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The Future of the U.S. Defense Industry

Speaker: Vance D. Coffman, Chairman and CEO, Lockheed Martin Corporation
Presider: Leslie H. Gelb, President, Council on Foreign Relations
October 1, 1998
Foreign Affairs

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Note: Remarks as prepared for delivery

This event was on the record.

Thank you, Les (Gelb), for that generous introduction. It is a great privilege to address the Council on a subject as important as the future of America’s defense industry. I realize this forum is one-third premise and two-thirds discussion therefore, my opening remarks will be brief.

Time for Taking Stock

Let me begin with a review of where we are some nine years after the fall of the Berlin Wall and after 14 years of continuous declines in the defense budget. Current expenditures are now at their lowest point since before the beginning of World War II in terms of share of GDP, the share devoted to defense is less than three percent. As a portion of the federal budget, it is at its lowest point in modern history. As a benchmark, during the Kennedy Administration, defense represented about one-half of the federal budget. Today it is about one-seventh.

The defense industry got its marching orders in 1993 from Defense Sec. Aspin and Deputy Sec. Perry at the now-famous “Last Supper”: “consolidate or evaporate” was the message. The subsequent consolidation of the industry eliminated more than 1.5 million jobs. Lockheed Martin itself closed 16 million square feet of plant space and eliminated approximately 100,000 positions in our heritage locations. These efficiencies allowed our company alone to begin to pass along savings of approximately $2.6 billion per year to our customers, primarily to the Department of Defense. And those savings will continue to help hold down the costs of products in the future.

In short, the U.S. citizens got their “Peace Dividend”—but at what might be considered a higher price than expected at the time. Today, we are seeing the result of 14 years of budget cuts—namely, investments in hardware at such a pace that the average ship, tank, or aircraft will have to last some 53 years before being replaced. That is equivalent to flying a DC-3 to your next business meeting or using a mechanical adding machine to figure out your strategic plan. With stealth technology aircraft already in use for some 15 years, and with the continued turnover of computer generations measured in months, rather than years, the time to reconsider our priorities is overdue.

The Technology Challenge

No doubt this audience is acutely aware of these realities, which have resulted from political and economic forces that have swept through the defense industry. What may not be as readily apparent is that a technological revolution has simultaneously been at work, transforming the industry.

For as long as we have had mechanized warfare, the major defense industrial challenge was basically a question of manufacturing or “surge capacity.” If you knew the production capacity of the defense industrial base, you had a pretty fair idea of how many armored divisions the U.S. Army could put on the North German Plain or how many cruisers the U.S. Navy could send to the South China Sea.

Newsweek reporter John Barry has characterized the issue this way: “The American way of war was to take the manpower of a continent, arm it with mass-produced weapons, and send it out over and over again [on a] series of fairly repetitive military tasks.” This explains, in part, why America’s defense industrial base was crucial to winning World War II O we were quickly able to turn from making trucks and automobiles into making tanks and landing craft.

In the post-World War II era, whatever shortfall that existed in force structure was compensated for by our strategic and tactical nuclear forces. Here, the technological challenge was slightly more complicated, but the industry understood the physics of ballistic missiles, and the Government, through the Department of the Energy and the National Labs, took responsibility for the warheads.

Now, in the post-Cold War era, the need for restructuring was only the first of a multitude of questions facing industry leaders and U.S. policy-makers. How well has the industry adapted itself to the revolution that is taking place in commercial information technology? Are we maintaining a technology base that will ensure American military superiority in years to come? Are there technologies developing outside our borders upon which we are dependent? And, most importantly, how will the defense industry respond to the competitive demands of an increasingly global and interdependent economy?

The technological challenge for the defense industry today is fundamentally different from the other challenges we face. The Department of Defense no longer asks companies like Lockheed Martin to manufacture lots of dumb weapons it asks us, in a general sense, to integrate relatively fewer, though highly complex and powerful, weapons systems.

This shift has necessitated a similarly fundamental change in the entire structure of the defense industrial base. Instead of chassis, airframes, and ship hulls, the modern defense industrial base requires, for example, sensors that sniff, sensors that hear, and sensors that produce images simultaneously in multiple spectra. The new emphasis on information reflects the nation’s overall strategic problem, which is: we often don’t know who the enemy is, what his capabilities are, or how or when he will choose to attack.

But this emphasis on knowledge, battlefield awareness, and assembling information in a coherent fashion for the armed services has forced the defense industry to reinvent itself. Today, we have relatively more clean rooms than shop floors, more systems architects than metal benders, more computer programmers than welders and riveters.

