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  February 11, 2022 | International, Aerospace

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  September 24, 2019 | International, Aerospace, Naval, Land, C4ISR, Security

  Defense Firms Angle for Eastern Europe

  By Dominik Kimla and Hamilton Cook Posted September 19, 2019 In White Papers One of the more dissonant aspects of NATO field exercises is, three decades after the fall of the Berlin Wall, the continued presence of Warsaw Pact weapons and equipment: Soviet-made T-series tanks, MiG fighters, Mi-17 helicopters, BM-21 rocket artillery, and more. Like their western counterparts on the continent, Central and Eastern Europe (CEE) states have repeatedly delayed needed recapitalization as defense needs gave way to domestic imperatives. But times – and threat assessments – are changing. By our analysis, cumulative CEE defense spending will be nearly $200 billion over the next five years, growing by nearly five percent per year. More than a quarter of that total, some $53 billion, will be spent on defense hardware procurement. This represents a rare opportunity for Western defense firms – European and American – to seize a first-mover advantage. However, US companies must find new ways to credibly differentiate themselves from European competitors that may offer more financial and industrial incentives (and fewer regulatory hassles) in the long run. Currently, US companies are well positioned for success as more aggressive US government advocacy has led to recent CEE customer wins for Black Hawk helicopters (Latvia, Poland, Slovakia), F-16 fighters (Bulgaria, Slovakia), HIMARS (Poland, Romania), JLTV (Lithuania), and Patriot AMD systems (Poland, Romania). The US effort to steer CEE weapons-buying decisions picked up further momentum last year with the State Department-led European Recapitalization Incentive Program (ERIP), which provided $190 million in financing assistance to five Balkan countries (along with Slovakia) to replace ex-Soviet and Yugoslav-made equipment. Even as ERIP expands, American companies will still have plenty of obstacles ahead. Historically, the limited new weapons procurement in most CEE countries included minimal offset or local industrialization requirements. Going forward, reporting suggests that CEE countries, even as small as Croatia or Slovenia, will demand some form of local industrial participation and technology cooperation to develop their indigenous capabilities. This puts American firms at a disadvantage given the US government's still-stringent technology transfer regime. Western European companies will differentiate themselves by proposing generous technology and work-sharing transfers, integrating local defense companies into their supply chains, and setting up a pan-European Defense Industrial Base. The European Defense Fund (EDF) will fuel this by providing up to €13 billion over the next eight years to cultivate and secure these local ties. By financing collaborative R&D projects, prototype development, and disruptive, higher-risk defense innovation, the EDF will entrench Western European companies in CEE defense establishments over the medium to long term. Yet, from the perspective of vulnerable members on NATO's eastern flank, only the US has the political power and defense capabilities to counter Russian meddling and aggression. Given the ambivalence of Western European powers about confronting Russia, and the appearance of oft-fluctuating US commitment to NATO, CEE nations may see buying American not only as a means to get best-in-class (but more costly) weapons, but also as a binding mechanism to enhance US political and military commitment. This dynamic was most vividly illustrated with Poland as it announced its intention to pursue the F-35, a platform historically out of Poland's “price range.” The purchase was also one of three major cornerstones for ensuring US investment in Polish security. The others were Poland's procurement of Patriot AMD systems and its agreement to – and its offer to fund – enduring US basing in-country. However, Poland will still expect significant local industrial benefit as part of any arms transaction, as defense acquisitions continue to be as much a political and (parochial) economic exercise as a military one. European firms have not stood idly by while the US competitors have targeted the region though, and they have gained their own CEE foothold. They have found success by targeting countries like Hungary, who recently purchased helicopters from Airbus along with tanks and howitzers from KMW. While this is smaller than recent US sales, Western European contractors have an advantage: time. Every programmatic delay buys more time for the EDF to mature, extend its tendrils into every Western European foothold in the region, and bring the promise of increased industrial participation. Thus, absent a dramatic softening of the US tech transfer regime, American contractors will need to push for more creative ways to provide credible differentiation from Western European competitors. First, they can