September 22, 2020 | International, Aerospace, Naval, Land, C4ISR, Security, Other Defence

Pentagon acquisition boss talks industry, mergers and coronavirus

WASHINGTON — A longtime industry executive, Ellen Lord was confirmed as the Pentagon's undersecretary of defense for acquisition and sustainment in August 2017. In that role, Lord — who is now the longest serving political appointee at the department from the Trump administration — oversees billions of dollars in weapons procurement and sustainment, while also overseeing the health of the defense industrial base, a particularly important role in the wake of the coronavirus pandemic.

Lord was a keynote speaker at this year's Defense News Conference, where she touched on a number of issues affecting the Department of Defense. This interview has been edited for length and clarity.

We're about six months after COVID-19 first hit the defense industry. How do you judge the health of the defense industrial base?

We use the Defense Contract Management Agency and the Defense Logistics Agency to track about 22,000 key companies that the department works with. And going back over the last six months, we did have hundreds of companies shut down, but now we're down to only about 30. So that's very, very good news. We monitor them on a daily basis; we look at on-time deliveries, deliveries missed and, most importantly, we listen to what the issues are, really leveraging the industry associations to do a lot of listening.

What we are looking for is whether or not we're maintaining war-fighter readiness for our production programs, and then relative to modernization, whether we are hitting key milestones relative to development programs. We have seen some slowdowns. We are carefully monitoring, using monthly metrics, where we are. That's something that I'm actually extremely proud of the team over the last few years — we have developed a very data-driven way of doing business.

The Pentagon is seeking billions of dollars from Congress to help fund reimbursements for the defense industry's pandemic-related costs. But we've heard criticism of this from a number of sectors, with some saying financial reports last quarter were not so bad. Why is that funding needed, and why now?

All the [quarterly] reports that have come out in large part don't reflect the hits that were taken by business. I would contend that most of the effects of COVID-19 haven't yet been seen because most companies gave their employees time off, they stretched out production, paid a lot of people for working 100 percent when perhaps they were only getting 50 percent of the hours in and so forth. So I think the system has absorbed it up to this point in time. Now when we get to the point where we're having payments and incentive fees and award fees earned, and if we haven't done the deliveries, that's where you're going to see the hit. So I believe there's a bit of a delayed response.

We want to make sure that we have a one-time accounting for these major COVID hits — very, very well defined in terms of a period of time, March 15-Sept. 15, that we take a very, very data driven approach [saying]: “Send us a proposal showing what the impact was; we will assess them all at once and get back.”

However, we can't do that at this point in time because we have an authorization through Section 3610 [of the Coronavirus Aid, Relief and Economic Security Act] and so forth, but we don't have an appropriation. We believe we need that appropriation to maintain readiness because if we do not get that, what we are going to find is we are not going to get the number of units delivered, we are not going to maintain war-fighter readiness, we're not going to move forward in modernization. We would like to take the one-time hit and then see where we go from there.

Assuming you get the appropriation, much money is needed? When will industry see it?

We think it's somewhere between $10 billion and $20 billion. We think it would take five to six months because once we got an appropriation, we would go out for a request for proposals, and the larger companies are going to have to flow down those RFPs through their supply chain, gather the data — because again, this has to be a very data-driven drill. So we would get all of that back; we think that would take two to three months. Then we want to look at all of the proposals at once. It isn't going to be a first-in, first-out [situation], and we have to rationalize using the rules we've put in place, what would be reimbursable and what's not. So overall we think five to six months, in terms of a process.

We're at about the two-year mark from the executive order 13806 study, which assessed the health of the defense industrial base and included some dire warnings about the supply chain. How has work on fixing those issues gone?

We had several areas that we pointed out were problematic, that we were concerned that the U.S. had too great of a dependency on non-friendly nations and that we just didn't have the security and resiliency that we were looking for. In fiscal 2019, we actually had 14 presidential determinations, which is the process you go through to actually say: “Yes, these are areas that are worthy of looking at.” Then we go to get the appropriation to be able to use [the Defense Production Act's Title III authorities]. A number of the areas we looked at were small unmanned aerial systems, rare earth [minerals], that type of thing.

