29 avril 2019 | International, Aérospatial, Naval, Terrestre, C4ISR, Sécurité, Autre défense

Scrutiny over Pentagon official’s Boeing ties highlights defense industry consolidation


The year was 1989. The Pentagon was under the command of President George H.W. Bush and Defense Secretary Dick Cheney. And aviation giant McDonnell Douglas Corp. was riding high as the top federal contractor, grabbing 4.6%, or $9.15 billion, of all federal contracting dollars. The next two largest contractors, General Dynamics Corp. and General Electric Co., raked in about 4% and 3.4%, respectively.

Thirty years and many acquisitions later, Pentagon spending has grown far more top-heavy.

Today, Lockheed Martin Corp. and Boeing — which bought McDonnell Douglas in 1997 — together reaped almost 15% of total U.S. government contracting dollars in fiscal year 2017, according to the most recent federal numbers. The two aerospace giants are the only makers of fast combat jets in the U.S. and are the dominant players for military transport aircraft.

The concentrated power of big defense companies became an issue two years ago when longtime Boeing executive Patrick Shanahan was confirmed as deputy secretary of Defense. Then in December, President Trump named him to serve as acting Defense secretary.

After a monthlong ethics investigation into allegations that Shanahan promoted Boeing while slamming rival Lockheed Martin, particularly in discussions about its F-35 fighter jet contract, the Pentagon's office of inspector general concluded Thursday that Shanahan “did not promote Boeing or disparage its competitors.”

“We did not substantiate any of the allegations,” the report said. “We determined that Mr. Shanahan fully complied with his ethics agreements and his ethical obligations regarding Boeing and its competitors.”

Shanahan is considered a leading candidate for permanent Defense secretary.

The question of possible favoritism toward Boeing had also been raised by some when the U.S. Air Force, in its 2020 budget, made a surprise request to purchase F-15X fighter jets, an update of that company's fourth-generation jet. The Air Force, Navy and Marine Corps have all made major commitments to the F-35, Lockheed Martin's more advanced and pricier fifth-generation fighter.

The inspector general report said the Pentagon's mix of fourth- and fifth-generation aircraft was a decision made by former Defense Secretary James N. Mattis before Shanahan's confirmation to the department. A Defense official told trade publication Defense News that the decision was bolstered by concerns about keeping “multiple providers in the tactical aircraft portfolio.”

But there was no contract competition based on a set of defined requirements — the way business typically works in the industry, said Richard Aboulafia, aviation analyst at market analysis firm Teal Group.

“It's a duopoly structure business with a lot at stake,” he said of fast combat jet manufacturing. “It's amazing that no one considered the optics here.”

In some cases, the military has encouraged monopolies. In 2006, Lockheed Martin and Boeing got government approval to form United Launch Alliance, a joint venture set up specifically to launch national security satellites. The venture was proposed after the companies argued there were not enough launches to sustain two competitors.

“The market is more concentrated,” said Mandy Smithberger, director of the Center for Defense Information at the Project on Government Oversight, an independent watchdog group. “You see the government making decisions thinking about how it will impact industry probably more than they should be.”

Still, when President Reagan was in office, there were a number of major manufacturers of tactical military jets — Northrop Corp., Grumman Corp., Boeing, McDonnell Douglas, and General Dynamics, to name a few, Aboulafia said.

But as the Cold War ended in the 1990s, defense funding dried up, leading to major aerospace mergers, such as Lockheed and Martin Marietta, and Boeing's acquisition of Rockwell International's aerospace business and McDonnell Douglas.

A push for commonality among the Pentagon's planes also led to the fewer numbers of tactical military jets. The idea was that using similar aircraft would lead to savings in development and production costs, Andrew Hunter, director of the defense-industrial initiatives group at the Center for Strategic and International Studies think tank, said in an email.

