James Hasik

What Oshkosh's FMTV win says about competition, industry structure, and intellectual property.

Last week, the US Army announced the winner of the recompetition of its supply agreement for medium trucks. The implications of the outcome merit some analysis.
Since 1992, the Army has purchased its Family of Medium Tactical Trucks (FMTV) from a factory in Sealy, Texas, about fifty miles west of Houston. (The Army refers to the entire family of related vehicles as the FMTV, but awkwardly, also calls any individual truck an FMTV. Someone please call William Safire about this.) The business was started by oilfield equipment firm Stewart & Stevenson; the original design was licensed from the Austrian truck firm Steyr, which is why American troops are found driving rather European-looking cab-over vehicles. Seventeen years and more than 54,000 trucks later, the factory is now owned by BAE Systems, and is the centerpiece of its Global Tactical Systems (er, Trucks) business.
At least, it was until about now. Years ago, the Army had bought the rights to the design from Stewart & Stevenson, and in May, bids were due in a build-to-print, fixed-price competition. Late on Wednesday, Oshkosh revealed that it had won the next contract from the Army, and that production (and at least 2,000 jobs) would be going to Wisconsin. For both companies, this was a huge deal:

• Oshkosh, after expanding several times over in the past decade, had been losing money recently, as its fire, trash, and concrete truck businesses had turned down in the recession. By the end of day Thursday, Oshkosh’s share price was up 23%. Moreover, after production of the FMTV winds down at BAE next year, Oshkosh will be the sole source of all medium (FMTV, MTVR) and heavy (HEMTT, LVSR) trucks for the US Army and Marine Corps.

• BAE Systems, having run the plant solely to produce the FMTV and its variants (LTAS, Caiman MRAP), may very well be left with nothing to do in Sealy after 2010. The company had hoped to win the MRAP All-Terrain Vehicle (M-ATV) contract, but Oshkosh landed that last month. Now, unless the Joint Light Tactical Vehicle (JLTV) program both proceeds and goes to the Lockheed Martin-BAE Systems team, the company will have nothing foreseen for filling the factory.

Indeed, as huge a deal as this is, we’ve gotten several questions from around the industry about it:

• What happened? We can’t say for sure, but it’s quite possible that Oshkosh simply beat BAE Systems on price. In the M-ATV competition, Oshkosh won with a bid of roughly $385K per truck; speculation before the announcement widely held that an M-ATV would cost about $500K. That suggests that Oshkosh just knows how to build trucks really efficiently, which is what one would expect for a company in a relatively competitive business.
• Does this mean that the Pentagon doesn’t care about a “competitive industrial base”? It’s just not relevant here. Colleagues have asserted to us recently that the Army Department, for one, has never paid much attention to industry structure. But even if it would, this wouldn’t be the place to start. In supply agreements for long-term contracts on commercially analogous items like trucks, there is little problem in putting as much business with one supplier as any customer cares. Allocating contracts on justifications other than quality and price is unhelpful here. We should all remember that Stewart & Stevenson entered the truck market with this (licensed) product back in the early 1990s. Thus, it's not just that the Army could turn to Daimler or MAN for trucks—market entry has already proven quite possible. There's no reason to agonize over future competition: wave enough money, and they will come.
• Could BAE Systems successfully protest the decision? Doubtfully. This competition was a build-to-print, fixed-price deal. Neither BAE Systems nor any potential supporters in the government could plausibly argue that Oshkosh couldn't be trusted to build trucks. Conversely, if the Army had given the contract to BAE Systems, for some sentimental reason, and yet at a higher price, that decision could not have survived a protest from Oshkosh The GAO would right now be ripping everyone's faces off.
• Was this all about the Army’s ownership of the technical data package (TDP)? That was necessary, of course, but not sufficient. The Army couldn’t buy Strykers from anyone but General Dynamics because it doesn’t own the rights to the design. It could choose to buy FMTVs from Oshkosh because it owns the rights, and because it doesn’t think that building to that print is too difficult. The Army could theoretically choose to compete its next upgrade to the Abrams tank (the proposed M1E), but it isn’t likely to do so, because this flagship vehicle is a tad more complicated, and a bigger deal if something goes wrong.

