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Acquisition Reform: Accelerating the Journey American Institute for Aeronautics and Astronautics
As Delivered by Deputy Secretary of Defense John J. Hamre , Washington, D.C, Thursday, January 28, 1999

Thank you, Bill, very much. And thank you for inviting me to be here.

I must say the thing that startles me more than anything is coming here today and realizing that we're only in one-third of the room, that we would have probably taken the entire room just ten years ago. It tells you something about what's going on in this business, that we are shrinking and in ways we need to all be concerned about.

I say that by way of backdrop because while I do want to talk about acquisition reform, the front end of this speech you're going to hear isn't going to sound like acquisition reform initially, but it will end up there when we're all said and done.

What I'd like to do is take a few minutes to talk with you about some insights into the thinking that's going on in the Department right now in a number of different quarters, and as I look around the room I see many of my colleagues that are involved in this. As we're looking at the issue of the globalization of America's defense industry and what that means. It's an enormously interesting and very complicated question and issue. While I promised I'd answer questions, with any luck at all I'll talk so long there won't be any time to do that, so... (Laughter)

We started wondering about this, and frankly worrying about this problem, probably coming from a lot of different directions. I realized some time back, a half a year back or so, that we had an inherent penchant in the Defense Department in the sense that we want to get rid of the defense industry in the sense of defense. We would like to be able to have an industry that supports America's defense needs and not have a captured, hot-house industry with all of the inefficiencies that flow from that. And of course that's the centerpiece of what acquisition reform is about, is to try to get rid of those non-value-added unique and government-only procedures which tend to add cost and don't tend to add very much in terms of value.

Yet we've been trapped by that over the last 30 years, and a lot of it is deep-seeded. It isn't a superficial thing at all. It's very, very deeply grounded in how we've evolved our economy and our political values and our cultural values as we have oversight of the Defense Department and in turn over defense industry, and we realized probably ten years ago we needed to get out of that, and we needed to get out of the business of having a defense industry per se.

At the same time, we're seeing American industry becoming global. As I've said on other occasions, I'm not sure what an American product is anymore. I drive a Ford Taurus -- the most American car you can buy on the market, and it's only 94 percent American content. It is 94 percent American content which sets it apart, but there are "American" cars today on the market that are 22 percent American content. We've become a global industrial base.

I think that, where I was first concerned about this was from a security angle. We have created an entire infrastructure around securing America's industrial strength through controls and procedures that really go back to World War II and are very much territorially grounded. The Board of Directors are all Americans. That gives you security. The headquarters are in some state in the United States. That gives you security. I'm not sure what any of that means anymore when you have an industrial base that's now global.

I'd venture to say that we really don't have any idea where most of the microchips are made that go into the black boxes on the F-22. We just haven't been tracking things like that. This industry underneath us has gone global and we have not kept up to pace.

I think this came to a head, at least in my mind, last summer and fall when we had the revelations about the China satellite launches and that allegedly some of our companies were involved in helping the Chinese correct some problems. And all of a sudden -- because of the short term of events, and the Authorization Bill was on the Floor around then, we had five amendments, that it was almost a capital crime to do business with a Chinese company.

So we reverted in our political environment to kind of an old model for security that didn't work or wasn't relevant to the way American business had evolved in the last 15 years. We have a global industrial base now and an intensely parochial political framework to deal with it. That got us to start thinking about this problem.

There are a lot of different dimensions to it. It gets to the business of what is it that we're trying to protect anyway? We are, after all, the only real superpower anymore. What's the secret for us? What are we trying to protect? From whom?

It got us to confront the issue; we're spending a lot of our time on a huge licensing procedure. Poor Bob Keltzer has been putting up with me on this, and you're going to hear from him later today. But I got a phone call from my counterpart from the Netherlands, a wonderful guy, Jon Miley. He's since left the job, but he was calling from a pay telephone outside of an American defense manufacturing plant complaining to me that he was not allowed to go inside to look at the airplanes that he just bought. (Laughter)

That's awkward, you know? (Laughter) And it's pretty hard to argue that the Dutch aren't allies. Gosh, they're with us in anything that counts. They're always there. And to tell a customer that good, who fought very hard inside his Parliament to buy American when he was facing huge, stiff resistance to buy from another European country, he bought American, and then we wouldn't let him in the plant to see his own airplanes. And the reason was security. Give me a break.

