F-35 Joint Venture

8/6/2019 F-35 Joint Venture

1/16

B Ethan B. Kapstein

Asenals End? Ameican Poweand the Gloal Deense Indst

F E b r u A r y

2 0 1 0


2/16

Cove Image

A F-35 Lightning II taxies down the ightline ate its fst ight

at Eglin Ai Foce base, Apil 23, 2009.

(SENIOr AIrMAN JuLIANNE SHOWALTEr/u.S. Ai Foce)

Acknowledgments

The atho wold like to thank Jonathan Cavele, Jacqes Gansle, and colleages at CNAS o thei comments on ealie dats

and the Sloan Fondation o its sppot o an ongoing CNAS eseach pogam on the gloalization o Ameicas deense

indsties.


3/16

Asenals End? Ameican Powe

and the Gloal Deense Indst

About the Author

Ethan b. Kapstein is a Non-Resident Senior Feow at the

Center or a New American Securit. He is aso the Tom

Sick Proessor o Internationa Aairs and Dennis OConnor

Regents Proessor o Business at the Universit o Texas at

Austin. A retired nava reserve Commander, Kapstein has

written wide in the area o deense economics.

B Ethan B. Kapstein

E b r u A r y 2 0 1 0


4/16


5/16

| 5

I N T R O D U C T I O N

In December 1940, one ear beorethe surprise attack on Pear Harbor,

President Frankin D. Roosevet

deivered a somber radio address to

the American peope. This is not a

freside chat on war, the President

began, it is a tak on nationa securit.

The President argued that the United

States sti had the opportunit to

deter the Axis powers, but on b

producing vast amounts o materie or

itse and its aies. We must have more

ships, more guns, more panes more

o everthingWe must be the great

arsenal of democracy.

oday, debates over American deense acquisitionare rarely cast in terms o national security. Instead,they tend to ocus more narrowly on the causes o thecost overruns and delays that are associated with the

procurement o nearly every major weapons platorm.But that discussion about procurement eciency,

whatever its merits, overlooks some o the deeperchanges that are shaping the structure o Americasdeense-industrial base changes that could have asignicant impact on the nations ability to prosecute

major conicts in the uture.

From the time o Roosevelts arsenal o democ-racy speech until the 1970s, the United States wasclose to being sel-sucient in the development

and production o its major weapons systems.Tese systems were nanced, designed, and built

by the Pentagon and its contractors, and they wereelded by the U.S. armed orces. o the extent theAmerican deense industry was global, it wasglobal only in terms o export markets or thehardware it produced.

oday, the Pentagon aces a vastly dierent real-ity in the deense-industrial space one that ithas actively helped to create. Increasingly, theUnited States is weaving a complex web o global

interdependence what might be called a hubstrategy when it comes to weapons acquisition.Te paradigmatic case o this approach is the F-35Lightning II Joint Strike Fighter, which is beingnanced and built in collaboration with eightpartner nations (and will likely be sold to many

others), but nearly every American platorm nowhas substantial oreign content.

Why did the United States decide to engage ininternational collaboration on the F-35? Why

didnt it just produce the plane domestical ly andthen export a slightly dierent version? Or more

broadly, why and how has globalization come tothe American deense industry and what are itsconsequences or U.S. national security? Tese arethe primary questions addressed in this paper.

It must be emphasized that these issues are not justo consequence or those who specialize in deenseprocurement. Te changes that this paper describespoint to a major strategic shif in American

national security policy. Rather than preservingthe United States as the great arsenal o democ-

racy, the Pentagon has instead been transormingthe nation into the center or hub o a vast interna-tional network o deense expertise and activity.

Some analysts and policymakers have reacted to thistrend by urging, or in the case o Congress, even com-manding the Pentagon to Buy American in a utileand costly attempt to maintain a deense-industrialbase that is prepared or total war. Protectionism

may still have some place in todays increasinglyglobalized deense economy, but such broad-brush


6/16

Asenals End? Ameican Powe and the Gloal Deense IndstF E b r u A r y 2 0 1 0

6 |

provisions ail to redress the vulnerabilities associatedwith the Pentagons weapons acquisition strategy. Teend o the American arsenal, and its evolution towarda hub, poses signicant national security challenges

that must be addressed, particularly as Washingtonconronts rising economic and military powers suchas China. Conronting these challenges in a respon-sible way dictates a pragmatic analysis o what (i any)capabilities the United States must maintain and howit can do so most eciently in light o expected cuts todeense expenditures in the uture.

