belfer Center for Science & International Affairs; Former Under Secretary of State for Global Affairs, US Department of State
PAULA J. DOBRIANSKY: Good afternoon. I’m Paula Dobriansky, a board director at the Atlantic Council and also vice chair of the Scowcroft Center for Strategy and Security.
It is indeed my pleasure to welcome you to our inaugural Forward Defense Forum, generously supported by Lockheed Martin, on understanding the challenges of US and allied defense innovation. The new Forward Defense Forum is designed for defense visionaries to put forth novel ideas for how the United States, its allies and partners can adapt, innovate, and win on the future battlefield. Built for creative thinking, this interactive public forum provides a space for the national security community to discuss issues key to the future of US and allied security.
Today’s discussion features Lockheed Martin Chairman, President, and Chief Executive Officer James Taiclet. Thank you very much, all of you, for joining us, and we look forward to hearing Mr. Taiclet’s insights over the next hour.
Here at the Atlantic Council, the Scowcroft Center for Strategy and Security works to develop sustainable nonpartisan strategies to address the most important security challenges facing the United States and its allies and partners. We seek to honor General Brent Scowcroft’s legacy of service and embody his ethos of nonpartisan commitment to the cause of security, support for US leadership in cooperation with our allies, partners, and also dedication to the mentorship of the next generation of leaders.
Now, consistent with that mission, the Center’s Forward Defense practice is designed to shape the debate around the greatest military and defense challenges confronting the United States and its allies, and create forward-looking assessments of the trends, technologies, and concepts that will define the future of warfare. That future is becoming more complex. The onset of advanced technologies, like artificial intelligence, the rise of competitors like China, and the militarization of new domains like space and cyberspace are all challenging the traditional US way of war.
Russia’s unprovoked invasion of Ukraine, coupled with China’s continued coercion of Taiwan, tests the viability of US deterrence and defense in the near term. In response to a changing security landscape, the United States, its allies, and partners must constantly learn and adapt. Otherwise, we are at risk of losing our military edge in the face of global challenges. To deter and defeat aggression, defense planners must urgently develop novel operational concepts to link, combine, and employ new and existing military capabilities.
Forward Defense’s newest project on twenty-first century security, in partnership with Lockheed Martin, gets at exactly these issues, exploring how the resolution of operational military problems can be translated into enhanced deterrence. As we learn interim lessons from the unfolding war, and await the Department of Defense’s National Defense Strategy, this event will explore how the Department of Defense, alongside its allies and industry partners, can update its capabilities to maintain its military advantage.
Now, we couldn’t be more pleased to welcome our guest today. As the leading executive at Lockheed Martin, the US government’s largest industry partner, Jim Taiclet has a unique perspective on the challenges and opportunities facing US and allied defense innovation. Prior to joining Lockheed Martin Jim led the American Tower Corporation, the fourth largest listed US telecommunications company. Under his leadership the company grew from a two billion dollar to a 100 billion dollar enterprise, becoming the only truly global player in its industry. Jim has also held leadership roles across the air and defense industry, including at AlliedSignal and Pratt & Whitney. He began his career as a US Air Force officer and pilot. The chairman has worked across military, defense industry, and telecommunications environments, and he has, consequently, a visionary view of twenty-first-century security as encompassing traditional and emerging domains and theaters of warfare, the entire competition continuum, and all instruments of national power.
Mr. Chairman—Jim, if I may say—I’m looking very much forward to learning from your perspective today.
Moderating this conversation is Courtney Kube, who serves as the national security and military correspondent at NBC News. She has reported from US military bases across the globe, embedding with troops across all branches of the military and traveling alongside secretaries of Defense, secretaries of State, vice presidents, and other senior US officials.
Now, before I turn it over to Courtney, I’d like to remind everyone that this event is public and it’s on the record. We encourage our online audience to direct questions to Jim using the Q&A tab at the bottom of your screen. Now, be sure to identify yourself and your affiliation in your questions and we will collect them throughout the event and Courtney will pose some of them to our guest. We also encourage our online audience to join the conversation on Twitter by following at @ACScowcroft and using the hashtag #ForwardDefense.
Thank you again, all, for joining The Atlantic Council for what I know is going to be not just a captivating but stimulating conversation.
Courtney, without further ado, over to you, and welcome.