As a result, the share of federal defense contracts awarded to the top largest private companies increased to 31.3% in 2000 from 21.7% in 1990, according to a National Bureau of Economic Research working paper on the effect of 1990s-era defense industry consolidation. In 2017, the share of the top five reached 35%, according to federal data analyzed for that paper by Stanford University researchers.

The paper concluded that those mergers resulted in a less competitive procurement process. But it did not find evidence of a significant increase in acquisition costs for large weapon systems, said Mark Duggan, director of the Stanford Institute for Economic Policy Research and co-author of the paper.

As the industry gets more concentrated, it can lead to concern that “there's only one or two potential contractors for a certain product, and then you may not get the kind of competitive outcome you want,” he said.

The consolidation process hasn't slowed, driven by the perceived need to compete for more and bigger contracts. Last year, Northrop Grumman Corp. acquired spacecraft and rocket motor manufacturer Orbital ATK Inc. Months later, military communications firms L3 Technologies Inc. and Harris Corp. announced their intent to merge.

Although acquisitions and mergers can lead to greater efficiency, they can also have a detrimental effect on product innovation, said Aboulafia of Teal Group. For example, he said, as aircraft manufacturers consolidate, clean-sheet designs may be more of a rarity in the future as there are fewer design teams in the industry from different companies.

For Boeing, “in terms of designing a clean-sheet fighter jet, it's been many, many, many years,” he said.

In 2017, Lockheed Martin won more than $50 billion in total federal contracting dollars, making the Bethesda, Md., company No. 1 on a list of the top 100 federal contractors, according to federal procurement data. Boeing was a distant second with more than $23 billion.

When narrowed to weapon acquisition contract dollars in fiscal year 2017, Lockheed Martin's individual piece of the pie totaled about 17%, with Boeing further behind at about 7.5%, according to federal data analyzed by the Center for Strategic and International Studies.

News of the Defense Department ethics investigation came after watchdog group Citizens for Responsibility and Ethics in Washington sent a letter to the acting Defense Department inspector general, asking him to investigate allegations that Shanahan had boosted Boeing while working in the Pentagon.

The letter includes a description from a Politico story published in January, in which Shanahan allegedly criticized Lockheed Martin's work on the F-35 joint strike fighter program, saying it “would be done much better” if Boeing had won the contract.

In that article, an unnamed former Pentagon official told the news organization that Shanahan said during a high-level meeting that Lockheed “doesn't know how to run a program.”

The inspector general's report said none of the witnesses interviewed said they heard Shanahan praise Boeing in meetings or discussions or make disparaging remarks about Lockheed Martin. Shanahan told the inspector general's team that he had never praised a Boeing military product and that he had said “program management on the F-35 is inadequate.”

Shanahan's Boeing career spanned more than 30 years, during which he led its missile defense systems and military helicopter units. He also served as senior vice president of the company's commercial airplane division and is known for his work on Boeing's 787 Dreamliner program, which was behind schedule when he first took the helm.

Boeing declined to comment this month on the initiation of the ethics investigation. The company referred to a statement it made in January, saying Boeing officials had not spoken to Shanahan about its programs during “his entire Pentagon tenure” and that the company “adheres to and respects Acting Secretary Shanahan's decision to recuse himself from company matters.”

Shanahan isn't the first industry executive to lead the Defense Department. Under President Eisenhower, Defense Secretary Charles Wilson joined the Pentagon after serving as chief executive of General Motors, which made military vehicles at the time. Other defense industry brass have also joined the Pentagon over the years, though in lower roles.

Analysts say the Pentagon could benefit from having a leader who understands how industry works, and who has been on the other side of the negotiating table and can avoid being tricked. And the Defense secretary typically works less with industry representatives than deputies do.

“Secretaries aren't making a lot of decisions on individual contracts,” Smithberger said. “They're setting the priorities for the department.”

But the potential conflicts may be “hard to escape,” said Loren Thompson, defense analyst at the Lexington Institute think tank, which receives funding from both Boeing and Lockheed Martin.

“Boeing is so big that almost every discussion of strategy, budgets or programs bears upon its interests,” he said.