So we have a system that grew up, again, in the Cold War for industrial security, where we were keeping track of all of these drawings and designs that go back 35 years, and thinking somehow we're protecting something through that process. So what are we doing?

At the same time that fairly substantial things are going on in industry. All of a sudden we contract with software houses overseas to produce the code that goes into operating systems, and we have no idea where it's even being written, and yet we're protecting old paper drawings for the transmission gears for 113's [M-113]. This doesn't make sense. We've got a lot of work we've got to do.

And then in a larger sense, it's got us to shift our thinking a little bit when we were confronted this fall by many feelers of potential proposals from companies overseas. Would you entertain a U.S. company merging with a European company? That really stretches a lot of thinking for us because we really have created the infrastructure of industrial security around the nationality of the Board of Directors.

Does that mean anything? Is that still a viable model? What does it mean to have that and then have a Daimler Chrysler? These are big questions.

We've spent a lot of time thinking about that, and we're very, very far along in our thinking about how we felt we could construct a more modern security model that was a closer fit to where American industry and American commerce is today.

Last week Art Money and I and a few others went to Europe to talk to some people about this, only to get there just at the same time that British Aerospace and GEC Marconi were announcing they were getting married. And I see some of my friends from the British Embassy here, so I'll be very careful how I... (Laughter) ...say this.

But I guess there's no way to sugarcoat it. I think that was a very damaging development, to be perfectly honest. Again, I want to be very careful in how I address this. I see people scratching notes on pads and it makes me very nervous.

Let me step back before I get to my observation with a broader context. I must confess to be very worried about where our allies are heading in Europe as it comes to their industrial underpinnings. Europe is not terribly different from us in the sense that our industrial underpinnings represent an intellectual reservoir that really has moved us along over the years to think about the tough business of innovation when it comes to warfighting. We have counted on this intellectual reservoir to be there, to test new ideas. They think about new products and new concepts and they challenge us.

It isn't just all being driven by a requirements process in the Pentagon. It's being driven by opportunities that are developed in industry as industry thinks about them and brings them forward, and it's been that dialectic between a market seeking to advance itself in profits and a detailed systematic requirements grounded process, in the Pentagon, that really has produced such a remarkable fighting force.

We would be set back enormously in the United States if our industrial base were to wither. That's why I say it makes me a little nervous. We're only one-third of the ballroom anymore. There was once a time when it was a much bigger company, company in a small "c" sense, not in an individual institution.

And yet when I go over to Europe what I see is a contraction that's really being driven largely by the collapse of the investment budgets of the governments.

You can't have a defense industrial base if you don't buy anything. And unfortunately, I see time and again places where programs, many of them collaborative programs, are being canceled as each country tries to maximize its national short term interests vis-a-vis a particular acquisition. And I think that's a very serious trend, a very worrisome trend.

Some people have pointedly said to me, "well you're just being a typical American. You want to eat everything. You want to have the entire market to yourself." I said no. I really do want to have a strong industrial base in Europe. But having one that collapses on itself to a single entity is not going to be in Europe's best interests.

I'm not talking about just market opportunities for the United States. I mean we're going to have a fairly big budget. I'm convinced of that. But to have a market that is collapsing, and the only solution is to have a single integrated entity throughout Europe, is not going to be in Europe's long term interests. And it's not in our long term interest, their being our allies.

I worried very much about the BAE/GEC merger because that now means there's for all practical purposes 90-95 percent of all British acquisition in one company.

Now that was exactly what we feared -- poor Tom, I apologize for bringing up old, wounds here -- but that was very much what we feared when Northrop/Grumman and Lockheed/Martin wanted to get hitched up. It was a step too far to consolidate a market that would have, we felt, taken away the competitive base we needed to protect. And I feel this step really has created that now in Europe. I must confess to be genuinely worried about it. Not for American business, although I do worry that I don't know who American companies now can partner with in a competition, but for Europe itself.

We can't afford to have this market collapse and everybody settle for second best technology just because it takes care of near term jobs. Because we're going to lose that impetus towards innovation and warfighting that we count on, and we don't have an ally stronger than the United Kingdom. And it's one that I, I can't turn the clock back, but I wish that we had had an opportunity to have a larger dialogue on this issue.

