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  December 14, 2017 | International, Aerospace, Naval, Land, C4ISR, Security

  American exodus? 17,000 US defense suppliers may have left the defense sector

  WASHINGTON — A large number of American companies supplying the U.S. military may have left the defense market, according to a study announced Thursday, raising alarm over the health and future of the defense industrial base. The Center for Strategic and International Studies study said the number of first-tier prime vendors declined by roughly 17,000 companies, or roughly 20 percent, between 2011 and 2015. The full study, due to be released in January, was authored by CSIS Defense-Industrial Initiatives Group Director Andrew Hunter, Deputy Director Gregory Sanders and Research Associate Rhys McCormick. It was sponsored by the Naval Postgraduate School and co-produced by the Aerospace Industries Association, which released an executive summary on Dec. 14, the day of its annual aerospace and defense luncheon in Washington. The authors, who used publicly available contract data, write that it's unclear — due to the limitations in the subcontract database —whether the companies have exited the industrial base entirely or still perform work at the lower tiers. “There is no doubt that a huge portion of the recent turbulence in the defense industrial base has taken place among subcontractors, who are less equipped to tolerate the defense marketplace's funding uncertainly and often onerous regulatory regime — yet it remains extremely difficult to determine the real impact of these conditions on subcontractors,” the authors conclude. Further details may yet be revealed by the Trump administration's ongoing review of the resiliency of the defense-industrial base. Defense Secretary Jim Mattis' assessment is due to President Donald Trump by mid-April 2018. The CSIS summary links 2011 Budget Control Act caps, subsequent short-term budget agreements, and Congress' “unpredictable and inconsistent” appropriations process to the “lost suppliers, changes in competition and market structure, and other turmoil” it found. The years 2011-2015 are considered a period of defense drawdown and decline. The authors, rather than focus strictly on the total decline of defense contract obligations over the entire period, chose to chart the “whipsaw” effect that struck certain sectors of the industrial base amid the imposition of sequestration in 2013 and subsequent budget caps. Though the defense budget had been declining in the years leading up to the Budget Control Act, the implementation of an across-the-board sequestration budget cut in 2013 “marked a severe market shock that had a considerable impact on the defense industry,” the authors say. Compared to the pre-drawdown fiscal 2009-2010 period, the start of the drawdown in fiscal 2011-2012, average annual defense contract obligations dropped 5 percent. When sequestration was triggered in fiscal 2013, defense contract obligations dropped 15 percent from the previous year. Average annual defense contract obligations fell 23 percent during the so-called BCA decline period, fiscal 2013-2015. The Army, which has a checkered modernization history, bore the brunt of the decline. Average annual defense contracts dropped 18 percent at the start of the drawdown, then 35 percent during the BCA decline period. Missile defense contract obligations actually gained 7 percent at the start of the drawdown and then dropped only 3 percent under budget caps. During his presidency, Barack Obama reversed course from early cuts to missile defense to spur the development and deployment of missile defense systems in Europe, Asia and the Middle East. Lockheed Martin CEO Marillyn Hewson reacted to the internally circulated findings earlier this month, saying budget cuts are responsible for the industry being “more fragile and less flexible than I've seen it, and I've been in the industry many, many years.” “What we've seen in the industry, I'll give you an example at Lockheed Martin: At the outset of budget cuts we were about 126,000 employees; today we are at 97,000 employees,” Hewson said at the Reagan National Defense Forum in California. “Our footprint has shrunk dramatically. We see some of our small and medium-sized business, some of the components that we need, there's one, maybe two suppliers in that field where there were many, many more before.” Budget cuts have squeezed the Defense Department to unduly prioritize low-cost contracts over innovation and investment. Cost “shootouts,” she said, are endangering the military's plans to grow in size and