The Virus And The US ‘Defense’ Industry: A Bit Less ‘Free Market’ Capitalism, A Bit More Strategic Planning In Order?

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The Virus And The US ‘Defense’ Industry: A Bit Less ‘Free Market’ Capitalism, A Bit More Strategic Planning In Order?

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Two recent articles, one in Defenseone.com and the other in Military.com, highlight different though not entirely unrelated aspects of the dis-functionality that has steadily encroached ever deeper into the US’ military-industrial complex, and how the situation can be addressed.

The first reviews structural and procedural impediments affecting the planning, procurement and development of advanced aircraft, and summarizes the arguments of a top Air Force official who warned earlier this week that the United States might need to nationalize parts of the military aviation sector if the Pentagon does not come up with new ways to buy planes that stimulate more competition in private industry.

The second article notes that the pandemic crisis has served as an incentive to consolidate the military production chain in a way that can benefit US technological and industrial capacity and thereby generate additional economic and employment benefits, as well as addressing security and resilience weaknesses inevitably associated with extensive overseas outsourcing of key components and technological processes.

A fundamental aspect of the military-industrial complex that escapes the attention of both analyses, however, is the role of the financial overlords that rule it all.

That the US has fallen far behind Russia in particular in the development of the most advanced high-tech weapons systems and platforms in many sectors has become increasingly apparent, despite the fact that Russia has about one tenth the military budget of the US.

The US weapons procurement and production system is characterized by isolated financial-industrial combines that have minimal interoperability as they compete to secure long-term supply contracts that will lock them into guaranteed production contracts for many years. The competition between conglomerates prevents cooperation among the country’s best scientific and engineering teams and creates an environment conducive to duplication of effort on key elements of procurement and development of new technologies. For example, while one of the conglomerate’s research units may have solved an obstacle related to, say, optimal fuel composition for a specific engine type, research teams at the other conglomerates may still be spending millions of dollars and thousands of research hours on finding a solution to the same obstacle.

Many aspects of how these conceptual dilemmas and structural realities are affecting the US’ ability to develop advanced high-technology weapons systems and platforms efficiently and cost-effectively are clearly revealed in the article by Defenseone.com, which reviews the comments of, Will Roper, the head of Air Force acquisition, at a forum earlier this week as the Air Force finalizes ambitious plans to buy a new series of combat fighter jets called the Digital Century Series.

Numerous anomalies have resulted from strictly isolated R&D and production systems. Lockheed Martin and Boeing are the only US companies that make tactical fighter jets. Boeing’s F-15 Eagle and F/A-18 Super Hornet are considered a generation behind Lockheed’s F-22 Raptor and F-35 Lightning II. Boeing and Sweden’s Saab are building the new T-7 pilot training jet.

Northrop Grumman is the only US manufacturer of a heavy bomber. Boeing’s KC-46 is the only aerial tanker in serial production and Lockheed’s C-130 Super Hercules tactical transport is the only military cargo plane in production. There are no strategic, long-range military transports in production. The isolation and fragmentation of final products has associated affects throughout the production chain, from strategic planning and scientific research and technological development to individual design, construction and production of components and the final product.

At a public forum Will Roper discussed some of the difficulties he faces as the head of Airforce acquisition, and some of the alternatives for moving forward.

“We have multiple vendors who can still build a high-end, tactical platform,” Roper told reporters. “I think it’s really important that we find a new model where there are no big winners and no big losers, but continual competition.”

“Technical talent is at a premium,” he said. “If the design opportunities are so few and far between that joining a defense company means you may get to design one thing in your career … — and that’s if you’re lucky — then that talent will go elsewhere into commercial innovation where the opportunities are more plentiful.”

Thus many separate but interconnected elements of the planning, design and development process are involved, not just in terms of adjusting strategic planning and management needs to existing structural and corporate realities, but also providing satisfying career paths and opportunities for individuals and groups that not only enable existing scientific, technical and managerial talent to be harnessed most effectively but also to provide for ongoing consolidation and enhancement of that capacity.

