Defense Issues: Volume 12, Number 37-- U.S. Perspectives on Trans-Atlantic Armaments Cooperation
It's a pleasure to be back in London to talk with you today. I've just come form a very important and historic conference in Prague. We are on the precipice of some extraordinary changes in the world and in Europe. NATO is expanding eastward, and our whole outlook and defense strategy needed to change with the times.
At a conference like the NATO workshop, it is impossible not to reflect on the world order that all of us have known for most of our lives: the Cold War. This world order led both sides to develop superb defense industries -- industries with remarkable capabilities and vast capacities. To the relief of all, that balance of terror has ended. But the capacity of world defense industries is now out of balance with the budgets for perceived defense needs.
There are two usual economic consequences when capacity exceeds demand: lower prices and lower profits. If overcapacity continues, companies will take one of two courses. They may lay off workers in an attempt to restore profits by lowering costs. Or they may lower prices in an attempt to stimulate demand from countries that were not previously customers. Companies that take this second route hope to expand their market share enough to restore profit.
The present excess capacity in the world defense industrial base puts governments squarely between the domestic political evil of unemployment and the foreign policy evil of proliferation.
Four years ago, our Department of Defense recognized that the U.S. domestic armaments capacity exceeded our demand. Bill Perry [former secretary of defense] was then the deputy secretary of defense. He called a dozen defense industry chief executive officers and invited them to dinner at the Pentagon. Dr. Perry told them that there were twice as many of them in the room as he expected to see in five years and that the U.S. government was prepared to stand by and watch defense companies go out of business. As all of you who have read the recent "[The] Economist" [magazine] now know, this dinner became known around the Pentagon as the "Last Supper."
If the mergers between Boeing and McDonnell Douglas and Hughes and Raytheon go through, 15 of America's top defense companies will have become four: Lockheed Martin, Boeing, Raytheon and Northrop Grumman. These companies have not simply merged, they have restructured by closing excess facilities and cutting their work forces.
The 20 or so mergers in the U.S. aerospace and electronics sector during this decade have cut 1.8 million jobs from the defense sector. The comparable number in Europe is about 600,000 according to yesterday's London "[The] Times." Fortunately, the U.S. economy has been robust enough to absorb this job loss. In fact, we have created more jobs than we lost during the present decade, and our unemployment stands near a post-WWII [World War II] low. Much of Europe has not been as fortunate.
But I do not want to minimize the pain that some of our workers have felt. The average skilled assembly worker who is laid off today often needs a year to find a new job that pays an average of $19,000 per year less than he received before. Our government -- and our aerospace companies -- care about these workers. However, there has been significant pain.
America's defense industry restructured out of necessity. As all of you know, our defense budget has fallen dramatically since 1985 -- both in real terms and as a percentage of GDP [gross domestic product]. As a percentage of GDP, it is now about 3 percent. This is the lowest percentage in half a century. While the present world conditions prevail, the defense budget is not likely to grow. At best, the defense budget may continue at about 3 percent of GDP. Bill Perry was willing to stand by and watch companies leave the defense sector because the security interests of the United States could not be properly maintained if the American people had to pay the costs of excess capacity. We simply could not stay strong militarily and economically by paying more for less.
The DoD has been watching the debate on defense consolidation on this side of the Atlantic with interest. You can probably tell me more about this than I can tell you. I hope you will. If Europe can work out their differences, the long-term result should help lead to a healthy defense industry that is a much more viable competitor and partner for U.S. industries in the worldwide armaments market. The other activity that is necessarily running in parallel to these government activities is the continued effort to consolidate and rationalize European defense industries, efforts that of necessity must take place both within and across national boundaries.
I have two cautions. First, it is not enough to privatize companies. Nor is it enough to merge them. Actually, I heard a new term in Prague: "denationalizing." Neither privatizing nor merging automatically eliminates excess capacity. Painful choices about closing excess facilities and rationalizing labor forces must be made. Second, if the formation of the WEAO [Western European Armaments Organization] and OCCAR [Organismes Conjoints de Cooperation en Matiere d"Armement, a Franco-German-British-Italian Procurement Agency] is also accompanied by the imposition of national preference rules, then we are headed in an extremely unproductive direction.
