James Hasik

Bricks with Wings, and More Modern Feats of Military Marketing

Words have meaning, or at least they should, and certainly in matters of marketing. As I’m over 40, I’m still not sure whether Walkman or iPod is a better generic-but-Xeroxish name for a portable music player. Each evokes a particular time in history, with its own endemic circumstances. Either way, the name conveys a certain sense of what one is getting.

My cross-town colleagues at Stratfor reported yesterday on an ambush of Chinese construction workers headed for a road construction project in Algeria. The attack, they said, had the hallmarks of the local branch of Al Qaeda, which was once called the Salafist Group for Preaching and Combat (الجماعة السلفية للدعوة والقتال‎ ). Now that tells you what you’re getting: sign up with us, and you can wear pants that are too short, listen to interminable-and-boring sermons, and hose down the local hardhats with your Kalashnikov. Charming occupation that.

I thought of this briefly when I read BAE Systems’ recent press release on its new Panther armored vehicle. No, from what I can tell, this is not the Panther that BAE is assembling at Newcastle-Upon-Tyne under license from Iveco. Rather, this seems to be BAE’s new name for the Medium Mine-Protected Vehicle (MMPV) that it is building at the Letterkenny Army Depot for the US Army. That differs throughly, by the way, from the Mine-Resistant Ambush Protected (MRAP) version of the RG33 that it had been building for the US Army. The former, after all, is a “program of record,” as they say. While big cats have a long history of lending names to armored vehicle, recycling Panther reminds me of Operation Desert Fox, Bill Clinton and Tony Blair’s four-day bombing of Iraq in 1998 (ostensibly to rid the place of those weapons of mass destruction). It seems that no one actually meant to invoke thoughts of Field Marshal Erwin Rommel’s tank troops racing across the desert. That connection was widely assumed, however, and five years later, George Bush and Tony Blair sent the tanks racing forward anyway (ostensibly to rid the place of those weapons of mass destruction).

Actually, while there are assuredly differences between the two versions of the RG33, it’s not clear that they’re so significant that one merits a name, and the other a mere number. The USAF never named Rockwell’s (now Boeing’s) AGM-130 because it was an unloved kluge of a missile—the Air Force’s own SLAM, one colonel in the secretariat once told me. To be fair, the Standoff Land Attack Missile has since evolved into a much better integrated weapon (after some ugly navigation errors in the 1995 Bosnia campaign), and SLAM is a rather fetching moniker. And all the same, the RG-designation itself (representing nothing more than the initials of the original designer) is a useful marketing tool in its own right, evoking the South African heritage shared with the RG31 and RG32 lines of vehicles seen around the world.

In the 1990s, the US Navy and Boeing collaborated very successfully on an upgraded version of the FA-18 Hornet that was almost not an upgrade, but a wholly new aircraft. Even the name—Super Hornet—helped strike for the strike-fighter the right balance between new capabilities and safe technical evolution in selling the idea to skeptical congressmen. Over the next few years, we’ll watch to see how well Boeing’s new, stealthier version of the F-15 sells around the world, but its name—Silent Eagle—is definitely a good try. Boeing IDS has also thus far kept the Insitu brand name on the drone aircraft company it bought last year, which seems a rather deft move. It is further invoking the name of an iconic (if occasionally derided) fighter plane with its new Phantom Ray jet-powered drone project, though we’re guessing that the engines will emit less smoke this time.

One way or the other, someone in Saint Louis—and perhaps in York, Pennsylvania—seems attuned to some of the flashier aspects of marketing. That’s an encouraging sign in this business. We had all, after all, pretty much had enough of the Klimov Girls.

British armor need not be British-built

Defense News reported yesterday how military procurement minister Quentin Davies’ told the Parliament that Britain’s future armored vehicles must come with modification rights, but need not be actually built in Britain. While Davies had been saying roughly this for several months, his statement, a related speech at RUSI, and a new policy document made the strategy quite clear.

Neanderthalic opinion might whinge about the decline of empire, etc., etc., but for the Army, the Royal Marines, and British taxpayers, this is unquestionably good news. As long ago as 1985, as Baroness Thatcher’s government was debating how to dispose of Westland Helicopters, Michael Heseltine invoked the experience of the Falklands War, observing that sovereign freedom of action hinged not upon one’s ability to build any given military platform domestically, but to modify and repair them. Lasting interruptions in supply apply mostly to countries like North Korea. British military performance in Afghanistan and Iraq has only been aided so far by the recent supply of armored vehicles from South Africa, the United States, Sweden, and Singapore, so it is hard to see why what applies in an emergency should not apply generally.