COURTNEY KUBE: Thank you, Madam Ambassador. And I just want to reinforce that we will be taking questions, and I know that the audience for these kinds of Atlantic Council events have amazing questions; I’ve watched a number of them myself, so I do promise that we will take some a little bit later in the hour.
But, pleasure to meet you, Jim. Thank you for being here. I’m looking forward to our discussion.
I want to start with something that President Biden announced yesterday, that he is going to Troy, Alabama, to a Lockheed Martin facility where Javelins are made. How did this visit come about? Did Lockheed invite him? Did the White House reach out to you? Why is he going there?
JAMES D. TAICLET: Well, the White House reached out to our team and planned for the visit, and our government affairs group worked closely with them to get the president down to meet the workforce that actually produces these deterrence-building and ultimately lifesaving missiles. What I’ve said to my team is, you know, every Javelin that you push out of the factory could be resulting in the saving of many, many lives because it’s one less tank that the Russians can use its gun to fire at an apartment block or train station or hospital. And so we’re really pleased and proud that the president’s going to come and meet our workforce and see how we build these products. And they’re very proud people, I can tell you; many of them are ex-military themselves. About 20 percent of our employees across the entire company—that’s about 23,000 of them—are veterans themselves, so we’re really pleased that the president’s going to show his appreciation to the workforce.
COURTNEY KUBE: Have you gotten any sense from the Ukrainian military or the US military about how the Javelins are performing in Ukraine? I mean, any numbers about how many have been successful or how many Russian tanks they may have taken out?
JAMES D. TAICLET: So we don’t have the figures as far as probabilities and performance rates, that I can share, but the vignettes and the stories coming out of Ukraine, as recently as yesterday, I think, in the Wall Street Journal, provide testimonials of people that have actually used these weapons in defense of their country and they’re basically saying it’s a game-changing capability that they have now because, without that type of technology, they would have been themselves prone to being attacked before they could actually get within range of what missiles they might have had or other weapons they might have had. So this is helping to save, you know—and it will be in the US I hope not someday—but soldiers, sailors, and airmen in Ukraine themselves, and that helps them protect the people behind them. So it’s been a very effective system and they’re asking for more, obviously.
And what our goal is going to be down at Troy, Alabama, and other locations where we make similar defensive products is going to be to expand the production capacity of those sites because there are two things going on. One is the stockpiles of the US Army, and some of our allied forces around the world who are providing their stocks to Ukraine are then diminishing their own stockpiles, and those are going to have to be replenished. The second element here is that people can now see how effective these defensive weapons are and we are already getting interest from many other countries, and I met with one defense minister just three or four days ago here in Washington that is asking, you know, for more production for their use down the road or their services down the road.
So we’re going to need to increase production capacity. About a week after this unfortunate tragedy started with the brutal invasion by Russia of Ukraine, I went over to the Pentagon with my team and, basically, told the senior leadership there, look, we’re already investing in increasing the capacity. You know, please make it right and give us the contracts and agreements that we need down the road.
But we’re going to start investing now because these are products that are going to help defend Ukraine and other places and, more importantly, create a deterrent effect where maybe this doesn’t happen again.
COURTNEY KUBE: When you say you were increasing—you were investing in increasing the capacity, is that more than just the Javelins or was that specifically in the capacity—increasing the capacity of—
JAMES D. TAICLET: It’s going to be more than just the Javelins. So we make the Patriot missile, the THAAD missile. These are all defensive products that keep offensive weapons from hitting either our troops or our territory or our people, and so those are—all are going to increase production. There’s a couple of other systems that are important. One’s a counter—it’s called a counter battery radar. It can sense where an attack is coming from based on the trajectory of what is being shot at you, and locate and estimate where that came from and that means you can fire against that and stop those offensive weapons from coming at you or your people or your population.
So we’re going to increase—we expect to increase the production rates of those and also of guided rocket systems that can, you know, provide that counter battery fire. So when you’re getting attacked these rocket systems that are on trucks or armored vehicles can then suppress or eliminate that offensive threat against you.
COURTNEY KUBE: Can you give us any sense of where—you know, February 20, let’s say, several days before the invasion, where Lockheed was on production of Javelins versus how you stepped it up in those initial days? And then—and is that something that—I mean, you mentioned going to the Pentagon and asking them to give you contracts for it. So does—I just don’t know how this works. Does that mean that you—that Lockheed put up the money sort of up at the top and paid for that investment at the beginning or does—and then with the assumption that the Pentagon is going to backfill the money?
