James Hasik

A few weeks ago, another consultant asked me what the Army was going to do about Ground Combat Vehicle—the GCV, or the hoped-for replacement for the Bradley troop carrier. I could only tell him that the one thing that I did know was that the Army didn’t know. Of course, not long thereafter, the Army actually released its RFP for technology development (TD) efforts aimed at building prototype GCVs. The Army is at least now claiming to know. And according to the chief of staff’s preferences, this new GCV should have

the off-road mobility of the Bradley
the over-the-road mobility of the Stryker (LAV-III)
the blast protection of an MRAP
ballistic protection better than that of a Bradley, and with modular armor
more firepower than a Bradley
seating for twelve (commander, driver, gunner, and nine passengers)

If this sounds like trying to stuff 10 pounds of kit into a five pound bag, well, I’ll get to that below. For now, let me at least say that fortunately, no one is asking that all this be air-transportable in a C-130. After an unhelpful experience with that requirement in the Interim Armored Vehicle (or Stryker) program, and a real disaster with it in the Future Combat System program, the Army is merely specifying transportability by C-17. That puts an effective upper weight limit on the whole bag at 70 tons, which may have been the basis for Reuters’ interesting report that the GCV would necessarily weigh 70 tons. If you give a mouse a cookie, after all, he’ll quite likely fill the parametric space.

What has not been generally noticed, though, is that the Army is considering awarding up to three 27-month, cost-plus-fixed-fee TD contracts. Three? Time was, we were all told that there were only two companies that could ever undertake this sort of project in the United States: General Dynamics Land Systems (GDLS) and what is now BAE Systems Land & Armaments (BAE L&A). The three part seems calculated to induce some other qualified party to bid—otherwise, what would be the point? And just who might that be? A quick check of the sign-in sheet from the recent GCV Industry Day in Warren, Michigan indicates who:

Krauss-Maffei Wegmann. KMW. Or as they say in Deutschland, Kay-Em-Vay.

KMW and Rheinmetall Landsysteme GmbH are partners in the consortium PSM (an abbreviation for the oddly Anglo-Saxon Project and Systems Management), which has been designing and building the Puma infantry fighting vehicle for the Bundeswehr. What we here in the US call initial operation capability (IOC) should occur sometime this year. The Puma is the closest thing on the market today to what the US Army wants. It’s not what the Army professes to want; it’s just the closest thing. The Puma, that is, has

the off-road mobility of a Bradley, more or less (we’ll wait for the rodeo to find out)
pretty decent blast protection with its double armored floors. (That might not be MRAP-performance, but only so much can be done with low-riding flat bottoms.)
more firepower than a Bradley, with its 30 mm cannon (including airbursting ammunition) and antitank missiles (and in a remotely operated turret for more internal space and greater survivability)
better ballistic protection than a Bradley, with modular armor that takes the maximum combat weigh to almost 41 tons (which leads to the unusual air-transportability profile of four panzers in five A400Ms)
room for a crew of three

What the Puma distinctly lacks are the two things that led the Army away from the Bradley, and towards the Stryker, back in 1999:

room for nine passengers (the Puma seats on six; the Bradley six or seven)
that high road speed, in what presumably must be a tracked vehicle, just to manage the off-road mobility

The first issue is addressable. We should not just breezily wave a hand and insist oh, KMW can just stretch it, maybe make a station wagon version. All the same, if KMW can build one for nine, it can build one for twelve. Stretching that design, however, and however it is done, could produce a vehicle of more than 50 tons.

That’s still transportable by C-17, but it gets to what is not so addressable: road speed in a vehicle with room for twelve that sports enough armor to withstand 30 mm armor-piercing cannon rounds. Managing that could require at least a huge powerpack. The US Marines have already had an interesting experience in the Expeditionary Fighting Vehicle program with supercharged diesels. Gas turbines? It’s a plausible suggestion. The GCVs are, after all, supposed to run (see below) with the updated Abrams, right?

