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.
- 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.
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.
