To The Point, Context n°75 (July 2004) — Somber Anniversary, Ten Years of US Defense Industry's Consolidation



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@SURTITRE = Somber Anniversary

@TITREDDE = Big Isn’t So Beautiful, After All

Almost ten years ago, on 4 September 1994, Norman Augustine, CEO of Martin-Marietta, announced the ‘mega-merger of the Century’, consolidating Lockheed and Martin-Marietta into Lockheed Martin. That move constituted a major event, a culmination of the tremendous restructuring of the US defense industry of the nineties. The trend was capped by a second mega-merger, the takeover of McDonnell Douglas by Boeing in 1997.

The announcement of the Lockheed-Martin Marietta merger evoked a reaction in keeping with the significance of the event. The specialized media greeted the event as “the decisive affirmation of American power, by forging a tool for the global conquest of the markets and of the sources for the production high-technology weapon systems”, according to an internal memorandum of the European Commission dated October 1994. In our November-December 1994 issue we wrote: “For many Europeans, this operation was planned and designed to give the US a powerful weapon to win foreign markets. It is the epitome of the aphorism ‘Bigger Is Better’.”

The message by those presiding over the merger was somewhat different, especially the one coming from Norman Augustine, the indisputable ideologue of the movement. As early as 7 October 1991, commenting on DoD budget cuts, Augustine observed: “Many companies will not survive, and the ones that do will be smaller but more competitive.” Lockheed Martin – ‘Smaller’? The same Augustine, on 4 September 1994, the day of the merger consolidating an initiative that was precisely the converse of what he had envisaged in 1991, soberly commented: “These are Darwinian times in our industry. Failure to change is failure to survive.”

For a decade, the Lockheed Martin model of the mega-merger was the be-all and end-all of the structural evolution of industry in the era of globalization.

Whatever the reactions and the observations expressed at the time, what could be called the ‘Lockheed Martin model’ became the prototype and the point of reference for modernization and the key to industry profitability in the era of globalization. The example applied initially for defense industry but soon spread to other industrial fields (mergers in the fields of communications, entertainment, etc.). The ‘Lockheed Martin model’ became an article of faith, the only way for high technology industry to survive and the only way in which to strengthen security.

This same approach still persists today in the most renowned fields of endeavor. We can cite a report by the Rand Corporation on European Defense Industry, which finds that the industry is in very serious danger. (A somewhat curious diagnosis for an industry that is showing renewed dynamism in many fields, especially when compared to American industry, which finds itself confronted with burgeoning problems in its new programs.)

Finally, we have the suggestion made by Rand for improving the prospects of European industry by ‘further consolidation’ along the lines of the ‘Lockheed Martin model’: “Access to the world’s largest market, the United States, is restricted for most players, while lingering national preference and governmental policy interventions limit the scope of further consolidation within Europe.” How can that approach be reconciled with the recent opinions that are gaining currency, such as that by Air Force Secretary James Roche, formerly of Northrop Grumman, who in April of this year, speaking of the US restructuring of the nineties (the Lockheed Martin model), had this to say: “… the collapse of the [US] defense industry. […] When I was in the industry, I said it was wrong to over consolidate, and that we would come to regret it.”

Today, there is great uncertainty surrounding the entire process of the consolidation of and the globalization of the defense industry. We shall examine two still pending events in our analysis of the situation:

• The order by the US Air Force for one hundred Boeing 767 aircraft, converted into aerial tankers and renamed the KC-767, on a 10 year leasing arrangement at a total cost of $23 billion.

• The second event is one our favorite topics: the JSF – viewed from a new and enlightening angle.

@TITREDDE = The Globalization Trap

Boeing’s offer to lease one hundred KC-767s at $230 million per aircraft is a first in the history of the Pentagon, of the arms industry, of the military industrial complex, and a first in the postmodern history of liberalism and of globalization. The Boeing/USAF proposal emerged at the end of 2001, amid the general confusion and patriotic fervor that followed 11 September 2001. At the time, the matter did not seem to pose the slightest problem, nor to occasion the slightest hesitation. It was poor form, not to say unthinkable, to even consider questioning a Pentagon budget request for equipment required by the military. Even so, there were, here and there, some requests for clarification, with the Congress feeling that on this particular matter, it was entitled to play its traditional oversight role over expenditures by the Executive Branch. (Senator John McCain played and continues to play a key role as thorn in the Administration’s side in the matter of the 767 aerial tankers.)

There was therefore what was considered a rearguard action being fought. The situation was soon to deteriorate, when Boeing found itself enmeshed in several unsavory affairs that posed issues of unethical conduct on the part of Boeing officers, involving corruption of federal officials.