lethality. AIA Vice President for National Security Policy John Luddy said companies have coped through a variety of “healthy efficiencies,” such as mergers and acquisitions, consolidating facilities, exploring shared services, and offloading certain contracting activities. “Our companies have done an amazing job of managing the downturn, they've pulled all kinds of levels to make it work, they've shown the ingenuity of the American free market system,” Luddy said. “Nonetheless, the uncertainty of the budgeting process has become a huge challenge for us.” Army Secretary Mark Esper, formerly of Raytheon, warned lawmakers at a Senate hearing Dec. 7 that uneven funding is driving small suppliers — “an engine of innovation” — out of the defense sector. “If you're a small mom and pop shop out there, and I'm referring to my industry experience, it's hard for them to survive in the uncertain budgetary environment,” Esper said. “And we risk losing those folks who may over time decide that they're going to get out of the defense business and go elsewhere. So that's a big threat to our supply chains.” But the CSIS study found that small vendors either increased their share of platform portfolio contract obligations or held steady, while large and medium vendors were most harmed by the market shock from sequestration and the defense drawdown. https://www.defensenews.com/breaking-news/2017/12/14/american-exodus-17000-us-defense-suppliers-may-have-left-the-defense-sector/

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  November 3, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

  What the defense industry is seeing and saying about the election

  By: Joe Gould WASHINGTON ― Anyone will tell you this is the most important election in U.S. history ― unless they happen to run a major American defense firm. In earnings call after earnings call, defense industry executives projected calm ahead of Tuesday's election, mainly because they see the coronavirus pandemic carrying greater uncertainty (especially for firms with commercial aviation businesses). But another reason is that, despite wide projections of flat 2021 defense budgets no matter who controls the White House, industry is confident in the Pentagon's commitment to modernization. “We continue to believe that bipartisan support for defense spending will endure and that our portfolio is well-aligned to support our National Defense Strategy,” Northrop Grumman CEO Kathy Warden said in remarks typical of third-quarter earnings calls last week. “While we plan for various budget scenarios, defense spending is largely threat-driven and today's threat environment warrants a strong defense. Emerging threats are intensifying, and we believe both political parties are committed to effectively countering these threats.” If defense firms are upbeat, then Wall Street seems skeptical, with pure-play defense firms down this year and lagging the stock market, said Capital Alpha Partners' aerospace and defense analyst Byron Callan. Partisan gridlock, he noted, is what led to the budget caps that bedeviled federal budgeting for the last decade. “You could argue that some of this underperformance is related to concerns about what the election's outcome could be. Even if the president wins, no one's predicting the House will flip, and then you'll still have gridlock in Congress,” Callan said. “Let's say there's a 50-50 split in the Senate. Things can get pretty sporty.” Defense executives were comfortable making warm predictions about 2021, but the lack of comment about 2022 and 2023 was telling, said Callan. Also, Pentagon officials have warned they will have to tap modernization and readiness funds if Congress does not appropriate about $10 billion for defense contractors' coronavirus-related expenses. So why didn't any CEOs use their earnings calls to amplify that message? “That was one of the dogs that didn't bark here. Either industry doesn't see it as an issue, or that it's inevitable it's not going to happen," Callan said. With Democrats readying to debate steep defense cuts if they sweep the election, the expectation is that swollen national deficits ― driven by pandemic aid and Republican-led tax cuts ― will pressure the defense budget downward. But industry is banking on Washington's drive to prepare militarily for a rising China, a disruptive Russia and an unpredictable North Korea. “Whether it's flat with a little bit of rise or flat with a little bit of fall may depend on the election, but I think that's a fairly narrow space you're working in politically, given the deficit and the threat vectors,” Bill Lynn, the CEO of defense