To some extent, then, one could say that this was an easy decision with relatively narrow implications. The relatively commercial nature of the product meant that Oshkosh could be trusted to deliver, and the high procurement volumes expected meant that Oshkosh could bid low even with a long learning curve. Oshkosh knows how to build trucks, so figuring out how to make the FMTV line lean shouldn't take too long.
But that might not be the whole story. Consider that on Friday, the Army released a request for information (RFI) regarding the upgrade of more than 1,000 MRAPs to the Panther Medium Mine Protected Vehicle (MMPV) standard. The MMPV carries the engineers of the Army’s route clearance companies; as the program was getting started in a Pentagon business-as-usual, buy a few hundred trucks sort of way, the MRAP program raced ahead to procure thousands. The Army now wants many more MMPVs for route clearance, but the Category II MRAPs lack some critical features, such as remotely operable bomb-poking arms and robot deployment ramps. Note further that the RG33L is the basis of the MMPV, and the Army has over 1,000 RG33 MRAPs. The RFI has indeed gone out to firms other than BAE Systems, signaling that the Army may trust third parties to undertake these scale and complexity of an upgrade, and on a front-line vehicle.
As one of our friends in the business put it,
all of this harkens to an idea that the several of us have been tossing about in various forms for a couple years. Competitive advantage in US defense contracting increasingly arises from anticipating customer requirements and providing them a pretty-good solution fast, as opposed to the traditional strategy of waiting for the customer to decide what he "requires", taking his money to develop a "solution" to the "requirement" at six percent margins, and then hoping for a long production run of the thing at ten percent margins. Contractors have always had the problem that the traditional approach buys them no sustainable advantage in intellectual property: they’d still have to fight the federal depots and other competitors for the aftermarket. The new twist on this paradigm is that even the production run is no longer a lock.
We’ve been alerted that more than a few Army program managers are, in the current budget environment, thinking about competing quite a few deals that would have gotten a pencil-whipped justification & approval just a short time ago. We think that rather leads to a to-do list for military product portfolios today:

• Think carefully about what rights you’re willing to sell to government customers, and for how much. In no case should rights be breezily signed away.
• Catalog extensively what intellectual property you’ve developed on your own, what you’ve developed with which customers’ money, and what you’ve jointly developed.
• When appropriate, hire some good patent attorneys and IP consultants to help you sort out the economics behind just what is worth how much.

There may even be hidden benefits to getting busy in this way. This is a technologically dynamic and engineering-intensive business. Taking full stock of what you’ve got both in the field and on the shelf could quite plausibly lead to commercialization opportunities that you never knew you had. And with declining military spending on the horizon (at least in the US), that’s a sound move to make.

"Should we expect more surprises in Afghanistan?"

Absolutely. That’s the short answer.

The question comes from a researcher and graduate student at the Turkish National Military Academy. Fairly put, it wasn’t that simple, but came in the middle of a long and well-considered commentary to me on the evolution of the MRAP concept. I’ll have more to say about that in the next few weeks, but for now, let me at least add that the surprises don’t all come from the Taliban.

NATO, that is, has more than a few of its own, and industry is a major source of those. As I was browsing through my photo library today, I noticed that my picture of Oshkosh’s famed Terramax robotic truck was from last year’s AUVSI symposium. Granted, that was the truck that crashed through the post exchange at DARPA’s Urban Challenge, but the field was impressive all the same. After this year’s AUVSI and other shows of the trade, we can imagine what surprises the Taliban will be facing in 2010.

Could it happen to a more deserving lot? I think not, which makes relishing the thought all the more satisfying. Offensive innovation is also rewarding when done right—both for the forces and the folks supplying them.

Arsenal Airplane? This should be no surprise.

On Friday, Inside the Air Force reported that

        The Pentagon is considering a modified commercial wide-body aircraft packed with cruise missiles as a possible low-tech replacement for the Air Force's aging B-52 bomber fleet, a previously unreported option being floated as part of a wider assessment of how the Defense Department might modernize its long-range strike capabilities, according to DOD sources.

        A “tiger team” formed earlier this year to examine the underlying need for a new long-range strike aircraft is looking at the option of a so-called “arsenal airplane,” according to Pentagon officials. The team was set up after Defense Secretary Robert Gates in April canceled the fledgling Next-Generation Bomber program.

        At issue is a fundamental question about the composition of the future bomber fleet: how much of it must be capable of penetrating sophisticated enemy air defenses? And what, if any, portion can operate like the B-52 does today—at a safe distance from enemy air defenses?

