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Chapter 17

INDUSTRIAL CAPABILITIES AND INTERNATIONAL PROGRAMS

The Department of Defense faces three strategic challenges. DoD must seek to shape the international environment, respond to the full spectrum of crises that threaten U.S. interests, and prepare now for an uncertain future. To meet these challenges and support the required Revolution in Military Affairs, DoD must be able to draw on a supplier base that can design and produce next generation weapons, innovate to preserve technological leadership, reduce cycle times to respond to evolving threats, lower costs significantly, and support interoperability for joint and coalition warfare with U.S. allies.

The Department is pursuing a three-pronged strategy to achieve these objectives:

Maintain effective competition in the defense industrial base.

Improve commercial-military integration to gain access to world-class suppliers, reduce costs by sharing overhead with commercial products, speed response times, and broaden the competitive base for components and subsystems.

Expand international engagement to leverage allied government investments, build alliance cohesion, and support interoperability.

A CHANGING COMPETITIVE ENVIRONMENT

The competitive environment within the defense industry has changed considerably in the past five years in response to the dramatic decline in procurement spending. In response to this decline, defense firms initiated a series of actions to restructure their operations to maintain profitability. They reduced excess capacity and work force levels to match reduced demand, streamlined processes, revamped supplier relationships, and began a process of industry consolidation via mergers and acquisitions.

The Department has generally supported the process of consolidation because it enables firms to eliminate excess capacity, reduce costs, and provide better value for DoD and the U.S. taxpayer. At the same time, the Department did not support transactions or parts of transactions that adversely impacted effective competition for DoD programs. Competition is a proven means of speeding innovation and reducing cost.

The Department has a clear process in place to determine when critical industrial capabilities are endangered and must be sustained. Additional funding or other actions (such as a change in acquisition strategy or investment strategy) may be required. There are small business efforts and other technology programs in place to support various industrial capabilities.

Overall, the restructuring of the defense industry is successful. Mergers and acquisitions helped consolidate defense industries, resulting in stronger and more stable firms. There were no significant bankruptcies or bailouts of defense firms, and DoD is maintaining competition for defense products while saving money.

Merger and Acquisition Reviews

ANTITRUST CONCERNS AND REMEDIES

The Department reviews each merger and acquisition transaction carefully to determine the effects on DoD programs and advises the appropriate antitrust agency. DoD reviews address four questions: First, will the merger result in a loss of necessary competition? Second, will the merger have an adverse effect on programs because of buyer/seller relationships between the two firms? Third, does the merger present potential organizational conflicts of interest? Fourth, what costs or savings could accrue to the Department as a result of the acquisition?

Since October 1995, the Department has reviewed 49 transactions; 23 of these were completed in FY 1998. During this period, a number of these transactions proceeded only on the basis of consent agreements between the companies and the Department of Justice or the Federal Trade Commission. These agreements required divestitures of businesses, agreements not to enforce exclusive teaming arrangements, and firewalls.

Once mergers are consummated, the Department will pay its fair share of restructuring costs. As required by law, before DoD pays any restructuring costs associated with business combinations occurring after August 1994, DoD must certify that projected savings are based on audited cost data and should result in overall reduced costs for DoD. In addition, for business consolidations occurring after September 1996, the audited projected savings for DoD must exceed costs by a factor of at least two-to-one for the restructuring costs to be allowed. DoD pays its share of amounts spent for severance pay, relocation assistance, retraining, and retention of medical benefits. DoD will not pay for any portion of the cost of making the acquisition, bonuses, or executive severance packages. Projected restructuring costs and savings were certified for eight business combinations since July 1993, and for one other business combination where a certification was not required by law. For these nine business combinations, DoD expects to realize about $4.2 billion in savings over five years and to pay about $840 million in restructuring costs as they are included in contract prices, for a payback of more than five-to-one.

