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Chapter 16

INDUSTRIAL CAPABILITIES AND INTERNATIONAL PROGRAMS

As the defense industrial environment continues to change, DoD is forecasting fewer new major systems and longer intervals between systems. Major firms are becoming more concentrated and vertically integrated as companies complete acquisitions and adjust their strategic posture. Subtier consolidation is accelerating while acquisition reform reduces DoD control and visibility into subsystem source selections and subtier firms.

These trends challenge DoD’s ability to maintain industrial competition to facilitate cost and quality improvements and innovation. To address this challenge, DoD’s industrial strategy has four broad thrusts:

· Increase the opportunities available to DoD suppliers by expanding their access to global markets and encouraging diversification into commercial markets.

· Increase the number of suppliers serving DoD by facilitating DoD’s access to global suppliers and by breaking down barriers between the commercial and defense industries to realize the benefits of civil–military integration.

· Invest in future industrial capabilities.

· Address industrial issues in the acquisition process to assure required capabilities remain available or can be reconstituted when needed.

Concurrent with DoD’s efforts to maintain competition, the Department is pursuing the critical goal of improving systems interoperability with allies and potential coalition partners. There are differences in international partners’ national political and economic priorities that support coalition interoperability. Thus, the Department’s objective is to capitalize on cooperative initiatives in joint and combined interoperability that incorporate solutions of materiel, doctrine, tactics, techniques, and procedures. The Department is focused not just on command, control, communications, intelligence, surveillance, and reconnaissance systems but also the goal of building a system of systems capability in support of joint and coalition operations.

A CHANGING COMPETITIVE ENVIRONMENT

Right–Sizing in a Changing Environment

Executing the National Military Strategy requires a supplier base capable of providing required defense goods and services in a timely and cost–efficient manner. In pursuit of such an industrial base, the Department supports the process of supplier rationalization enabling firms to eliminate excess capacity, reduce costs, sustain critical mass in research and development, and provide better value for DoD and the U.S. taxpayer. On the other hand, the Department does not support those transactions that adversely impact effective competition and innovation for DoD programs and requirements. The restructuring of the defense industry to date is a success, maintaining competition and innovation while receiving significant cost benefits from a more efficient, right–sized industrial structure.

However, as both the cost of technology and the degree of military cooperation with key U.S. allies continue to increase, DoD must ensure its supplier base continues to match the realities of the 21st century national security environment. DoD increasingly obtains its goods and services from a mixture of commercial and defense firms with international ownership and facilities. At the same time, the National Military Strategy increasingly relies on the employment of coalitions of like–minded allies to achieve its objectives, as well as the pursuit of information dominance in any future conflict. The latter goal is driving DoD to incorporate more advanced information technology into its systems and the suppliers of these systems typically rely on global sources of labor, technology and capital. The Department is addressing these trends by examining ways to foster more linkages between U.S. defense suppliers and those of its allies to ensure that DoD adapts to the changing environment and captures the benefits offered by globalization. For example, closer integration of allied supplier bases facilitates more interoperable coalition forces, access to the most advanced commercial technologies, and a more efficient industrial structure. At the same time, it inhibits the formation of rival fortresses in the United States and Europe that may threaten the cohesion of the NATO alliance and yield economic inefficiencies. Key elements of a more integrated industrial base include reciprocity and congruence of market access, export controls, law enforcement and intelligence cooperation, and business practices.

Merger and Acquisition Reviews

The Department conducts a careful and comprehensive assessment of mergers and acquisitions involving its suppliers to determine the transaction’s effects on DoD programs, particularly regarding competition, innovation, and cost. DoD cooperates closely with the relevant antitrust agency—either the Department of Justice (DoJ) or Federal Trade Commission (FTC)—in the overall U.S. government antitrust review. This DoD process is an integral element of the Department’s broader efforts to oversee the health and suitability of its supplier base.

Departmental reviews focus on four principal questions: Will the transaction result in a loss of necessary competition and innovation? Will the transaction have an adverse effect on programs due to pre–existing buyer/seller relationships between the two firms? Does the transaction present organizational conflicts of interest? What cost savings might accrue to the Department as a result of the acquisition? These issues are at the heart of the review process DoD institutionalized in the mid– 1990s.

