ARTICLE

April 2003

U.S., U.K. Vow Stronger Industrial Cooperation

Trade reform, outsourcing efforts could lead to growing business opportunities

by Elizabeth Book

The United States is the largest investor in the economy of the United Kingdom, while the United Kingdom is the biggest foreign customer for the U.S. defense industry. For companies on both sides of the Atlantic, this means partnerships are the order of the day.

At the U.S.-U.K. Defense Industry Seminar, sponsored by the National Defense Industrial Association and the Defense Manufacturers Association, several officials touted the benefits of better coordination and industrial cooperation.

“Getting the best value from the defense industry and partnerships is a big priority in the United Kingdom,” said Lord Willy Bach of Lutterworth, U.K. undersecretary of state and minister of defense procurement. “It is a measure of the strength of our relationship to be able to speak frankly about defense industrial relations,” said Bach.

U.S. and U.K. officials are nearing completion of a waiver of International Traffic in Arms Regulations (ITAR), which will give both nations preferred status is doing business with one another. A similar waiver has already been granted to Australia. The agreement with the United Kingdom is expected to be in place by 2004.

Discussions at the conference centered around private financing and competitive sourcing initiatives, technology transfer policy and export controls.

Private Financing Initiative
“I absolutely believe in competition as the best form of procurement,” said the U.K. chief of defense procurement, Sir Robert Walmsley. “Lessons can be learned from the U.K. Private Financing Initiative.”

PFI is a Defense Ministry program, where capital assets used by the government are owned by the contractor. For example, he said, “Sealift services are provided by the shipping company to the MOD, using ships owned, serviced and managed by the sealift operator. It’s cultural bias that we have to own everything,” he said.

However, Walmsley said it was important to take into consideration the implications of commercial ownership of defense assets, as well as consider whether contractors need combat skills to do their jobs.

Walmsley explained how the Defense Ministry gets private companies to invest in military support services. “Can we convince a private company to invest in tank transporters? Yes, but there is a lengthy application process, and a lot has to happen before the deal is completed,” he said.

First, the ministry assesses the suitability of a project for a PFI. Then, it advertises the requirement in the MOD Defense Contracts Bulletin, a publication that comes out every two weeks. Companies express their interest and the selected ones receive invitations to negotiate and submit bids. Then a protracted decision-making and negotiating process takes place. The timetable varies, because “Every deal is different. But it takes about a year, or 11 months to close a deal with a preferred bidder,” Walmsley said.

Private financing is being explored more and more by the U.S. government. “We are currently questioning the role of what government does, and wondering how much should be outsourced or competitively sourced,” said Deidre Lee, director of defense procurement and acquisition policy at the Defense Department.

Currently, instead of private financing initiatives such as public private partnerships, Lee said the Defense Department was focusing on “e-everything. … Going electronic is a little bit of a challenge in the procurement area, but e-business is a tool to work for us, not the other way around.”

Technology Transfer
“Many of our policies in place are still mired in the Cold War,” said Lisa Bronson, deputy undersecretary of defense for technology security policy and counter-proliferation. “That will have to change, as the president has asked the Defense, State and Commerce Departments for a comprehensive review of the Defense Trade Export Policy,” she said.

“We want to increase the pool of countries that can come fight with us,” she said. Also, “we want to increase the scrutiny of our exports that could contribute to terrorism,” she said.

Bronson said that her review seeks to recommend specific programs that will facilitate cooperative programs. “We have had some good results with Unmanned Aerial Vehicles (UAVs). For a long time, U.S. policy was restrictive, based on the missile defense control regime. But this is a technology that we must find a way to share,” she said. Licenses for UAVs were granted for Operation Enduring Freedom. The model created by the Joint Strike Fighter’s global project authorization “should also work on a micro-level,” such as with UAV licenses, Bronson said.

“In our industrial base of the future, we see getting more network-based, combat support power, homeland protection, integrated battle space, and more joint programs with an international industrial base, like the Joint Strike Fighter … which we think will be the wave of the future,” said Lisa Davis, principal assistant deputy undersecretary of defense for industrial policy. The Joint Strike Fighter is a “transformational acquisition model for the Defense Department,” she said. The program “has had a significant impact on the strength of the industrial base, both U.S. and foreign,” Davis said. Plans are in place to consider JSF-type global project authorization for other internationally-relevant programs, she said.

Defense Export Controls
In the 1990s, defense export controls were a “serious impediment” to international defense procurement policy, said Jeffrey Bialos, former deputy undersecretary of defense for industrial policy. The decade was characterized by “process dysfunction and delays, and technology release was ‘divorced’ from armaments goals,” he said. The bottom line was that a high priority was placed on export control reform and the Defense Trade Security Initiative (DTSI).