THE LOCKHEED MARTIN/NORTHROP GRUMMAN PROPOSED MERGER

In March 1998, the Department of Justice, with the support of DoD, sought to block the proposed $11.6 billion merger of Lockheed Martin and Northrop Grumman. This was the first time since 1992 that the antitrust agencies went to court to block a transaction involving defense firms. Competitive concerns in the intervening years were resolved through consent agreements or firms abandoning a proposed transaction in the face of concerns of the antitrust agencies or DoD. In July 1998, the companies decided to abandon the transaction, and the matter did not proceed to trial. The Departmentís opposition to this merger did not represent a change in policy, but reflected the fact that industry consolidation to date has changed the defense market significantly and future acquisitions/mergers are thus more likely to raise competitive issues.

Improved DoD Visibility Into Industrial Capabilities

The Department is working to increase visibility into supplier capabilities and subtier relationships to assist program managers in the development and implementation of future acquisition strategies. DoD has made significant progress in several areas.

ACQUISITION STRATEGIES THAT TAKE ADVANTAGE OF EXISTING INDUSTRIAL CAPABILITIES

DoDís acquisition managers need to ensure acquisition strategies promote competition not only at the prime level, but also at the subtier level, throughout the programís life cycle. To emphasize the importance of competition in subtier markets, the Department revised DoD Regulation 5000.2-R, Mandatory Procedures for Major Defense Acquisition Programs and Major Automated Information System Acquisition Programs. This requires that acquisition strategies foster competition at prime and subcontractor levels, and that program managers focus on subtier competition during early exchanges of information with industry. Under these guidelines, acquisition strategies will need to identify the potential industry sources available to supply products and technologies critical to meeting the programís needs, highlight areas where potential prime contractors also are potential suppliers of these critical products and technologies, and describe the approaches to be used to establish or maintain access to competitive suppliers for critical areas at the system, subsystem, and component levels.

In recent years, the Department has employed a variety of strategies to promote competition at both prime and subtier levels. Specific steps taken include maintaining government flexibility in the selection of critical suppliers, competing subsystems separately from platforms, supplying critical subsystems as government furnished equipment, and breaking anticompetitive exclusive teaming arrangements.

COMPONENT AND MATERIAL INDUSTRIAL ASSESSMENTS

The Department is expanding visibility into key product and technology areas to identify single sources and endangered capabilities. Initial efforts focused on products affected by recent mergers and acquisitions, such as monolithic microwave integrated circuits and focal plane arrays. DoD is intensifying efforts to identify concerns posed by vertical integration and develop insight into key subtier capabilities, competition, and innovation.

Since 1994, the Department has completed a series of studies on industrial capabilities across a range of weapon systems, including tracked combat vehicles, helicopters, bombers, space launch vehicles, and torpedoes. Recently, studies also were completed on a few critical components, including radiation-hardened electronics, microwave power tubes, and capacitors and resistors. Currently, DoD is expanding the monitoring of potential single source concerns for selected, important products and technologies, including fixed wing aircraft, satellite payloads, electronic systems integration for combat systems, advanced suspension systems for tracked combat vehicles, deformable mirrors, radar systems, strategic and space launch solid rocket motors, missile and bomb fuzes, and integrated automatic aircraft flight controls.

Small Business Efforts

Small business is an important source of the industrial capabilities supporting defense needs, as well as an important element of the economic fabric of the nation. Small businesses bring critical innovation to the defense marketplace. Additionally, small business is an engine that provides job creation and ensures a greater number of citizens receive benefits from defense procurement dollars.

The small business program completed a successful year in FY 1998. Small businesses were awarded $23 billion in prime contracts out of the $109.7 billion awarded to U.S. business concerns in FY 1998. This represents a small business prime contract achievement rate of 21 percent. DoD awards to small disadvantaged business (SDB) concerns were similarly impressive, with prime contract awards equaling $6.5 billion (6 percent). In the Women-Owned Small Business (WOSB) Program, the Department awarded $2 billion in prime contracts in FY 1998. This represents 1.8 percent of total prime contract awards. The Department is pursuing a number of initiatives to enhance WOSB participation to meet the government-wide 5 percent goal.

MENTOR-PROTEGE PROGRAM

The Mentor-Protege Program proved to be a valuable tool in the Departmentís success in meeting its SDB prime and subcontracting goals. Proteges may be SDB firms or qualified organizations which employ the severely disabled. Over 200 large business mentors provided over 300 protege firms with business and technical assistance targeted toward enabling these firms to compete more effectively in the complex DoD marketplace. For their efforts, the mentors receive reimbursement or credit toward their SDB subcontracting goals.

