U.S. Defense Executives Warn Against Shutting Out Foreign Competitors

By Sandra I. Erwin

The Pentagon for decades has been a reliable buyer of "Made in America" weapons technology. While that should please U.S. companies, defense CEOs are warning that protectionist policies over time will backfire by thwarting innovation and by making U.S. companies less competitive in the cutthroat international arms market.  

 The U.S. defense industry is in a fight for its future, and the government is not helping, says former Deputy Defense Secretary William J. Lynn, currently the CEO of the aerospace and defense firm Finmeccanica North America.

American industry is shrinking and many of the technologies the Pentagon wants are not domestically available, he says. Nonetheless, the Defense Department consistently shows bias against foreign products, which in turn hinders U.S. companies' access to overseas markets, Lynn adds.

"You need something of a realignment," he says in an interview. Today's military-industrial complex consists of a small group of conglomerates that are coping with declining Pentagon sales, investing less money in new technology and increasingly depend on the global market for innovation. A more open market would benefit the Pentagon by spurring competition and also would help U.S. companies to more easily tap into global sources of supply, he says.

"We need to have global sourcing. Our export regulations make that somewhat difficult. And our patterns of behavior make that even more difficult," Lynn says. "The market has shrunk enough that if you want to maintain competition you have to look globally. The Defense Department needs to adapt."

Both the military and the defense industry would benefit from globalization, Lynn argues in a recent Foreign Affairs article, titled, "The End of the Military-Industrial Complex." The U.S. military fights alongside allies in war zones, but the Defense Department "still often ignores technologies and products made overseas, sometimes at significant cost to the American taxpayer," Lynn says. In the 1990s, for instance, the Pentagon sought to develop a new artillery system, called the Crusader, rather than adapt an existing German design that met most U.S. requirements. The Defense Department ended up canceling the program in 2002 when the cost spiraled, "wasting $2 billion and leaving the U.S. Army to rely on upgrades to a much older artillery model." The United States, Lynn says, "no longer has to be the source of all advances in military technology, and in fact, bringing foreign companies into the fold will help distribute the burden of development costs, as it did with the F-35."

Although the Pentagon tends to be mistrustful of technology sharing agreements with foreign countries, U.S. defense contractors view them as necessary to grow their business. Co-development deals help companies stretch their R&D dollars, says Thomas A. Kennedy, chairman and CEO of The Raytheon Company.

The Pentagon is asking companies to step up R&D investments during these times of reduced defense budgets, but that is not realistic, Kennedy says during a panel discussion last month at the Ronald Reagan Presidential Library. The Pentagon is "handcuffed with sequestration" which has kept spending decisions on hold and the industry with little incentive to invest. Sharing R&D programs with foreign partners is something the Pentagon should embrace, says Kennedy. "We have a tendency to do everything on our own."

Raytheon is finding that co-investment helps the company secure business overseas. Examples are a Navy ship-defense missile that was funded by 13 countries and the Patriot missile-defense system, which has been upgraded with funding from Middle Eastern buyers. Foreign military sales are not just about selling, but also sharing the cost and the investment, says Kennedy.

U.S. export laws hurt these efforts, says Robert J. Stevens, former chairman and CEO of Lockheed Martin Corp. Further, many countries that want to do business with American companies are wary of U.S. protectionism, he adds. "What won't work is having one country open markets and not having a reciprocal opening of markets," Stevens says during an industry conference at the Center for Strategic and International Studies.

"We've seen a checkered pattern of what is an open market and how accessible technology is," he says. "The worst phrase I've ever heard is 'Buy America,'" says Stevens. "If that's imposed, all our programs are shut down. We don't have that reach any more in the U.S. industrial base. ... I don't see us having the ability to go it alone.”  

If Pentagon contractors only had to incorporate U.S. technology, says Stevens, “I can't think of one company that could deliver a product tomorrow."

Stevens was at the helm of Lockheed Martin when the company won the biggest weapons contract in history, the F-35 joint strike fighter, and went about the laborious recruiting of international partners. The program has a global supply chain, but that is an exception in U.S. weapon systems. "Congress was first skeptical but supported it. ... Just to get global procurement authority was a struggle," says Stevens. "In the beginning we couldn't talk to our partners. We needed special authorities to simply have a conversation." Things are "better" now, he says, "But if we're going to have a market rather than a program, we have a lot of work to do."

Suppliers like Rockwell Collins that make avionics systems for both the Pentagon and for commercial buyers are designing products specifically so they are not subject to military export controls, says Clayton M. Jones, the company's former chairman and CEO. "A lot of countries I talk to say they don't look forward to doing business with the United States," he says. "We are a hard country to do business with. ... Our regulatory oversight creates a burden."

The biggest overseas opportunities for aerospace companies are in products that are "ITAR free," which do not have to comply with the U.S. International Traffic in Arms Regulations, says Jones. "We have to consciously design around that.”

The George W. Bush and Obama administrations have been advocates of U.S. arms sales overseas and pushed a number of administrative and bureaucratic reforms to the export licensing process. In recent years, the administration has removed several "dual-use" technologies from restrictive ITAR controls. Industry executives have argued that, while these reforms are welcome, the agencies that oversee exports — Defense, State and Commerce Departments — still have to comply with export laws that are rooted in the Cold War and intended to shield U.S. technology from potential enemies. That mindset still governs the export control system, argues former Pentagon procurement official Andrew Hunter.

"The single biggest challenge to U.S. industry in managing the reality of a global value chain for defense products may be ITAR," says Hunter, a senior fellow and director of the defense industrial initiatives group at CSIS.

"The increasingly global nature of industry presents opportunities for the United States to deepen its relationships with allies and partners in areas of common security interests. However, significant challenges to capitalizing on these opportunities exist," Hunter adds. Countries naturally want to protect domestic jobs and economic interests, but often the benefits of cooperation outweigh the drawbacks, he says. "While almost all nations rely to some extent on national champions in their indigenous industry to produce some or all of their most high-profile defense systems, it is already the case at the subsystem and component level that most technology is globally sourced. This is particularly true where technologies originate in the commercial realm, something that is increasingly the case even in the most sophisticated defense systems."

Hunter says the Pentagon should view the F-35 as a model to apply in other programs. "The F-35 program was high profile enough to work through these issues, but the question remains whether the United States and its partners can effectively extend this level of cooperation to multinational programs with lower profiles."

Topics: International, Manufacturing, Procurement

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