James Hasik

Why Boeing and Alenia's split over the C-27 is unsurprising.

At the Air Force Association symposium this week in Orlando, Boeing finally confirmed that it was breaking off its putative alliance in Jacksonville with Alenia Aeronautica . Boeing and Alenia had been negotiating for some time over establishing a joint venture for the assembly of C-27Js for the US Joint Cargo Aircraft (JCA) program. Boeing, however, seems recently to have soured a bit on the long-term outlook for light transport sales worldwide. Alenia will now build the aircraft on its own, as it does already in Torino.

This minor breakup, though, is neither deleterious to the two company’s relationship, nor all that surprising. Consider the inability to come to agreement in terms of the methodology for analyzing alliances that I expounded in Arms and Innovation:

Is there considerable change underway in the light cargo turboprop business with respect to processes and goals?
No: only modest change. Boeing and Alenia both know a great deal about building airplanes, and the USAF and the US Army, the current customers for the JCA, know pretty much what they want. As with the C-130 and the C-27A (G.222), it’s possible that several special-purpose versions of the aircraft will be built. If that happens, Boeing’s participation in the aircraft assembly would be less helpful in responding to requests for a product line extension than help from armaments, avionics, and electronic warfare systems suppliers.

Are the intellectual assets involved in the design and construction of light cargo turboprops moderately appropriable?
Yes, but it probably doesn’t matter. Had Boeing assisted Alenia in building C-27Js in Jacksonville, Boeing would have learned something from Alenia. Of course, that’s already occurring to some extent about 200 miles up the coast, at Global Aeronautica, their airframe integration joint venture in Charleston. Establishing a second center for cooperation in airframing and aircraft assembly would have increased the rate of knowledge transfer, but not in a thoroughly novel or overwhelming way.

In this line of business, are there moderately expropriable quasi-rents from specific assets?
No: there’s very little potential for a shakedown. L3 may hold the prime contract, but the C-27J is clearly Alenia’s airplane, and the USAF, the US Army, and Special Operations Command—all distinct buyers—are each individually enthused about the aircraft’s potential as a light transport and gunship. Boeing wasn’t going to muscle Alenia out of the deal.

Even without Boeing, Alenia and L3 say that the line will be running by next spring. Given Alenia’s long experience with building the C-27 and its forerunner, that seems a reasonable goal. It’s just that Boeing’s involvement wasn’t critical to the process, particularly as an alliance or joint venture partner.

Update on the presidential helicopter matter

Yesterday’s Washington Post carries two opposing stories about Mr. Obama’s assertion that his current fleet of nineteen Sikorsky helicopters is “perfectly adequate”:

R. Jeffrey Smith (Wash. Post), “Marine One Upgrade Now Looks Less Likely”
Donna Borak (AP), “Aging presidential chopper may force Obama's hand”

Two oft-cited commentators seem to agree more with the second title than the first. Loren Thompson, who runs the Lexington Institute public relations firm in Washington DC, asserted that the existing Sikorskys are “dangerously outdated”. He may have meant that they are very old—roughly thirty years—and this is a reasonable concern. James McAleese, a lawyer in Washington DC who primarily serves military contractors, asserted that the money expended so far had been well spent, because

You can't lose the president of the United States. This aircraft only has one purpose and that is to protect the president.

Actually, no. There is a roughly estimable cost to losing the head of government or state of any country, and no vehicle replacement program should proceed without first estimating that cost. Here in Texas, the governor rides around in a very nice GMC Suburban (built, of course, in Fort Worth). Someone, at some point, decided that the governor didn’t need the same sort of limousine as the guy in Washington, and chose to save the taxpayers some money. The helicopters may need replacing, but $390 million per helicopter (that’s right: $11 billion for 28 aircraft) is a difficult case to make, regardless of who’s riding in it.

The point here, as I have made before, is that the era of performance-at-any-cost is drawing to a close. As Bryan Whitman, the Pentagon’s press briefer ominously observed yesterday, the VH-71 program

certainly fits the category of requiring a Nunn-McCurdy breach notification, and that is not a good position to have a program in... We are committed to looking at expensive programs, particularly those programs that are underperforming.