JAMES D. TAICLET: That’s our hypothesis.
COURTNEY KUBE: That’s the model, right?
JAMES D. TAICLET: That’s the model. In something this urgent, we’re going to go ahead and invest ahead of need, as it’s called, because the need is pretty obvious and so we’ve moved out ahead of that. So we’re investing in a couple of things—our own factories, so that we can buy equipment, hire more people, expand the footprint of the space, things like that.
But we’ve also got to help and work with our suppliers because there are thousands of parts in these products and, for example, just microprocessors alone, there’s about 250 microprocessors in every Javelin unit. So we have to help our suppliers get ready to bulk up their capacity, too, and so we may prefund them to help them do that. So those are the kinds of things that you can do proactively as industry, and I know some of our industry cohorts are thinking or doing these same kinds of things.
COURTNEY KUBE: How much has the supply chain crisis hurt efforts like that, specifically, things like microprocessors? I mean, has that delayed the ramping up of the production? Can you quantify that in any way?
JAMES D. TAICLET: We’ve been able to keep up production pretty well, but most of the aerospace and defense industry in the third quarter of last year, like 2020, the—you know, the effects started to be felt from COVID in the supply chain restrictions early in the supply chain, right. So the microprocessors, the smaller parts, forgings, and castings that are made a year to a year and a half before they go into an actual product like an airplane, that started to flow through because what happened in, say, you know, 2020—early 2020—now was at the factory front gate.
We’re not getting what we thought and planned to get at that time, and so that slowed down some of the production of our larger systems and that happened across the defense and aerospace industry. Much of that has been relieved but it’s not completely gone, and so we’re recovering from essentially COVID-related supply chain issues even today.
COURTNEY KUBE: Wow, a year or two years later.
JAMES D. TAICLET: Yeah.
COURTNEY KUBE: You mentioned the THAAD and the PAC-3. Yesterday, also as part of the White House announcement about this twenty billion dollars in additional aid—military aid that was going to go to Ukraine, the White House put out a fact sheet that said that it would include advanced air defense systems, and it’s been a big question at the Pentagon. Secretary Austin was asked yesterday. He kind of talked about the S-300s and helping the Ukrainians to maintain their S-300s and things, but didn’t really talk about US systems that might be provided. But I’m wondering if you have any indication that any US long-range or any air defense systems—we know about the Stingers, obviously, but other longer-range air defense systems they might be talking about providing to use in Ukraine?
JAMES D. TAICLET: So, that will be a policy decision by the United States government to make, and so, industry’s role in all that is to then step to the requirement. Again, we expect—whether it’s directly to Ukraine or it’s to the allies in the region or to backfill again with the US Army and other services might be providing—we know that PAC-3 THAAD—that, you know, the Stinger parts that we make for Raytheon’s Stinger missile product—and also certainly the Javelin is going to go in increased demand as I said earlier.
So, we’re just going ahead and investing in those. We’re also in the midst of creating—actually, pretty effectively—integrated air and missile defense system that uses artificial intelligence as well to figure out what’s coming kind of towards you and make really wise and bright decisions on how you can actually stop that missile from hitting you. So, that’s part of integrated air missile defense. It’s what we call the effectors, the counter missiles, but it’s also intelligence, the computers, the radars that need to be put in place to be able to have an entire system.
So, it’ll be up to the US government to say what various countries in the European region, for example, will be able to get from the United States and our defense industry. But we’re gearing up because the need’s going to be there. We just don’t know exactly who and when they’re going to be supplied to.
COURTNEY KUBE: The Pentagon keeps telling us that their stockpiles—yes, they are using things from the Presidential Drawdown Authority, but that the US military stockpiles of things like Javelins are not—have not been depleted. They still are at a readiness state.
Is that your understanding in your conversations with the Pentagon, that they are maintaining a level? And is there a point where—you know, is there a point where it would potentially become a readiness issue for the US military and Lockheed would have to step in and even increase their production even more?
JAMES D. TAICLET: I think that’s really a question for Secretary [Bush] and General McConville, for example, to address that. We don’t have visibility to what the numbers are and then what is considered to be sufficient for the Army in this particular example. So, again, I think Secretary Bush and General McConville are best to answer that.
COURTNEY KUBE: We’ve been trying, actually, to ask them those same questions. It’s funny you should say that.