If we fail to reduce the world excess capacity in defense articles, or if we wind up with a U.S. market that is closed to European defense articles and a European market that is similarly closed to U.S. defense articles, we could enter an economic prisoner's dilemma situation that encourages weapons proliferation.
The essence of the prisoner's dilemma involves the defection of rational individuals to a position that is irrational for the community as a whole. Let me illustrate this point by presenting a hypothetical situation in which the debate on the sale of a particular weapon in the halls of a hypothetical government.
"I would never sell this weapons technology to Country X. Except that I know you will. So, since Country X is going to get the capability anyway, I may as well get the sale." Of course, all competitors will think this way, and Country X winds up with the capability in question even though this might be harmful to the security posture in the region. In fact, the sale might even be made at an unprofitable price for the selling company. I am not suggesting that companies and governments will succumb to the prisoner's dilemma, but let me just read to you from yesterday's "Herald Tribune" (June 25, 1997):
"Lockheed Martin executives at the air show, who spoke on condition that they not be identified, justified selling the F-16 to Latin America and other tense regions on the ground that if the United States does not do it, someone else will."
Let me just touch on another area that came up at the NATO workshop and that is beginning to trouble some of us at the Pentagon: the potential for a technology gap between the United States and our allies. The issue becomes important in relation to my responsibility to equip our fighting forces in an era of coalition operations. The critical area is C4I (command, control, communications, computers and intelligence). About a month ago, I received a report from the Office of Naval Research in Europe. Let me quote part of it:
"Partly for reasons of cost, but also for reasons of sovereignty, and most importantly, jobs and industrial competitiveness, our NATO allies are balking at adopting U.S. C4I standards and purchasing U.S. equipment, and are not fielding systems with comparable capabilities. The resulting "technical divergence" exacerbates traditional problems of interoperability, and extends their dimensions beyond operations, to security and industrial policy."
Such a technical divergence would work against our present defense plan and put our country at risk. We need to look for constructive ways to work in partnership with our international friends and allies.
What can be done? The only reliable solution to the prisoners dilemma is cooperation in the defense armaments field. So how must we proceed? Nations should begin the armaments cooperation process early -- initiating discussions on common military needs before formal requirements are "locked in stone." Further, plans for armaments cooperation ideally should begin before any country has identified a specific company to perform the work.
Second, we should plan to buy systems in a competitive environment. We should buy from competing teams that include industrial participants from each partner country and not by competing one nation's industry against another's. In this way, we can capture the benefits of competition without creating the political unease which results from competitions in which a participant might not receive an equitable work share. In this way, we can achieve competition between companies instead of a competition between parliaments.
We and two of our European partners are using this model in the Medium Extended Air Defense System (MEADS). We hope to do the same in the production phase of the Multifunctional Information Distribution System (MIDS) program. Further, once we have created these competing teams, it would be ideal to continue the competition throughout the production phase of any cooperative program, using a "leader-follower" scheme. By creating a true partnership among the nations acquiring the system, we will be able to produce and obtain interoperable equipment that incorporates the best technologies and capabilities of the cooperating nations in a way that maximizes economic value and further minimizes the threat of proliferation.
Defense Secretary [William S. Cohen, in a new policy memorandum on international armaments cooperation, directs early commitment to international programs. Secretary Cohen says: "In the evolving environment of coalition warfare, limited resources and a global industrial and technology base, it is DoD policy that we utilize international armaments cooperation to the maximum extent feasible, consistent with sound business practices ... ." It is DoD policy to deploy and support standardized or interoperable equipment with our allies and to leverage our resources through international cooperative R&D [research and development], development, production and logistics support programs. Secretary Cohen has directed that:
- We engage allies in discussions at the earliest practical stages to identify common mission problems and to arrive jointly at acceptable mission performance requirements;
- We will designate appropriate defense acquisition programs as international cooperative programs, noting that DoD must be a reliable international partner by funding fully the U.S. share of such programs; and
- In support of designated international cooperative programs, DoD will give favorable consideration to transfers of defense articles, services and technology consistent with national security interests, laws, policies and international agreements.