take advantage of the upcoming eastern shift of US operations in the region and establish logistics and maintenance centers that are able to serve both a country's new equipment and US forces in region, in a model similar to the F-35's maintenance depots in Australia, Japan, and the United Kingdom. This expands NATO's operational support footprint into the region and grants CEE countries access to a much larger sustainment enterprise. Second, American firms should push for more aggressive releases of Excess Defense Articles. While older, this equipment still represents a substantial increase in military capability that many CEE countries otherwise could not afford. This has been seen in Croatia, where 16 retired OH-58 Kiowa Warriors are providing the country with new capabilities it could not afford (and now cannot afford to replace) and a pair of UH-60Ms donated to the Croatia Special Forces have introduced the platform to the Croatian military ahead of an eventual Mi-8/17 replacement program. These introductions induct CEE customers to US-style CONOPS and equipping standards that increase switching-costs to European competitors. Finally, American contractors should extol the wider advantages of buying into the US defense enterprise. The opportunity to tap into the extensive US training enterprise during and after the acquisition process would be a boon to CEE nations overhauling their militaries. While this has most recently been highlighted by international F-35 customers conducting their initial training at Luke Air Force Base amid the expansive Western US training range infrastructure, it is an opportunity that can be granted to non-Air Force customers, particularly given the establishment of a new Combat Training Center in Drawsko Pomorskie, Poland. Meanwhile, the Foreign Military Sales process grants international contractors access to DoD buying power, not only for the acquisition itself, but also for the all-critical procurement of spare parts and weapons reloads decades down the line. As they pursue long-overdue military modernization CEE countries will have to balance competing economic, political, and security imperatives. While going with US defense prime contractors provides top-tier capability and stronger ties with the only NATO member that can credibly deter Russian military adventurism, Western European firms will offer the lure of technology sharing and a more lucrative package for local industry. How CEE nations strike that balance will shape the military-political alignment of Europe's eastern flank for the next generation. https://www.avascent.com/news-insights/white-papers/defense-firms-angle-for-eastern-europe/

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  April 8, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

  The Pentagon’s supply chain faces an economy under siege

  By: Valerie Insinna and Aaron Mehta WASHINGTON — On the morning of April 2, companies up and down the Pentagon's supply chain got an email from Eaton Aerospace, a mid-tier supplier that provides parts such as fuel pumps and hydraulics to defense primes for aircraft like the KC-46 tanker and F-35 Joint Strike Fighter. “The truly unprecedented situation with [the coronavirus] COVID-19 is jointly affecting our business, families and communities we live in,” said one such email, which was obtained by Defense News. “While the health and safety of our employees and those of our supply partners remains paramount, our industry is significantly impacted. ... As a result, our Eaton Grand Rapids, [Michigan], plant will [be] closed starting April 4, 2020 and will reopen on April 13, 2020." Similar emails for other locations followed. In a statement, Eaton Corp. spokeswoman Margaret Hagan acknowledged that the company was temporarily implementing closures “at a few sites,” but maintained that there would be no impact to the “critical support” provided to the U.S. military. “We've made the important decision to maintain operations during the COVID-19 crisis because Eaton products are critical to our global infrastructure,” she said. “As a strategic supplier of aerospace fuel, hydraulic, motion control, electrical and engine solutions for the aerospace and defense sector globally, Eaton's aerospace products and support services are vital not only to the military, but to the transport of passengers and goods around the world.” Although perhaps not a household name in the defense sector, Eaton is far from a small business, bringing in more than $21 billion in sales in 2019. However, the quiet closure of its production lines illustrates how widespread the impacts of COVID-19 have reached — past the major prime contractors like Boeing, or even its major subcontractors like Spirit AeroSystems, and to the large and small companies that populate the middle and lower tiers of its supply chain. “The whole supply chain is a mess right now,” said an employee of one electronics manufacturer that provides components for both commercial and defense products. The source, whose name and company affiliation Defense News is withholding to protect the individual