I wonder if you could just sort of give us, you know, your view of how the war in Ukraine—I know that the National Defense Strategy, obviously, talks a lot about China as the pacing threat, right? But the war in Ukraine has thrown a lot of things on its head—you know, a tremendous investment of equipment and weapons that the United States is making in Ukraine and other allies are.
But how do you see it actually impacting the future of defense, I guess? Not, you know—is it going to change the way that the US military and the defense industry develops equipment and technology because of this specific threat that at this point may go on for months or years? How do you see it going forward?
JAMES D. TAICLET: I think the invasion of Ukraine is Russia’s sort of brazen attempt to regain domination in Eastern Europe, which is starting with Ukraine and could go beyond that. So, that is a complicating factor that we didn’t have so visibly before, you know, February of 2022.
So, you do have to add that, though, to the China pacing threat, as our senior military officials call that, and the view I have of China is they’re in an ongoing long-cycle campaign to themselves to achieve dominance in East Asia, and maybe even beyond that. And with Taiwan there, though, and its critical position in the global semiconductor industry—which we touched on earlier about microprocessors—you know, that’s the most immediate threat.
And if Taiwan was to be overtaken by China, let’s say, the vast proportion of the most advanced semiconductor test and integration facilities would be in the hands of China—the vast, vast, majority—and it would give China significant control over the world economy. So that’s an immediate term threat too. The Russia and Eastern Europe threat wasn’t as evident, you know, two or three months ago as it is now. So the Defense Department and US government’s going to have to deal with both of these at the same time now. So the theory that we’ve had is we’re going to ramp up these shorter term needs. You know, Javelin, Patriot. We know that that’s coming.
But we’re also ramping up production for longer-term, more sophisticated systems, because we’re going to have to play both sides of the street unfortunately now in Asia and Eastern Europe that we didn’t expect. So systems like F-16, the THAAD missiles that we talked about earlier, these counter-battery radars, these take years to develop and produce. And so we’re already getting a head start on those too, because we’re getting what we’d call demand signals from—whether it’s in the US or other countries—that more of these systems are going to be needed. And so we’re off. We’re raising capacity in all of those areas too.
But I think most importantly, this more complex situation now highlights even more so the greater need for this 21st Century Security concept. And it’s a pretty straightforward concept, again, coming from the telecom and technology industry for the last eighteen years or so, where if we can accelerate the adoption of digital networking technologies, twenty-first-century digital technologies, into the defense enterprise, we could act a lot more like the technology industry does. Meaning, while we continue to develop the next fighter aircraft, that’s called next-generation air dominance airplane, it’s going to take, you know, eight, twelve years to get that fielded in sufficient numbers to make a difference.
But during that entire time, when it comes to the air dominance mission, we could actually upgrade, just like Tesla does with its cars—more rapid than this—but let’s say six to twelve months, we could get a mission upgrade in air dominance while we’re waiting, so to speak, for the new airplane to come out. And the way to do that is to establish an open architecture, Internet of Things environment or set of standards, architecture, that will enable—whether it’s Lockheed Martin, or Northrop Grumman, or Boeing—to plug their products into an Internet of Things 5G-enabled system that you can tie all these assets together, and increase every, again, six to twelve months, the capability of a mission.
Now, that’s not the way that the Defense Department buys things. And it’s not the way that industry has been organized to produce them. So this is really—while we keep the traditional method going and get better at it, we hope, in delivering products, and platforms, and airplanes, and submarines, and satellites. We’re going to have to continue to do that with excellence, I hope. But at the same time, we need to turn that model on its side and start looking at missions. And so what our company’s tried to do as a pathfinder is we’ve got—our chief technology officer and our chief engineer identified fourteen missions that the DOD needs to pursue. And each of those missions we’re building—and we’ve built three of them already to completion—a technology roadmap based on what they already have today and what we could insert from the digital world, so to speak, into that mission.
And I’ll give you a really quick example because it’s kind of an easy one to understand. So we were talking about integrated air and missile defense earlier. And we talked about, say, the Patriot missile system. So the Patriot system has a radar. It has a fire control computing system that figures out how to hit the incoming missile. And it also has the missiles itself. We call them a PAC-3 MSE. It’s the most modern Patriot missile. That’s an integrated system. The problem with it in the mission set, though, is if someone is firing an advanced, low-altitude cruise missile at the Patriot battery itself, its radar can’t see it soon enough, in some cases, to actually get a high probability of stopping that missile from hitting our soldiers and sailors.