Defenseone writes:

In this sense, Roper hopes his Digital Century Series plan will attract a new generation of engineers to the defence sector and provide a model for buying different types of military aircraft.

Roper’s project envisions developing and buying plans at a much quicker rate than traditional tactical fighters which often take a decade before they are produced in large quantities. By that time, technology is already dated and brand new planes must undergo costly and time consuming upgrade projects.

The Digital Century Series is a throwback to the U.S. military’s “Century Series” fighter jets built in the 1950s and 1960s. His hope is that new companies can emerge and disrupt the sector, much like Elon Musk’s Tesla electric vehicles have disrupted the automobile industry.

“If our industrial base collapses any more, we’ll have to nationalize advanced aviation and maybe other parts of the Air Force that currently are competitive,” Roper said. “But I also am holding out some hope that if we open up the door to do design frequently, and build things in smaller batches that are between X-planes and mass production, that we will eventually encourage an innovative company to cross over into defense, or companies to start up that just want to build really cool airplanes or satellites, because they don’t have to own the big production lines and tooling workforce, which is the only way to work with us today.”

The defense industry has contracted (SF comment: i.e., become even more concentrated in terms of ownership, control and functional and organizational structuring and management) in recent years following a series of high-profile mergers and acquisitions, the latest being the April mega-merger of United Technologies and Raytheon, which followed UTC’s acquisition of Rockwell Collins. L3 Technologies merged with Harris last year.

Roper said he has been surprised that other top defense officials seem unworried about the shrinking defense industrial base. “It’s not because the defense industrial base has gotten worse, it’s just programs are so few and far between that to be any long-term partner with us in defense tech, you’d have to have a pretty diversified portfolio,” he said.

Roper believes his Digital Century Series plan will lower the military’s long-term costs. Since becoming the Air Force’s top weapons buyer in early 2018, he has been looking for ways to lower the lifetime costs of owning planes. Roper compared buying weapons to getting a free or deeply discounted mobile phone from a wireless provider which then locks the customer into a long-term service contract.

“I believe it’s going to be cheaper to procure airplanes this way than it will be with the major production line, not because the per unit price will be cheaper … but because the total price of ownership is lower, that we will get out the heavy modernization and sustainment costs that really start piling after Year 15,” he said.

Roper has pushed for companies to build weapons with open technology, so the Air Force isn’t forced to repeatedly pay the company that made a specific weapon for upgrades over its lifetime.

“Everything has to change,” Roper said. “This 21st-century challenge we have simply flies in the face of Cold War acquisition. We’re going to have to use technology available to everyone. We’re not going to be able to own it and have it be exclusive for us. We’ve got to create a business model that … [empowers the] defense industry to design systems that are open for technology, especially digital technology that again will be open to everyone.”

So how does the defence industry feel about Roper’s plan to radically change the way the Air Force buys weapons? Not surprisingly, the industry is against any changes that could `potentially interfere with the structures of ownership and control that they have systematically and meticulously developed over the last few decades.

Thus, one analyst says other countries — Britain, France, Japan, Sweden — have proven that they can keep a single combat aircraft manufacturer alive without formally nationalizing it.

Nationalization is “an admission that they have failed miserably and I don’t think they have failed,” said Richard Aboulafia, vice president of analysis at the Teal Group aviation consulting firm.

“The arsenal system was great for the Civil War, where you don’t have to respond to market needs in terms of talent and corporate organization, but the real world of aerospace calls for, at the very least, a public-private partnership — nationalization being, kind of the land of the lost,” Aboulafia said.

Similarly, another industry consultant was dismissive of the possible benefits of carrying out a fundamental re-evaluation of the existing modes of production of the financial-military-industrial process.