Unortunately, analyzing the consequences odeense-industrial globalization or U.S. nationalsecurity is a daunting task. Te Deense Departmenthas hardly been orthcoming with data regarding this

phenomenon; indeed, the website o the PentagonsOce o International Cooperation contains nodata whatsoever, not even a list o the cooperativeprograms that the oce is currently overseeing. IAmericans are to have the kind o serious discussionabout the relationship between security policy and

deense acquisition that President Roosevelt urgedin 1940, then acts are its necessary oundation, andthe Pentagon would do well to make such acts at itsdisposal publicly available and easily accessible.

WHy COllA BORA TE GlOBA lly?

In October 2001, the team o Lockheed Martin,Northrop Grumman, and BAE Systems was chosento develop what was then called the Joint StrikeFighter (or JSF, since badged the F-35 Lightning II).Te industrial organization o the F-35 program,which could run up to 40 years, is unique in the

annals o American military history. Accordingto a recent report by the Congressional ResearchService:

Te F-35 program is the Department oDeenses (DODs) largest weapon procurementprogram in terms o total estimated acquisitioncost. Current DOD plans call or acquiring atotal o 2,456 JSFs or the Air Force, MarineCorps, and Navy at an estimated total acquisi-tion cost (as o December 31, 2007) o about

246 billion dollars in constant (i.e., inationadjusted) FY2009 dollars. Hundreds o addi-tional F-35s are expected to be purchased byseveral U.S. allies.

Te plane was also unique in that it was designed to

cost, coming in at an aordable 35 million dollarsper unit. Not surprisingly, that ambition has crashedinto the reality o cost overruns.

Rather than und, design, and build the plane

domestically and then export a variant at someuture date the United States brought in part-ner countries rom the very beginning to assistin the nancing and development o the program.

For example, the United Kingdom was invited tobecome a Level 1 partner and provided a hefynancial contribution o 2 billion dollars (about 10percent o the development costs) or the F-35, whilehaving two o its contractors (BAE on the airrameand RollsRoyce on the engine) play a signicant rolein program development, ensuring early acquisi-

tion by the Royal Air Force and Royal Navy (whichsought the F-35 as a Harrier replacement). Otherpartner nations include Canada, Italy, Norway,

Te end o the American

arsenal, and its evolution

toward a hub, poses

signifcant national security

challenges that must be

addressed, particularly as

Washington conronts rising

economic and military

powers such as China.


7/16

| 7

Denmark, the Netherlands, urkey, and Australia,and Israel and Singapore have signaled their strong

interest in acquiring the platorm. All told, the

partner nations have provided nearly 20 percent othe development costs o the program.

While each partner nation has made a nancial

contribution toward developing the F-35, theirdomestic deense industries have been more thanrepaid in terms o the work they have received.According to a report prepared or the Pentagon,or example, the United Kingdom which had ini-tially planned to buy something on the order o 140

F-35s (it now looks more like 70) could generaterevenues or its rms o 43 billion dollars based onits initial investments o 2 billion dollars, giving it astartling return o over 2,000 percent. And thereinlies part o the genius o the F-35 program design.

At the time when the F-35 program was rst pro-posed during the early 1990s, the end o the ColdWar had abruptly arrived and deense spending inthe United States and Western Europe was beingdrastically reduced (see Figure 1). Faced with an

aging eet o ghter aircraf, each U.S. military

service was studying potential replacements. TeClinton Administration, however, was unprepared

to und three new airplanes and instead decided to

produce a Joint Strike Fighter that would meeteveryones needs, albeit in dierent versions. Tus,the Navy would receive a carrier version o thisaircraf, the Marines (and Royal Navy) a verticaltake-o and landing version, and the Air Force a

conventional ghter. In short, the JSF was designedto be an aordable, all-around ghter that couldmeet myriad needs in the context o a harsh bud-getary but more benign security, climate.