A FY 1998 review of mentor-protege agreements approved between FY 1994 and FY 1997 indicated that:

There was a net gain of 3,342 jobs within these protege firms.

There was a net revenue gain in excess of $276 million within these firms.

Participating mentors reported an additional $695 million in subcontract awards to small disadvantaged business firms during this period.

In addition, protege firms received new technology, improved quality assurance systems, and business infrastructure support. Mentor firms received value as the direct result of developing a technically qualified and more competitively priced supplier base. As mentor firms restructured and downsized, they often formed strategic alliances with protege firms for the specific purpose of outsourcing functions previously performed in-house. Similarly, the Department gained by having an increased number of cost-effective, technically qualified small business sources for defense prime contracting and subcontracting requirements. It is apparent that significant benefits accrued from the DoD pilot Mentor-Protege Program to mentors, proteges, and the Department.

WOMEN-OWNED SMALL BUSINESS PROGRAM

The Departmentís Women-Owned Small Business Program has three objectives:

To facilitate, preserve, and strengthen full participation for WOSB firms in the DoD acquisition process.

To promote efforts to achieve the government-wide 5 percent goal for prime and subcontract awards to WOSB concerns.

To support the growth of WOSB firms through outreach and technical assistance.

The DoD WOSB Working Group launched a series of initiatives toward the attainment of these objectives. These include the development of a nationally acclaimed WOSB Web site (www.acq.osd.mil/sadbu/wosb), which highlights program best practices, initiatives, and success stories, and provides a step-by-step approach to the defense marketplace. A WOSB Program Presentation was developed and disseminated to DoD field activities and Procurement Technical Assistance Centers as a tool for training and outreach. Most recently, the Departmentís WOSB Working Group developed a focused outreach program targeting specific industry areas which offers maximum potential for increasing prime and subcontract awards to WOSB concerns.

SMALL BUSINESS INNOVATION RESEARCH PROGRAM

DoDís Small Business Innovation Research (SBIR) Program funds approximately $550 million each year in defense related research and development (R&D) projects at small technology companies. SBIR-developed technologies contribute significantly to U.S. military capabilities in the full spectrum of requirements from aircraft to logistics to communications programs. For example, an infrared-absorption hygrometer developed under the SBIR program led to the development of the pilot alert system now used in the B-2 Bomber. The pilot alert system warns a pilot if the plane is about to produce a trail of condensation that could be detected by enemy radar. Also, an SBIR project led to the technology that increased the capacity of communication satellite networks by a factor of ten, allowing each network to serve ten times as many users during the course of a day. This technology is being used extensively in military satellite communications. The Department has a number of initiatives under way to streamline and improve SBIR processes and leverage the programís output.

The Commercial Operations and Support Savings Initiative

As equipment ages, operations and support (O&S) costs increase. Because many of the systems currently in use will remain in the DoD inventory for years to come, O&S are prime areas for DoD cost reduction efforts.

The Commercial Operations and Support Savings Initiative (COSSI) is an innovative way to reduce O&S costs. COSSI modifies existing or imminent commercial technologies to develop a prototype that can be inserted into a military system to improve reliability, reduce maintenance, improve fuel efficiency, reduce spare parts costs, or eliminate parts obsolescence.

A key feature of the program is the requirement for the contractor and DoD to share the cost of developing the component. Another feature is the use of authorities given to the military departments by 10 U.S.C. 2371. These authorities allow the Secretary of Defense and the Secretaries of the military departments to enter into transactions that are not encumbered by many of the procurement laws and regulations that apply to other acquisitions. The flexible nature of these agreements promotes the formation of government-industry partnerships. Both the program office and the contractor are given greater freedom to concentrate on project objectives instead of rigid compliance with contract provisions. Additionally, contractors who have traditionally shied away from doing business with DoD because of the complexity of DoD contracting requirements can take advantage of the streamlined process made available by 10 U.S.C. 2371 to offer their ideas for O&S cost savings.

