“Screw you guys, I’m going home”.
I have been working on a root-cause analysis of the F-35 project. As I got deeper into the subject, I realized that the impact of decisions taken in the early 1990s was not only colossal but largely unintentional.
I’m talking about The Last Supper, the 1993 meeting where deputy SecDef Bill Perry advised the aerospace primes who still considered themselves to be viable to look to their left and their right “because one of you will be out of business in five years”. The Joint Strike Fighter project turned this prediction into an imminent threat, as the only new combat aircraft program on the books for the next decade at least.
It triggered a wave of near-panic M&A, where the survivor primes expanded their reach across the entire defense and intelligence industry, while those who knew they were not going to be in the first rank scrambled to sell themselves, as a whole or in parts, to the wealthiest or best positioned bidder. Companies that expected to retain prime status used merger and acquisition (M&A) aggressively, to absorb weaker primes, expand their markets (from aircraft into space, for example), establish themselves in long-tail sustainment business, and shed low-margin activity such as aerostructures. Conversely, companies that were not well positioned to survive raced to sell businesses to those expanding primes.
I don’t think that was expected, or that “Boeing buys McDonnell Douglas” was on anyone’s bingo card. But as the late Charlie Munger would say: “Show me the incentive and I’ll show you the outcome.”
From the end of 1996, when JSF kicked off, there was a longer and drier drought of major combat aircraft programs than anyone had expected (think about no new projects between the P-80 and the F-111), because of the Pentagon’s focus on counter-insurgent operations. The industry has evolved to survive this, to some extent by collaboration, but also by continued acquisition to broaden the business base, and (above all) a focus on sustainment and support.
Next, the Pentagon focused on squeezing the industry on initial acquisition cost, through projects such as Better Buying Power. Too often, though, the government has not focused as closely on full-rate production and sustainment, leaving intellectual property (IP) rights on the table to sweeten the pill of low-margin R&D.
Finally, too, we saw the shift of business emphasis towards maximizing shareholder value. What is good for that is cash profit. What is less good is low- or negative-margin R&D, and what is even worse is spending money competing for programs that you don’t win, or that you might win only to see them canceled or delayed. Or as Northrop Grumman is seeing on the B-21, massive losses due to unforeseen inflation.
So, as Charlie Munger said…
For defense prime contractors today, the path to prosperity, the Prime Directive, is to defend your existing programs. There is no direct competition at the customer level, but there is at the supplier level, where it benefits the prime. With few new starts for suppliers to bid on, the prime can force them to recompete, or threaten a competition when demanding lower cost and other concessions. The primes can squeeze suppliers until the pips squeak, raiding them for their best performers, and then complaining about late deliveries and quality escapes.
Defending the program and extending production increases sustainment volume. A performance-based logistics deal, too, can deliver benefits for the prime and the customer – but while the customer sees a negotiated cost-per-hour rate for support, the prime can make bank by leaning on the suppliers (and everyone else) and driving cost down at a higher rate than the Pentagon’s price.
We see this in F-35, of course. But there’s Boeing’s KC-46, where the company’s returns hinge on no competition, and Lockheed Martin dropped its effort to establish an Airbus-based alternative (equivalent to a beer and pork-pie truck in Riyadh?) in October. Northrop Grumman has tipped a lot of effort into its Global Hawk and Triton programs, because they are heavily dependent on contractor support.
Now, back in January 2017, people did wonder why Northrop Grumman announced a no-bid in the T-X contest after flying its Model 400 Hawk/F-20 crossbreed demonstrator on its own money. But there were two existing airplanes in the mix, plus Boeing, who needed a new program and were indicating clearly that they would bid to win, not for margin.
That called to mind… 2007, and a rather icy few days in Trondheim, at a conference of Norwegian air power folks that focused on their F-16 replacement options. The Saab people were happy to promote what would become Gripen E (they were funded for their demonstrator). Eurofighter’s campaign manager, a canny ex-Tornado-F3 Scot, was there. He read the room and concluded that decisions had already been taken outside it. Team Typhoon no-bid and escaped being publicly trashed. So I called that the Cartman Gambit after the South Park character’s signature line.
Fast forward to last week, when LockMart CEO Jim Taiclet announced: “we don’t have any must-win programs with Lockheed Martin anymore. If we have a good business opportunity with a balanced price-risk profile, we will bid. If not, we will not bid. If we hit our limit parameters, we won’t go beyond those. A competitor may win, so be it.”
That’s a very important statement, because it means the Air Force’s Next Generation Air Dominance, where Northrop Grumman boss has already pulled the Cartman card. (Not known: whether NG has already negotiated a role with Boeing and/or LM to participate as it does on F-35.) Taiclet even talked about DoD “taking advantage of that monopsony power over the industry… And what’s happened as a result of that over years or even decades is
you have lots of programs which are over-cost… and you have schedule delays because some of the competitors feel that they’re must-win programs.”
In short, Taiclet called the government’s bluff. There are no must-wins, and he is not going to buy into NGAD at the kind of price the customer thinks he can get, even if it means that Boeing might win, but… Boeing, with a low bid and its hardly stellar recent reputation? As sole bidder? Meanwhile, Taiclet wants to move the industry into delivering value-priced services as well as products, such as upgrades and PBL support.
And recalling what Lyndon Johnson said about J. Edgar Hoover, if you’re trying to push NGAD, what’s it going to be like when Lockheed Martin wants to sell more F-35s? We have seen the start of this and it is not pretty, and it will not get better.
We haven’t talked about real innovation yet. That is, the potential of arrivistes following General Atomics’ tracks, most specifically in unmanned and autonomous systems, and creating situations like that of 2008, where the MQ-9 was competing for funding and priority against the F-22 and a new bomber, and won. Say what you like about Anduril and its very online founder Palmer Luckey, but the strategy of spending the money on autonomy – expensive software to design, cheap to reproduce and install – is the right one if unmanned systems are what you need.
Ultimately, it’s about incentives, and the Pentagon needs a different mix of carrots and sticks to resist the drift to obsolescence.