and aerospace conglomerate Leonardo DRS, said in an interview. Lynn is a former deputy defense secretary and Raytheon lobbyist. Though there's been speculation Democrats would cut defense spending, former vice president Joe Biden, who is running against Republican President Donald Trump, would face pressure not to for economic and political reasons, said Michael Herson, president and chief executive at American Defense International, a defense lobbying firm. (Biden has said, if elected, he doesn't foresee major defense cuts.) “The first thing that Biden's going to worry about is COVID and the economic recovery,” Herson said in an interview. “So do you really want to touch defense spending, and add to your economic woes ― because it increases unemployment ― in the first year of your presidency?” Defense Secretary Mark Esper has warned that a flat budget will force the armed services to make budgetary trade-offs and likely cuts to legacy programs. But the Pentagon has also communicated a commitment to modernization, and that's part of industry's confidence. In September, Northrop won a $13.3 billion award for the Ground Based Strategic Deterrent program, the U.S. Air Force's effort to replace the LGM-30G Minuteman III intercontinental ballistic missile. But some Democrats have attempted to defund it, and investors grilled executives about the program's post-election survival prospects ― and those of Northrop's B-21 Raider. Warden, Northrop's CEO, argued the nuclear triad becomes more of a budgetary priority when conventional military forces are under pressure. “So we're confident that a new administration would recognize that value and continue to support the modernization efforts that are well underway for both GBSD and B-21,” she said. The Pentagon over recent years has oriented itself toward technological competition with China, with related investments in artificial intelligence, next-generation networks, cybersecurity and space. Companies did not see signs of that momentum reversing. “The government doesn't pivot on a dime,” Booz Allen Hamilton's chief financial officer, Lloyd Howell Jr., told investors. “And a lot of the programs that we currently support ... are increasingly tied to their missions, which is politically agnostic.” The CEO of infrared imaging maker FLIR Systems, Jim Cannon, acknowledged there will be “top-line pressure on the budget ... no matter what happens with the election,” but he put stock in Army leaders' assurances that the service must remedy long-underfunded modernization efforts. “The message that was sent out to industry loud and clear is that, after four decades largely without significant modernization transformation, now is the time,” Cannon said. “And if we look at the priorities that we're aligned against and the work that we've been doing for the past two years, we think we're well positioned there. But look: I agree there's a lot of uncertainty, a lot of work yet for us to do, but that's our perspective right now.” When asked, L3Harris downplayed how a drawdown from Afghanistan ― which Trump and Biden both favor ― or hypothetical cuts to end strength would impact the sales of radios or night vision goggles. “We're not even 40 percent through the modernization ramp with radio. So even if end strength comes down, as I expect it likely will, I don't think it's going to affect the growth rate in our radio business,” said CEO Bill Brown, arguing that night vision goggles and radios had “under-penetrated the force.” “So if anything, reduced end strength might actually free up some dollars to be put onto modernization investments that really affect a broad part of our business,” he added. Executives at companies without a stake in a specific major platform had a good story to tell, and several pointed to investments in cybersecurity or artificial intelligence. Leonardo DRS' Lynn said the firm's investments in communications, sensors and computing systems had made it “ambidextrous." "We can go in any direction,” he said. “The larger companies have greater exposure across the breadth of the defense budget. We're more in targeted areas and haven't got broad exposure. “We're in Army sensors, satellite communications; we're in 10 or 12 segments. We can be targeted, and frankly in a flat budget environment, that ability to target's important to grow at all.” https://www.defensenews.com/congress/2020/11/02/what-the-defense-industry-is-seeing-and-saying-about-the-election/

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  July 29, 2019 | International, Aerospace

  Japan wants to be an official F-35 partner. The Pentagon plans to say no.