I JSF was to be aordable, however, it would needto have a long production run. Only then could theheavy up-ront costs o research and developmentbe amortized. Moreover, the JSF program was sup-posed to keep these initial costs to a minimum as itwas supposed to rely primarily on proven tech-

nologies. While the United States would purchasethe vast majority o the aircraf, oreign sales couldplay a crucial role in bringing down the unit cost.Initially, this suggested that an export variant othe plane should be built.

Figure 1: U.S. and UK Defense Spending as a Share of GDP, 1988-2005

Source: SIPRI Miitar Expenditures Database

0

1

2

3

4

5

6

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

US

UK


8/16


8 |

But the allies o the United States had no interestin buying an American plane o-the-shel. Asin the United States, weapons procurement deci-sions overseas reect a political calculation thatincorporates both economic and security variables.Politicians worry about national security, but they

are also concerned about jobs, high technology, andthe other economic benets that they and theirvoters associate with deense spending. Americanplanners and deense executives, thereore, recog-nized that they could only lock-in oreign markets

i they made potential buyers industrial partners inthe endeavor.

Foreign participation also promised other benets tothe F-35 program. o the extent that oreign suppli-ers had distinctive expertise (and at lower cost than

U.S. rms) the program could meet its objectives obeing both cutting-edge and aordable. Competitionamong suppliers would also bolster innovation. Andthe military would benet rom the added interoper-ability o working with a common platorm.

What resulted rom this strategic decision wasperhaps the most complex industrial program inmodern history. oday, the Pentagon and LockheedMartin must coordinate the decisions o eightnations and over 1,000 suppliers, each o which has

its own deense budget cycle (and budgetary poli-tics), capital requirements, intellectual property andexport control regimes, and so orth. Ensuring thatall these players are on the same page is a ormi-dable challenge, as illustrated by the programscost overruns and delays. Te total acquisition

cost o the F-35 program is now estimated by theCongressional Research Service to have risen about100 billion dollars with procurement delayed by atleast one year. On a unit cost basis, the price o eachplane has risen by nearly 40 percent. What percent-age o these overruns is related to the complexity o

oreign collaboration and how much is due to theinuences o the U.S. political economy (e.g. thecongressional decision to second-source the F-35sengine over the Pentagons objections) is unclear,and indeed the data to make this sort o determina-

tion is not easily available.

THE INTERNA TIONA l ORGA NIzA TION

O F D E F E N S E P R O D U C T I O N

Building weapons collaboratively like any other

cross-border, high-technology venture presents aunique set o problems that must be managed. Tegovernance o such an enterprise is daunting, inthat the alignment o everyones interests may notbe perect. Indeed, international joint ventures have

very high rates o ailure.

Why is that the case? In particular, it is because othe inability o project leaders to control oppor-tunistic behavior by suppliers. In other words,

suppliers may act in their own short-term interest,reducing the likelihood o program success (this isthe inamous Prisoners Dilemma o game theory).Te ailure to deliver parts on time and within aspecied budget, or the inability to meet militaryspecications, could all create logjams in aircraf

Te total acquisition

cost o the F-35 program

is now estimated by the

Congressional Research

Service to have risen about

100 billion dollars with

procurement delayed by

at least one year. On a unit

cost basis, the price o each

plane has risen by nearly

40 percent.


9/16

| 9

development and production. Furthermore, theprime contractor and the U.S. government must be vigilant about the possibility o oreigngovernments and rms attempting to poachsensitive American technology, such as low observ-

ables (stealth) in the case o F-35. While the U.S.governments export control regime aims to curbthe leakage o military secrets, its ability to do soin the context o a highly interdependent multi-national program involving engineers rom manyrms and countries may be open to question.