It is not even obvious that this is altogether bad news for BAE Systems. The company is bidding on the Army’s two priority projects—the Warrior Lethality Improvement Program (WLIP) and the FRES tracked scout vehicle—but neither bid involves a wholly British-build product. The WLIP entry comes from the CTA consortium with Nexter, and its light tank will probably be based on Hägglunds’ CV90. Allowing offshore production may actually provide BAE’s management the encouragement needed to source what they need from where they can most efficiently get it. That’s just good business, regardless of the industry.

Kodachrome and the Kansas Army Ammunition Plant

Today’s Wall Street Journal carries a story about how Kodak is ending the Kodachrome line of wet film. Since I haven't shot a roll of actual film in about ten years, I'm not broken up, but there are people who love the stuff. I noticed therein that Kodachrome is so difficult to process that there's only one company in the US still certified by Kodak to handle Kodachrome anyway. That is (got to love the name) Dwayne's Photo in Parsons, Kansas. Parsons is a little town with an adorable Victorian downtown that was host to the Kansas Army Ammunition Plant from 1950 until early this year: it was BRACked in 2005. Back then, I did a small project for the operators, Day & Zimmermann, trying to (unsuccessfully) save the place from the Commission, and a colleague & I actually spent a whole day in Parsons back then. I don't normally talk about past clients, but after so much time and little effect, there seems little harm. DZ are still hoping to make munitions at the plant, having secured the PPE necessary for the work from the local redevelopment authority. Dwayne's apparently employs about 100 people, which probably makes it the fourth largest employer in the county, probably after the local hospital, DZ, and the country government. In any case, it's an entertaining and remarkable geographic connection between two industrial enterprises—wet film and artillery shells—that may be on the downside of sales volume, but which continue to have a truncated-but-important role for their buyers. It’s rather an indication how there’s often money to be made from customer segments that all others have passed by.

Aviation Week's approach with its 'Best Aerospace & Defense Companies' needs some retooling

Aviation Week & Space Technology released early this month its list of the Best Aerospace & Defense Companies for 2009. The methodology [1 June 2009, p. 65] behind the rankings requires some comment, as it constitutes one of the worst financial analyses I’ve ever seen. If you want all the details, click on that word above for Aviation Week’s own one-page elucidation of the approach. After reading that a few times, the rest of this will make more sense.

The first and foremost problem lies with the regression used to "validate", as it were, the approach. The logic appears circular. Aviation Week’s analyst seems to have regressed one set of accounting ratios on another set of ratios, and claimed a correlation coefficient of 99 percent. The magazine hasn’t published the list of the underlying ratios, but we might guess that the four response variables incorporated many of the supposedly independent variables. Rather than bragging about that ninety-nine, the editors should have recognized it as a red flag. The effect is at least one of collinearity, and the importance of avoiding it is taught in every introductory multivariate statistics class. It’s even possible that the analyst was essentially regressing X on X. The error is so embarrassing that a colleague and I each read the paragraph describing the approach several times, just to be certain that the writer really was saying something that silly.

The second problem is found in the egregious data-mining. Given the probably irredeemable collinearity of the method, the issue may be merely stylistic at this point, but it's still severe. Whoever piled on all these metrics has clearly missed the point of Occam's Razor. A model that relies on so many inputs is not just inelegant; it actually lacks explanatory power, because comparisons cannot be made with reasonable expectation as to the underlying differentiators.

The third problem is the lack of a clear and defensible objective function. Attempting to look forward, the analyst chose not to simply measure total shareholder returns—even though it seems that all the companies in his large-company population are publicly quoted. We might pause for a moment to think about the forty years of financial research that tell us that predicting future performance across companies is simply impossible. As Gene Fama put it in his blog back in April, “it's understandable, however, that hedge fund managers [and equities analysts] are immune to this evidence, since it's a threat to their existence.” But let's forget about that for the moment, and let this guy try. His objective function is a qualitative grab bag of four substantially overlapping measures—ROIC, Earnings "Momentum" (see below), Asset Management, and Financial Health—that he equally weights. He doesn't even take a stand on which ones might be more important.

The first problem, if it is indeed as severe as it appears, invalidates the method and impeaches the findings. The second problem would as well, even if a truly independent set of variables had been chosen for the model. The third problem would at least cause us to smirk strongly, even if we could bear to stay in the room. Yet there are still more problems.