  By: Aaron Mehta , Valerie Insinna , and Mike Yeo WASHINGTON and MELBOURNE, Australia — Japan has formally expressed interest in joining the F-35 program as a full partner, but the Pentagon plans to shoot down that request, Defense News has learned. Sources say Japan's request to join the partnership creates major political headaches for the Pentagon, with fears it would cause new tensions among the international production base for the joint strike fighter and open the door for other customer nations to demand a greater role in future capability development. In a June 18 letter from Japan's Ministry of Defense to Pentagon acquisition head Ellen Lord, obtained by Defense News, Atsuo Suzuki, director general for the Bureau of Defense Buildup Planning, formally requests information on how Japan could move from being a customer of the F-35 to a full-fledged member of the industrial base consortium. “I believe becoming a partner country in F-35 program is an option,” the letter reads. “I would like to have your thoughts on whether or not Japan has a possibility to be a partner country in the first place. Also, I would like you to provide the Ministry of Defense with detailed information about the responsibilities and rights of a partner country, as well as cost sharing and conditions such as the approval process and the required period.” “We would like to make a final decision whether we could proceed to become a partner country by thoroughly examining the rights and obligations associated with becoming a partner country based on the terms and conditions you would provide,” the letter concludes. Lord, the Pentagon acquisition head, is scheduled to meet with Japanese officials this week, and the question of membership is expected to come up. But Tokyo won't like the answer. Although Lord's office will be responsible for carrying the final message to Japan, the F-35 Joint Program Office told Defense News that the partnership remains limited to the initial wave of F-35 investors. “The F-35 cooperative Partnership closed on 15 July 2002,” stated Brandi Schiff, a spokesperson for the F-35 JPO. The decision was documented in an April 2002 memo by the Pentagon's acquisition executive stating that, “except for those countries with which we are already engaged in Level III System Development and Demonstration partnership negotiation by 15 July 2002, we will not be able to accommodate any additional Level III partners due to our inability to offer equitable government-to-government benefits and U.S. industry's inability to offer equitable 'best value' workshare arrangements,” according to Schiff. The F-35 partners in 2007 reiterated in a separate memo that only the partners who participated in the development phase of the F-35 program would be eligible to remain partners during the production, sustainment and modernization stages. A source familiar with internal discussions says the Pentagon is concerned that letting Japan become a program partner would lead to other nations demanding similar access. Japan's query is hitting the F-35 program at a time of change. Vice Adm. Mat Winter, the head of the JPO, retired this month after only two years on the job, and Turkey's pursuit of a Russian air defense system has resulted in them being booted from the F-35 consortium, with all work being done by its companies to end early next year. So in many ways, Japan asking to be made a full partner now makes sense, said a former senior official in the F-35 program, who agreed to speak on background out of respect for current decision makers. “You now lost a partner in Turkey, so there is a vacant parking space, so to speak. And other than the U.S. services, [Japan] will be the one nation with the most F-35s,” the former official said, noting two changes that have happened in just the last year. “Ultimately, the Department of Defense, in coordination with the State Department, made up the rules," the former official said. "The Department of Defense can change the rules.” Global impact There are two tiers of participation in the F-35 program. The first-tier members are considered “partners” in the program, which comes with direct involvement in the joint program office. That includes having national representatives stationed in the JPO, weighing in on decisions about future capabilities, and deciding what future industrial participation looks like. And that industrial participation is important — building parts of the jet that go into the global supply chain is expected to net the partner nations billions in revenue over the lifetime of the program. The partners are made up of the first nine nations to sign onto the program: Australia, Canada, Denmark, Italy, the Netherlands, Norway, Turkey, the United Kingdom and the United States. The second tier consists of “customers” for the jet, comprising nations that came later to the program. Those nations command less industrial participation, lack voting power on what future development of the jet looks like, and do not have officials assigned to the JPO. That tier is made up of Israel, South Korea, Belgium and Japan, but could expand in the future with Finland, Singapore and other nations. In December 2018, Japan announced a plan to expand procurement of F-35s from 42 to 147 jets, making it the single largest F-35 operator outside of the United States, as well as one of only three foreign nations to operate the F-35B jump-jet model. But Tokyo appears interested in increasing its teaming with the program, in large part because it wishes to take part in guiding new capabilities development as the plane gets ready for its Block 