U.S. Defense Industry Needs Export Reform to Beat Global Competition

By Jon Barney and August Cole
Special Contributors

Global commercial aerospace and defense markets are far more competitive than is currently appreciated in Washington.

The sales of manned and unmanned military aircraft, satellites and advanced sensor systems are no longer shoe-ins for American firms selling to U.S. allies. Being underbid by state-backed companies from China is not the only competitive threat. There is broad-based competition from multiple countries, including Brazil, India and Israel, among others. These global players are also making faster-than-expected commercial and technological advances.

Rising defense spending overseas is a big driver of this latest wave of new competitors. Spending outside the U.S. should rise to more than $500 billion in 2016, up from $300 billion in 2008.

Concurrently, American aerospace and defense firms are looking to offset decreased spending by the Defense Department and allied European governments by pursuing new markets and opportunities. Yet current roadblocks in the form of export rules and policies endure despite the ongoing export control reform initiative led by the Obama administration.

Regulations and rules are a necessity in the aerospace and defense sector to ensure business is done in a legal, ethical and effective manner. The market is moving faster than these rules are being changed.

According to a recent Avascent and FleishmanHillard survey, 80 percent of aerospace and defense executives believe their competitive landscape will increase next year, led by disruptive competitors with low cost offerings in China, closely followed by those in other Asian countries, the Middle East and North Africa region, and Latin America. Nearly all of the surveyed executives, some 93 percent, believe international sales will be increasingly important in the coming years.

They are clearly not alone in this ambition. The survey revealed executives are starting to see competitive threats in key segments where U.S. firms are largely accustomed to being the uncontested leaders. These areas include unmanned aerial vehicles, intelligence, surveillance and reconnaissance systems, and missile technology.

This illustrates a larger trend where there is increasing competition. A proliferation of rivals is a true sea change for the defense industry, one that has until now dodged the most difficult aspects of globalization.

Just as the industry is going to have to catch up to this new reality, so too must the regulatory environment. The competitiveness of America’s aerospace and defense sector depends on reforming current laws that are holding up the sales of technologies and systems, effectively forcing U.S. firms to cede ground to rivals in strategic and commercially vital markets.

Some of the biggest challenges with current export controls are out-of-sync lists of prohibited exports, overly complex oversight management, and an overall sluggishness. Attempts to align and simplify Defense Security Cooperation Agency, Commerce Department and State Department processes are well intended but are moving too slowly. While DSCA has announced improvements in the foreign military sales review process, there remains a perception within the defense industry that there is a real competitive disadvantage.

According to former Sen. Jim Talent, R-Mo., partner at Banner Public Affairs, “While export controls serve an important purpose — preserving America’s tactical military advantage — outdated policies can have the same negative effects on competition and innovation as burdensome over-regulation. When America’s defense industry base is disadvantaged, our nation and its allies pay the price measured in economic and military strength.”

Within the next five years, certain segments of the aerospace and defense industry are especially vulnerable if current export control rules persist. Avascent believes the sectors most at risk to rising competition are unmanned systems, intelligence surveillance and reconnaissance, cyber security and air traffic control management. The latter is of growing importance given the soaring market projections for global air travel in the coming decades.

Unlike the highly political fight over the Export-Import Bank, which has become a battleground in the larger struggle over the role of the government in supporting America’s corporations, reforming export-control rules can be a non-partisan priority. Not only would reform improve the competitiveness of one of the nation’s most strategically important industries, it could also be a political win for all involved.

Exports help support America’s defense and aerospace industrial base, which is going through a difficult period as it rebalances to lower levels of government spending. Exports also help sustain current well-paying jobs in technical fields that are crucial to the foundation of tomorrow’s aerospace innovation. Moreover, the next generation of engineers evaluating where they want to work will be hard pressed to choose a field they see as globally uncompetitive.

Defense exports are also a cornerstone of U.S. national security. Supporting allies through the sales of systems and services helps shore up military relationships using up-to-date technology and a fundamental commitment to a position of strength. That is not to say looser export controls should unleash a flood of arms sales worldwide. The Islamic State wresting control of American-made military equipment from the Iraqi army should be seen as a cautionary tale of what can go wrong. The U.S. government should use forward-looking judgment concerning military aid, and export control reform will free up resources used for unnecessary reviews while allowing for a stronger focus on cases needing the most scrutiny.

For its part, the defense industry needs to ensure it is the first choice for America’s allies. U.S. firms looking at overseas markets should conduct a thorough portfolio analysis, evaluate and prioritize markets and develop a strategic approach.

Ultimately, reforming export-control policy is both a commercial and a strategic issue. Doing so will improve the competitiveness of American aerospace and defense firms while also making sure that

U.S. partners around the world can continue to count on America when it comes to bolstering their own national security. The best way forward is to enact speedy reform, and show that there will be real benefits for America and its allies.

Jon Barney is a managing director at Avascent, a strategy and management consulting firm. August Cole is a writer-in-residence at Avascent. He is also a nonresident fellow at the Atlantic Council where he serves as the director of the “Art of Future Warfare” project within the Brent Scowcroft Center on International Security.

Topics: International