One of the aforementioned four estimators is earnings momentum. Earnings are indeed classically easy to manipulate, at least for a while. Earnings momentum then becomes an addictive game for dishonest CFOs and day-traders alike. That's why everyone who's serious in finance looks at free cash flow, which is hard to manipulate, even if it requires a little work to calculate. Free cash flow, however, appears nowhere in the model.

I would mention that companies in the range of $3–10 billion in revenue are judged according to two sets of criteria: one for companies from $1–5 billion, and another for companies with more than $5 billion. This would be material were it the only problem. At this point, including it on the list of complaints is almost boring.

I wish that I were overstating just how bad this methodology really is. To produce something like this, one must have slept through or missed his introductory statistics, finance, accounting, and microeconomics classes. My best guess is that whoever is responsible was recently laid off from a job as a financial analyst at Freddie, Fannie, or a Norwegian village’s pension fund. I anticipate that Aviation Week will do better next year—as it’s a great magazine, it really must.

Why amphibs are like smart phones: a bit on the relationship between platforms and applications

Last month, Paul McLeary of Aviation Week’s blog Ares observed how

        Chairman of the Joint Chiefs of Staff Adm. Mike Mullen seems a little annoyed that he has all of these great ships, but doesn't have enough people to put on them. During a brief Q&A with reporters following his address at a Navy League conference in Washington, he groused that “I’m six or seven years into a time where I had an awful lot of amphibious ships without Marines on them.”

        He said that while he recognizes that “we need that [amphibious] capability for the future,” the question is how much amphibious capacity does the United States need on a “day-to-day” basis. In the end, like everyone else, he’s waiting on the 2010 Quadrennial Defense Review to come out before making up his mind what kind of amphibious capacity the Navy and Marines need.

The admiral may be able to use more of that amphibious capacity than he realizes, as long as he realizes that it’s capacity for more than just amphibious assaults.

Yesterday was the fourteenth anniversary of the rescue of USAF Captain Scott O’Grady, which rather reminds me of this issue. O’Grady was shot down while patrolling over Bosnia in his F-16, but his rescue was affected not by an USAF rescue squadron, or an Army commando unit, but by a Marine task force flying off the helicopter carrier Kearsarge. As the Navy’s on call amphibious flotilla in the Adriatic Sea was closer to the crash area than the other services’ bases in Italy, the Marines on board got the call. As Robert Gates grouses out loud as to why the USAF needs a dedicated fleet of combat search-and-rescue (CSAR) aircraft, the incident of recent history is worth recalling. Over the next few years, those helicopter carriers will routinely be deploying with squadrons of V-22 Osprey tiltrotors, which may have some unresolved issues as CSAR aircraft, but which will fly further and faster than the Chinooks that the USAF was hoping to buy for this purpose.

This hasn’t been the only alternative use of the asset. The Navy and Marines used the Nassau in 1991, and the Bataan and the Bonhomme Richard in 2003, as “harrier carriers”. The two embarked several fighter squadrons of Marine Air Group 13, and flew hundreds of combat sorties over southern Iraq, substantially in support of advancing troops of the British Army and the Royal Marines. It’s rather analogous, for that matter, to how the Royal Navy employed its Invincible-class carriers before the commissioning of HMS Ocean, its own dedicated helicopter carrier.

I could discuss the recent article in Naval Institute Proceedings on “influence squadrons”, but the real question for industry is how to use this evolving openness towards asset flexibility to strategic advantage. For the US Navy, an unfortunate artifact of the Clinton Administration’s encouragement of a duopoly in domestic military shipbuilding in the 1990s is the concentration of aircraft carrier production at Northrop Grumman. Northrop is building the Gerald Ford-class ships in Newport News, and the Wasp-class ships in Pascagoula. For General Dynamics, trying to build a helicopter carrier at NASSCO could be quite a stretch.

For the builders of smaller ships, such as littoral combat ships (LCSs) and joint high-speed vessels (JHSV), however, there’s something here. The modular nature of these vessels means that they are already used or meant for uses as varied as minehunting, submarine-hunting, shore bombardment, commando infiltration, general troop transport, and the most laudable suppression of piracy. Even more is possible: Lockheed Martin has been advertising a smaller-scale Aegis system for its version of the LCS-type: the ship might not carry much more, but would pack a powerful air defense suite for coastal applications.