It’s not clear just how that general on-road, off-road mobility conundrum can be worked out, and whether it should be at all. But with the Puma specifically, there is another off-putting matter: its price, or at least its fully-loaded price in Germany. The consortium’s contract with the Defense Ministry for 410 Pumas exceeds €3 billion, or roughly $10 million per vehicle at today’s exchange rates. That’s a bit above the going rate for an infanteriepanzer, even if it is an impressive vehicle.

On the other hand, if there’s good news here, it’s that the US Army won’t need to buy many. To begin, even if it could, the money is just not there. As Zen Pundit put it the other month,

in all the recent elections, Democrats have been clobbered by a “Revolt of the Moderates”—socially liberal, fiscally conservative, independent voters who came out in 2008 for Obama and are now shifting radically away from him. For the next year, politicians of both parties will be competing hard for this bloc, which means “deficit hawks” will soar higher than defense hawks.

This effect has already taken hold up North. The Ottawa Citizen’s David Pugliese wrote back in January that the Canadian Army’s Close Combat Vehicle (CCV) was looking a lot less essential against the federal government’s C$55 billion budget deficit. The vehicle viewed most favorably for the CCV role was BAE Systems Hägglunds’ CV90, but with the right pricing, the Puma could have been a contender. Neither is likely to happen now, at least not for quite a while.

Fortunately, given the US Army’s force structure, not too many GCVs are required. The Army is reducing its lineup of heavy brigades to just fifteen, all to be eventually equipped with the M1A3 Abrams, the M109A6 Paladin, and this future GCV. Each heavy brigade has, alongside its four companies of tanks and two batteries of howitzers, four companies of infantry in (today) 13 infantry fighting vehicles. If the TO&E continues forward, that’s just 15 x 4 x 13 = 780, or not much more than 1000 GCVs, after factoring in training, prepositioning, war reserve, and other marginal requirements. The National Guard could take more, but that depends on the long-term plan for heavy brigades in the Guard. Military police and engineers are a bit more useful to state governors, so don’t count on that indefinitely.

Even so, that’s more than twice the number of vehicles the Bundeswehr is buying, so one can easily imagine KMW and Rheinmetall’s interest. Two things make KMW (presumably with Rheinmetall) a particularly probable bidder. As noted, its people showed up in Warren, Michigan for industry day. They’re clearly interested. But critically, the company is one of very few, not controlled by either GD or BAE, and in a clearly friendly country, that could credibly propose to design and build this vehicle.

Israeli Military Industries (IMI) is arguably another firm with the right stuff—particularly through its experience with designing and building the Namer heavy infantry fighting vehicle built with the chassis of a Merkava IV tank. While firms like Elbit Fort Worth have shown that Israeli arms businesses can prosper in the US, IMI is state-owned, which could give the Army the conflict-of-interest willies.

Would either company want to facilitize a factory in the US to build something like Pumas or Namers? For the right price, sure, but that wouldn’t be necessary in any event. For who else showed up at industry day? Navistar and Force Protection. Neither company builds tracked vehicles, both know a lot about protection technologies, and both can be expected to have capacity to spare in a few years. Textron had earlier expressed interest in the build-to-print requirements of the Israeli Namer program, which to make use of US financial assistance, may need some assembly in the US. The American connection may be important for corporate citizenship, as the Army has indicated that it is looking for a third American company for that third TD contract. A teaming arrangement would make that happen right away.

Besides, for KMW at least, it all makes sense geographically. Navistar builds armored vehicles in Texas and Mississippi, Force Protection in South Carolina, and Textron in Louisiana. From Werner von Braun to BMW and Benz, we know that German industrialists like the South. So why not?

There’s just one reason that comes to mind: this whole thing may never happen. It’s not that the Army can’t make the case for a new armored troop carrier. Rather, it’s that no one can make an armored troop carrier that combines all the attributes the Army is requesting. At some point soon, the generals will need to choose whether they want road speed or cross-country mobility. The first points to wheels; the second to tracks. Unless someone has a revolutionary solution available—and the Army has sworn off “revolutionary” this time—whoever are chosen as the development teams are going to spend a lot of money chasing another technically elusive objective.