Just now, some large lines of business are in grave jeopardy, and as I wrote yesterday, thicker briefing decks aren’t going to save anyone. In the longer run, this relative debacle reemphasizes the importance of managing one’s customer. Contractors who fail to control the over-specifying impulses of military bureaucracies stand to see more than a few programs founder.

Now hear this: "perfectly adequate" means good enough

Today’s Early Bird carries stories from the Washington Post and others about the VH-71 program, Lockheed Martin’s effort to build 23 new ‘Marine One’ helicopters for presidential usage. After his first few rides in the existing Sikorskys, Mr. Obama declared that the current aircraft “seems perfectly adequate,” and that he had instructed Robert Gates, his defense secretary, to undertake a “thorough review of the helicopter situation”.

I really can’t imagine how the morning is going for Lockheed Martin’s program manager. Or AgustaWestland’s, who’s responsible for the actual aircraft. Or Bell Helicopter’s, who’s responsible for assembling the whole thing here in Texas. It’s going to be a bad day all around, with a really, really high briefing slide count by close of business. Which will be really, really late tonight.

Unfortunately for those concerned at those three companies (and with their suppliers), PowerPoint engineering isn’t going to fix this problem. At a White House meeting yesterday, federal senator John McCain (R-Arizona) said that he couldn’t think of “any more graphic demonstration of how good ideas have cost the taxpayers an enormous amount of money.” As the Post put it,

        Senior Pentagon officials, including outgoing procurement chief John J. Young Jr. and testing chief Charles E. McQueary, have frequently described the VH-71 as an example of how military systems should not be bought: the White House security office repeatedly added highly complex security requirements, and the Pentagon began building the helicopters without first settling on a design and testing the key components.

This is not news, as parallel problems have sunk program like the US Army and Navy’s Airborne Common Sensor, and imperiled projects like the Navy’s Littoral Combat Ship (LCS). In a floor statement yesterday, McCain explained how he and senatorial colleague Carl Levin (D-Michigan) were introducing a bill styled the “Weapon System Acquisition Reform Act of 2009”, which amongst other things, “puts Nunn-McCurdy on dynamite.” That is, the bill would require

        that programs currently underway (post-Milestone B) experiencing “critical” cost growth either be terminated or enter the new defense acquisition system, which the DoD recently and fundamentally restructured to help it manage technology and integration risk. In so doing, Chairman Levin and I hope to transform Nunn-McCurdy from a mere reporting requirement into a tool that can help the DoD manage out-of-control cost growth.

Of course, decades of acquisition reform have had, at best, mixed results. Fortunately, McCain says that he and Levin are under no illusion that legislation alone will change this, and that commitment from the appointed leadership in the Pentagon is essential. This is why the recent nomination of Harvard professor Ashton Carter to replace Young as Under Secretary of Defense for Acquisition may be important. Young seemed a late convert to the concept of thrift; Carter has been talking about it for some time.

As I have been saying for some time, spending will be decreasing, and many procurement programs that aren’t obviously more important than others will be eliminated. If you’re managing a portfolio of programs in military contracting, and the US government is amongst your larger customers (as it is for many), you may want to think about three factors that could signal vulnerability or opportunity, and what to do about them next time:

Substitutability—are there other platforms or systems that could perform this mission adequately?
Possible example: the CSAR-X. As Mr Young mused to the press a few weeks ago, the cost-benefit analysis for a separate fleet of helicopters raised purely to affect “single-digit” rescues is hard to make. If you’re at Boeing Helicopters, you might take solace, however, in the worldwide demand for and admiration of the power and versatility of the Chinook. That leads to my next point...

Adaptability—are there other latent missions that your platform could be marketed to perform?
Possible example: the San Antonio-class assault ship. Admiral Vernon Clark once famously admitted that he hadn’t considered whether helicopters and small craft based on large ships wouldn’t be a better solution to littoral sea control than small frigates. After all, the Danish approach to this problem is nearly cruiser-sized. If you’re at Northrop Grumman Ship Systems, you might be marketing this alternative hard against the now relatively costly Freedom and Independence-class LCSs.