(The Boeing crisis culminated in the dramatic resignation in December 2003 of the company’s CEO, Phil Condit, and his replacement by Harry Sonecipher.)

The climate around the offer of the one hundred 767s took a turn for the worse when rumors began circulating that the competition had been rigged in favor of Boeing and against Airbus (which had submitted a proposal to the USAF). In normal times, the Congress shows little concern in response to recriminations by non-US competitors, especially since it is conceded (see Rand report) that non-US bidders have practically no chance of penetrating the US market. But this time the recriminations did not fall on deaf ears. Rather, they added fuel to the fire and strengthened the position of those opposed to the Boeing deal going through.

Other aspects of the deal were being bruited about, in particular on Boeing’s intention to ‘sell’ the KC-767s to the USAF at the end of the period of leasing, as is normally the case, at a price already being negotiated, one which would bring the total cost to an estimated, astronomic sum of $50-$60 billion. And all of this without broaching the pressures for supplements entailing similar costs, since we are talking, after all, about replacing a fleet of over 600 KC-135s. The provisional conclusion: at the end of May, the USAF announced the reopening of the competition, while James Roche specified that the procedure would not be initiated before the November presidential elections and that EADS Airbus would have a fair crack at the prize. “I don’t care if the aircraft are produced by Martians… Airbus was not ready before, now it is.”

How the hundred Boeing tankers has become a fundamental test for globalization.

In the meanwhile, the affair has become a major controversy in Washington, with repercussions more far-reaching than the procurement contract itself and more far-reaching than the mission of the materiel, including the absence of any strategic role for the materiel. The atmosphere is no longer as ultra-patriotic as it was in 2001. Criticism is no longer treasonable. People are starting to loosen up and are beginning to talk. James Roche clearly leads the pack. Roche’s position clearly shows that he opposed the procurement and that he just about considers it the product of a cabal between USAF generals and Boeing.

In mid-April, Roche explained how much he viewed the contract for the hundred KC-767s as a veritable catastrophe, compounded by the opprobrious conduct by a Boeing officer suborning the corruption of a senior USAF official. According to Roche: “The debacle could have been avoided if there had been a legitimate competition.” Roche speaks of Airbus, clearly buying into the version that there was never any real competition. Nevertheless, he observes: “… but a contract of that magnitude – worth about $23 billion – would not likely have been awarded to a non-US supplier.” Compared to what he said a few weeks later, quoted supra, we note that the situation has undergone a crucial change, since Roche now concedes that EADS/Airbus could indeed carry it off.

We conclude with a fuller quotation of Roche’s statement: “Part of the problem is the collapse of the defense industry. We are increasingly dealing with monopolies. When I was in the industry, I said it was wrong to over-consolidate, and that we would come to regret it.”

@TITREDDE = JSF, — A Road to Corporate Homicide?

Which brings us to the JSF. As much as we have written about the JSF program, still more remains to be said. A 10 May article in Defense News opens a totally new perspective on the JSF. In this new light, the program emerges as a key player in globalization and a now-unavoidable standard in the light of which the heady theory of globalization must be compared against the economic, technological and human reality which the theory shrouds in obscurity.

The article’s interest lies in its conclusion: even if the JSF turns out to be the colossal success that it was cracked up to be at the outset, it may still be an unprecedented catastrophe. In framing the issues, the article draws largely on statements by Art Cebrowski, head of the Pentagon’s ‘transformation’ service. (The service inaugurated by Rumsfeld to conduct basic studies with a view to ‘transforming’ the US military-industrial system. Today, we have discovered the magic of the word ‘transformation’ – a word imposed by the Pentagon bureaucracy, like all authoritative sounding buzzwords, covering nothing and everything, but mainly substantiating the existence of a full-blown crisis. Though the crisis is primarily a US crisis, that has not stopped other Western military industrial establishments from getting caught up in the ‘transformation’ tarantella.)

Cebrowski considers that enthroning a single program (the JSF) – one with global dimensions and ambitions and one that proceeds on the assumption that most countries will buy the aircraft – presents very serious threats. According to Cebrowski: “Without programs that force you to stretch your horizons, this industry is doomed. [Companies] need lots of programs, enough to make sure that if you lose this one, there will be another one out there. Integral to that is competition as robust and vibrant as you can make it, to keep people excited. The answer is not to build JSF and nothing else for the next 40 years. In fact, that may be exactly what pushes us into the abyss.”