Would anyone be particularly discomfited? GDLS may not crave more competition, but it’s BAE L&A, for sure, that will be put out. It’s notable that the US Army’s plans for its armored fleet involve upgrading vehicles from GDLS (the Abrams and the Stryker), but mostly discarding vehicles from BAE (the Bradley and the M113). The Paladin Integrated Management (PIM) program is a potential bright spot for the moment, but note again that the Regulars will only keep 30 armored artillery batteries in the long run. Even with the aforementioned marginalia, that’s fewer than 400 howitzers. With the winding down of MRAP purchases, the loss of the FMTV program to Oshkosh, and the disappearance of recapitalization opportunities for Bradleys and M113s, that’s not a lot on which to sustain a business. GCV is then a must-win for L&A, which helps explain why Northrop Grumman was recruited onto the bidding team. At this point, they’ll readily share the proceeds if it means getting those hulls through the factory.

As happened the FMTV and KC-X disputes, we can expect to hear howls of indignation about the fate of something called “the industrial base” (a term which exists not outside the rarified world of military contracting). We’ll hear how “capabilities” will vanish forever with any exit from the industry, and how the Army’s probably single source approach will result in an eventual monopoly on heavy armored vehicle production in the United States. This is hogwash. For as the introduction of so many overseas designs in the MRAP program demonstrated, enough money can induce almost anyone to bid. Call that Biden’s Law, for the onetime federal senator who said so in debate.

As the United States spends more on its armed forces than any other country in the world, and by a big margin, the threat of entry by capable companies like KMW or IMI will most often be enough to put those concerns to rest. Once those firms come to the very lucrative US market, with local production facilities and American boards of directors, they become meaningfully American firms. So, if no one is soliciting KMW in particular, it’s probably time to ask.

As a naval captain friend once told me from his experience in buying ships, there are just three leading Rules of Management:

Know how they’re going to screw you.
Share the pain.
Remember that hope is not a strategy.

The third rule is useful counsel today for those (as I recently suggested) watching the Joint Strike Fighter program, and for anyone who voted for that Obama guy. The second rule has been shown stunningly this week by Airbus Military: its penance for the disastrous A400M development contract is to be a few billion euros more from its customers. The first rule, though, is the overarching one that will hopefully preserve you from needing to invoke the others. It’s also now one for consideration at the Pentagon in regards to the KC-X program.

That is, the US Defense Department has willingly wedged itself into a difficult spot. Deputy Secretary Bill Lynn said yesterday that he was “disappointed” that Northrop Grumman would be declining to bid. As a salty former naval person, I’m inclined to suggest that Bill pack sand; if the government had really wanted Northrop and EADS to bid, it could have written an RFP that would induce a bid. It didn’t, so now it’s stuck with that awkward problem of double monopoly: one buyer, one interested seller, and a Kabuki dance of bilateral contracting relations on the way.

Using the hedonic framework that I introduced in that essay of 9 February, the situation has now migrated from that of an undesirable vertical demand curve and dissimilar supply curves—

—to a vertical demand curve but only one supply curve—

As indicated, the net effect ex ante, in the absence of potential countermoves by the customer, should be an even higher price from the remaining bidder. Once the contract is signed, Boeing will have a price against which it must deliver, and limited potential for adjustments based on changes in commodity input prices. Until then, Boeing may feel like a monopolist: the only game in town, and one who knows it. Until then, I must say that I will not envy Air Force Secretary Michael Donley in his position. So, because dealing with a monopolist is rarely less onerous ex post, I offer two bits of managerial advice—in an economic context—on what signals to send and not send Boeing before it submits that bid.