When COVID-19 hit, it shone a spotlight on the concern we had with this fragility and helped us tell the story. Because of another executive order coming in declaring a federal emergency, we no longer had to go through the presidential determination route, which is a bit time consuming, to identify areas where we needed to invest.

Then [with the pandemic] we had new areas bubble up, probably the most significant of which was aviation propulsion, where we have a number of our key suppliers who are extremely dependent on commercial aviation that was grinding almost to a halt for a while — huge impacts there. So what we did was we were now able to move a little bit more quickly, which is always helpful. And we made a number of awards to aviation companies that literally kept those companies in business, which allowed us to continue to support the war fighter.

COVID-19 has helped us accelerate some of those areas. Others are perhaps not getting as much attention as they were pre-COVID-19, looking at our defense industrial base for nuclear modernization for instance, also for hypersonics. But overall, the team is working very hard, and we have put out almost a billion dollars in DPA Title III over the last six months.

It sounds like the pandemic may have been beneficial in addressing these long-term issues.

What it did was allow us to really put speed in the system, peel away all of what I would call the non-value-added bureaucracy. COVID-19 gave us a burning platform to really demonstrate we could be very responsible in terms of taxpayer dollars, very responsible in terms of security of the war fighter, but move at the speed of relevance to get things done. So I don't want to backslide there. And I want to make sure we really take advantage of all of that.

Companies are concerned about being in compliance with the Section 889 rules, which prohibit the government from buying a system that might have Chinese equipment in it from the telecommunications supply chain. Are more waivers for companies possible?

We are incredibly supportive of making sure that we don't have Chinese technology in a lot of our telecom systems, which has proven to be a problem in terms of exfiltration of data. So what we did is we got a waiver from [the Office of the Director of National Intelligence] for noncritical weapon systems. We continue to discuss an extension beyond September of that with them. We are getting waivers on a case-by-case basis, we will look at those. However, we are encouraging industry and we are very, very pleased at how we see industry still stepping up to really get these systems out of their supply chains. So it will be by exception that we will do waivers, and we are looking to really have a clean path through everything.

There have been significant mergers and acquisitions during your tenure at the Pentagon. Are you seeing a downside for the department, given the desire for more competition on programs?

I actually put a process in place early on, when we are notified of M&A deals, that we go out very formally to all the services and agencies and ask for objective evidence as to whether or not these mergers or acquisitions will constrain competition in any way. We then work very, very closely with either [the Federal Trade Commission or the Justice Department] on those deals to make sure there are divestitures if needed.

Where I'm really focused, and the team is focused, is really getting the small companies going. That's where the predominance of our innovation comes from. That's what bubbles up to these larger companies. So we are holding all kinds of webinars and meetings connecting not only our traditional defense industrial base, small company partners, but nontraditional [firms] with our DoD efforts. We're partnering with the services to get more of that activity. So we want that diverse group coming in, and I'm really excited about what I see coming up through.

That doesn't sound like you have many concerns about what you've seen.

We watch very carefully. And at this point, we think we've made some smart divestitures on some of those. And we like competition. It's our friend.

https://www.defensenews.com/interviews/2020/09/21/pentagon-acquisition-boss-talks-industry-mergers-and-coronavirus/