In the same vein, Cebrowski takes issue with the program selection process that consists of reducing the competition to two teams and then eliminating one of them under circumstances (program duration, program monopoly on R&D funding, etc.) that effectively kills off the team eliminated. “As soon as you downselect, you shoot the other design team, which is a real national asset, in the head. This is not downselecting, this is homicide.”

The JSF is a ‘Clinton Program’ which constitutes a paradigm of how a development and production program should be structured under the rules of globalization.

The remainder of the article deals with how to prevent such a turn of events and how to salvage the team eliminated. From our standpoint, however, the only element that needs to be added to the JSF file is the reminder that the JSF is a ‘legacy of the Clinton era’. In effect, the program has always been seen as a ‘Democratic program’, to the extent that, on the arrival of the Bush Administration, it was thought that there was a danger of its being scrapped.

But, of course, the JSF program broadly transcends any simple political tug of war. True, the JSF is a ‘Democratic program’, but one that must be placed in the very special military, economic and political context of the nineties. Defense News summarized it in these terms – and one understands that what is being described is a process of globalization, signifying that the JSF is basically a ‘globalized program’: “To cope with budget cutbacks, the Clinton administration pursued a dramatic consolidation of the industry; consolidated weapon programs from multiple individual systems to multifunction ones like JSF; sought acquisition reforms to make it easier for commercial companies to do business with and compete against traditional defense contractors; and fostered globalization to yield truly trans-Atlantic contractors able to win business in home and overseas markets.”

@SURTITRE = Augustine, the Prophet, — Sort Of

@TITREDDE = Clinton Globalization

We recall the rather somber comments by Norman Augustine at the time of the mega-merger between Lockheed and Martin-Marietta in September 1994. With the passage of time, not only did Augustine not change his tune, his forecast became even gloomier. Augustine’s pessimism broadened from the industrial scene to the national security situation generally under the new conditions that the ‘Lockheed Martin model’ foreshadowed. At a July 1997 Air Force Association symposium, Augustine formulated certain questions, answers to which he deemed essential to determining the future of the US defense and aerospace industry. Three of those questions strike us as going to the heart of the key issue of the foreseeable impact of globalization on America’s defense industry:

• “If the industry is to globalize, who will decide what will be sold to whom?”

• “Should the US permit foreign governments to indirectly own elements of US defense R&D and production capability?”

• “Should the US allow itself to become technologically dependent on offshore software and electronics?”

In posing these questions, Augustine remained in the conventional domain of the national defense industry. The formulation of the questions obviously implied that, if one remained at the national level (American, in the case of Augustine), his concerns had little justification. His remarks also mean – a rare admission in a US context – that the nation’s defense industry is not an industry like any other. Rather, as the keystone of national security, America’s defense industry is vitally dependent on the country’s political power. This situation, viewed from the standpoint of an American industrialist as concerned as Augustine was, remained satisfactory for as long as the Pentagon was in control of the situation.

@TITREDDE = The Wall Street Touch

Which leads us to pose the question of whether the Pentagon was still in control of the situation in 1997? At the time when Augustine expressed his doubts on the future, economic analyst Ann Markusen showed that the ‘consolidation’ of US industry was not limited to the spectacular mega mergers. Markusen analyzed the process that led to the mergers. The main point was that at the same time as the mergers were proceeding, the financial structures were changing – an understandable development in view of the amounts of capital required to fund the mergers. The far reaching consequence of this phenomenon was the massive infusion of Wall Street capital into the US defense and aerospace industry. According to Markusen, the mega-mergers were the doing of a “strategy initiated by Wall Street investment bankers and a select group of CEOs …” (Of course, Augustine was one of those CEOs. This fact throws an even stranger light on this personage who was one of the instigators of this immense operation as well as one of its most lucid and clairvoyant critics.) Markusen observed: “Although the mergers have been rationalized as cost-saving moves, driven by budgetary imperatives, they have been chiefly motivated by short term financial gains and long term enhanced market power and political clout.”

The restructuring operation was strongly supported by the Clinton Administration, by Secretary of Defense Perry and later by Deputy Secretary of Defense John J. Hamre. The Pentagon position was supported by then Secretary of the Treasury to be Robert Rubin, himself a Wall Street banker, who was a strong advocate for the viewpoint of New York financial circles in the affair. Moreover, the Clinton Administration was only following a Democratic tradition, going back to Franklin Roosevelt, of government closeness to Wall Street financial circles.

In this case, the question that must be posed is: Is Augustine’s implicit reasoning that US defense industry will be protected as long as it remains American still valid? If Wall Street is running the show, and no longer industry, then the understanding between industry and the Pentagon no longer stands. In the new situation, notions of interest, dividends and the concept of globalization –under which economic considerations trump any ‘guiding principle’ – dominate. Augustine has been beaten: his strongest guiding principle, the one which says that America’s defense industry is not an industry like any other and that it is a strategic industry which must be protected in the national interest at all costs – that guiding principle has gone by the board.