“The Digital Century Series may help America win the tech war with China while making it more likely our military loses in a real war,” defence industry analyst and consultant Loren Thompson wrote in Forbes earlier this year. LINK

The second article, by Military.com, briefly recounts some of the collateral benefits that have resulted from the structural disruptions caused by the Coronavirus outbreak.

The COVID-19 crisis has accelerated Defense Department efforts to secure supply chains against China and bring overseas manufacturing capacity back to the US, according to the Pentagon’s acquisitions chief.

“This has, in a way, been the silver lining for us” in the pandemic, Ellen Lord, the undersecretary for acquisition and sustainment, said at a Ronald Reagan Institute forum aired Thursday.

“We in government cannot let a good crisis go unused here,” Lord said, adding that the pandemic is “a wake-up call to do things a little bit differently.”

The crisis has pushed the DoD to accelerate efforts under President Donald Trump’s July 2017 executive order to secure supply chains and strengthen the Defense Industrial Base, or DIB, she explained.

“We identified a lot of single-source, offshore supply chain critical items” that could be produced in the U.S., including microelectronics, Lord said.

The DoD “also advanced pharmaceutical ingredients that go into our drugs,” she said, adding that much of generic drug production now comes from China.

Most chief executives are well aware of the challenges of doing business in China, Lord said, but there “wasn’t really a compelling reason to reshore” (‘onshore’) and bring the work back to the U.S. until COVID-19 hit.

She stressed her continuing concern about “adversarial capital” taking over U.S. firms through shadow third parties controlled by China.

The major concern is for aircraft manufacturers who supply the DoD, as well as the commercial aircraft industry, she explained.

“Those dual-use providers have been particularly hard hit,” as air travel has cratered during the pandemic, Lord said.

“We have made amazing inroads in coming back up to prior productivity levels” throughout the Defense Industrial Base despite the pandemic, although shipbuilding and aircraft production have lagged behind, Lord said.

The official quoted in the second article expressed “continuing concern about ‘adversarial capital’ taking over U.S. firms through shadow third parties controlled by China.” Certainly, each country must take every precaution to ensure that actual and potential adversaries don’t get access to the most advanced research and technology, much less infiltrate or worst of all take over the entire research, development and production process. However, by limiting their perspective to a traditional Nation-State perspective the officials seem trapped in a paradigm that blinds them to the possibility that this may have already occurred.

The fundamental challenge in conceptual terms is creating an operational environmental that promotes diversification and competition among research efforts, whilst maintaining mechanisms for strategic planning and coordination of efforts to meet national needs. Another structural and conceptual aspect is, is the profit motive and ‘free market competition’ the only way to achieve innovative weapons production?

However, notwithstanding the compartmentalization of each conglomerate’s R & D and production capabilities there is an apparent structural anomaly, in that the major shareholders of each conglomerate are almost identical. The ‘free market’ is not at all free, and a small number of investment funds appear to have captured control of the majority of the largest weapons producers. Hence, there is a high capability for strategic planning and coordination of effort, and one must assume that this is occurring. The many billion dollar question is, who is determining the strategic planning parameters and objectives, and on what basis? The circular and interlocked ownership of the major investment funds involved prevents a clear answer to this question.

The people of the US are enthusiastic, to the point of fanatical, about the virtues of ‘free enterprise’, the ‘pioneering spirit’, individual liberty, etc. These concepts and values certainly have much merit and are to be encouraged.

However, they don’t seem to realize that these values have been appropriated and transmuted into malignant forms of predatory capitalism where huge financial and corporate combines claim these same individual values to justify corporate immunity from any form of State regulation and accountability to the public (reduced to a basic equation of State = bad, ‘free market’ = good). This is not to suggest that the equations should be reversed in a similarly simplistic manner (State = good, corporations = bad), and the analyst’s comment above that public-private partnerships can be beneficial cannot be reasonably disputed.

