Transatlantic Defense Partnership at Stake?
Geostrategic Changes,
Economic Trends,
and Mutual Defense

Panel Two: What Future for the Defense Industrial Base?

 


Ethan Corbin:

I’m the director of the Defense and Security Committee of the NATO Parliamentary Assembly, which means I work with NATO parliaments on NATO-related defense questions. Parliaments approve defense budgets and purchasing and often approve troop deployments, so there are reasons to have them looped in and sensitized to nearand long-term strategic environments.

I also work with member state governments on the future of the defense industrial base. I often think about ways and means and ask myself, what ends are we in fact seeking here? Do we have the means to achieve them? What are the ways in which we will be deploying those means?

The new threat environment has been calling attention to territorial defense. This does not mean assembling the static deterrent forces of the Cold War, nor marshalling the post-Cold War push for expeditionary capabilities. Rather, the current view is to have forces capable of projecting security at home; to create a more mobile, dynamic
deterrent, but here in Europe, particularly in the wake of the Eastern and Southern flank threats.

This pullback to within national borders has led to a reduction in personnel and in the purchasing of and training in heavy equipment. It has had an interesting effect. While force structures were slimmed down, the actual amount of spending per soldier dramatically increased, so that the effective capability of that soldier is now quite good.

The shock of the Russia-Ukraine crisis, however, has led to a new focus on increased spending for territorial defense. But this spending is still relatively small, and in many respects more a matter of halting the previous reductions in defense spending than increasing the budget.

The legacy of the 2008 economic crisis has revealed itself to have a long political shelf life. It is still very convenient to talk about domestic economic woes to avoid addressing the significant hurdles to overcome in Transatlantic defense investment and in gearing our industries to confront the new security environment.

The Transatlantic community, particularly its European member states, are confronted with coming up with a common understanding of threat. The threat environment is far
more nebulous than before. The lack of a monolithic threat confuses the security environment and makes it very complex. There’s a divergence of perspective of where the
threat is coming from—East, South, or even the North. There’s a blurring between internal and external security. The need for new domestic conventional defense capabilities,
as well as strong demands to develop new creative ways to counter asymmetrical means, requires significant focus on situational awareness, intelligence, surveillance, and reconnaissance (ISR), and new avenues for sharing information. Governments must adapt their defenses to a spectrum of capabilities, and they’re being forced to do so within the desperately fragmented defense market here in Europe.

A quick overview of the European Union defense market versus that of the United States shows the degree of lack of integration in the former. There are 37 types of armored personnel carriers among the E-28; there are nine in the US. There are about 12 types of tanker aircraft in the E-28, four in the United States; nineteen types of combat aircraft in the E-28, 11 in the US.

Another hurdle is the increasing costs and time dynamics of the larger defense platforms today. A great example of this is the Zumwalt destroyer. It was supposed to be the new destroyer for the United States. Unit costs are now at $7.5 billion per unit; therefore, the US Navy decided to go back to the Aegis class destroyer at about 20 percent of the cost per unit and 10-15 percent of the operating costs. From the expression of wants from any commander in the field to the actual launching of the capability now is, on average, about 16 years.

This doesn’t even touch on the problem of the decreasing ability to sustain the costs of operating. Parliamentarians throughout the NATO alliance have told me that, although they were able to find the means to buy a new platform, they soon realized that sustaining and operating it actually would be unaffordable.

So the fractionated market and advancing technology requirements have left very few countries in Europe—really only the United Kingdom, France, to a lesser extent Italy, Germany, and Sweden—capable of developing and launching new advanced platforms.

This begs the question, how has the increasing realization of the need for new secure environments spurred new thinking about breathing new life into a Transatlantic, and particularly a European, defense industrial base or defense industrial cooperation? International, intra-European cooperation is desperately needed. Eighty percent of procurements in Europe and 90 percent of research and technology projects are managed at the national level. The lack of defense cooperation likely costs about $75 to $100 billion per year. Joint planning of purchasing and acquisition would clearly bring enormous savings and allow for a richer environment for creative investment and development.