Don’t pretend that the DCAA will save you. One could be tempted to hope (there’s that word again) that once the legion problems at the Defense Contract Audit Agency (DCAA) are corrected, the watchdog will reclaim its teeth. Sure, it’s a fixed price contract, but Boeing must disclose both its costs and its profit margin, so even without competition from Northrop and EADS, the government will get a good deal, no? Eh, no. The problem is that effective regulatory regimes are generally elusive, and for four reasons:

This is true in the first place because the informational asymmetries in regulation are severe, so the perspectives that regulators develop on their subjects are almost always distorted. In theory, the government needn’t spend too much time and effort trying to gin up should-cost numbers for the 767, as that airplane has been in production for 30 years. However, with a large, technically complex, and sun-setting system like the KC-X, the problem is serious. As relative prices shift, and commercial customers for this plane that no one else wants fall away, what it should cost becomes anyone’s guess.

Further, the appropriate contracting mechanisms are not obvious. Whether contractors are regulated according to price or cost, they, their managers, or their labor forces generally find some way of gaming the system to extract at least a portion of the rents they desire. Auditors and regulators can set rules, but smart people will always find a way around them.

Besides, regulatory capture is a near certainty. Regulators are very frequently observed to go native in the firms they regulate. The problem is particularly severe in technologically intensive industries where the regulators, by virtue of the domain knowledge required to participate in the regulatory process, most frequently hail from the industry itself. Sooner or later, factions within the KC-X program office, the DCAA, and AFCAA, and any other organization with what people on Capitol Hill like to call “oversight” would come to think about Boeing’s interests as synonymous with the Air Force’s interests. It’s an industrial base thing.

Finally, the regulatory burden itself is costly, which contributes to the overall cost of the project, even if no further rents accrue to Boeing. Ultimately, the Air Force has to pay for those squadrons of bean-counters and fact-checkers, and all those clipboards and green eye shades cost money. But more significantly, at a certain point, the managerial cost of the added oversight, through gummed-up processes and drawn-out schedules, exceeds its marginal returns.

Instead, threaten to do as Northrop does: to take your marbles and go home. Boeing had earlier made noises about “launch customer pricing” for the KC-767. At this stage, the folks there may think that the only number they must beat is the $184 million per plane that Northrop said that it would have bid. Exceeding that could embarrass even the machinists’ union. More practically, it would lead to immediate insistence in the congress for a reopening of the competition on terms more conducive to a bid from Airbus.

That is, for all the Pentagon’s insistence that tanker replacement must start yesterday, the RFP does contain this standard boilerplate (on page 8 of Section M):

2.3.1.1. A price analysis will be conducted in accordance with FAR 15.404-1 in order to ensure a fair and reasonable price has been proposed. The government may determine that an offer is unacceptable, and therefore unawardable, if prices are found to be not fair and reasonable.

Should-cost, as I note above, is guesswork. Fair and reasonable, however, are so vague and subjective as to lack all meaning. As a professor under whom I studied in graduate school once put it to us, fairness basically means “I like it”. And that’s the beauty of the language here: if the Air Force doesn’t like the price, it can balk, and tell Boeing to pack sand. Then, the Pentagon can restart the process with an RFP more likely to solicit competitive bids.

Late last month, I offered several reasons for why Northrop Grumman might decide to bid after all, even though the cards were so clearly stacked against them in this RFP. Herein, we may have a good reason for not bidding: it’s just possible that Boeing will get greedy, price like it’s a monopolist, and wind up with yet another restart. It’s unlikely, but it’s arguably a better shot than bidding a ten-pound hog in a seven-pound contest.

Then again, as one reads carefully, that press release from EADS nowhere says that the company won’t bid on the KC-X alone. After all, as its own prime contractor in the already-successful Light Utility Helicopter program, and corporate citizenship established through its American board of directors, there’s little to stop EADS North America from undercutting a complacent Boeing at the last minute.

Either way, there’s ample reason for Boeing to keep its pencil sharp—and the Air Force might do well to firmly reinforce that point.