When you can tie that system into an F-35 that’s flying about with its sensors and its ability to have connectivity back to a network, the F-35 can see that cruise missile way further out, create a targeting solution for the Patriot battery, which then the battery would use to fire the defensive missile and stop the one coming in. And that’s just networking, right? It’s networking an F-35, which the US already has, with a Patriot missile, which the US already has. And then the Z-axis of all this is we could have a German Patriot battery and an American F-35 tie together as well, and that would increase NATO’s deterrence factor dramatically. That’s one example.
So we’ve demonstrated a number of these missions and a number of these technology roadmap connections in actual exercises, you know, in the Pacific, in Europe, and in the US with the services, and they’re starting to understand the concept. We’re also—we’re sharing these technology roadmaps, which we’ve done at a special access program level, the highest security clearance level, to senior military, civilian, and you know, foreign leaders, and they’re saying that’s what we mean by integrated deterrence. That’s what Secretary Austin has characterized as part of the National Defense Strategy, is we’ve got to use all the technologies we have—whether they’re defensive, aerospace, or commercial—to tie together all of our assets. And so we’re demonstrating on how to do that.
That’s the goal. That’s what 21st Century Security’s meant to do. And when you’ve got two threats like this that are evolving very quickly themselves, especially China, I think it’s the only way to maintain an effective deterrence for the next, you know, five, ten plus years.
COURTNEY KUBE: So it’s essentially taking a physical technology that’s already being developed or is—has already been in use and bring it together with a digital technology.
JAMES D. TAICLET: That’s exactly right.
COURTNEY KUBE: Is there—have you looked at ways that this could potentially help with hypersonics? And specifically, you know, hypersonics—you know, it’s the maneuverability, right, that is the problem with a hypersonic. It’s less about the speed; it’s more about how it’s maneuverable, and that’s what makes it so difficult to defend against.
JAMES D. TAICLET: Right.
COURTNEY KUBE: Is there any way that you can apply the twenty-first-century warfighting to how you can defend against a hypersonic?
JAMES D. TAICLET: Absolutely. So what the 21st Century concept is meant to do is connect platforms—which are satellites, submarines, ships, tanks, aircraft, et cetera—to tie those platforms together across domains. So that’s space, air, ocean, subsurface ocean, land, et cetera.
So, in the case of hypersonic defense, we need satellite sensing in the early stage of a hypersonic missile launch, and we have sensors that are infrared sensors in space that can see this is happening now. We can do some tracking on the initial phase of the flight. But with the speeds that are going on and the defensive capabilities we have, we need to use these twenty-first-century digital technologies to close the loop, so to speak. So we need artificial intelligence to do the calculations and predictions of how this missile could fly. We need really high-speed connections—network connections—at the 5G level to be able to push enough data from the satellite, for example, to the command-and-control center and the fire-control computer to have the information that it needs to create a tracking solution. And then we have to be able to connect to a THAAD missile battery or a Patriot missile battery, et cetera, to actually hit the thing.
So all these technologies—again, when you look at things as missions like you just pointed out—how do you defend against a hypersonic missile—we do have to develop system, but we would be much more effective much sooner if we tie together the systems we have already and the future systems when they come online. And the way to think about it that I explained to some of our senior officials is, you know, think of a train switching station and there’s twenty tracks going into the station. These are the things we all have today. It’s the F-22, the F-35, the U-2, the F-18, et cetera.
What are the—to get the air dominance mission done, what are the smartest two of those to connect first? And we actually did the F-35 and the F-22 because they’re the fifth-generation stealth fighters and they didn’t have a datalink that connected them. So we connected those. Then we connected it through a U-2, which then could get signals from satellites and ground stations and other places. And so we’re starting to create this network already based on mission.
And so the train tracks all start coming together and, you know, five or ten years down the road you’ve got a lot of connectivity between sensors, command-and-control systems, and then defensive weapons so that you can actually stop attacks coming at you much, much more effectively than you could five or ten years ago.
COURTNEY KUBE: So when you’re talking about all of these additional connections, are you talking about more vulnerability for interference, electronic warfare, cyber intrusion? I mean, it seems like you’re—you’re creating a web of potential vulnerability at the same time.
JAMES D. TAICLET: That’s right. And so you have to take the best concepts out of the commercial Internet of Things and 5G networks and bring them to what we’re trying to create here. And so we’ve partnered—and we’ve got about ten commercial industry leader partners. They’re all US companies. We’ve announced three or four publicly so I can kind of speak to who they are.