Flexibility—does my platform or system address the balance between big-war and small-war needs?
Possible example: the MRAP-ATV. If the M113 and the Humvee were meant for the Fulda Gap, then it’s unclear why evolutionary developments of the all-terrain MRAP program wouldn’t be a more cost-effective solution in second-line roles than the great leap forward of the Joint Light Tactical Vehicle. Such a fleet would certainly be less expensive than a utility version of the tracked FCS vehicles, and the basic concept is already proven against the classic trinity of small-war weapons: the Kalashnikov, the RPG-7, and the roadside bomb.

As I indicated in the title of this article, when the words “perfectly adequate” emanate from the Oval Office, it’s time to take note. Money is going to get short, and as in the early 1990s, congressional benefactors will only be able to save a few pet projects. The response to that predicament requires strategy, marketing insight, and engineering excellence. It was time to get started quite some months ago.

Governments Should Care about Small Firms—and Not Sentimentally.

As I wrote in my recent paper on the MRAP and the JDAM, Mr. Obama’s decision to retain Robert Gates as defense secretary, but to fill many of the subordinate positions with a new team, is creating a unique opportunity for change in the way the US Defense Department outfits its forces. Balance, specifically between large and small-war forces, is the new watchword for procurement. Shorter cycle times are a serious goal again. Just yesterday, Mr. Gates noted at a press conference that the "department faces difficult choices among competing priorities and programs." Some of those tradeoffs can be less sharp when responsive contractors offer innovative solutions, and lately, that lot has disproportionately included smaller companies.

I wrote extensively about that in my recent book Arms and Innovation: Entrepreneurship and Alliances in the Twenty-first Century Defense Industry. The University of Chicago Press has a basic synopsis at its website. Amazon has several very nice reviews, and Google Books offers a limited preview. I don't have sales figures yet, but it has been picked up by 135 libraries, and I've been interviewed about it in Unmanned Systems and National Defense magazine. It seems to be garnering some attention. So, while I’ve written about the book elsewhere, its relevance to the new government’s ongoing military challenges drives me to highlight several points again. The comments here focus on the Pentagon, but are applicable to many other defense ministries.

The book argues that some of the most innovative systems that the US Defense Department has procured since the end of the Cold War have been developed by relatively small companies. As illustrated in several of the case studies in the book, these have included Force Protection's Cougar and Buffalo MRAPs, General Atomics' Predator unmanned aircraft, Austal's multihull high speed vessels, and Cambridge Research Associates' Powerscene terrain visualization system. These firms have succeeded in considerable part because they had entered the right sectors at the right times. Specifically, small firms tend to have an advantage in sectors which exhibit three characteristics:

• high rates of innovation, but with low R&D intensity, and high uncertainty about markets or future technological trajectories
• skill intensive production, to take advantage of the network effects within small firms
• heterogeneous industry structure, with medium-speed learning curves, which allow small firms to find niches between the scale and scope of larger firms

Small firms could thrive in environments like this, bringing great products to military forces, but they often lack access to capital and customers. Even with competitive, innovative solutions, small firms can fail to penetrate markets with structurally entrenched suppliers. One answer, which I argue that their customers should encourage, is for small firms to seek alliances with larger, more established firms seeking to help commercialize emerging technologies. As I explain in the book, alliances generally have an advantage over mergers or arms-length relationships in sectors which exhibit (again) three characteristics:

• considerable change with respect to processes and goals
• moderate appropriability of intellectual assets (that is, moderately leaky knowledge)
• moderate expropriability of quasi-rents from specific assets (that is, a moderate potential that the large firm will shake down the small one for its profits)

For various reasons, this describes more than a few areas of military contracting, and some of the firms in the case studies have had consider success with alliances. Force Protection could not have sent thousands of vehicles to the campaigns in Iraq and Afghanistan without help from BAE Systems, General Dynamics, and Spartan Chassis. Austal has benefited greatly from its teaming arrangement with GD for the Littoral Combat Ship, even when competing against it (successfully, I might add) for the Joint High Speed Vessel. General Atomics may not have benefited directly from its alliance with Lockheed Martin for the Mariner version of the Predator, but there are other good and more recent examples of this sort of teaming in unmanned aircraft.