Frankly, none of this should be surprising, and for two reasons:

1. The B-52s aren’t remotely penetrating bombers, but they’re the ones needing replacement. There were plenty of good reasons for terminating the Next-Generation Bomber (NGB) project, but somewhere near the top of the list had to be the misordering of priorities. The NGB seemed intended to replace the B-2 Spirits—oddly, the newest segment of the long-range bomber fleet, and not the B-52 Stratofortresses, the oldest segment. If the B-52s work as standoff missile carriers today, then arguing for more aircraft like the lightly used B-2s will be difficult.
2. This idea is at least thirty years old. I first remember hearing about this idea in the early 1980s, when no one really thought that the B-52s could reliably penetrate even Warsaw Pact air defenses. That was the whole point of outfitting them with the Air-Launched Cruise Missiles (ALCMs)—but if B-52s could employ ALCMs, the argument went, then why couldn’t an airplane with lower operating costs, like a converted airliner?

So frankly, if the B-52s are really in dire need of replacement, and they all operate from safe standoff, then it’s really unclear why the performance of a converted airliner wouldn’t suffice for that segment of the fleet. There are plenty of ways to fulfill that requirement, but two alternatives stand out as minimizing risk and enhancing commonality:

• Buy a bomber version of the Navy’s patrol plane. American and Canadian P-3s are operating over Afghanistan today on surveillance duty, and were they equipped for it, dropping JDAMs from the weapons bays just wouldn’t be a stretch. To replace those rather old P-3s, the US Navy is just now starting to buy P-8 Poseidons from Boeing—basically 737s converted to drop sonobuoys and torpedos. Adding some new air-launched cruise missiles and bombs to the repertoire would be a routine integration matter.

• Buy a bomber version of whatever tanker the USAF buys. After that last protest decision, and the shifting of the bidders’ plans, that could be either a Boeing 767, a Boeing 777, or an Airbus A330. The integration challenge here would be a bit greater, simply because none of those aircraft are known to have been cleared for weapons separation, but the fundamental principles are pretty much the same.

Naturally, any such project would be a boon to either Boeing or EADS, and a relative loss to Northrop Grumman, which had begun designing the NGB (in a black project that was too big to hide on a public company’s books). Northrop could be anticipated to team up with EADS to offer a bomber version of the A330, particularly if the USAF winds up confirming is desire to order the Airbus as its next tanker. On the whole though, the benefits ex ante probably accrue to Boeing, and not just on home field advantage. Boeing builds a torpedo-bombing airliner today, and EADS is still seeking its first sale of a maritime patrol Airbus. That will play well when the risk-reduction slides go up at the pitch briefings.

Whatever the outcome, however, let’s note that “low-tech” is a poor description of any of the airplanes in question. Some aspects of parametric performance may be lower, because the radar cross sections are so much larger, but the lower operating costs and greater upgradeability of the aircraft may more than make up for that. Technology, we’re figuring out in the post-Cold War context, means a lot of things.

The Once and Future Combat System

If you have not seen our new paper on the armored vehicle business—The Once and Future Combat System—you can download a copy at our firm’s website. This is the third paper in our series of occasional viewpoints this year on what we expect for the industry in the near future.

We weighed in on this particular topic because after eight years of war in Afghanistan and Iraq, ground forces around the world have at their disposal a potential wealth of lessons to be learned. The emphasis in force structure has shifted to the infantry, and the need for blast-protection in vehicles is essential—across the whole of the force. This might call for more MRAPs, but the demands of the campaign in Afghanistan are showing how a large off-road vehicle is needed. Heavier vehicles might offer greater ballistic protection, but a reasonable chance at stopping large caliber cannon rounds or anti-tank missiles requires a vehicle as massive as a heavy tank.

Thus, we expect that the next generation of troop carriers—and particularly those of the US Army—will likely be wheeled 8x8s, just with v-shaped hulls for robust blast-protection. Designs will likely be sourced from a company with experience in the 8x8 segment; save for General Dynamics, all of these are based outside the US. Those manufacturers are finding American production partners to ensure adequate domestic content and technology insertion. In the long run, though, the builders of these vehicles may not be solely those manufacturers of tracked combat vehicles with lineages in the Cold War. Rather, speciality truck manufacturers are increasingly showing how they have the skills needed for wheeled armored vehicle manufacturing.

Firms planning to compete for business in this environment face a challenging set of strategic questions, for which the answers are not obvious. Management in the armored vehicle industry today requires a whole-of-business approach, involving multiple functions of the enterprise in daily decisions. After all, these are wartime conditions, and the pace of change has picked up.