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  • ‘You need two to tango’: Naval Group CEO Hervé Guillou on business in Europe and Down Under

    17 mars 2020 | International, Naval

    ‘You need two to tango’: Naval Group CEO Hervé Guillou on business in Europe and Down Under

    By: Sebastian Sprenger COLOGNE, Germany — Hervé Guillou, who took the helm at France's shipbuilder Naval Group in 2014, will retire from the company later this month due to an age limit that comes with the job. He made consolidation in Europe's naval sector a key tenet of his tenure, though there has been little movement so far other than Naval Group's cooperation with Italian shipyard Fincantieri and the resulting Naviris joint venture. With fears of demand drying up at home, Naval Group made an aggressive sales push across the world, perhaps most notably with the multibillion-dollar Australian Attack-class submarine program. The project received some criticism in Australia in recent months, though Guillou brushed it aside and said the Australian government remains committed to the program. Guillou spoke to Defense News' European editor, Sebastian Sprenger, by phone on March 10 about the international marketplace and industrial cooperation. With talk of a need for the European naval industry to consolidate, to what extent do you view Naval Group as a European company? We are the European leader of naval defense and as a strategic pillar we are willing to contribute to the building of the Europe of defense. We could not deliver the value to our shareholders if we didn't have a reasonable balance between our national programs like Barracuda or FDI frigates, coupled with a number of significant programs for export. Like Dassault Aviation, we need about 40-60 percent of value added for export if we want to maintain competences and competitiveness on the full scope of our offer. In our effort for internationalization, we have two streams. One is direct sales; we have established 10 new companies outside France. We have seven new customers in seven new countries such as Belgium, Netherlands, Argentina and Romania. That completely changed our international base. The second aspect is Europe, starting with the joint venture with Fincantieri. We have always said other companies can join. The process is slow, but we are absolutely clear that consolidation is needed if we want European sovereignty to be preserved. We are on the way. Naviris is one step. I hope there will be others. But it's a slow move, particularly in the naval industry because of the political visibility and because of the huge differences between the operational concepts of the European navies. Today, the closest to the French Navy would be the British Navy. But the British are on another agenda after Brexit [Britain's exit from the European Union]. On the submarine side, our closest partner in terms of worldwide, expeditionary capacity for oceanic operations are the Netherlands. On surface ships, because we have done Horizon and FREMMs together, it is Fincantieri. Today, Italy and the Netherlands are the likely first steps in our European road map, but others are welcome to join. In late 2018, you said you would make an overture to Germany's ThyssenKrupp Marine Systems for some kind of cooperation agreement once the Australian submarine deal is settled. Did that happen? No. You need two to tango. I don't know yet what is the consensus — or not — between the ThyssenKrupp leadership, government policies and parliament. It's not for me to interfere in that. I have been sending clear and open messages, and [Fincantieri CEO] Giuseppe Bono did the same, publicly. But today, we have no real answer. Germany and France have a land project together, the European battle tank, and two air projects, the Eurodrone and the Future Combat Air System. Do you think a naval project besides those is feasible? I think you cannot copy the aircraft or the land model to the naval sphere. Again, there are no likely bilateral or trilateral programs with Germany in the naval business because Germany has very different operational needs for their Navy than France or Italy. Their submarines are more coastal submarines, geared toward the Baltic Sea. Their surface ships — for example, when you look at the MKS 180 — are of a total different specification than the FREMM or the FDI, which are heavy, weaponized, combat-focused frigates. The Germans have no need for anything like an aircraft carrier, and they are not going to build SSNs [attack submarines]. So today, in my view, if we do something with Germany, it would be more of an industry agenda, as we did first with Italy, to be able to add and find synergies in our international presence, rather than relying on a bilateral program. And the way our industry consolidates is very different. But we have a survival issue in industry, to be able to find volumes, procurement synergies, export opportunities among ourselves and being mindful that the real competitor is more China and Russia and not Germany, Italy or the Netherlands. We continue to explain that, but we need to be patient. I understand well where the Germans come from. With three German yards — TKMS, Lürssen, and Blohm and Voss — it's more fragmented and difficult for them. What about the argument that it would be hard to mix a former state-owned company like Naval Group with shipyards who don't share that