After September 11, everything changed, Bialos said. “Higher defense budgets, transformation and war,” as well as “homeland security, missile defense and anti-terrorism initiatives,” took away from the priorities set by the DTSI. Also, there were changing country policies related to India and Pakistan, and technology security policy received increased attention.

However, Bialos gave the Bush administration credit for policy continuity. “There has been a very strong commitment to DTSI, but a very slow implementation,” he said. “There has been very slow progress of the Australia/U.K. ITAR exemptions, and broad designer licenses have been largely unused,” Bialos said. Further, he added, “There is a continued disconnection between armaments and technology transfer policy. Export controls are still a significant impediment to closer transatlantic defense cooperation.”

State Department officials, meanwhile, do not believe that export controls are the main impediment to coalition interoperability, said Greg Suchan, a principal deputy assistant secretary of state in the Bureau of Political-Military Affairs.

“Rather, a low level of defense spending on procurement and high technology on the part of our allies has led to major challenges in coalition politics,” he said. Such spending is important, because “Ad hoc coalitions are going to become the instrument of power projection,” he explained.

Mike Jenner, director-general of defense export services at the U.K. Ministry of Defense, said that the issue of export licensing was slightly more important for the British than Suchan indicated that it was for the Americans.

“Export licensing is not the only problem, but it is big. It makes everything less efficient than it might be. Every program we’re involved in has problems with clearances,” Jenner said.

Five impediments hinder U.S.-U.K. cooperation in defense procurement policy, according to Bob Bruce, director of Atlantic Armaments for the Defense Department. The first impediment is U.S. protectionist legislation. “We admit it. The current legislation does not always allow us to take advantage of innovation,” he said.

Second, there are many competing programs. Third, most programs are given only single-year funding, thus throwing certain multi-year programs into jeopardy annually. “Congress only appropriates money one year at a time. It’s a risk, but almost no cooperative programs have been canceled,” he said. The fourth and fifth impediments, he said, are export controls and technology transfer regulations.

U.S. firms also experience difficulties trying to get into European markets. “First, countries have national champions, or a directed competition. We think this significantly removes the benefits of competition in a full and open marketplace. We seek best value for our fighting men, for the least buck. Competition gets us the best prices and the most innovation,” he said.

Bruce said that there is also a perception of a “fortress Europe.” The negotiations between France, Germany, the United Kingdom and Italy, creating a common defense export policy called OCCAR, raise a concern that Europe will band together against procuring weapons systems from the United States.

The U.K. perspective on buying and selling in the U.S. defense marketplace is quite different. Britain is a high-tech, world leader in many niche areas, said Chris Cook, first secretary for defense equipment at the British Embassy, in Washington D.C.

The United Kingdom, he said, is “experienced in program management, has an extensive relationship with U.S. industry, has a background in lean manufacturing and is used to open competition.” Roughly half of all Defense Department foreign procurement is from the U.K., he added.

Cook said that while there are many advantages to the U.S.-U.K. relationship, such as having strong political and cultural ties, there are also challenges, such as legislative barriers, congressional influence on programs, and the Defense Department acquisition process.

The U.K. government plans to pursue collaborative projects, increase sub-tier work, sell platforms, and exploit new markets, he said. The British industry can help make these goals a reality by understanding the U.S. business environment, being realistic about expectations, and by teaming with U.S. industry on projects, Cook said.

The British Embassy would provide support to U.K. industry trying to break into the U.S. market, by lobbying the administration, Congress and U.S. companies “on barriers, either general or specific,” he said.

Having leading-edge products and technology is definitely a way for U.K. companies to expand into the U.S. defense market, said Peter Cavill, managing director of U.K.-based Radstone Technology PLC. “Radstone invests 14 percent of all sales in research and development,” Cavill said. “Radstone’s experience is that being a U.K. company is not a barrier to sales in the U.S., although it is essential that service and support is at least as good as the U.S.-based competition.”

Radstone Technology Corporation is a U.S. based subsidiary of the U.K. parent firm. “Though we don’t hide the fact that the parent is a U.K. company, U.S. customers place orders in dollars and receive deliveries from a U.S. supplier,” he said.

Cavill observed that the U.S. market is far more open to using commercial off-the-shelf technology and open standards than U.K. or other European Union firms. “Radstone’s U.S. customers are far less demanding than our U.K. customers … though the ITAR regulations can be a source of frustration and delay,” he said. The ITAR regulations “definitely put Radstone at a disadvantage compared to its U.S. competitors.”

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