@TITREDDE = Globalization – The JSF Way

This approach, promoted by the Clinton Administration, is to be found in the JSF program as described by Cebrowski. The program is indeed based on the doctrine of economism that grants pride of place to globalization, and one understands more easily how the program can be dubbed a ‘Democratic program’ or a ‘Clinton program’. It is the same men, the same teams and the same doctrines which, drawing inspiration from the DoD, largely assisted in the development of the restructuring of America’s defense industry, and which is to be found behind the design and the development of the JSF. The idea itself of marshalling the successors of several models (F-16, A-6, A-10, AV-8A) into a model with several versions represents, according to a source from French industry, “an initiative typical of globalization, which strives to standardize systems and to maximize profitability.”

Ideally, the JSF, according to its initial concept, was conceived as the epitome of the globalized product, oriented more toward foreign markets than toward export: this apparent redundancy is in fact a key nuance. In a globalized universe, it is no longer really a matter of exports; on the contrary, it is a matter of a sort of super ‘single market’ and it in effect becomes necessary to think in ‘market’ terms, where all the players are already in place, rather than in ‘export’ terms.

The ‘Universal Fighter Aircraft’ – A Case Study in Americanizing the World Through Globalization

The JSF thus became the ‘universal fighter aircraft’, corresponding perfectly to the Americanization of the world through globalization. That approach explains the unusual action on the part of the Americans of bringing into the program, as from the design phase, the maximum number of ‘non-American partners’ (an expression preferable to ‘foreign countries’, which might imply that there could be important national differences).

But the limits of the exercise were rapidly attained, the point where the JSF (the globalized system) meets the Boeing aerial tankers (Boeing, the globalized industry). These limits go by the names ‘monopoly’ and ‘national security’. Both cases, JSF and Boeing, demonstrate the extent to which the process of globalization has nothing to do with important national differences, as Augustine believed. The real problem is that of a world that answers only to economic interests and to other private interests as opposed to a world where there exists a higher interest involving the protection of communities and of peoples. The monopoly that the JSF is expected to establish places in jeopardy the future capabilities of the technological base of American power; the Boeing monopoly places in jeopardy public authority in terms of its budgetary capability and of its freedom of choice. The case of the JSF adds insult to injury with the increasingly unbearable contradiction between the program’s globalizing claims and the ever stronger demands for protection of the technological base in the interest of US national security. (The non-US partners have only begun to get an inkling of this.)

@TITREDDE = Globalization – The Hard Way

With these two cases – the order for the Boeing aerial tankers and the JSF – we see the flaws, the shortcomings and the failures of the globalization system: monopoly, rejection of collective interest, manipulation of the consumer, to mention but a few. Clinton’s defense industry globalization experiment is clearly open to criticism, as is the entire globalization process under Clinton. We have confirmation of the fact that the main effect of the process is abrogation of all the rules and nullification of all the structures (destructuring), as well as rejection of long-term measures in favor of the short term. The situation of America’s defense industry is the forerunner of what we can expect globally: the abuses with which it abounds and the crisis into which it finds itself plunged will inexorably permeate industry in its entirety.

The most notable in the process, with reference to the fears expressed by Norman Augustine, is the paradox illustrated by the case of the Boeing aerial tankers. What Augustine feared was that the absence of control by foreign players could place in jeopardy America’s R&D capabilities, its industrial base – in particular the defense and aerospace industry – and hence the integrity of the country’s national security. In a way, Augustine was making an appeal for the defense of US sovereignty by protecting US industry from outside incursions. Today, the contrary is happening, when James Roche, inviting Airbus to participate in the aerial tanker competition, almost openly advocating a successful bid by Airbus, explains: “It’s the only way we’re going to discipline the big airframe makers in the United States.”

The paradox clearly is that it is US industry itself, with its unbounded demands and its cozy relations with the bureaucracy, which today constitutes a threat to US national sovereignty. We see how much the globalization process per se translates into perverse effects which have nothing to do either with nationality or with the geographic field in which the process operates. Globalization can be effected within a national field of action; it nevertheless carries with it the elements of destabilization and threatens the structures essential to the protection of national interests.

The most astonishing thing – and perhaps the most disturbing – is that despite the grim reality of the situation, globalization and consolidation continue to be presented as the only way forward to resolve the problems confronting the defense and aerospace industry – as we have seen with the Rand report.


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