So for 5G it’s Verizon, for example. For distributed cloud computing, which is moving, processing, and connecting data in different nodes and different levels, Microsoft’s our partner for that. Nvidia is a partner of ours for simulation and AI, OK? And then we also have Intel as a partner because the chips themselves need to be anti-spoof and anti-hack and able to be customized relatively cheaply because of the numbers we’re going to need, if it’s chips, to get into these systems and be safe. So we’re trying to really accelerate our speed by partnering with the commercial technology industry, which has already invested billions and billions of dollars into this. They’ve got tremendous talent that the defense industry will not ever be able to replicate, and so we’re partnering with them and not just sort of standing aside from them trying to do all this.
And the last thing I’ll say is that this kind of approach, this 21st Century Security strategy, that can be applied to other national issues and national problems. I’ll give you an example. Nvidia is part and parcel of this. So we’re working with Nvidia on twenty-first century firefighting, OK, concept, which is a way to bring together, you know, Newtonian or physical technologies and digital technologies into a much more effective wildfire-fighting capability for the United States. And if you just think about it, we have, again, whether it’s in NOAA or the DOD, we’ve got weather and other satellites that sense infrared heat, could be a missile launch, could be a fire starting, weather patterns. We’ve got all this data up there, and 21st Century Security is really about not just connecting things but connecting and moving data from multiple sources.
So we take those sensing sources; we also have sensors that we could put on, whether it’s ground-based locations in the forest and wilderness lands, or on aircraft flying around when there’s conditions prime for a fire to start. You combine the sensors that are airborne, ground-borne and spaceborne, and we could actually—we’re sitting at a point now, we can actually predict where fires might start and start moving assets there, like helicopters and C-130s and things that we make that actually do fight fires today. We have a FIREHAWK Helicopter, we have C-130s that can drop retardant on fires. But, again, they’re not connected to anything else, really; there’s kind of a clunky system of—there is satellite data available, tends to be about twenty-four hours old by the time it gets to a fire commander; we’re trying to make that an hour. You know, so there’s just a lot of AI, 5G, distributed computing, distributed processing that we can put into that problem—it’s a climate change problem, it’s a safety problem for our citizens, it’s a property issue, it’s an issue around utilities, you know, getting caught up in the fires and no power.
So we can apply this concept of really bringing together the Newtonian world, the technologies that the defense and aerospace industry’s really good at, and this digital world where, you know, companies like Microsoft and Verizon and AT&T and others are really good at that, and let’s bring them together and solve national problems. Defense is one; this is another one in climate. And then the last one I’ll just touch on is space, space exploration. So we’re looking at putting together under these kind of principles a lunar services, a lunar mobility services capability on the moon, where the moon rover, whether you’ve got an astronaut there or not, doesn’t need to be there. We can combine autonomy, battery life extension, and artificial intelligence to have the lunar rover do missions until the next astronauts come, and to do that you need what’s called position, navigation, and timing, so a satellite around the moon that would do that, and then you also need connectivity back to earth to give it commands and control. So we’re actually sort of designing this now and we’re going to—I think we’ve got a chance of really making it happen.
But you have to think about things again; sort of turn it on its side and apply those digital technologies to what we already know we can do. And so one of our partners on that project is General Motors, actually, GM, because they’re our teammate on the lunar rover of the future. So it’s exciting. I think we have a really good approach here, but applying it to situations like Ukraine is pretty immediate, so we’d like to get onto that.
COURTNEY KUBE: I want to take a question from the audience here from Eli Clifton, who writes, the seventy-five billion dollars in Pentagon contracts received by Lockheed Martin in fiscal year 2020 is well over one and a half times the entire budget for the State Department and AID for that year, which was a total of forty-four billion dollars. Does it seem like a reasonable balance of expenditure and is it reflective of US national priorities? And I would also ask, you know, do you have any sense—I would imagine that, going forward, because as we’ve been talking about here, stockpiles of things like Javelins are down, do you anticipate that it’s only going to grow the contracts with—
JAMES D. TAICLET: So the allocation among the departments of the US government is up to the US government, obviously, and, of course. But, you know, we need all instruments of national power—you know, a capable, well-supported State Department. We need a capable and well-supported Commerce Department for trade. We, you know, need, you know, an Agriculture, Interior, and Commerce Department that can get together and address wildfires, because there are three different departments that actually have a piece of that.