kind of heritage? That is totally wrong, and it's totally badmouthing. We are a company with a private status and an independent board even if we have a French government shareholder. Governance guidelines apply to Naval Group like they apply to all French industry in the market. The government does not interfere with the social interests of the company, and my board would not accept it. The same applies to the false charge that we get government subsidies. It is totally untrue. If it was the case, everybody could file claims against us in the European courts. Some of your competitors have argued that Naval Group is too diversified to be compatible with firms that do nothing but shipbuilding. Again, this is not true. Diversification has been put under control. During my time at Naval Group, I closed two big projects in the nuclear area, which were losing money. I have restricted hugely the area of marine energy production, concentrating on offshore wind and geothermal. We are 98 percent focused on naval business. This is not a good subject for our competitors to argue about. What are your expectations of the new French aircraft carrier and Naval Group's role in the program? Naval Group's role is very clear: We shall be the prime contractor for such program. We are the only one capable of designing and integrating such a warship, which includes the concurrent engineering of the combat system and of the platform, including aircraft, drones, the new electromagnetic catapult from the U.S. — more than 200 functions in all. The hull will be built in St. Nazaire, at Chantiers de l'Atlantique, where the big dock for cruise ships will be used. We expect a decision on the future aircraft carrier program sometime this year. I cannot predict the exact timing, but I am optimistic that the decision will be made this year. We have delivered to DGA [the French defense procurement agency] our preliminary studies, our cost-capability tradeoffs; we have given a lot of details as well on the timing of the possible entry into service of such a new aircraft carrier. The government now has all the information they asked to make their decision. Naval Group has been criticized in Australia about the Attack submarine program recently. Did that catch you by surprise? I must say I'm more disappointed than surprised. We have very, very strong support from our customer and from the Australian government. We know where these attacks come from, and we know how it is used in Europe to damage our reputation for ongoing and upcoming competitions. The first crisis was about postponing by five weeks a design review for a 30-year program. The attacks around that are unfair. The other controversy was about including local industry. What is the official plan on workshare for Australian companies? There is no contractual obligation. But we are in a strategic partnership, and there is a clear commitment from Naval Group to reach 60 percent of local content, which is more than the Collins class. And based on our experience in Brazil or in India, we truly believe that at the end of the day we will reach it. It will take time. It is a long, long way to train new industries, to train people, to transfer technology. But we are absolutely committed to Australia, to this partnership to deliver sovereignty, and to deliver this very, very significant percentage of Australian contracts. Do you think the EU is on a good trajectory to foster defense cooperation? I don't know yet. There are two sides of the coin. On the defense side, I would say the progress made in the last three years is absolutely huge. The European Defence Fund and the European Defence Industrial Development Programme, for example, are significant achievements of the previous commission. Is it due to U.S. new policies? Is it due to Brexit? I don't know. It's probably a mix of a lot of things. With the new commission, my understanding is that there is a clear intention to continue in this direction. Nevertheless, there is the budget discussion, which is not completely finished, and where the budgets dedicated to defense are still under threat. We need time to see what the results will be. I'm rather optimistic. The second issue is more in the civilian-economic area, where we still have a significant issue with the rules for anti-trust in European rules. Those are currently preventing European industry to consolidate at a time when we see the Chinese, Korean and U.S. industries are consolidating. In that context, in the shipbuilding sector, we're not hearing good things about the Fincantieri/Chantiers de l'Atlantique case. This is a big worry for us, as this would prevent European players to turn into world players. How will the European Patrol Corvette become a truly European program? Of course, it cannot be a 27-country project. So Europe has to start with two, three or four. This is a Franco-Italian initiative, which is supported by our two navies and our two governments. It was initiated by Fincanteri and Naval Group, and is carried out by Naviris, our joint venture. Greece has declared their interest formally to join the program. Spain is starting to study the case, though they have not declared officially. If we are three, four countries, it's good enough to start. https://www.defensenews.com/global/europe/2020/03/16/you-need-two-to-tango-naval-group-ceo-herve-guillou-on-business-in-europe-and-down-under/