from reprisal, described challenges with working from home and retaining workers on the production line. Some colleagues, the source said, are choosing to take paid leave or voluntary layoffs rather than risk exposure to COVID-19. “We are at 20 percent capability,” the source said. According to Jeremy Bash, a former Pentagon official now with Beacon Global, “there is deep concern among industry and department leaders that the second- and third-tier suppliers need to be protected." “There's a sense DoD [the Department of Defense] needs better visibility into the supply chain, mapping out how a part makes its way into a plane or ship," Bash added. “There is a growing number of tech companies providing software to illuminate supply chains, and since COVID, the phones of those companies have been ringing off the hook because the department now realizes supply chain concentration is a huge risk.” ndustrial shock waves But one doesn't have to dive down the supply chain toward Eaton to see that the defense market is taking a beating, particularly the companies that also have a strong exposure to the commercial market. Up until last month, financial analysts would have seen commercial sales as a major boon to the overall health of a defense supplier, but that has changed, as the economy has taken a nosedive, said Richard Aboulafia, a defense and aerospace analyst with the Teal Group. “The commercial market is under siege, which means of course there is excess inventory, slumping revenue, major challenges on many levels,” he said. "On top of that, everybody faces the immediate impact of social distancing and workforce concerns. And on top of that, if you're heavily exposed to commercial, the harder time you might have getting credit. All of these are big issues. "The defense-industrial base, if it could somehow be removed from commercial aviation, we'd be in pretty good shape by the standards of the world economy. But we can't. They're intertwined.” Bloomberg reported Monday that Airbus sent a letter to employees over the weekend, warning that gaps in the supply chain, among other issues, will impact the company's ability to resume normal operations. Also on Monday, simulation firm CAE announced it was temporarily laying off 2,600 of its 10,500 global employees, while placing another 900 employees on a reduced work week. The company also instituted salary freezes and reductions for remaining staff, ranging from 50 percent for the CEO and executive team down to 10 percent for regular employees. Roughly 40 percent of CAE's overall revenue comes from defense contracts, according to the Defense News Top 100 list. Boeing, meanwhile, extended a shutdown of its Puget Sound, Washington, facilities, while also stopping work at its rotorcraft production line in Philadelphia, Pennsylvania. As a result of the Puget Sound shutdown, Spirit AeroSystems announced last week that it is halting work at a number of locations. Small businesses that form a core of the Pentagon's future technological development may be particularly vulnerable, according to government data and analytics firm Govini. In a new data sheet, the company noted there are roughly 50,000 small businesses that provide innovation support for the DoD, all of which is vulnerable to economic upheaval. “If this ecosystem suffers widespread failure due to COVID-19, the resulting impact will stretch well beyond short-term disruptions,” Govini said. “These vendors are not just critical links in the DoD supply chain important for immediate purposes. They are also vital for the development of both next-generation systems in the midterm and revolutionary capabilities that will shape the competitive landscape for decades into the future.” Between fiscal 2015 and fiscal 2019, roughly 28 percent of defense spending on underwater unmanned vehicles — a key part of the U.S. Navy's plan to build a fleet of the future — went to small businesses, according to Govini numbers. Small business contracts also accounted for 30 percent of the DoD's research on artificial intelligence during that same time period. Martijn Rasser, a senior fellow at the Center for a New American Security, warned Defense News last month that “for small business, a shutdown would be extremely difficult to get through because even with bailouts and economic stimulus, once those businesses close up, its really hard to get those started again.” “If an airline goes out of business, the planes don't disappear — you can start over. If it's a highly specialized manufacturing company, those employees are going to disperse and try to find other work. So I think that's something to be very cognizant of because of all the consolidation in the defense industry,” he added. “If they have to curtail operations for an extended period of time, it's extremely difficult to get it going again.” What's the Pentagon's response? Starting March 20, the Pentagon began issuing guidance on how to support industry. But a three-day span last week showed how those efforts remain a moving target, particularly in relation to the smallest suppliers. On March 30, the department's