The process is quite successful. Since March 1994, the Department has reviewed over 120 transactions, 12 of which required consent agreements, and only a few of which were withdrawn due to DoD and DoJ/FTC expressions of concern. In 1999, the Department reviewed more than 30 transactions and opposed two—separate General Dynamics and Litton proposals to acquire Newport News Shipbuilding.

Improved DoD Visibility Into Industrial Capabilities

The Department is employing a variety of strategies to promote competition at both prime and subtier levels. DoD is 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.

Additionally, the Department is evaluating and addressing changes in key component and material providers that supply many programs and affect competition, innovation, and product availability. Selected DoD assessments also consider the extent to which vertical integration (or the use of preferred suppliers) within a consolidated defense industry might adversely affect competition and innovation. Finally, the Department is continuing to review foreign product restrictions contained in the Defense Federal Acquisition Regulation Supplement that were imposed by a DoD policy decision, not by statute, to determine if they should be continued for national security reasons.

DoD completed industrial capabilities assessments of fixed wing aircraft, electronic systems integration for combat systems, advanced suspension systems for tracked combat vehicles, deformable mirrors, strategic and space solid rocket motors, military fuzes, integrated automatic flight control systems, and polyacrylonitrile carbon fibers.

Small Business Efforts

Small businesses are an important source of the industrial capabilities supporting defense needs and an important element of the economic fabric of the United States; they bring critical innovation to both the defense and commercial marketplaces. Additionally, small businesses are widely recognized as the economic engine creating jobs and ensuring that a greater number of the nation’s citizens receive benefits from defense procurement spending.

In FY 1999, DoD awarded contracts totaling $116.6 billion; 21.5 percent, or $25.0 billion, was awarded to U.S. small business concerns. In addition, DoD awards to small disadvantaged business (SDB) concerns also were significant; prime contract awards equaled $7.0 billion (6.0 percent of total awards). Finally, in FY 1999, DoD awarded prime contracts totaling $2.3 billion to women–owned small business firms, 1.9 percent of total DoD prime contract awards.

Mentor–Protege Program

The Mentor–Protege Program is valuable to the Department’s success in meeting its SDB prime and subcontracting goals. Over 200 large business mentors have 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 either reimbursement or credit toward their SDB subcontracting goals. Proteges may be SDB firms or qualified organizations employing the severely disabled. As a direct result of the assistance program, protege firms received new technology, improved quality assurance systems, and business infrastructure support.

The Department receives value as mentors reevaluate their make or buy decisions and identify requirements that can be outsourced to proteges. In one example, a mentor transferred the technology used to produce warm/hot formed titanium aircraft parts to an SDB for use in the Cobra, Huey, Kiowa Warrior, and V–22 Osprey helicopter programs. The resulting efficiencies attributable to outsourcing this effort to a small business concern reduced ship–set costs to the Cobra program, alone, from $21,700 to $6,500.

Similarly, mentors used the program successfully to develop vertically integrated suppliers. As a result of participating in the program, a protege manufacturing electronic assemblies for a major aerospace contractor developed capabilities in testing and troubleshooting electronic assemblies for aircraft and flight test equipment, and achieved ISO 9002 certification. Both the Department and mentor benefited from lower costs and improved production efficiency.

In other instances, proteges broadened their customer base, achieved cost efficiencies, and increased their economic stability. For example, the Choctaw Nation established a custom commercial trailer business and manufactures oil field equipment using mentor technology originally associated with the development of missile subassemblies and containers. The Choctaw Nation uses the profits for health and medical services, job training, and scholarships.

SMALL BUSINESS INNOVATION RESEARCH PROGRAM

Under the Small Business Innovation Research (SBIR) program, DoD funds approximately $550 million annually in defense–related research and development projects at small technology companies. The SBIR program is designed to harness the innovative talents of small technology companies to benefit the U.S. armed forces and U.S. industry. The National Academy of Sciences, National Bureau of Economic Research at Harvard, and General Accounting Office have consistently reviewed the program favorably for its contribution to the U.S. military and economic capabilities.