4 upgrade. “There are various merits in participating in continuous capability development and delivery deliberation process by partner countries. In addition, there is a further need to obtain flight safety information for accountability to the public,” the letter from the Japanese defense ministry reads. “I understand that partner countries are allowed to join [JSF Executive Steering Board], to be involved in capability improvement, to dispatch their personnel to JPO, to participate in parts production and to access further information.” The emphasis on the need to obtain flight safety information is notable, after an F-35A crashed into the ocean in April, resulting in the loss of both the plane and its pilot. Japanese officials have since blamed the crash on spatial distortion for the pilot. However, customer nations receive the same safety information that partners do, albeit slightly delayed due to the need to clear information. The letter also acknowledges that “partner countries share significant costs,” an indication that Japan would be willing to pony up more cash in order to join the inner circle of F-35 members. From a pure program logistics perspective, Japan becoming a partner would not be a problem, and in fact program officials would likely find it easier to deal with the largest foreign buyer of the F-35 as a partner rather than customer overall. The politics, however, quickly get tricky. Should Japan be allowed to join, the former official noted, “you've opened Pandora's box.” The former official specifically said that South Korea, due to its complicated political relationship with Japan, and Israel, which was the first nation to be added as a customer after the partnership option was closed, would try to use Japan's joining the program as a way in, as well. The official also highlighted Belgium, for now the sole NATO ally buying the F-35 as a customer and not a partner, as a nation with a strong case for promotion should Japan be allowed in. The best argument DoD could make would be that the sheer size of Japan's buy deserves special privileges, but that sets a bar that other nations could look to climb and effectively buy their way into a partnership. “This is a very interesting political football that DoD has to wrestle with. This is a bigger political decision than a programmatic one,” the former official noted. “I personally think DoD doesn't want the headache if they say yes.” No other countries have made formal requests to join the program, Schiff confirmed. Requests for comment from Lord's office, as well as the Japanese MoD, were not returned by press time. Benefits for Japan In terms of industrial participation, there are opportunities for Japanese firms to pick up work that has been removed from Turkey, said Richard Aboulafia, an analyst with the Teal Group. Major Turkish defense firms have had a hand in building hundreds of parts for the jet. Turkey's expulsion from the program, which includes the United States blocking Turkey's planned procurement of 100 fighters, means that production will at least temporarily move to the United States, with a plan to farm it out to other partners in the future. Turkey's aerostructures work could be picked up by Mitsubishi Heavy Industries, and to a lesser extent Kawasaki and Subaru, Aboulafia said. But he said he was “baffled” by the idea Japan would want more industrial participation at the same time they have publicly moved away from its domestic final assembly and check out (FACO) facility, which since 2013 has handled final production on Japan's domestic F-35s. The FACO facility, which is operated by Mitsubishi Heavy Industries, will continue to carry out production work until FY22 to fulfill the F-35As contracted by Japan between FY15 and FY18. Instead, Aboulafia sees Japan's interest as being driven by a desire for future developments, given the decision to increase the island nation's planned procurement of the jet. “If they are going to base their fighter force on this plane for decades to come, they clearly want a say in how this plane is upgraded,” he said. “It's a sovereignty thing.” And floating in the background is another potential complicating factor for the Pentagon: Japan's continued drive to develop an indigenous fighter. Japan is developing a new fighter type to replace the indigenous Mitsubishi F-2 fighter currently in service, and wants the new design to enter service in the 2030s. It is also looking at development pathways for this project, with a fully indigenous design, collaboration with a foreign partner, or a spinoff from an existing fighter design being considered as possible options. The country is already conducting research and development into a number of relevant areas for fighter design, including stealth technologies, fighter engines and active electronically scanned radars, and had previously built a technology demonstrator, the X-2 Shinshin, and carried out a series of test flights with this aircraft to validate these technologies. Asked if the Japanese could be considering the fighter program in their decision to pursue membership in the F-35, Aboulafia bluntly responded, “How could they not?” Schiff, the JPO spokesperson, said the F-35 remains a critical focal point of the U.S.-Japan alliance. “Any opportunities to strengthen the alliance through interoperability and cooperation will be emphasized. As an FMS customer, Japan participates in F-35 user groups and other bi-lateral forums and engagements," she said. https://www.defensenews.com/global/asia-pacific/2019/07/29/japan-wants-to-be-an-official-f-35-partner-the-pentagon-plans-to-say-no/