But the nature of the specific roles and functions of the respective parties must be carefully identified and considered in each instance. In the US it seems that the State (the Presidency, the Congress and all relevant State agencies and officials) have abdicated, or outsourced, most of their strategic capacities and functions to the financial-corporate combines.

Beyond the superficial appearance of ‘dynamic free market capitalism competition’ between Boeing, Lockheed Martin and Northrop Grumman, each is actually controlled by the same three to five key shareholders, with several other investment funds clearly also firmly meshed into the central network of ownership, control and management.

Boeing’s largest shareholders are Capital Research & Management (approximately 14.3%), The Vanguard Group (7%), Evercore Trust Company (6%), Newport Trust (5.8%), State Street (through its investment vehicle, SSgA Funds Management, 4.6%), T. Rowe Price (3.5%) and BlackRock (2.2%). (The percentages listed are probably underestimates, and sourced from ‘marketscreener’.)

Northrop Grumman’s largest shareholders are Capital Research & Management (33%), State Street (9.9%), Vanguard (7.7%), and Massachusetts Financial Services (3.5%).

Lockheed Martin’s largest shareholders are State Street (15.1%), Capital Research & Management (9%), Vanguard (7.9%), Putnam (5.3%), Wellington Management (4%) and BlackRock (2.2%).

A more detailed tabulation of the shareholding structure is provided in another study by South Front. In relation to some of the largest weapons producers and some of the largest corporations of the financial sector the results were as follows:

The Virus And The US ‘Defense’ Industry: A Bit Less ‘Free Market’ Capitalism, A Bit More Strategic Planning In Order?

Click to see the full-size image

Vngd – Vanguard,  BkRk – BlackRock,  StSt – State Street,  Nwpt – Newport, CapRM – Capital Research & Management,  FMR – Fidelity Management & Research Co. – FMR LLC,  TRP – T. Rowe Price Associates,  Bnk Am – Bank of America,  LAC – Longview Asset Management, Norges – Norges Bank, Harris – Harris Associates, Brkshr H – Berkshire Hathaway, Mtbshi – Mitsubishi

The difficulty of penetrating the corporate veil to identify real shareholders, the actual people who are directing and benefiting from the activities of these mega-shareholders, results from the fact that the shareholders of Vanguard and BlackRock, for example, are virtual replicas of those listed above. Some of the mega-shareholders’ stakes are a bit less, some a bit more, and some other investment funds and corporate vehicles appear, but overall they forma consolidated nucleus of interlocked entities where there is no head and no tail apparent from the surface. This aspect is also explored in more detail in the earlier South Front article.

The power of these mega-shareholders to appoint directors of the industrial conglomerates flows down from there into the subsequent appointment of senior managers and permeates into every aspect of each industrial combine’s activities and subsidiaries. The phenomenon is by no means limited to the ‘defense sector’, but penetrates all of the most strategic and lucrative sectors of the US economy, as well as those of many other countries.

The financial/corporate combines meld the worst of unaccountable centralized planning and total control exercised by a small group of corporate executives and shareholders, without the benefits accruing to the American people of the consolidation and coordination of strategic planning, prioritization and management. There is definitely a form of extremely strategic and centralized planning and management occurring: the very precise allocation of carefully calculated strategic percentages of shares held between a small number of shareholders demonstrates this beyond a doubt.

The paramount question is who is directing this centralized effort, based on what values and objectives? It clearly isn’t the Congress or the Presidency, who depend on these same combines for the money to run their election campaigns, to receive favourable media coverage, etc.

And who is responsible for running the security checks of the people that control and manage the investment funds and the vast array of corporate vehicles that they have progressively brought under their control? How do they even identify who they are? An excellent study (Hidden Power of the Big Three: Passive index funds reconcentration of corporate ownership and new financial risk) analyses some of the structural elements and mechanisms through which the shareholders translate into influence or control over the decisions of specific industrial combines.

However, it gets no closer to identifying the locus of control, ownership and beneficiaries behind ‘the Big Three’ and the associated constellation of investment funds.

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