COSSI is currently funding 30 projects in a variety of technology areas. Some projects involve the replacement of obsolete computers in aircraft. Others are redesigning electronic components to improve reliability and to take advantage of open system architectures so future upgrades will be easier and less costly. A number of projects involve the use of advanced composite materials for rotor blades and airframe components. The 30 ongoing projects have the potential to save DoD over $3 billion in O&S costs over a ten year period.

KEY TECHNOLOGY AREAS TARGETED FOR TITLE III ACTION

Title III of the Defense Production Act creates assured, affordable, and commercially viable production capabilities and capacities for items essential for national defense. This is achieved by partnering with the Servicesí acquisition, support, and laboratory programs and with industry. Title III is the only direct vehicle used by the Department for establishing or increasing production capacity that directly benefits national security. A key tenet of the program is to rely on dual-use production capabilities, leveraging shared demand for these technologies by both military and commercial markets. The current Title III Program is targeting three key technology areas: electronic materials, electronic devices, and advanced structural materials and components. Current projects in these technology areas are focused on sustainment of fielded systems, while also facilitating early insertion of production-ready technologies in new and modified systems. U.S. commercial markets share the benefits of these technologies because Title III assures availability of products while enhancing their affordability and quality.

Efforts in the electronic materials area are focused to support higher frequencies, radiation hardness, and much higher power levels essential to evolving electronic devices in radars, lasers, other sensors, and advanced wireless communications. Specific Title III projects include high purity float zone silicon, semi-insulating indium phosphide wafers, silicon on insulator wafers, and silicon carbide semiconductor substrate material.

Projects in electronic devices include Active Matrix Liquid Crystal Cockpit Displays, Small Flat Panel Displays, and Power Semiconductor Switching Devices. Benefits gained from these devices include greatly enhanced pilot and crewmember performance through better information display; smaller, more affordable, and more reliable power switching; and conditioning on ships, aircraft, and land vehicles.

Titanium Metal Matrix Composites and Aluminum Metal Matrix Composites are two projects in the advanced structural materials and components area. These two efforts will lead to earlier insertion of these emerging composites in advanced jet engines and tracked vehicles, respectively.

WORKING WITH OTHER NATIONS

U.S. forces often fight or work alongside the military forces of other nations. Deploying forces in cooperation with those of other countries places a premium on interoperabilityóensuring U.S. systems and allied systems are compatible.

DoDís International Armaments Cooperation Policy

International armaments cooperation is a key element of DoDís acquisition and technology efforts to field the most capable force possible. International armaments cooperation, in its many forms, enhances interoperability, stretches declining defense budgets, and preserves defense industrial capabilities. Successful efforts require that DoD engage allies in discussions at the earliest practicable stage to identify common mission problems, arrive jointly at acceptable mission performance requirements to balance cost, meet coalition military capability needs, and assure interoperability.

While many weapons programs will remain national, cooperation with allies must be the choice for those systems that require interoperability in coalition conflicts. Examples are air defense, communications, intelligence, chemical/biological defense, and information security. Where opportunities for cooperation do exist, these programs must be implemented efficiently and effectively.

To achieve success, cooperative international defense programs should apply the lessons learned from successful international commercial alliances. Essentially, DoD is working toward a new international armaments cooperation model, one in which governments establish the military requirements and business rules, and the industries involved establish the best international teams of their own choosing to competitively bid on the work. This will forge a more balanced partnership that guarantees each individual memberís independence. It will recognize the interdependence of cooperative partners and take full advantage of the efficiencies and effectiveness of competitive market forces.

Some of the more notable success stories in international industrial cooperation include the F-16 Falcon and the F-16 Mid Life Upgrade, AV-8 Harrier, T-45 training aircraft, CFM-56 engine, the continuing cooperative efforts under the NATO Airborne Warning and Control System program, and the Multifunctional Information Distribution System. The Department is now working with allies in Europe and Asia to explore other cooperative programs, including the Medium Extended Air Defense System, Tactical Reconnaissance Armored Combat Equipment Requirement, Joint Strike Fighter, and NATO Allied Ground Surveillance efforts.

The International Cooperative R&D program led to sharing of military technology among allies, as well as to development of joint equipment to improve coalition interoperability. Frequently, these R&D investments provide the cooperative linkage required to leverage independent national developments and enhance military capabilities. Such items include advanced aircraft, combat vehicle command and control, communications systems interoperability, and ship defense. These cooperative programs also foster closer international and military-to-military relations.

