James Hasik

On the 21st century aerospace company

I was recently asked to come up with 750 words (or less) “the 21st century aerospace company”. The essay was meant as a read-ahead for an upcoming industry conference, and not many people have the time to read multiple monographs in advance. This sort of brevity can be challenging, at least for me. One of my best clients recently described me as a “man of many but well-chosen words” (I’ve written a few books, after all). The final version was edited, but what follows is what I initially dreamt up—and in just 656 words. Comments, as always, are appreciated.

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The future of aerospace may seem today a confusing mixture of continuity and change. Recessions hit our commercial business hard, but business invariable recovers to airmail its people around the world. Military spending is less susceptible to downturns, but few countries now face the existential threats that drove spending in the past. Globalization’s discontents continue to grumble—and sometimes violently—but free markets remain the global engine of growth—and particularly for our line of work. Technology continues to advance, but is notably becoming more modular and autonomous. Established centers of production endure, but worldwide trade is shifting as markets emerge. Against this backdrop, the industry remains committed to innovation, but disquieted about its future.

Of course, all these things were true as well in 1993, and thus we have been waiting almost two decades for the world to acknowledge that the Cold War is really, really over. Back then, commercial manufacturers found the Brazilian aircraft industry a Third World indulgence, and sourcing from China unthinkable. Today, an Embraer or AVIC (One, Two, who knows?) may yet prove tomorrow’s Airbus. Military suppliers in the US may still consider the so-called Last Supper of that July a milestone, but the Pentagon proved insufficiently enlightened and ruthless to restructure the industry to its benefit. The latest candidate milestone, Robert Gates’ budget announcement of April 2009, may seem more conservative, but its signals may yet prove more salient. Money matters more than mere guidance, and the patterns of spending are finally qualitatively changing.

Consider that the iconic airplane of the wars in Iraq and Afghanistan, the Predator, is built at a company that had but twelve employees in 1989. Consider that the satellite system that holds the campaigns together, the GPS, flourishes through user equipment designed and built by an industry too diverse, distributed, and rapidly developing to dominate. The provenance of much of the technology in these segments has been substantially commercial and multinational: dozens of companies worldwide make drones, and GPS will soon be joined in orbit by fully-functional, open-access siblings from Russia, China, and the European Union. If these are the leading systems, should not we expect more of their kind in the future?

Change will not come overnight, and thus may be hard to spot. Demographics and geopolitics will continue to favor the United States as the nexus of the business. The excess inertia of existing standards and installed asset bases will moderate the pace of change. The path dependence of existing portfolios will hold the industry’s structure in place for some time. Nonetheless, the success of these platoons of emerging suppliers shows the direction of the industry. Scale, scope, and national origin are receding in importance; responsive innovation is winning over ponderously planned programs; and entrepreneurial suppliers are infiltrating military markets heretofore presumed unassailable.

So what should today’s companies do? First, acknowledge that the past twenty years have constituted a transition from a bipolar world of armed standoff to a globalized world of collective security. Order books ten years on will differ greatly from order books of ten years ago, and now is the time to build the corporate capabilities to meet customers’ future needs—from wherever the technology originates. Next, question whether the conglomeration following the industry’s last sea change will be allowed to recur. Trying to buy one’s way into new segments will not generally reward shareholders; rather, divestitures may unlock more value than large mergers. Perhaps most importantly, understand the interrelationship of government and industry in aerospace innovation. Unmanned aviation and satellite navigation have required official sponsorship to launch, but have blossomed rather apart from formal requirements and planning processes. As technology around the world becomes more accessible and recombinative, we can expect these successes to continue. The best businesses of the next few decades will be built with global viewpoints and interrelated resources, but most essentially, the courage to innovate ahead of the curve.

Poltava, the Congo, and the Nordic Battlegroup: Evolving Swedish military needs and signs for industry structure worldwide

Yesterday was the 300th anniversary of the Battle of Poltava, the famous battle between Swedish and Russian armies led by Charles XII and Peter the Great, respectively. It was a crushing defeat for Charles: unable to return to Sweden, the king would wind up spending the next five years in exile in Turkish Moldavia; captured by the Russians, his second-in-command spent the next nine years as a POW. More generally, the battle is generally considered the end of Sweden's bid for world power status, and the rise of Russia’s.