On the same subject

October 25, 2018 | International, Aerospace

Lockheed: DoD Focused on Lowest Price in Recent Competitions; May Affect LM Participation in Future Bids
By: Ben Werner Lockheed Martin officials say their loss to Boeing in three recent aircraft competitions indicates that Pentagon weapon buyers are valuing low price tags over high-tech capabilities, which may lead the company to question its participation in some future competitions. The company reported strong revenue growth and expected solid earnings in the future, but during a Tuesday morning conference call with Wall Street analysts, company officials sounded burned by losing out on three significant contracts during the recently completed third quarter of 2018. “We do see that affordability is a very important element for them,” said Marillyn Hewson, Lockheed Martin's chief executive, referring to the Pentagon's weapons buyers. In a competition pitting designs from Lockheed Martin, General Atomics and Boeing, the Navy awarded Boeing an $805-million award in August to build the first four unmanned carrier-based aerial refueling tankers, the MQ-25A Stingray. Ultimately, the Navy wants to purchase 72 more vehicles, for a program price of roughly $13 billion. Boeing also beat out Lockheed Martin for a pair of Air Force contracts – $2.38 billion to replace the Air Force fleet of H-1 Huey helicopters, and $9.2 billion for the new fleet of Air Force T-X trainer jets. “We believe our proposals represented outstanding technical offerings at our lowest possible pricing,” Hewson said. “Had we matched the winning prices and been awarded the contracts, we estimate that we would have incurred cumulative losses across all three programs in excess of $5 billion; an outcome that we do not feel would have been in the best interest of our stockholders or customers.” Hewson and Bruce Tanner, Lockheed Martin's chief financial officer, downplayed the long-term significance of missing out on this trio of large contracts. Lockheed Martin reported revenues of $14.3 billion for the quarter, compared to revenues of $12.3 billion a year ago. Earnings for the quarter were $1.5 billion for the quarter, compared to earnings of $963 million a year ago. Increased sales of F-35 Lightning II Joint Strike Fighters as production increases, as well as increased demand for missiles, were vital to the revenue increases. Looking forward, even with Pentagon spending not expected to grow, Tanner expects Lockheed Martin's profits from sales to grow, resulting in cash from operations to remain in the $7-billion range for the next three years. However, neither Hewson nor Tanner masked their disappointment in the selection of Boeing over Lockheed Martin for the three aviation programs. “Those were disappointing for a lot of reasons. But the fact they really decided, all three, on an LPTA (lowest price technically acceptable) basis, didn't help the situation,” Tanner said. “It's not getting the best capabilities for the warfighter in the hands of the warfighter.” A year ago, when discussing the MQ-25 program, Navy officials suggested capability was their primary focus. Cost estimates were specifically not addressed because the Navy wanted to learn what was possible, Rear Adm. Mark Darrah, Program Executive Officer Unmanned Aviation and Strike Weapons, told USNI News in July 2017. “When we put a number out there, eerily they tend to get to that number and go backwards, go backwards in their development, so they hit that number. We are taking a different approach this time. We're not going to define that number at this point and direct them to provide us with their input so that we can adequately and accurately determine what they truly can do,” Darrah said in the 2017 interview. On Tuesday, Hewson acknowledged the types of projects Lockheed Martin bids on in the future could be affected by the Pentagon's focus on price when seeking new weapons programs. “We're going to pursue good business opportunities for us,” Hewson said. “We have talked about this before: affordability is an important value for them.” Hewson also addressed the growing speculation over whether defense contractors would be allowed to continue doing business with Saudi Arabia, as the United States government still grapples with the fallout from the death of journalist Jamal Khashoggi after last seen entering the Saudi consulate in Istambul. The kingdom is a Lockheed Martin customer, but Hewson said the company had relatively minor exposure to any fallout from having arms deal nixed by the U.S. government. Currently, the largest contract Lockheed Martin has with Saudi Arabia is to build the kingdom's fleet of four multi-mission surface combatant ships, based on the Littoral Combat Ship, worth $6 billion. Saudi Arabia just awarded Lockheed Martin a $450-million detailed planning and design contract, which is related to the planned four-ship purchase. “The largest order we've been waiting on obviously is for THAAD (Terminal High Altitude Area Defense), ” Tanner said. “That has not taken place yet. Not sure when that will take place. The interesting thing with the THAAD order is, while it brings a significant increase in backlog, the resulting sales, profit, and cash flow with that order are very much pushed to the right.” Required upgrades to Saudi Arabia's radar technology will delay the $15-billion THAAD order delivery for at least four years, Tanner explained. Without the technical refresh, he said Saudi Arabia would be unable to use the missiles effectively. “I think we have in 2019 about less than half a billion dollars of sales planned, and I looked out into in 2020, and it's less than $900 million in sales,” Tanner said. “So it's not a huge amount of dependency on the activity, even though the opportunities we've described are much larger than that obviously.” https://news.usni.org/2018/10/23/37506
November 25, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