This dynamic does not always hold, of course. Spectrum Astro had great success in the mid-1990s building the Miniature Sensor Technology Integration (MSTI) series of experimental missile detection and tracking satellites, but stumbled badly with the Space-Based Infrared System (SBIRS) Low contract a few years later (that's another case study). Cambridge Research Associates got run over by Lockheed Martin's huge investments in the mission planning market. And sometimes that’s fine. In the former case, the project was probably too big for any single contractor, and in the latter, few are complaining that innovation has suffered. Small-large alliances, after all, aren't a panacea for procurement problems, but they are a very useful tool.

Achieving that aforementioned balance, of which Robert Gates wrote so notably in Foreign Affairs, will require hard choices. In this context, and as a heading on one of the last pages of the book puts it, Governments Should Care about Small Firms—and Not Sentimentally. Some of those tradeoffs can be less sharp when responsive contractors offer innovative and adaptable solutions. There are at least two good reasons for this.

The first is that many defense ministries could use more competition amongst suppliers, both for technological innovation and factor efficiency. In the United States and the United Kingdom in particular, mergers have probably proceeded over the past fifteen years beyond the government's interest. There is strong evidence now—backed by research at the Institute for Defense Analyses, the LBJ School at the University of Texas, and the US Naval Postgraduate School—that consolidation produced measurable savings for the US government only in the missiles sector. Everywhere else, the cost effects have been elusive. My own research in 2005, backed by more recent studies at IDA and RAND, indicated that interyard efficiencies in shipbuilding were particularly hard to identify. The mergers that left the six largest yards intact may have, vis-à-vis the government’s interest, served largely to increase the lobbying clout of the two surviving contractors. The better way to induce additional competition is not to encourage another unrelated-but-established military contractor to enter a given sector, but to sponsor the development of a smaller, insurgent one to go after a bigger share of the spending. This has already worked to some extent in shipbuilding and combat aircraft, and it has worked famously in armored vehicles.

The second reason is that search, in the US and elsewhere, for balance and shorter cycle times in procurement. What's particularly attractive about small and medium-sized enterprises is that they tend to thrive in industries with innovation that is continuous, incremental, and recombinative. Their entry into markets tends, eo ipso, to produce it. There's a high proportion today of information technology spending associated with most military platforms, and progress in IT tends to be of this type. Encouraging smaller, dynamic enterprises to do business with defense ministries could actually help produce clustered waves of recombinative innovation that would be particularly helpful in the face of high uncertainty about battlefield requirements.

One can think about this in terms of the armored vehicles business. The US Army's much-vaunted Future Combat System was conceived way back in 1999. At the time, what became the Stryker (the US LAV-III) was the Interim Armored Vehicle program. The government handed the contract to Boeing and SAIC, which handed the vehicles contract to a team of (what is now) BAE Systems and General Dynamics. At the time, those two firms constituted over 90 percent of armored vehicle production in the US. Since then, we've seen several iterations of designs in the MRAP field from almost a dozen different firms worldwide—including both BAE and GD—but we're still waiting for something more than a few NLOS-C prototypes.

This is not about set-asides to placate the small business lobby. This is about building kit that the troops need. The exigencies of the campaigns in Iraq and Afghanistan have induced important innovations, but the tendency of defense ministries in the US and the UK in particular to bet the farm repeatedly in long cycle programs has often effectively shut down competitive pressure early in the process. This drags the customer (and his money) along with the supplier, whatever the performance. To be fair, the book leaves many questions unanswered about policy and its implementation. Most of the advice was about how small and big business can and should work more effectively together, and where. Some change will occur even with outright hostility from the military services—look at what Tom Cassidy accomplished with the Predator despite all the resistance from the USAF. More change will occur, however, if military-political leaders think through how to encourage more dynamic teaming between small and big business.