Sweden as a world power may seem a bit far-fetched, but Sweden has significant influence worldwide, striving to “punch above its weight” for a country of just nine million people. Even during the Cold War, when Sweden worked to build defenses to ward off the Warsaw Pact without joining NATO, successive governments in Stockholm kept troops abroad on peacekeeping duties as part of their commitment to collective security. During the Congolese Civil War (1961–64), the Army and Air Force even engaged in relatively heavy combat. The relatively centrist government in Stockholm today may not be looking for fights overseas, but it is keen to build more capability for this sort of work.

After all, despite the recent unpleasantness in the Caucasus, the Russian threat is generally considered to have subsided, so the emphasis in Baltic security has necessarily shifted towards increased overseas commitments. The peace dividend is being applied not just to relatively lower military spending, but to opportunities to enforce and keep the peace further abroad. In Sweden, in the UK, in the US, and throughout the world, this is necessarily leading to different priorities in spending and patterns of industrial structure. This week saw two notable developments in Sweden along these lines:

• Patria’s armored vehicle sale to the Army. The FMV selected Patria’s AMV as the 8x8 meant to equip battalions of the Swedish Army meant for overseas service. BAE Systems Hägglunds is laying off 300 staff as a result. Dagens Industri reported yesterday that the head of the business unit at BAE that control Hägglunds sent a rather nasty letter to Prime Minister Reinfeldt, going as far as to question whether the company "would continue to invest in or have a presence in Sweden in the wake of the lost order." (That's the translation from the English-language paper in Stockholm).
• Saab’s offer of a 50-50 partnership in Brazil. Saab has had meaningful export success with its Gripen in South Africa, Hungary, the Czech Republic, Thailand, and the UK (at the Empire Test Pilot School). It is still chasing opportunities in Switzerland, the Netherlands, and elsewhere. India and Brazil, however, are the big prizes. In pursuing Brazil, Saab recently offered to shift up to half of Gripen production there—today’s Brazilian aircraft industry, after all, is impressive, if only for Embraer.

Some years ago, a past head of the FMV observed that there was a defense industry in Sweden, but not a Swedish defense industry per se. That is, research, development, and production were becoming increasingly internationalized, and the trend was not abating. While national requirements clearly remain for a country with such relatively unique geography, these don’t extend to every system. Hence, Hägglunds’ work on adverse-terrain vehicles like the Bv206S and the BvS10 Viking are more likely to garner national support than work on a brand-new 8x8 vehicle, regardless of how compelling the concept is. The Gripen was initially tailored to Swedish requirements, with its ease of operation and maintenance, and short-field capabilities. Today, the exact future path for the Swedish Air Force is less clear, so Saab is aggressively looking worldwide for opportunities, and specifically outside of what Gripen marketing director Bob Kemp notes as “the five members of the UN Security Council.” In particular, not everyone wants to put up with American restrictions on technology transfer.

The lesson from Sweden this week is indeed broadly applicable beyond the Baltic. In the UK, the Ministry of Defense has announced that it is unconcerned about where its armored vehicles are built, so long as they can be maintained and upgraded in Britain, and it controls the intellectual property behind them. The United States will remain an exception for some time—as The Hill reports this week, the US-UK Defense Trade Cooperation Treaty is still unratified two years after George W. Bush and Tony Blair signed it. Efforts to burden it with additional “oversight” provisions, however, have the feel of a rearguard action that is merely slowing the retreat. Russia will be Russia, and we are not predicting any sudden changes in German and Italian affection for local vehicle- and ship-building. But overall, the concept of dominating local markets by a Wal*Mart strategy—controlling a local asset too big to economically displace—is falling in utility.

It's not easy being green in this business, but it sure can pay off.

One of my colleagues observed today that according to a recent survey in CFO magazine, US business managers appear only half as likely as their European or Asian counterparts to consider environmental initiatives as worthy of sustained investment. It’s possible, another suggested, that the Americans are just being more honest: most businesses consider, say, energy savings efforts as sensible cost-reduction measures, whether saving kilowatts is good for the planet or snail darters or whatever. Consumers’ decisions often get down to price: British Airways carbon offsets program—in which travelers willingly pay more their tickets so that BA can plant trees somewhere—has reportedly had a take-up rate below five percent.

In commenting myself, I made the point that I am very suspicious of survey opinions, as they are considerably cheaper than cash. Thus, I tend to look in my work at how people and organizations—and not just early adopters—actually spend their money. As Vinod Khosla recently said, in explaining the up-and-down sales rates of the Prius, “five percent of Californians will buy anything.” A perennial money-loser for Toyota, the car could be derided as a marketing stunt—or it’s quite possibly a little something more.