Evolving To Survive

As a result of these three converging forces O the change in the political environment, the resulting economic dislocations, and the rapid technological advances—our industry has been transforming itself. The point is that the changes which have occurred in the defense industry in the last decade have been essential to competitiveness and survival, not discretionary. We have built large corporations with great technological depth—and with sufficient product diversity and the commercial base needed to remain profitable and competitive despite the government’s reduced investment in procuring weapons systems.

Building on and adapting our core defense and aerospace competencies, we have expanded our product lines and our customer base to an extent few thought possible. A decade ago, approximately 90 percent of our collective companies’ business was with the U.S. Department of Defense today, that figure is about 50 percent. I think it is fair to say that over that timeframe, Lockheed Martin has transformed itself from one of America’s premier defense companies into a globally oriented, advanced-technology company that retains a significant defense portfolio.

We have stayed close to our core businesses, but are expanding our activities in related dual-use and commercial sectors that are growing faster than the economy as a whole and where we can apply our advanced technology skills. As such, we now have significant interests in space-based commercial telecommunications, information management services, and systems engineering.

This strategy explains why we have built a $6.5-billion Information Sector comprised of 18 companies and 45,000 employees. This is also why we recently formed a global telecommunications subsidiary, and why we have decided to purchase the Comsat Corporation. Obviously, we are interested in fast-growing markets in which we can leverage our skills in space-based activities and advanced data systems. But such actions also recognize that remaining abreast of advances in these commercial arenas has become a critical requirement for remaining competitive as a defense company.

In addition to broadening the technology base and leveraging our skills in adjacent commercial markets, our industry has had to respond to the challenges of the global economy. The fact is that our defense industry, like the rest of business, is part of an increasingly interdependent global economy, which raises difficult issues but also presents novel opportunities.

Furthermore, the continuing worldwide decline in defense spending, combined with the escalating cost of research and development, create an imperative among allies to share the financial burdens and investments required to develop new technologies for our common defense. I believe that cross-border partnerships and alliances are increasingly desirable, if not inevitable.

Directly addressing this issue, Defense Secretary Cohen recently established a new advisory panel on National Security and the Globalization of Business and Industry. He said, “This accelerating globalization and transformation of defense-related business offers important cost and efficiency advantages to the U.S. defense establishment. At the same time—individually and collectively O these trends raise new issues and potential security risks.”

We’re beginning to see our European colleagues move seriously on consolidation, which offers the possibility of new trans-atlantic partnerships and alliances. I believe that the next phase of the defense industry realignment will proceed on a trans-atlantic model. Some such partnerships are already at hand. For example, Lockheed Martin has teamed with British Aerospace in the competition to provide the Joint Strike Fighter to the U.S. Air Force, Navy and Marines, and the British Royal Navy. We have similar joint ventures with companies in Israel, Italy, and Australia. And let me quickly add that we have non-defense relationships with interests in such countries as Poland, Hungary, China and Argentina.

Such private-sector-to-private sector relationships will help shape the structure of the U.S. defense industry well into the next century. And again, the reasons are essential for competitiveness and survival, not discretionary.

Only by pooling our research and development and production efforts will any of us be able to provide our military forces the systems they will need. And if we are serious about retaining the ability to wage coalition warfare, we need to develop cross-border industries. One doesn’t have to be a geopolitician to understand that an alliance which trades together and pools its defense investments is an alliance that is more likely to stay together.

Furthermore, if we want our aerospace and defense capabilities to stay at the cutting edge, we also have to be willing to acknowledge that America does not have a monopoly on all relevant technologies. European industry, in particular, has capabilities that could make significant contributions to cooperatively developed systems.

The Ground Rules-National Security

Now let me make clear that when I encourage what I believe to be the inevitable cross-border partnerships of individual companies, I am not endorsing any sort of “defense bazaar.” Each proposed partnership—or joint venture—must be evaluated on a case-by-case basis, not just by the countries involved but also by the companies involved.

From a national security standpoint, I have discussed the issue of cross-border partnerships with officials of our government, and I have offered the suggestion that there are at least three critical criteria that I believe the U.S. government might want to consider before approving such partnerships:

First, the government should have the necessary assurances that key proprietary technologies will be protected O and the mechanisms in place to guarantee those assurances. After all, we want to make sure that the investments of the U.S. taxpayers in critical technologies are protected and that those technologies do not inadvertently migrate to “third parties.”

Second, our authorities should have a very high “comfort” level that the interaction between the countries’ industries will be mutually beneficial and cooperative. What I hope would develop are company-to-company cooperative interactions that would complement and reinforce the traditional government-to-government exchanges that have marked previous alliance success stories. Examples of private-sector partnerships between U.S. and U.K. companies that are already working include the MERLIN anti-submarine helicopter program, the TRACER future reconnaissance vehicle, and the emerging Joint Strike Fighter program.

Third, what we should be striving for is true “interoperability” resulting from joint development of the systems produced so that they meet the requirements of the armed forces of the nations involved.