So we, as a country, rely on our government to provide all those services through all those departments and it’s, really, only up to us to step to what we’ve been asked to do and we’re just trying to do that in a more effective way, and that’s our role.
COURTNEY KUBE: Another one here from Kenneth Spencer. He asks: What countries have recently decided to procure F-35s instead of competing platforms?
JAMES D. TAICLET: So we’ve had a lot of success with international competitions. So we had Switzerland recently. We had Canada. Poland was about a year and a half ago. So we’ve been very successful with international competitions. And the Swiss, I have to say, because I was part of it, their selection process was as rigorous and objective as anyone can imagine.
You know, the Swiss government was really strict and strong about making it objective. When they put out their final report, basically, said that aircraft was the most capable and the least expensive from a lifecycle perspective.
So that was telling to us and, therefore, we expect that we’re going to get more demand again for the F-35 and the F-16, and one of the most immediate signals there that we’ve just had was from Germany, and Germany had been—you know, we couldn’t tell their interest level in the F-35.
After the Munich Security Conference it became immediately obvious and they chose to take the F-35 because they know that those capabilities, especially the sensing and networking capabilities of the F-35, are head and shoulders above any other aircraft that’s out there.
COURTNEY KUBE: Is that specifically because of the war in Ukraine or—
JAMES D. TAICLET: I think it was because the German government recognized around the time of the potential invasion that things were—things were changing in Europe and that they would need to really refocus on their national defense, and Olaf Scholz made a speech about doing exactly that. And, therefore, they want to—if they’re going to invest, they want to invest, you know, in the most advanced products and systems and the F-35 is that.
COURTNEY KUBE: Mmm hmm. This, you know, event is really about the challenges of US and allied defense innovation. So what are some of the capability gaps that you see for a future war? I mean, it’s strange to say future war because, you know, the US, for all intents and purposes, is supplying a lot in this current war in Ukraine.
But what do you see that the US needs to invest more in for the future war and what do allies need to invest more in?
JAMES D. TAICLET: Yeah. So for the US, we have the most sophisticated systems. We have the largest defense enterprise, and so I think it falls to us to, really, create the space and aerospace domain dominance to prevent—really, again, to have a great deterrent for, really, the entire allied family, so to speak.
It really does hinge on space capability and aerospace or, you know, air dominance capability. That’s being demonstrated in Ukraine right now between the intelligence that Ukraine is able to gather from numerous sources and then apply it and the fact that the Russian air force has not been able to dominate the sky, so to speak.
So just—the Ukraine war so far has heightened the importance of that—those aerospace domains and—you know, and defending yourself, frankly. So I think the US will invest more in those areas. But there’s also, you know, the nuclear side of things where our subsurface nuclear capability, which, I guess, I could argue, is probably the single most important factor to having avoided nuclear war since World War II, is—the US submarine fleet is, essentially, undetectable and it provided a really survivable second strike capability, which may have prevented others from trying the nuclear option.
So that’s going to be invested in as well, and there’s a number of things in between, of course. I think the allies, if they can provide more of their local defense themselves in their particular region, that will enable the US to invest in sort of the more global capabilities like that.
COURTNEY KUBE: Mmm hmm. One thing that a lot of US officials think that the reason that the air space has remained contested over most of Ukraine is because in advance of the invasion and in the first sort of days and weeks, the Ukrainians were really moving their air defense systems around, and their aircraft, right? Do you think that it has made the case for a more mobile air defense system than, frankly, some of the larger ones that even Lockheed manufactures?
JAMES D. TAICLET: Well, you’re going to need a mix of them because the more sophisticated and capable the system, the heavier and larger it’s going to be. But the US military services are recognizing this and saying, look, even if, you know, we were going to have an F-35 squadron in East Asia, it needs to be able to move. So General Brown from the Air Force is basically saying: You know, we can’t just rely on fixed bases 100 percent. We’re going to have to have capabilities to take a squadron and move it into a commercial airport somewhere in Korea that they didn’t expect us to be at, those kinds of things. So mobility is going to be more important as we go.
COURTNEY KUBE: I’m going to ask a question from Byron Callan. I hope I’m saying that right. He asks: Your deal to acquire Aerojet was blocked. What else could Lockheed Martin do with its free cash flow, other than just pay dividends and repurchase stock?