  • Pourquoi les Européens n’arrivent pas à convaincre lors de l’achat d’équipements militaires

    22 mai 2019 | International, Aérospatial, Naval, Terrestre, C4ISR, Sécurité, Autre défense

    Pourquoi les Européens n’arrivent pas à convaincre lors de l’achat d’équipements militaires

    Nicolas Gros-Verheyde (B2) Mois après mois, les résultats tombent. Quand ils ont le choix, certains Européens préfèrent acheter américain plutôt qu'européen. Pourquoi ? Un achat de défense n'est pas uniquement un achat En matière de défense, un pays n'achète pas seulement un matériel, il répond à une histoire — tradition maritime, terrestre, etc. —, une géopolitique intérieure — neutralité, non aligné, aligné, autonome —, une affirmation de soi — volonté de prouver au peuple, à ses voisins sa puissance —, un contexte géopolitique — proximité ou non d'adversaires ressentis ou réelle —. La volonté d'avoir une autonomie d'équipements, ou non, découle de tous ces facteurs. La meilleure défense face à un adversaire ... Face à la Russie, nombre de pays européens estiment que la meilleure défense reste les États-Unis. Il ne s'agit donc pas de desserrer les liens qui existent avec les USA, mais de les resserrer. Et le meilleur moyen reste alors les achats d'équipement, qui solidifient de façon claire ce lien euro-atlantique. La duplicité de l'appel à dépenser plus C'est toute la duplicité de l'appel à dépenser davantage pour la défense. Appel largement soutenu par les Américains. Au-delà de l'objectif, justifié, de partage du fardeau entre Européens et Américains, la pression a un objectif purement économique : favoriser l'industrie américaine qui est la seule à répondre à la fois aux objectifs industriel (les matériels), opérationnel (l'interopérabilité), économique (le moins disant) et politique. La panoplie complète des Américains La fourniture des équipements militaires s'accompagne de la logistique, des armements et de la formation. Un ‘package' ordinaire pour ce type d'armements. Mais les Américains ont une panoplie beaucoup plus complète, qui va de l'outil de financement à crédit au soutien logistique dans les opérations extérieures, en passant par la présence de troupes ou de matériels dans les pays concernés, destinés à les rassurer face à des voisins inquiétants, un forcing permanent de leurs politiques, sans oublier l'accueil de jeunes ou moins jeunes officiers ou sous-officiers stagiaires dans leurs écoles. Un effort notable américain de formation Rien que pour la Roumanie, par exemple, pays qui préside actuellement aux destinées de l'Union européenne, ce sont 700 officiers qui franchissent le seuil d'une des écoles militaires US, des écoles de guerre réputées aux simples écoles de gardes nationaux. Cela forge des réflexes, une culture commune, des camaraderies, une solidarité... et l'habitude d'utiliser certains matériels. Peu étonnant ensuite que chacun soit convaincu dans l'armée roumaine qu'il faille acheter ces équipements. Une réflexion à engager Si les Européens veulent un tant soit peu défendre leurs équipements, il va falloir réfléchir sérieusement à se doter de ces cinq outils : les échanges et l'accueil dans les écoles européennes — l'Erasmus militaire prôné dans la fin des années 2000 est un peu tombé dans l'oubli (1) —, le financement croisé, la présence dans les pays (qui ne soit pas dispersée). (Nicolas Gros-Verheyde) https://www.bruxelles2.eu/2019/05/17/pourquoi-les-europeens-narrivent-pas-a-convaincre-lors-de-lachat-dequipements-militaires/

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