Suppose that I run an airline, and I think that a government, in whose jurisdiction I have assets or operations that are difficult to relocate, is going to tax the life out of my petroleum usage or carbon emissions or something like that. Getting ahead of the curve and figuring out how to fly on pixie dust would be green, but more to the point, it would keep my business from tanking. If I’m running Toyota, I might some money on that Prius thing because the R&D and the burnished image will keep me ahead of my rivals.

This is obvious, of course, but we might ask ourselves how aircraft manufacturers and military contractors might crassly pursue self-interest in this environment, either by surfing the tide of policy, or by attempting to influence its direction in seeking rents. If build a cleaner jet engine, I’d want airlines required to buy the cleanest engine they could; if I build a cleaner diesel engine, I’d want EU military forces signed up for the maximally restrictive emissions controls.

Almost every significant military contractor appreciates how influencing legislation and policy important aspects of strategy, but the efforts are usually focused on the end products—getting governments to buy one’s own kit instead of the other guy’s. Influencing the requirements-setting process is more subtle, but upstream of that is influencing regulatory action. Engine manufacturers, energy firms, and construction companies understand that, but the more clever military contractors could probably do more for themselves in this arena.

And by the way, my VW New Beetle does sound a lot cooler than any of my Austinite neighbors’ Priuses.

Could everyone please stop using the term "light infantry"?

I heard the assertion today from a well-connected friend in the business that

The [US] Army is mindlessly headed in the QDR [Quadrennial Defense Review] toward a force structure that's mostly light infantry, and it will come to regret this at some point in the medium-future.

I would like to ask, once and for all, that everyone please stop using the term light infantry. Call them infantry, riflemen, regiments of foot—whatever. Just stop using that adjective light. Infantry might be light if they’re walking about on foot, but once they saddle up in armored vehicles, there’s nothing light about them. If they’re flying to their objectives by helicopter, they’re own gear might be light enough to carry, but the logistics footprint of their accompanying aviation isn’t light either. Still, troops of the 101st Airmobile Division aren’t light if they’re riding in MRAPs—at that point, whether they like it on not, they’re effectively panzergrenadiere. And as the campaigns in Iraq and Afghanistan have demonstrated, infantry are going to ride under armor when that’s appropriate regardless of their shoulder patches or cap badges.

This is more than a matter of nomenclature—it’s a fundamental issue of force structure, generation, and employment. A modern infantry unit, trained for action across the spectrum of warfare, is a very flexible instrument. Send it out on foot, and it can chase Taliban up-and-down the slopes of the Hindu Kush. Mounted in armored vehicles, it’s relatively protected from interdiction on the way to its stepping-off point, and can subsequently exploit gaps in enemy defenses by motor march. With enough antitank weapons and on-call firepower, it can defeat even the most heavily armored forces opposing it.

Questions about that narrative can be referred to Stephen Biddle’s excellent Military Power: Explaining Victory and Defeat in Modern Battle (Princeton University Press, 2004). Biddle’s case studies and statistical tests argue convincingly that factors like training and combined arms doctrine are far better predictors of success in conventional land battles than the weight of armor, the volume and precision of firepower, or the latency of technology. These are important factors, but only inasmuch as they enable well-handled forces to more severely punish the incompetence of their opponents.

As Biddle observes, the Marine expeditionary force that frontally assaulted Iraqi lines in Kuwait in 1991 achieved its breakthrough in roughly the same amount of time, and at roughly the same casualty rate, as the much heavier and more recently equipped Army corps moving through the desert to its left. Following this argument, what US land forces need is not more or newer armor or artillery: these they have in more than sufficient quantities. With tens of thousands of armored personnel carriers on hand, there’s no concern that anyone is going to walk when he should ride. Asking Oshkosh to build another 5,244 troop carriers by next March isn’t lightening the infantry, either. So, we can all probably take a deep breath now.

Rather, if anything is important, the Army should be very careful not skimp on training, maintenance, and doctrinal development, regardless of budget problems. And frankly, the QDR may very well recommend a US Army that’s structured more like the US Marine Corps: largely composed of infantry that can walk, ride, or fly as the mission requires, and with enough tanks, artillery, and attack aviation that it can add armor and firepower as conditions permit. Are there growth areas, then, for companies with interests in land warfare? Absolutely. Even if more and newer tanks aren’t the answer, land forces will continue to consider continued healthy spending on C4ISR systems, but particularly on those that actually help them make better decisions in combat. That was the one part of the Once-and-Future Combat System program that survived the recent termination relatively intact, and that’s like a pattern that will hold for some time.