JAMES D. TAICLET: Well, what I’ve been striving to do since I arrived in management of the company and of the board about a year and three quarters ago was invest more in Lockheed Martin. So we really have wanted to do that. There’s a few ways to invest capital expenditure—you know, plants and facilities and tooling and equipment. We’ve increased that. I think our run rate is about two billion dollars a year. Independent research and development, we’ve increased that to, again, the same order of magnitude. There are limits to how much you can build and how much you can do for research and development, because it ends up going into the rates of what you end up charging for the product. So we are kind of bound by that kind of system.
So what I’ve asked the Department of Defense to consider is to provide a vehicle for long-term contract commitments to companies like ours because—and I’ll give you a good example. A hypersonic wind tunnel—we don’t have enough capacity in the United States to really develop all the programs we want to. And there’s an opportunity to invest in one, but there’s no government budget line item that says, OK, here’s, you know, three million dollars for another hypersonic wind tunnel facility.
However, what commercial industry does in these cases, and Intel is doing for example on building chip factories, is they’re basically saying: I can either predict the demand—it’s a commercial product, I got a lot of customers, I’m going to go do it myself. We can’t do that predicting of demand because we have one customer, right? We have one customer. Even for the F-35, which is flown around the world, it all goes through decisions made by the US government—the State Department and DOD—to authorize us to tell to any other country. So we only have one customer.
So what I’ve offered is said, look, similar to the cell tower business, if we had a ten-year commitment of a minimum revenue from, say, the Department of Defense for another hypersonic wind tunnel, we would go to Wall Street and finance that. Say, look, I’ve got a minimum revenue commitment. I’ve got to go out and get more revenue, but at least I have enough to get financed and built this. So that’s one of the reasons our capital expenditure and independent R&D is limited, because we don’t have access to long-term revenue commitments like the commercial industry does.
COURTNEY KUBE: Has DOD been receptive to that idea or long-term—
JAMES D. TAICLET: I think they’re listening now but, you know, it’s a long cycle system to get through something like that. Now, IT services are often bought on those kinds of contracts. So there’s precedent for it. But when it comes to assets and products, it’s got a little bit more development to go. By the way, M&A, merger and acquisition, was another goal that I had coming into this job. There’s companies—especially our suppliers who are not so strong and maybe somewhat vulnerable.
If they’re critical, we should—my theory was, we should, you know, acquire them, put them into our system. We’ve got a great credit rating. We can finance them, we can build them up, we can keep their people, we can add our engineering expertise to whatever they’re doing, like rocket engines and such. But that Aerojet Rocketdyne deal having been blocked, this tells us that that route is closed to us in any meaningful way. So we can maybe invest outside the US and try to do that kind of thing, but it won’t be as significant as we could inside the US.
So basically, everywhere I turn as an investor, in my role, there are limitations to that investment. And so our shareholders, you know, if we’re generating cash flow, they’d love to see us build another factory if we had business for it. They’d love to see us do R&D if we could get a long-term commitment on it. They’d love to see us buy a company and improve it and get a good return on investment out of that. Those are not accessible to us the way they are in the commercial industry, and therefore it leaves us only a couple of choices.
One is to increase the dividend dramatically. But then if we do need to invest someday and we’ve increased the dividend, we can’t really go back on that. And then you end up with, well, I’ve got to buy back the stock. It’s the only way I can provide the shareholders their money back because I have nothing else to do with it. And if we don’t provide their money back, they’re going to get an activist investor to come in and say you need to change the management because they’re hoarding our money. They have nothing to do with it, they’re keeping it themselves, and they’re not buying back stock, which is the only vehicle that we have based on all those other conditions.
COURTNEY KUBE: We’re just about out of time. I just want to ask you one more very quick one: How long—have you gotten any sense from the US government how long they expect to keep supplying Ukraine with weapons like Javelins? Are they giving you any sense, speaking of long-term planning?
JAMES D. TAICLET: Not on that dimension because no matter how long that goes on for and what rate it goes on for, the stocks that have already been delivered need to be replenished. So we’re just focused on getting the capacity up to a rate where we can replenish in a timely fashion what’s already been provided. And you know, we’ll add to that if we need to, but that’s our focus right now.
COURTNEY KUBE: Great. Jim, thank you so much for your time. Thank you to the Atlantic Council for this event today and for inviting me to be a part of it. I’m always amazed when I am asked to do things with people talking about defense industry, that anyone would give me that kind of an honor. So thank you all and thank you to our audience, and have a wonderful weekend, everybody.
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