Smaller scale in air defense ships ahead

The cover article in Defense News this week concerns supposedly huge changes to the US Navy’s ship-buying plans. To be frank, much of what's called dramatic in the article has been predictable for some time. This paragraph was singularly underwhelming:

        It is not clear, however, whether the Navy wants to sanction a redesign of the DDG 51 to accommodate more missile launch tubes, a more powerful engineering plant or a much bigger radar. Several sources said the service was directing design studies to hold to the 51's existing dimensions, but others said those improvements would mean lengthening or otherwise enlarging the hull.

From the standpoint of the ultimate customer, the people running the US government, the one thing that the US Navy's air defense ships do not need is more missile tubes. Just about every other design around the world stops at 48 missiles, and only a few go up to 64. Designing the vertical launch versions of the Ticonderogas with 128 was done when the threat was regimental-sized raids of Tupolev-22s ("Backfires") against carrier groups in the North Atlantic.

Time was, the officers of the US Navy lived for that stuff. Not so much today. Now, the only reason for a bigger engineering plant would be a bigger radar, and the only reason for a bigger radar would be sea-based midcourse missile defense. Otherwise, the requirement is a non-starter, as the current government is seriously unlikely to pay for it. That’s not a commentary on its importance, just its importance to those in power. Without the overwhelming need for a missile defense mission, the planned future cruiser—the CG(X)—need be nothing more than a Arleigh Burke Batch III with a flag suite. It’s not recommendable that any shipbuilder, radar-maker, or weapons supplier plan otherwise.

What the Swedish Army reorganization means for the market

As it was leaked a week ago, Swedish Supreme Commander General Håkan Syrén did indeed make some big recommendations to the government last Friday. The general’s plan, as presented to Defense Minister Stefan Tolgfors, is said to call for

• a reduction in the size of the Swedish Army from 20,000 to 12,500 troops,
• the reorgnization of the Army and the Amphibious Corps’s eleven combat battalions into eight,
• a reduction in the number of operational Leopard 2 (Stridsvagn 122) tanks from 160 to 80, and
• the consolidation of all initial training for the army at a single base.

While it may be easy to dismiss Sweden as a small country that hasn’t fought a major war since 1814, this view would miss Sweden’s role as a bellwether for change in military markets. In particular, a host of impressive-yet-affordable material solutions have originated in Sweden over the past few decades, from all-terrain armored vehicles to multipurpose stealthy warships. As such, developments in Sweden and around the Baltic are worth watching, and this plan suggests at least two longer-term market developments.

Training. The plan almost certainly signals the eventual end of conscription in Sweden, as there is no point in supporting such a small army with a draft, and no time to waste training short-service conscripts who might only possibly volunteer for overseas service. For that matter, there’s almost no point to conscription anywhere, save in a few countries facing acute territorial threats, such as Taiwan and Israel. The Swedish military has traditionally demanded gear that was particularly easy to learn to operate; hopefully, this tendency will not evaporate. However, as a greater proportion of training funds shift from basic to relatively advanced training, training systems providers will have an easier time finding outlets for their more sophisticated products and services.

Armored vehicles. In the mid-1990s, the Swedish Army had 280 Leopard 2s; today, it seems to be aiming to provide each deployable battalion with a company of ten—if they’re needed. As well, there will almost certainly be no replacement for the excellent CV90 infantry fighting vehicles in Swedish service, though there will now be all the more reason to see them upgraded to something approximating the latest Mark III standard. The recently-announced competition this year for new Armored Wheeled Vehicles will likely proceed, simply because they will be so needed on overseas operations, and there are no other pressing needs for new vehicles for the Army. The pattern we have seen for the past several years is thus once again replicated: new wheeled, blast-protected vehicles for, and upgrades only to smaller numbers of existing, heavy tracked vehicles.

Finally, the plan points to one more trend that has been developing since the end of the Cold War, if slowly. It is most notable that Amphibious Corps’s one operational battalion will be retained amongst the eight, but that it will be made available for overseas service. This indicates how the Swedish military plans to specialize: its amphibious forces have a long history in preparing for activities in concert with small combat vessels in littoral environments. That’s a role for which there’s considerable need today, from the Horn of Africa to the Persian Gulf and beyond.