There are now concentrated efforts to mobilize NATO and EU cooperation. A significant component of the process involves rethinking and refocusing existing structures and incentivizing a more efficient and effective European defense industrial base.

We now have several foundations providing mechanisms for European cooperation in defense planning and spending. One of them is NATO’s Defense Planning Process, NDPP, which is a voluntary initiative aimed at harmonizing national defense plans. Given Trump’s focus on transactional international relations and burden sharing, we now have a demand for annual national plans coming out of NATO. NATO’s NDPP is comparable to the EU’s Capability Development Plan produced by the European Defense Agency. It tries to identify future capability needs and priorities for joint action and make recommendations for international planning by the EU member states. On June 7, 2017, the European Commission presented the details of the capability of the European Defense Fund, the EDF, which is part of the EDA. It will support defense-related programs encompassing design, definition of common technical specifications, prototyping, trials, qualification, material and material components, technologies, etc.

In response to the limited success of these measures, the EU has decided to develop a mechanism of Coordinated Annual Review of Defense, CARD, due to launch in 2018. CARD would facilitate a coordination of national defense spending and deliver critical capabilities on the basis of agreed upon priorities.

CARD’s main aim is to facilitate national defense cooperation here in the European defense industrial base, essentially to make the idea of common capabilities a reality. To have access to the fund, any project would need prior funding by at least 3 companies established within the European Union. Any subsidiary contracting also needs to have headquarters in Europe. Initially CARD established a fund of about €500 million Euros. Even though the idea is right, 500 million towards a joint funding project is relatively small and disappointing.

The establishment of a joint capabilities coordination framework is moving forward in Europe and within NATO, partly because of this complex interactional security environment, where you see the need for highpowered territorial defense, and also for more soft power mechanisms, from policing to information sharing. These can be well articulated between NATO and the EU. I think we’re getting there; we will see a positive impact and a permanent structure of cooperation. The EU Military Planning and Capability Center is a good idea that will allow us to unify the scattered defense cooperation needs in Europe.

We are seeing a drive towards better coordination, better capability, requesting, and cooperation arise in response to the complete inefficiency and the decline of capabilities of NATO member states in Europe. For instance, since the end of the Cold War, Germany’s inventory of ships, aircraft, and armored vehicles was cut by up to 75 percent, and there have been significant reductions in both spending and readiness. This year Germany, the Czech Republic, and Romania announced the integration of their armed forces. German forces have declined so far that they are forced to seek brigades from other member states. In an ad hoc way the Bundeswehr is creating European joint forces that may be able to find a way to order common needs.

Challenges remain. Threat perception remains disparate, and that will continue to cause cleavages in strategic understanding of equipment needs and who is going to do what. Defense issues are always very much tied to national interests and national strategies, but they do not have to be divergent.

I find that the public understanding of why we spend on larger equipment and/ or common platforms is declining rapidly. A means of sensitizing the public to why the public treasury should be put towards new defense spending and reinvestment needs to be found. I also think that, particularly at the governmental level in Europe, there’s a common misunderstanding that joint economic cooperation means jobs will be lost locally. In fact, these larger joint projects can make national economies far more vibrant.

And a final hurdle that I’d like to mention is that CARD, Permanent Structured Cooperation (PESCO), and NATO DPP are voluntary, which means you have to try and find ways to motivate everyone to contribute to make these projects go forward.

 

Eugene Gholz:

We were asked to talk about the future of the defense industry. I’m not good at the future. I’ve tried many different things— crystal ball, tarot cards, tea leaves. I always get it wrong. None of these things work. Instead my talk is going to be about how to understand some of the dynamics of the defense industry, particularly in the US.

It is the defense budget cycle that really drives a lot of the defense industry in the United States, whether it’s on an upswing or a downswing. On an upswing you get all kinds of pernicious effects that lead to inefficiencies, bad design processes, a whole bunch of problems; while the industry does okay. They race to start lots of projects in the couple of years they’ve got while things are good. The budget cycle is turning around again, and so in the next few years we’re going to launch a bunch of projects, and it’s going to make the industry very happy.