acting director of defense pricing and contracting, Kim Herrington, issued guidance to contracting officers that essentially said industry should not be penalized for missing performance targets as a result of the ongoing pandemic. “We must do our utmost to ensure that both the Department and the vital industrial base that support us remain healthy for the duration of this emergency and emerge as strong as ever from the challenges of this pandemic,” Herrington wrote. But some in Congress feel the department is still not doing enough to clarify policy changes for contracting officers and defense companies. On April 1, a group of Ohio lawmakers wrote to Defense Secretary Mark Esper and Under Secretary of Defense for Acquisition and Sustainment Ellen Lord, warning that “we are concerned that guidance to the defense contractor workforce remains ambiguous and lacks uniformity in application,” particularly in terms of communication from department contracting officers to small companies. Over the past several years, the Pentagon has worked to delegate decision-making authorities to low-level contracting officers. But while that may work to empower contracting officers to find creative solutions to problems under normal circumstances, during a pandemic, these officials are ill-prepared to decipher “uncertain, often conflicting guidance,” the lawmakers said. The lawmakers asked that contracting officers be directed to ensure that contractors are allowed to work remotely to the maximum extent possible; that contractors be given “maximum flexibility to meet their contractual obligations”; that efforts be made to not have “avoidable reductions” in the workforce; and that companies involved in research and development work be clearly labeled as essential personnel. And on April 2, two trade groups — the National Defense Industrial Association and the Professional Services Council — asked Congress to instate a six-month delay for a legal requirement included in the 2019 National Defense Authorization Act that prohibits the government from doing business with companies that work with vendors Huawei and ZTE. That language “will impose significant financial and operational costs on medium- and small-sized firms at a moment of substantial uncertainty and hardship,” at a time when they are dealing with the economic impact of the coronavirus pandemic, the letter stated. Later in the day, the DoD released a statement providing clarification on previous announcements. The department confirmed that higher progress payment rates — which had been jumped the previous week — will apply to already completed work, and not just future production. The new cash-flow rules should result in more than $3 billion in new cash moving into industry, according to department estimates. But that prediction came with a warning: The Pentagon “has high expectations that that prime companies are ensuring cash flow is moving to small businesses in their respective supply chains who need it most.” So far, the Defense Contract Management Agency has modified approximately 1,400 contracts with increased rates, the announcement noted. Contracting officials are working to ensure invoices at the higher progress payment rate keep arriving on time, with the department claiming there have been “no reported delays on contractor submitted invoices.” The announcement also stated that any delay related to COVID-19 issues will result in “an equitable adjustment of the contract schedule and cost,” meaning the department will adjust the contracts so that the vendor does not take an economic hit. The steps taken by the department are important, said Bash, the former Pentagon official. “The most powerful force the government can bring to help these companies is to say to industry: ‘We have money,' ” he said. A wildcard, Bash noted, is the $17 billion in national security-focused funding made available under the most recent stimulus package passed by Congress. However, Byron Callan, an industry analyst with Capital Alpha Partners, warns that more money doesn't necessarily mean less problems. “The DoD faces the same issues as any other branch of the government or the Fed that is providing more cash to address the crisis — if people aren't at work because of COVID-19, that cash won't help much in keeping a factory or office open and all projects on schedule," Callan said. For Aboulafia, increasing the value of progress payments is a good first step for increasing the flow of cash to suppliers. “In times like this, it really is about access to cash because of the risk of credit markets freezing up for commercial companies. Accelerated payments, maybe loan guarantees should be considered," Aboulafia said. But he's realistic that the defense industry isn't the only issue on the table for the Trump administration. “I think there's a lot that government can do,” Aboulafia said. "Unfortunately there's a lot that government has to do because the entire economy has been put into a medically induced coma.” https://www.defensenews.com/coronavirus/2020/04/08/the-pentagons-supply-chain-faces-an-economy-under-siege