Four factors to consider in keeping NATO relevant
By: Hans Binnendijk and Daniel S. Hamilton The NATO alliance survived four years of U.S. President Donald Trump due largely to strong congressional support and clever leadership by Secretary General Jens Stoltenberg. After the bell ringing and fireworks end in European capitals to welcome President-elect Joe Biden, the alliance will need to realize that it can not go back to business as usual. The world has moved on during those four years and the alliance will need to continue to rejuvenate in order to remain relevant. That rejuvenation process will be enshrined in a new Strategic Concept, which should emerge over the next year or so. Stoltenberg already has a so-called reflection process underway designed to identify key areas where change is needed. Biden's foreign policy team will now weigh in. NATO's rejuvenation might unfold under what we call the “Four Cs.” We should want an alliance that is more coherent, more capable, more comprehensive in scope and with a more co-equal balance of contributions to the common defense. The return of Joe Biden alone will contribute to NATO's coherence, and reverse poisonous trans-Atlantic political relations. But the problem is deeper. Threat perceptions differ markedly across the alliance. There is broad lack of confidence in commitments to the North Atlantic Treaty, including its mutual defense Article V. There is democratic backsliding among several NATO members. Allies are facing off against each other in the Eastern Mediterranean. There are differing attitudes about Russian behavior around the Black and Baltic sea. There are differences about the endgame in Afghanistan. And there are uncertainties of how the alliance should address China's growing security role in Europe and the global commons. The new Strategic Concept will need to enhance coherence by reaffirming common democratic values and recommitting to the common defense. This will be the most important element of a new Strategic Concept. A review of the Strategic Concept can provide a process through which allies can assess mechanisms to uphold their mutual commitment to strengthen their free institutions, avoid straying from agreed democratic practices and prevent allies from confronting each other militarily. Second, the alliance needs to continue its efforts to strengthen its capabilities in two distinct areas: conventional military might and resilience against so-called hybrid or non-kinetic attacks. Since the Russian annexation of Crimea in 2014, NATO nations have begun to focus again on a major power competitor. Four NATO battlegroups are forward-deployed to the Baltic states and Poland. A small, very high-readiness force and a larger readiness initiative were undertaken to back up those battalions. A mobilization initiative was designed to make sure ready forces can forward-deploy quickly. But European defense budgets constrained by COVID-19 will put those initiatives in jeopardy. The Strategic Concept will need to prioritize those programs. The alliance must also more methodically address unconventional challenges to human security from Russia such as media disinformation, corrosive cyber operations, supply chain disruptions and energy intimidation. The Strategic Concept needs to design resilience programs so that alliance members can better protect the critical functions of our societies to such disruptive dangers. Next, the scope of NATO's mission needs to be more comprehensive. NATO's core tasks of collective defense, crisis management and cooperative security must be expanded to include countering challenges that contribute to global instability. Those challenges would range from managing global warming and pandemics through the refugee crisis to the rise of China. NATO has recently used its mobility and civil defense assets to mitigate the impact of the COVID-19 pandemic. NATO navies have contributed to saving the lives of refugees at sea. In addition, the consequences of a major ice melt will have a significant security impact in the Arctic, along urban coastlines and on further refugee flows. To remain relevant, NATO must begin to define its role in these areas. Stoltenberg has focused the alliance's attention on China. That nation is increasingly partnering with Russia in the military arena including defense industrial cooperation and joint exercises. It also has invested in European strategic infrastructure, created technology dependencies and used coercive diplomacy to stifle European voices. NATO's expanded role should include reducing those dependencies and developing much closer partnership ties with America's Asian allies. Finally, the new Strategic Concept should result in more co-equal trans-Atlantic distribution of military capabilities and responsibilities. This is less about traditional burden-sharing than it is about responding to two historical trends. Europe's response to the Trump years has been to seek greater strategic autonomy. China's military challenge has American planners focusing on Asia first. Many American friends of Europe are discussing a possible new division of labor, with the United States focusing more on China and European militaries focusing on Russia. This, however, could leave Europe poorly defended and open to coercion. The Strategic Concept will need to divine an elegant solution, perhaps with Europe accepting the responsibility to provide half of the capability needed to defend against a major Russian attack. NATO has remained history's strongest alliance precisely because it has adapted to new strategic conditions. It can do so again. Hans Binnendijk is a distinguished fellow at the Atlantic Council and formerly served as the U.S. National Security Council's senior director for defense policy. Daniel S. Hamilton is an Austrian Marshall Plan distinguished fellow and the director of the Global Europe Program at the Woodrow Wilson Center. https://www.defensenews.com/opinion/commentary/2020/11/24/four-factors-to-consider-in-keeping-nato-relevant/
February 10, 2020 | International, Naval