But what projects could they be? I really can’t figure that out. The Trump administration doesn’t really care about details; they just want the headline, the 350-ship navy. They want to have numbers, and that would suggest we’re going to buy lots of current technology, like Aegis ships; but even Aegis ships are pretty expensive. The lowest end
high-volume stuff they can buy to bulk up numbers is one possibility.

On the other hand, Trump talks about what a disaster the military is. We’ve got to inject money in it. We’re getting killed on technology, and we really need to focus on all the high-tech parts.

So I don’t know whether all the money is going to go into quantity-oriented buying of more equipment of current designs, or into some kind of perceived quality increase
through lots of new programs. The industry will make money either way.

There have been a couple of surprises in recent years in the defense industry in the United States. The first is that some production lines have actually died out. For the first time since the end of the Cold War, major weapons systems assembly lines have closed even in the last year. The old McDonald-Douglas plant in Long Beach, California, has sold off its equipment at auction. It’s gone. The Avondale Shipyard outside New Orleans, Louisiana, tried briefly to make a go of it selling equipment to fracking companies. They thought other heavy industrial equipment could be a market for them; but now they’re gone, too. Everyone’s been fired; the place is closed down.

That’s a big change, because after the end of the Cold War we had a gentle defense budget decrease of half a percent per year on average over 10 years from peak to trough, and nothing went out of business. Even as demand dropped, you didn’t see the industry shrink. That was because of the political dynamics.

No individual representative wants to vote to pay for defense; they just want to benefit from the spending of other representatives. They want other people to pay for defense because you can’t fail to defend Kansas when you’re defending the rest of the United States. There is a public goods/ free rider problem with under-providing for defense. But a large assembly plant that employs, say, 5,000 workers and that dominates a district suddenly will make its representative a very strong advocate for continuing defense spending.

So, two cheers for the military-industrial complex (MIC). If you would have underprovided defense absent political pork barrel dynamics, the MIC is what gets you at least some spending on this public good; you’re creating private incentives by lobbying these factories. But it’s only two cheers because this approach prevents rational adjustment. You get some defense spending; but as the threat changes, all of those pockets of employment continue to lobby, and you can’t cut even those that have become irrelevant.

The other surprise, along with production lines dying out, is that a big increase in Trump’s budget proposal was actually for R&D. R&D doesn’t evoke the political logic of lots of employees in particular districts very well; R&D employs expensive, highend scientists and engineers, but only a few hundred of them, as opposed to 5,000 assembly line workers. From that perspective, it’s weird that the US fetishizes defense technology and wants to invest in it.

In the past, there was another religion in US defense realms that surprisingly propped up spending. It was the readiness religion. People got freaked out by the hollow force debate of the 1970s, when some thought we weren’t spending enough on training, fuel, munitions, etc., and our forces weren’t ready to fight. This led to a very telling point in American politics when a politician could be criticized for not supporting the readiness of the troops and we felt guilt if the troops had to get sent into battle and weren’t perfectly trained and perfectly ready. Now the readiness religion is being outpaced by the technology religion. You see that especially in the famous Third Offset.

The Third Offset is nominally about some AI, sensing technologies in particular, and a real interest in contracting with high-end tech companies in Silicon Valley. But really the Third Offset is the technology religion coming up with a solution to the Chinese anti-access area denial problem. A huge fraction of new spending is going to very high-end technology directed at defending American ships and bases from Chinese missiles. Rather than adapting our strategy to changing Chinese technology, we’re throwing lots of money into our confidence in American technology.

It’s ironic that we talk about this as an offset. In the Cold War, we decided to use technology to offset the quantitative superiority the Russians posed. Now we’re allowing the Chinese to offset us by buying cheap coastal systems and short-range missile technologies; and in response we’re spending lots on technology. We’re not trying to go around their defenses, as we did with the Soviet numbers in the Cold War; we’re using technology through a misnamed offset to fight our way into the teeth of it.