The accelerometer used in most DoD missile systems (including the Patriot Advanced Capability–3 (PAC–3), Hellfire 2, AIM–9X, and Javelin) is a recent example of a highly successful SBIR–developed technology. The accelerometer, developed by Silicon Designs Inc. of Issaquah, Washington, is a sensor that tells the missile to arm itself when it reaches a specified acceleration. This technology replaced a mechanical switch that was significantly less reliable and five times the price. Silicon Designs’ accelerometer is used also in all new Ford and Chrysler automobiles produced in the United States. In automobiles, the accelerometer triggers the inflation of the airbags when the car decelerates abruptly during an accident. As in the missile systems, this technology replaced a mechanical switch that was significantly less reliable, several times as expensive, and unlike the accelerometer, could not be tailored to respond differently to different types of impacts. Accelerometer sales to DoD and commercial customers total $40 million per year. DoD’s initial SBIR investment was just $1.2 million.

WOMEN–OWNED SMALL BUSINESS PROGRAM

The Department’s Women–Owned Small Business (WOSB) 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 Department initiated a nation–wide focused outreach program targeting WOSB concerns in four industry areas: construction, health care, manufacturing, and research and development. DoD held the first WOSB conference for the manufacturing industry in June 1999, in Tampa, Florida. Large DoD prime contractors joined with DoD buying activities in the southeastern region of the United States to publicize DoD prime contracting and subcontracting opportunities. Similar events are planned for FY 2000 in other regions of the country. In addition, the Department maintains a WOSB Web site (http://www.acq.osd.mil/sadbu/wosb) that highlights Program Best Practices, Initiatives, and Success Stories. The Department advocates active solicitation of WOSB firms for all competitive acquisitions.

COMPREHENSIVE SMALL BUSINESS SUBCONTRACTING PLAN TEST PROGRAM

The DoD Comprehensive Small Business Subcontracting Plan Test Program authorizes the negotiation, administration, and reporting of subcontracting plans on a plant, division, or company–wide basis. The purpose of the test is to determine whether comprehensive subcontracting plans will result in increased subcontracting opportunities for small and small disadvantaged businesses, while reducing the administrative burdens on contractors. The test period extends through September 30, 2005.

Eligible contractors include large businesses that during the preceding fiscal year performed under at least three DoD contracts valued in the aggregate at $5 million or more. Participants must have achieved an SDB subcontracting rate of 5 percent or more, or submit a detailed plan with milestones leading to a 5 percent SDB subcontracting rate. There are 23 companies participating in the test.

INTERNATIONAL PROGRAMS SUPPORT DOD’S TRANSFORMATION

Across the full range of military operations, 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 interoperability—ensuring U.S. systems are compatible with allied systems.

DoD’s International Armaments Cooperation Policy

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

Many weapons programs will remain national. On the other hand, cooperation with allies must be the choice for those systems that require interoperability in coalition operations—for example, in areas such as air defense, communications, intelligence, chemical/biological defense, and information security. Where opportunities for cooperation do exist, these programs must be implemented efficiently and effectively. Interoperability includes political and cultural aspects in relationships, as well as military activity.

The success of future multinational coalition operations depends on how well the Department prepares now for future interoperability on multiple levels. The recent lessons learned in Kosovo further illustrate the difficulty of conducting responsive and effective coalition warfare and the need for enhancing interoperability.

Coalitions are the preferred way for U.S. forces to confront major regional or global security issues—sharing the burden of resources and political legitimacy. However, inherent in coalition warfare is the critical requirement to significantly improve interoperability—further exploiting the Revolution in Military Affairs. Using no new resources, the Department has formed an Interoperability Directorate to leverage activities of the entire Department to improve coalition interoperability by providing focus and strategic vision to enable the full range of military operations, through interoperability and coalition initiatives.

The Department is engaged in forums that are designed to achieve Multinational Force Compatibility with its allies and likely coalition partners. NATO’s Defense Capabilities Initiative is designed to improve defense capabilities and interoperability among NATO military forces, and partner forces where appropriate, bolstering the effectiveness of multinational operations across the full spectrum of Alliance missions. Combined with other military–to–military engagement activities, these programs go beyond seeking the physical interoperability of systems. They pursue, as well, interoperability in the areas of tactics, techniques, and procedures. By promoting common thinking, the Department increases the potential for developing common requirements.