Of course, this is not the only market segment in which we find this dynamic. Military automotive firms sold blast-resistant armored vehicles (MRAPs) for more than just shuttling foot soldiers on the inside: from early on, they were meant to carry bomb-disposal robots, electronic jammers, and remotely-controlled machineguns and grenade launchers. They were soon fitted out as ambulances and battlefield surveillance vehicles. Note that there was no need for the manufacturers to have all the capabilities for these applications in-house; sourcing the modular components from subcontractors proved more than workable. The drone aircraft business grew similarly: after Insitu realized that the plane it marketed for monitoring weather and finding tuna would have military applications as well, it didn’t go about building a sensors business to enter that line of business.

Improving the marketability of smaller, modular platforms—air, land, or sea—is rather like selling computers or smartphones. The base platform requires an architecture sufficiently open for interested parties with plug-and-play subsystems to invest in your success. Sometimes, the learning curve or the marketing challenges are serious enough that the platform builder itself needs to blaze a trail by investing in demonstrations of those capabilities in advance of customer demand. That can be a foreign concept to traditionally-minded military suppliers, but how many of the more successful medium-sized contractors in this business got going in the recent past.

A short treatise on uncertainty and the segmentation of military markets

Much has been made lately about the damage that the Obama regime is doing to the American economy through its Peronist shakedown of Chrysler’s secured creditors. As recounted in Mario Rizzo’s recent review of Raymond Moley’s old book, After Seven Years (Harper & Brothers, 1939), it’s not a wholly new problem from Washington. Moley was a conservative Democrat who quit working for FDR—the first guy in the White House who thought that he could stimulate and orchestrate his way out of a downturn—after the guy really started to go off the reservation in the mid-1930s. Or, as Robert Higgs put it, “insufficiency of private investment from 1935 through 1940 reflected a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns.” Government provides the legal certainty that business needs to operate; regime uncertainty, on the other hand, can be devastating to innovation and initiative.

Plenty of businesses and their enthusiasts like certainty—particularly those who benefit from existing ways of doing things. In an essay in the May issue of Armed Forces Journal, "Let's make a deal," Harvey Sapolsky of MIT argues that the US federal government should seek

        to reestablish a buyer-seller collaboration in most segments of the industry. The government would guarantee a level of employment and profitability for the firms. The firms would collaborate with the government on the design and production of new systems... Dynamic segments of defense such as UAVs and sensors, where the technology is changing rapidly and economies of scale of not important, can be left open to competition.

It is important to note that the 2010 Pentagon budget does this to some extent, though on a program-by-program basis. While ending purchases of F-22 Raptors, MQ-1A Predators, and Zumwalt-class destroyers (er, battlecruisers), the Defense Department is putting its chips on the F-35 Lightning II, the MQ-9 Reaper (and MQ-1C Sky Warrior), and Arleigh Burke-class destroyers. Termination of the alternatives provides a credible commitment that partly forecloses options for future governments. Another regime in Washington could theoretically dump the Lightning II for the Rafale or the Typhoon, but this is rather unlikely.

However, Harvey’s deal, if more broadly brought about, would be a profoundly bad deal for taxpayers. To understand why, let’s revisit some specific goings-on about combat aircraft. While the F-18E/F and the F-35C competed for attention in the budget, the competition for further upgrades of older F-16s and F-15s was more new MQ-9s. Harvey admits that drone aircraft is a dynamic business, but he errs in calling it a market segment. If you’re wondering about this, open one of your old marketing textbooks. Ground attack could be called a market segment, in that it addresses customers’ needs for a solution to a particular problem. Any of the aforementioned aircraft can drop 500-lb JDAMs on hostile troops; the Reaper just does it more cheaply at much longer ranges.

This industrial dynamism and fungibility of firepower exists, however, well beyond UAVs. Zumwalts, it was thought, had been competing with Arleigh Burkes from much the same builders. Since the former were touted for their utility close to shore and the bombardment potential of their 155 mm guns, it’s fair to ask whether they were actually competing with Independence and Freedom-class littoral combat ships and their Netfires rockets. Is there more need for buyer-seller collaboration in the design of new heavy tanks?! Was long-term certainty so necessary to the success of MRAP program?

Harvey’s deal is thus extraordinarily unlikely to be put into practice, simply because certainty is so hard to come by in military preparedness. Peck & Scherer observed as much back in 1962. And that’s not bad, as the opportunity for risk is what creates the potential for outsized rewards. While a few contractors can probably plan for large production runs, the rest can sharpen their pencils. Now, for some regime certainty, we just need a bit less fulmination about fuzzy constructs like “windfall” profits. Yeesh.