And why is that? I think it goes back to politics. It’s foolish to think we’re going to re-change US defense spending to contract with a bunch of small Silicon Valley and Austin,
Texas-based startup companies that do AI and quantum computing. What we are going to do is buy weapons platforms that incorporate some of those technologies. We won’t contract directly with Silicon Valley. We will contract with Lockheed to buy a weapon, and we leave it up to Lockheed to sub-contract for the technology. The politics are in the major weapons systems contracts. The “offset” strategy is about funneling technology money to major defense weapons system programs that are going to allow US aircraft carriers to approach the Chinese coast.

Renaud Bellais:

Within the desire for a robust defense industry which provides solutions that actually contribute to effective security, I want to discuss the way the technological base in Europe and North America could evolve and expand. We have many solutions to overcome the limited size of domestic markets. On the demand side, of course, exports are one solution. Exports work sometimes, but the export markets can be very uncertain and changing. We have also tried some cooperative programs that were not that successful. Those are demanddriven solutions.

If we look at the supply side, what are the solutions? The most conservative approach from the industry is to ask the Ministry of Defense for more money; but that money is not always easy to get.

Next, we could try to make some mergers and acquisitions. This has been done in Europe with some success. We created Thales in France and BAE Systems in Sweden;
but most of the aggregation was actually within domestic production activities.

It’s the same for transatlantic cooperation and mergers. We had some attempts and some big successes. BAE Systems, for instance, is a huge player in the US market. But BAE is not integrated transatlantically; there are few connections between the eastern and western sides of the Atlantic within BAE Systems. In fact, there have been very few attempts by European companies to invest in the US, although among those that have there have been a few successes. Thales guidance systems worked for quite a long time; but then Thales was de-merged, shall we say. Airbus is a top ten defense contractor in the US, but among European companies in the US, it is more the exception than the rule.

The supply side seems to offer a twofold solution to save the defense system in that it looks at both the technological concerns of the industry and the way we are developing solutions for our armed forces.

So, how is the industry evolving? We still tend to think of the DTIB as the Cold War DTIB; but the context was quite different then. In the 1950s, most of the platforms we had in Western countries, even in Eastern countries, focused on the then-emerging technologies of electronics, computer science, and so forth. We needed to protect all this knowledge from the other side, so we created a DTIB that was segregated from the civilian economy.

In the 1980s and 90s, we talked about convergence between the civilian and military DTIB as a way to lower costs. When we look at the evolution of technologies, in fact the convergence of industries has been very strong due to the search for ways to use purely commercial content to develop military solutions. But if you speak, for instance, to economists from Dassault, they don’t want to develop new airborne solutions; they just want to have a new aircraft, a new version of an old aircraft. This is true in the US, Sweden, and many other countries. Most of the largest suppliers of defense just want to keep their competencies and improve existing platforms. The question is, do those platforms correspond to the needs of our forces? And do we need to have a specific way of developing innovations of technologies to observe the armed forces’ needs? In fact, here we do need a convergence, and to some extent the strategy is to try to lower the borders between the DTIB and commercial activities.

Even for the contractor and supplier companies, keeping this system operating is a mistake because if you don’t change the way you are working on technologies, you’re going to have very bad solutions and be uncompetitive. To convince the armed forces to change their supplier, you must overcome a legacy of this attachment to the status quo, which is very difficult.

1996 was the lowest point for post-Cold War defense spending in Europe; and if you look at the purchasing power of the major arms-producing countries in Europe, they don’t spend very much more today than in 1996. This is because we have had a revolution in production. The mistake in my view is that, even though you need large volumes, you need to have more flexible industrial manufacturing. This revolution with additive production, robotics, and all the systems you can imagine could change the way we are producing. But most companies are very conservative. They keep their own 20th-century approach of building and producing aircraft. A strong revolution is a way to be more relevant, to have shorter series. We don’t want to be stuck in long-term series because of unit costs. And then we have less and less effective solutions for armed forces.

We face a big change, and we need to push on that. The environment has changed, needs have been changing and evolving quickly. The changes are not easy to accommodate because we have a very conservative industry and very conservative armed forces. To meet the future, we need our industry to meet the needs of our armed forces.