Unfortunately to them it looks like America trying to eat the world, you know? That was the one theme I heard consistently every place we went, was you can't expect us to throw away our infrastructure and our industry and just become a wholly-owned subsidiary of the United States. I understand that. I agree with that. But I also don't think that that really answers the question.

The real question is are you going to have a strong, vital military infrastructure in the future or not? And with a strong industrial underpinning to it. I think that was the question we should have in front of all of us.

We'll work our way through this. These are wonderful allies, and we'll work our way through that. We had the same discussions in Bonn and in London, and there's an awful lot of uncertainty right now.

The one thing that we did appeal for is not to let this quest for a European industrial identity lead to a lowest common denominator as it concerns issues like security. We're going to continue to have to work with our counterparts in Europe and we want to work with our counterparts in Europe on not only just an operational level, military to military, but an industrial level. But I don't think we can afford to do that and have a European defense industry that simply throws away its industrial security concerns for the sake of transnational integration in Europe. So I'll be honest - I'm sending a message here. It's again not in Europe's interests to have that happen and certainly not in our interest to have that happen.

Now let me say, I think that's ever more reason why we need to take the acquisition reform agenda ever more to heart here in the United States. The reality is we don't have enough of an industrial base, enough of a market to keep doing business the way we've been doing it for the last 30 years. We can't afford to waste 20 percent of our overhead on needless procedures that only the government wants that don't bring value. So it's absolutely crucial that we continue to do this, so we can maximize the purchasing power of the budget that we bring to the equation.

I also think it's crucial, and you'll hear from Bob Keltzer later, we have got to start streamlining our approach in the United States to foreign military sales. We can't burden our contractors who are having to compete now in a very tough market, with a lot of non-value-added steps that are just carryover from the 1970s. And we've got far too much of that. We've got far too much of an infrastructure.

And even though I end up yelling at my good friends at the Defense Security Cooperation Agency, I really have to lay this at the footsteps of the acquisition executives for the services. We've got to shed the overhead so that foreign military sales don't carry the overhead for a shrinking base inside the United States. So a good way to take care of some of those extra engineers is drop them on an FMS case. You follow me?

We can't afford, I think, to continue to keep a security system that's guarding technology secrets of 1970. Yet we're doing a lot of that.

We can't afford to keep treating our customers as though they're a poor, pathetic Third World country that doesn't understand what we're doing. These are very savvy buyers nowadays, and they're starting to cherry pick on us. They'll come to an FMS to find out what kind of a deal they can get, and then they'll come to industry to find out what kind of a deal they can get, then they'll check to see what part is industry not giving me and I'll come back to FMS to pick up on the margin. These are much more savvy, intelligent buyers than our current, slightly paternalistic process accommodates. So we've got an awful lot of work here we've got to do so that we can be vital and vibrant even though we are a shrinking base ourselves.

And like I say, I'm confident our budget's going to go up. The five year plan that we submit on Monday from a procurement standpoint will fall slightly below our target for 2000. We wanted to be at $54 billion, we'll be at $53, but we'll be at $61 billion next year, and we will get up to actually $75 billion in the out years. I think we're getting up that curve.

It was only two years ago our budget was $42 billion, so we really are turning around and starting to get some reinvestment going. But we can't afford to waste any of it on needless business procedures that don't add value.

I'm very serious about it. These are enormously important efforts, and we need your help on the FMS reform business, too. As genuine partners -- not just as outside kibitzers.

I must say, we initiated this process, Bob's been carrying the load on it. We've met with industry, and I must confess to say we haven't gotten very many good ideas from you. We've gotten a lot of complaining, you know. We haven't gotten a lot of good ideas. So shame on you. If we've got to solve this problem together it means coming forward to the table to help with real solutions. There are some good things that are out there, but we've got to be working on this thing together if we're going to make it work.

We will try to sort through the international picture, which is very complicated right now. Fortunately we have really quite solid, good leadership in the capitals, the major capitals in Europe that I think are also concerned with this problem. The question is how do they wrestle with the underlying problem. Europe doesn't see the kind of pressing requirement for defense spending today that we all felt keenly ten years ago, and what does that mean? So we've got some big issues we're going to have to sort through.

Let me stop with that.