Spain seen joining Greece, France, Italy on European Patrol Corvette program
By: Tom Kington ROME – Plans by Italy and France to win European Union funding for the construction of a new corvette have been boosted as Spain looks set to follow Greece and sign up to the program. The planning for a new 3,000 ton corvette is a cornerstone of the new naval joint venture between Italy's Fincantieri and France's Naval Group which was launched last year and named Naviris. The two firms are hoping to match Italian and French navy requirements with a jointly built, modular vessel that can handle patrol and surveillance missions as well as taking second-tier roles in anti-submarine and anti-surface missions. The program, dubbed the European Patrol Corvette, has also been inserted in the EU's so-called Permanent Structured Cooperation, or PESCO, list of recommended pan-European defense programs, which according the EU offers members “options on how to plan and bridge capability gaps in a collaborative manner.” The PESCO corvette project is coordinated by Italy, with France as partner, but in recent weeks, Greece has also joined as a partner, following discussions between the countries' navies. And now Spain is likely to follow, an industrial source told Defense News. “Naviris presented the program to Spain's Navantia which is interested and it is likely Spain will sign up,” said the source. On its PESCO listing for the corvette, the EU states “the objective is to design and develop a prototype for a new class of military ship, named “European Patrol Corvette” (EPC), which can host several systems and payloads, in order to accomplish, with a modular and flexible approach, a large number of tasks and missions.” Adding new partners to the roster of Italy and France is key to winning EU funding. PESCO programs are possible candidates for cash from the European Defence Fund, but only if they have more than two partners on board. “The corvette is the only naval program on the PESCO list and it should be a priority,” said the source. Naviris expects the EU fund to issue a Request for Proposal for projects this year, with proposals to then be submitted by industry in 2021, and for decisions on fund allocation to be made the same year. The source said that if the corvette program gets EU part-funding, it would help sustain the development of the ship's modularity, allowing it to serve different functions for different navies. “It would have a very open architecture, as well as having a basic and enhanced version,” he said. Apart from the boost given the program by potential EU funding, the corvette remains a requirement for Italy and France. Rome needs to replace Cassiopea- and Minerva-class vessels being phased out as well as aging Commandante-class vessels. France is looking to substitute its Floréal-class vessels. “Italy might need eight corvettes and France is looking to substitute six ships. They both have a need, so the EU funding would be an added opportunity that could create a bandwagon effect with other navies,” said the source. As Naviris picks up steam, Naval Group CEO Hervé Guillou has said the industrial alliance is open to new partners joining, but so far Germany seems to be uninterested. Addressing the economic affairs committee of the French Senate on Jan. 28, Guillou said he had visited Berlin the week before to sound out German interest but got little response. https://www.defensenews.com/global/europe/2020/02/07/spain-seen-joining-greece-france-italy-on-european-patrol-corvette-program

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