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August 4, 2015

How the Defense Industry Might Become More Like the Automobile Industry

Leipzig, Germany: The future of the defense industry? The new Honda Civic Type R Concept is seen at the 2014 AMI Auto Show on May 30. (Jens Schlueter/Getty Images)

LEIPZIG, Germany: The future of the defense industry? The new Honda Civic Type R Concept at the 2014 AMI Auto Show on May 30. (Jens Schlueter/Getty Images)

William J. Lynn III, the former No. 2 man at the Defense Department, compares the state of the defense industry to the car business from the late 1970s to the early 1980s. “It was basically unpatriotic to drive a European or an Asian car,” he said Tuesday. “Look what’s happened now. Of the top 10 most American-made cars now, five have foreign name plates.”

Conditions for the defense industry these days are such that Lynn said at the Atlantic Council that three things need to happen: there needs to be more consolidation among defense contractors; the Pentagon needs to adopt more commercial technology; and the industry needs to become more globalized.

Lynn’s company — Italy-based Finmecannica — has a stake in the last part, so it’s important to view his recommendations with that in mind. (Lynn is currently CEO of Finmecannica North America and DRS Technologies, which the company bought to gain a foothold in the U.S. market. He previously served as deputy secretary of Defense under President Barack Obama.)

But his argument goes like this:

The U.S. defense budget is coming down. Lynn said it might not drop as far down as it usually does after wars, though, because Democrats aren’t talking up a “peace dividend” very much and Republican support for defense spending is split between traditional party stances and those of the Tea Party, which is motivated by deficits. “There’s not as much pull down from the left, and there isn’t as much support from the right,” he said. “There’s an uneasy stability.”

And the needs are changing. Non-state actors like terrorist groups are more of an immediate threat than countries stockpiling large militaries, while the cost of cyber attacks are lower for other kinds of attacks for anyone who wants to use them, he said.

The defense industry is more consolidated than it once was, and isn’t spending as much on research and development; five leading defense companies are spending a combined 1.6 percent of their revenue on independent R&D, partly because they would have to hazard a guess on where the Defense Department is going, a betting game they don’t much want to play, Lynn said. Meanwhile, Facebook is worth more than Lockheed Martin, Raytheon, Northrop Grumman and General Dynamics combined, he added.

It used to be that the defense industry’s tech weaved its way into the non-defense world, like the Internet or GPS, but now “the technologies we need are increasingly coming from outside the defense industry,” he said, like 3D printing, nanotechnology and the cloud. “So you need a structure that pulls it into the national security arena and operationalizes it for the military force,” he said. Over the past 10 years, the department has gone from 10 percent commercial technology to 30 percent, largely because of information technology.

As much as it’s in the nature of good public policy to want competition for defense contracts, it’s getting harder to find it — the Air Force, as of 2012, did not have competition for more than 60 percent of its contracts, and in sheer tonnage, only 4 percent of the Navy’s ships came via competition. So, Lynn said, the United States might need to get over the notion of being opposed to industry consolidation.

Although, he said, one solution to that is more globalization, like the auto industry has done. More globalization means more competition, and that might in turn lead to more foreign defense companies shipping jobs to the United States, as has happened with the car business, and blending with U.S. companies. The parallel is imprecise, he acknowledged, given the security needs in the defense business that don’t exist in the auto industry.

And during a question and answer period, he also acknowledged globalization of the industry brings new problems with it. The Russian-manufactured RD-180 rocket engine has become a subject of worry in U.S. defense circles thanks to the tension with Russia over Ukraine.

“International politics isn’t going to disappear. You’re going to have conflicts where nations have their interest which collide,” he said. “I don’t think it’s that different from the commercial world… you are going to have to manage your way through these conflict situations.”

Lynn said he anticipated resistance to some of the ideas he proposed for that reason, and difficulties in translating them into policy.

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    July 31, 2014
    3:26 a.m.

    How companies might regain the innovation edge and whether they should
    become less dependent on the Pentagon are top issues of concern to
    industry today. Many consequential technologies still exist outside the
    defense industrial base. The defense sector has not come to grips with
    the outsize importance of non-defense technology, nor has it figured out
    how to diversify successfully into commercial business. The challenge
    is to understand how to piece together markets. U.S. companies have to
    prepare for a much more globalized defense business and we at Blackhawk Partners are ready to help them doing that.

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