The Foreign Comparative Testing program also enhances international defense cooperation. This program evaluates foreign non-developmental items for DoD use and includes 20 foreign countries as active participants. The Services and the United States Special Operations Command procured over $4.9 billion worth of foreign equipment as a direct result of successful equipment evaluations. By purchasing foreign non-developmental items, DoD saved over $3 billion in research, development, test, and evaluation costs while providing earlier fielding of quality items to U.S. warfighters.

As DoD takes greater advantage of the opportunities in international defense cooperation and commerce, it continues to address the risks of the proliferation of weapons of mass destruction and advanced conventional weapons. DoD worked to ensure the Services and agencies understand the nature and importance of the February 1995 Conventional Arms Transfer policy and take its tenets fully into account when pursuing cooperative international defense programs and sales. As a result, both economic security and national security interests are pursued and protected.

DoD took steps to improve the effectiveness and efficiency of international cooperation. An International Armaments Cooperation Handbook was developed to provide a compendium of current policies, key processes, and points of contact for use by persons working cooperation issues in the Department.

International Cooperative Opportunity Group Developments

The Department is examining the potential for international collaboration on upcoming major systems acquisitions. As part of the Departmentís review of potential opportunities for cooperation on upcoming major system acquisitions, the Armaments Cooperation Steering Committee (ACSC), the senior armaments cooperation policy and oversight body within the Department of Defense, is implementing a disciplined process for identifying new opportunities for international cooperation. A major ACSC initiative deals with the formation of International Cooperative Opportunities Groups (ICOGs) to identify and recommend specific new opportunities for armaments cooperation.

ICOGs are looking at areas of common need and seek to establish communication with allies to create opportunities early in the acquisition process. The ICOG process identified programs as candidates for potential cooperation based on several factors: the degree of requirements commonality; the extent to which the technologies, strategies, and budgets of the potential partners are complementary; the potential for international industrial teaming; and the perceived benefits and risks associated with execution of such a program.

Environmental Cooperation

ENVIRONMENT AND NATIONAL SECURITY

The U.S. military developed a comprehensive and robust environmental program over the past 27 years that addresses all aspects of environment, safety, occupational health, pest management, fire and emergency services, and explosive safety. In order to build trust and enhance stability and interoperability in other countriesí militaries, the Department is sharing its experience and knowledge in defense environmental issues.

MILITARY-TO MILITARY ENVIRONMENTAL COOPERATION

Through military-to-military cooperation, DoD conducts bilateral/multilateral environmental cooperation with Argentina, Australia, Canada, Finland, Germany, Italy, Norway, Sweden, Russia, Poland, the Czech Republic, Hungary, and South Africa. Discussions for such cooperation are under way with several other nations. In addition to promoting stability through engagement, DoD gains useful information from these exchanges in support of the Departmentís environmental responsibilities as it takes advantage of the perspectives that other nations offer.

ARTIC MILITARY ENVIRONMENTAL COOPERATION

DoD also engages in agreements such as the Arctic Military Environmental Cooperation Program (AMEC), which is a trilateral forum for dialogue and joint activities among U.S., Russian, and Norwegian military and environmental officials to address critical environmental concerns in the Arctic. One of the main objectives of AMEC is to develop technologies for the Russian military to address its radioactive and nonradioactive waste challenges in the fragile Arctic ecosystem. DoD, together with the Department of Energy and the Environmental Protection Agency, will leverage U.S. expertise in environmental techniques to address radioactive and chemical waste associated with nuclear submarines. More importantly, this unique effort is helping to build trust and understanding among these three militaries.

CONCLUSION

Industrial capability reviews and international programs serve a central role in the Departmentís interface with industry to provide equipment and capabilities for the warfighter. DoD will continue to work with industry to eliminate unused capacity and lower overhead costs, while ensuring that industrial capabilities are sufficient to meet DoDís needs. The Department will also continue improving its relationships with allies through increased cooperation and interoperability. These efforts will enhance the Departmentís capability to promote competition, seize the opportunities presented by innovation, and respond rapidly to warfighter needs.

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