Cooperative international defense programs should apply the lessons learned from successful international commercial alliances to enhance successful implementation. DoD is adapting commercial practices and establishing a new international armaments cooperation model, one in which governments establish the military requirements and business rules, but the industries involved establish the best international teams of their own choosing to competitively bid on the work. The objective is a more balanced partnership, one that guarantees each individual member’s independence while recognizing cooperative partners’ interdependence, and takes 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 working with allies in Europe and Asia to explore other cooperative efforts, including the Medium Extended Air Defense System, TRACER, Joint Strike Fighter, Theater Ballistic Missile Defense, and NATO Allied Ground Surveillance efforts.

The International Cooperative Research and Development program led to sharing military technology among allies, as well as to development of joint equipment to improve coalition interoperability. Frequently, these research and development 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. It is important to recognize that these efforts also enhance the joint capability of U.S. forces, as well as the capability to conduct coalition operations.

The Foreign Comparative Testing program also enhances international defense cooperation. This program, which evaluates foreign non–developmental items for DoD use, has included 20 foreign countries as active participants. The Services and the United States Special Operations Command have procured over $4.5 billion worth of foreign equipment as a direct result of successful equipment evaluations. By purchasing foreign non–developmental items, DoD saved over $2 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 tactical systems. DoD has worked to ensure that 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.

The Department also took steps to improve the effectiveness and efficiency of international cooperation. DoD has developed an International Armaments Cooperation Handbook to provide a compendium of current policy, 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 Department’s 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 early communication with allies to create opportunities earlier 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. Key topics at the recent Cooperation Day III annual meeting included mechanisms to:

· Better organize national/collective efforts to identify interoperability requirements.

· Ensure appropriate national/collective investments in building and testing interoperable systems.

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 explosives safety. Further, the Department’s experience and knowledge in defense–related environmental issues can provide a useful engagement tool for combatant commanders in developing theater engagement plans.

MILITARY–TO–MILITARY ENVIRONMENTAL COOPERATION

Military–to–military environmental activities support U.S. foreign and defense policy objectives by shaping the international environment through cooperative engagement. Through bilateral and multilateral associations, DoD can help interested militaries obtain the necessary tools to understand, prioritize, and meet military environmental security needs. DoD environmental engagement reinforces efforts by militaries in newly democratic societies to adjust to such concepts as civilian oversight, public accountability, openness, and cooperation with civilian agencies. These activities, which support Secretary of Defense commitments and State Department regional strategies, are consistent with defense requirements identified in the National Security Strategy and Commander in Chief Theater Engagement Plans.

DoD conducts bilateral/multilateral environmental cooperation with Argentina, Australia, Canada, Czech Republic, Estonia, Finland, Germany, Georgia, Israel Italy, Latvia, Lithuania, Jordan, Kazakhstan, Mongolia, Norway, Russia, Slovenia, Sweden, South Africa, South Korea, Thailand, Turkmenistan, United Arab Emirates, and United Kingdom. DoD is discussing cooperation with China, Chile, and El Salvador. In addition to promoting stability through engagement, DoD gains useful information from these exchanges in support of the Department’s environmental responsibilities as it takes advantage of the perspectives that other nations offer.

ARCTIC MILITARY ENVIRONMENTAL COOPERATION

DoD also engages in agreements such as the Arctic Military Environmental Cooperation (AMEC) Program, a trilateral forum for dialogue and joint activities among United States, Russian, and Norwegian military 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 three militaries.

CONCLUSION

The Department of Defense must ensure that it can access, utilize, and maintain the best industrial resources available—defense and commercial, domestic and international—to obtain the lowest cost, highest performing products. Accordingly, the Department is reviewing merger and acquisition transactions to determine the effects on DoD programs and advising the appropriate antitrust agency; identifying and addressing industrial capabilities and competition concerns; and encouraging international industrial, armament, and environmental cooperation. DoD is doing this in a manner consistent with sound business practices and the overall political, economic, and national security goals of the United States.

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