This is a new and powerful policy memorandum in support of international armaments cooperation. The department has also recently issued a new policy on release of software documentation to include source code. The policy states that the department "will give favorable consideration to requests for transfers of software documentation consistent with national security interests ... "The new policy document provides guidelines when evaluating case-by-case proposals to transfer software document and identifies the factors for consideration. Those factors include the purpose of the transfer, security concerns, interoperability, availability, proprietary rights, cooperative opportunities and liability.
Another major change we are undertaking is to try to take advantage of the technological innovation from the commercial sector by inserting commercial technology into our fielded weapon systems to help us cut our growing operations and support costs. This year we initiated a new $100 million program called the Commercial Operations and Support Savings Initiative (COSSI) to help meet this challenge. The program pays for, on a cost-sharing basis, the testing and evaluating of the insertion commercial "kits" into fielded weapon systems. We can buy these "kits" as a commercial item and not have to go through the traditional government procurement and cost systems.
Through the use of a competition that was held earlier this year, we generated proposals that would, when implemented, save over $3 billion in operations and support costs. Most of the savings come from avoiding parts obsolescence and upgrade costs of specialized systems, decreased maintenance and reduced inventory.
For example, the Army is working with TRW to insert a commercial RISC [reduced instruction set computer]-based processor into its Guardrail Common Sensor System. Guardrail is an airborne intelligence-gathering system that supports commanders with precision-strike operations, information warfare and battlefield digitization. This new commercial system should increase reliability and processing speed and enable the Army to take advantage of the commercial upgrade path. It will replace existing complex mainframe computers that require substantial cooling and maintenance expenses.
The use of commercial technologies helps DoD in several ways. It helps us keep up with the commercial innovative cycle. It helps us take advantage of commercial economies of scale. It helps us reduce operating and support costs that are becoming increasing higher as our systems get older.
This effort is not limited to domestic commercial technologies. We want to use the best technology wherever it may be found. We know that there are instances where our allies have developed commercial technologies that would significantly help reduce costs or improve performance. We believe that we have not taken full advantage of all such opportunities.
The COSSI competition was not limited to U.S. suppliers, but open to worldwide teams. We are also committed to the competitive market process. We strongly believe this is the way to obtain the best value for our money. I know that many of you believe we have unnaturally restricted our market because of legislation that prohibits the department from buying certain types of defense goods from offshore sources. While it is true that we do have some restrictions, our defense R&D and acquisition budget still provides more opportunity for offshore producers in our market than there is opportunity for U.S. producers in the defense market of any one of our allies because our budget is larger than all our allies combined.
Congress, through a provision in the 1997 Defense Authorization Act known as the McCain Amendment, has allowed the department to relax some "Buy America" provisions for countries that have opened their defense procurements to U.S. companies.
Let me close by repeating that armaments cooperation -- true cooperation -- is a complex and challenging business. But I believe we are making good progress. The results of the QDR [Quadrennial Defense Review] process reinforce the need for international armaments cooperation and open competition among transatlantic teams. So do the military, economic and political realities of the millennium we will soon enter. When no one nation possesses all the best technologies, when no nation has unlimited resources and when nations will be coalition partners, the case for international armaments cooperation is compelling.
The end of the Cold War should not -- need not -- signal the beginning of a trade war in defense armaments. We can, and should, secure the benefits of military interoperability, along with the benefits of the world's best technology, from cooperation in defense armaments. Further, the true benefits of such cooperation can be achieved only if this cooperation is trans-Atlantic.
We in the United States believe that this cooperative approach is the optimum way for all of us in the NATO alliance to approach meeting the needs of our forces in the 21st century. We have already set our course in this direction, and judging by the favorable reaction in this latest edition of "The Economist," we are headed in the right direction. We believe this approach to armaments cooperation is the right thing for the alliance, and with your help, we will continue down this road to a new era in defense armaments cooperation.
Published for internal information use by the American Forces Information Service, a field activity of the Office of the Assistant Secretary of Defense (Public Affairs), Washington, D.C. Parenthetical entries are speaker/author notes; bracketed entries are editorial notes. This material is in the public domain and may be reprinted without permission. Defense Issues is available on the Internet via the World Wide Web at http://www.defenselink.mil/speeches/index.html.