I have summarized what I believe to be the three key national security issues that our government should consider in approving cross-border relationships. Another issue that might be raised is the concern of some who view Lockheed Martin and our U.S. competitors as being “too big” or whose technological capabilities are “too broad.” Let me offer a brief explanation of our view: Competitiveness in today’s very robust marketplace is determined not by the size of aggregate sales, but by the “base” of sales within lines of business and the ability to draw upon a range of technologies that would enhance the marketability of one’s products. As such, our consolidation efforts in the past were to generate increased base and access to a broader set of technologies.

The point here is that for the foreseeable future, transnational cooperation will be less likely to occur among corporate entities per se, but rather among operating units within corporations that are seeking to increase their competitiveness in a given line of business or technology.

The Ground Rules - Corporate

Let me now turn to the corporate criteria that Lockheed Martin considers when we evaluate possible cross-border partnerships:

First, the proposed partner must have the same basic ethical and cultural values we have established for our company, including compliance with both the letter and the spirit of the Foreign Corrupt Practices Act. Additionally, its parent government must have a demonstrated track record in support of U.S. foreign policy and national security interests.

There obviously should be synergy between the two companies, with complementary products and services, and a mutual understanding of the benefits each will derive from cooperation.

We also equally consider essential, the potential partner’s demonstrated competitiveness in the relevant market in which we would be doing business.

We prefer partners that are privately, rather than governmentally, owned when considering any kind of equity relationship. Our experience is that the agendas of foreign governments and U.S. shareholders are not always identical, and are often quite different.

Finally, reflecting my earlier concern over the security of technology, there has to be absolute and verifiable compliance with all U.S. national security controls over the technologies shared or jointly developed.

To be candid, there have been relatively few companies where we have been able to find both the criteria I just cited and a mutual interest by those companies in partnering or doing joint ventures. The bar is set fairly high because we are interested in a tangible business enterprise, not an experiment.

Dealing With the Russians

Which brings me to one of the most surprising developments to emerge from the end of the Cold War O and that is the fact that some of Lockheed Martin’s most successful international joint ventures have been with Russian companies. Let me quickly note that these initiatives have had bipartisan support, beginning in the Bush administration and continuing under President Clinton.

Our relationships with Russian companies are authentic partnerships among equals: real, strong and substantial. It is ironic that we have been able to work through all the contentious commercial cross-border issues with a former adversary at a time when we still have difficulties setting up significant joint ventures with our traditional allies.

We are partners, with the Russian companies which previously developed ICBMs, to launch commercial satellites on the Proton and to supply RD-180 rocket engines for the next generation of American space launch vehicles. By the way, this is transferring technology to the U.S.—not away from it.

These economic initiatives have demonstrable, positive national security consequences. For example, we are helping move Russian industry from military production to commercially profitable products and services and, incidentally, productively employing Russian scientists and engineers who might otherwise be tempted to answer calls for “assistance” from the Iraqs and Libyas of our world. And, of course, the fact that these same joint ventures result in substantial injections of hard currency underpins the transformation of the Russian economy and should be seen as one factor that encourages Russia’s progress toward a free market system.

Conclusion

Now, let me conclude by briefly summing up my major points:

One, the defense business is not just another business. Notwithstanding a downsizing of historic proportions, the people who work in the defense industry remain motivated by their sense of their special relationship with the men and women who defend our country and with their role in preserving our national security.

Two, we must develop greater partnerships with the defense industries of our allies, both to share R&ampD and production expenses and to ensure the “best of the best” solutions for U.S. national security. Ultimately, these relations will help to ensure that the fabric of our alliances does not tear apart in the middle of the Atlantic.

Three, we should set the bar fairly high for potential cross-border partnerships, both as a country and as a company, in order to assure our ability to keep U.S. and allied armed forces at the forefront of technology.

And four, we must never lose sight of the ethical values which the nation’s defense and technological base were developed to safeguard.

If there is one thing I wish to convey to the foreign policy community it is that our American defense companies were built in response to challenges that confronted America and built on a foundation of ethical values. I believe that active engagement of our industry in the global economy is the only way we can be assured of maintaining America’s technological military preeminence.

Finally, we all recognize that the world is still a very dangerous place, as recent events from Sudan, Afghanistan, Kosovo, North Korea, Iran and Pakistan have reminded us. While the defense industry was executing an enormous reduction, overall the force structure has also been slashed by more than one-third. Recent actions by President Clinton, Secretary Cohen, and the CINC’s acknowledge that we have gone further than prudence allows in reducing our force structure and deferring modernization, so I am pleased that there is some effort now under way to redress that imbalance.

That’s the “Big Picture” as a humble engineer sees it. I look forward to your questions and comments. Thank you.

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