GLOBAL DEFENSE MARKET
Industry Could Benefit From Cross-Border Defense Programs
A prescient Rand Corp. study some years ago warned of obstacles to joint cross-border procurement as numerous and complex, the product of parochial industry interests, domestic legacy systems and national doctrines.
Collaborative programs required agreement on requirements, costs and schedule, leaving little control to individual countries facing projects often fraught with risk and uncertainty. No wonder collaborative defense acquisition had remained fairly meager.
The year was 1978.
The historic parallels between 1978 and today should not be overlooked. The global economy was recovering from an energy price shock and economic problems, the legacy of Vietnam and defense-spending fatigue were settling in worldwide, just as the geopolitical certainties of the early Cold War were crumbling and Iran was on the verge of imploding. Recent years have witnessed joint defense procurement initiatives, extending beyond NATO to include countries such as India. However, growth in collaborative defense projects has remained modest, hampered by the same decades-old challenges.
Where cross-border collaboration exists, it tends to be exceptional rather than typical of a general trend, largely relegated to bilateral or consortia-based efforts rather than broad alliance or regional programs. The primary motivation for such agreements has almost always been cost efficiency, with an important nod to interoperability in the NATO context. And while their legacy has been mixed, the current defense spending contraction will likely breathe new life into this model ensuring it remains a niche opportunity for U.S. and European defense firms.
Nordic countries have pioneered some of these approaches, despite overlapping memberships in the EU and NATO. For some 15 years before it was subsumed into a broader regional defense program, their joint procurement arm NORDAC conceptualized and managed a host of development and procurement programs on a country à-la-carte approach. Such collaborative acquisition efforts can be a lifesaver for imperiled programs. Two members of NORDAC, Norway and Sweden, recently inked a $200 million deal to procure the BAE-supplied 155/52 light mobile artillery system, a program that had been conceptualized by Sweden’s FMV defense procurement agency, but then languished because of budget constraints until Norway joined the fray.
Alarmed by the simultaneous downturn in U.S. and European defense budgets, NATO has recently announced a number of initiatives under the “Smart Defense” moniker that could result in the joint procurement of maritime patrol aircraft, naval and air surveillance radars and counter-improvised explosive device technology.
In the shadows of the Joint Strike Fighter, perhaps the most notable collaborative defense project to date, NATO’s air power center of excellence has begun to ponder the option of a regional fighter partnership, as many of its smaller members look to recapitalize or replace aging equipment with affordable and proven, but also state-of-the-art light multi-role aircraft. NATO, the world’s most successful collaborative defense initiative, is a modest player in the development and procurement space in its own right.
Under the umbrella of the Alliance Ground Surveillance program roughly half of the alliance members, mostly smaller nations joined by Italy and the United States, have contributed resources for the acquisition and sustainment of five Global Hawk unmanned air vehicles from Northrop Grumman, an effort that will total nearly $4 billion over the next two decades. Yet this project was too long in coming and had to navigate many torturous twists and turns.
Industry opportunities shrink beyond the Western alliance. A number of countries in Asia have pursued and funded joint programs, almost exclusively bilateral in nature. In South Korea, a joint public-private sector initiative by Lockheed Martin, KAI and the Korean government has resulted in the TA-50 advanced supersonic trainer, destined for both local and international markets, including the now delayed U.S. Air Force T-X competition and other trainer and light-attack opportunities.
India has turned to joint development programs on a grand scale, largely with Russia. One of their preeminent projects is the fifth-generation fighter, based on Russia’s Sukhoi T50/PAK-FA design, slated for production within a decade. The Indian prototype, FGFA, co-developed by the country’s aerospace national champion HAL, has experienced many of the birthing pains associated with collaborative development efforts — technical challenges, cost overruns and disparate requirements.
While none of these challenges is unique to collaborative defense programs, Indo-Russian cooperation foreshadows another dynamic in defense cooperation: geopolitics. Some observers explain India’s keen interest in working with Russia as an attempt to keep the former superpower from doing more defense deals with New Delhi’s rival to the north, China. Even allies must hedge their collaborative efforts; much ink has already been spilled on the political and defense industrial implications of bilateral collaboration agreements on UAVs, ground vehicles, rotorcraft and others between Europe’s defense triumvirate: the United Kingdom, France and Germany. All those involved have been quick to note that the relationships are not exclusive, but such deals have clear and lasting business implications for firms such as EADS, BAE and Dassault, which face contracting home markets.
Other regional blocs still seem far from embracing collaborative defense efforts. In Southeast Asia, an area of increased interest for U.S. and European defense firms, the region’s premier multilateral organization ASEAN treads softly on the issues of defense and security, limiting itself to dialogue. In the medium term, one could imagine ASEAN or a similar organization investing in some non-offensive sectors, such as disaster relief.
In the Middle East, the United States has worked hard to encourage the Gulf Cooperation Council to improve mutual security, largely focused on mobility, interoperability, maritime security, missile defense and crisis response. However, residual regional mistrust and a firm belief in a sustained U.S. military presence are likely to stifle major multilateral defense programs in the near term.
And while programs, once launched, can both drive opportunities for defense firms and generate cooperation and goodwill among participating nations, long-term success is not guaranteed. Technical complexities, cost and budgetary constraints, coupled with government indecision have hobbled the Medium Extended Air Defense System, a joint U.S.-Italian-German collaboration involving Lockheed Martin, MBDA and others. Struggling to secure congressional funding for the remaining development work and unwilling to proceed with its procurement, the Obama administration has found itself in the sights of both its Italian and German partners, who have warned that the program is of vital importance to their relationship with the United States.
Bearing in mind the defense spending outlook across the alliance, U.S. and European firms have little choice but to position for additional joint development and procurement efforts. While opportunities are unlikely to be huge and despite the added challenges of multiple stakeholders, shifting needs and competing technical requirements, some moderate- to large-scale efforts are unlikely to move forward without bilateral or multilateral funding in the coming years.
Firms will have to be prepared to identify and cultivate the right partners, enhance their branding and government affairs efforts abroad, develop a more sophisticated understanding of national requirements and the competitive landscape, and work equally hard to appreciate funding streams and stakeholder communities among potential partner nations.
Aleksandar D. Jovovic is a senior associate at Avascent, a Washington, D.C.-based management consulting firm. He can be reached at email@example.com.