Within the domestic context, problems o oppor-tunism can certainly undermine the success o acollective project undertaken by two or more rms.But actors who work on a purely domestic stage

have several outlets or resolving their disputes.First, they share a common legal environment, andthereore contracts and law enorcement providetools or adjudicating dierences between partners.Second, a prime contractor can always decide tobuy a supplier and vertically integrate i necessary,

as Boeing has recently done in order to shore up its787 Dreamliner production. While there are alsomethods under international law or dispute reso-lution, these are likely to prove less eective andmore costly, given, or example, dierent propertyrights regimes and legal systems. Furthermore, to

the extent that weapons technology may involveindustrial secrets, rms are unlikely to bring theirdisputes into a oreign court. Finally, oreign coun-tries may not allow a military prime contractorrom the United States to purchase a local deense

rm or strategic reasons, limiting the possibilityo vertical integration. Indeed, the United Statesgovernment has previously blocked selected oreignacquisitions o American companies owing tonational security concerns.

As already noted, the history o international jointventures in high technology is not a particularlyhappy one in either the deense or the commer-cial sectors. In deense, the Europeans have longstruggled with controlling costs and delays in

programs like the Euroghter and A400 transportaircraf, while Boeing has aced diculties manag-ing its ar-ung supply chain network in the case othe Dreamliner. Tese problems are not surprising;they are precisely what the literature on macroeco-

nomics would predict.

Te question, then, is why the Pentagon wouldallow itsel to collaborate in weapons acquisitionand thus render the nations security hostage to

oreign companies and governments? Tis paperargues that, in addition to any military advantagesthat might be gained rom this policy (e.g. owing tointer-operability or access to useul technologies),it is because the United States has decisive advan-tages in the deense procurement space that

give it tremendous power over oreign behaviorsand outcomes. Tis is what makes it possible orthe United States to make the decisive shif romarsenal to hub without putting the nation at anunacceptable level o risk.

Specically, the United States now has one great

advantage over virtually all other nations, namelythe colossal size o its deense procurement budget,which has rebounded sharply rom its post-ColdWar lows since the terrorist attacks o September

11, 2001 (it had al len by some 40 percent in realterms between 1990-2000, and now the ObamaAdministration is planning a new round o cutsbetween 2010-2014). Te U.S. deense procurementbudget (not including logistics or supplementalunding or the wars in Aghanistan and Iraq)

o 140 billion dollars is equal to the amount that

almost every other country on earth put togetherspends on weaponry (to put this in perspective,the combined total deense budgets o China andRussia equal about 230 billion dollars; see able 1).Te consequences o this market power must not

be neglected.

In short, this means that the United States can posethe ollowing choice to a potentially opportunisticoreign supplier: You can either be a supplier to a


10/16


10 |

locally produced weapon (say, in Western Europe)

and provide 100 (or 200, or even 300) sub-systems,or you can supply an American weapons acquisitionprogram and provide 1,000 (or 2,000, or even 3,000)

sub-systems. Te scale dierence is so signicantthat it has the eect o concentrating the mindand promoting good behavior on the part o oreign

contractors. Furthermore, the jobs thus produced intheir actories also reect well on national politi-cians, who would close down an armaments projecto this scale at their electoral peril.

It is thereore American market power in deenseacquisition that makes successul international

collaboration in armaments possible, just asAmerican market power in the commercial domainduring most o the postwar era gave Washingtonthe most inuential voice in deliberations oversuch issues as global trade, nance, and regulation

(e.g. with respect to climate change). Tis is notto diminish the great challenges presented by theF-35 program: deense executives are still acing anengineering project o enormous complexity. But itdoes mean that opportunistic behavior by oreignsuppliers, which would be the normal or reexive

concern o most students o industrial organiza-tion (and which is very much in evidence on thisprogram, as with Italys recent demand or moreworkshare), is unlikely to emerge as the most press-ing problem or program managers so long as theUnited States maintains its commitment to acquir-

ing this (and other) platorms.

THE HUB OF DEMOCRA Cy?

While the Pentagons transormation o the UnitedStates rom deense-industrial arsenal to hub reects

a pragmatic recognition o the changing economicand security environment since 1989, including theglobalization o high technology, policy analystsmust still conront what it means or America to

lose the capacity to acquire deense systems autono-mously. o be sure, some might argue that Americano longer aces an existential threat like the SovietUnion, and thus, the kinds o ears that existedduring the Cold War simply have no place in thecontemporary context, where Americas battles are

mainly with small, highly mobile groups. In act,

at the strong urging o Secretary o Deense RobertGates, the U.S. deense budget increasingly supportsspecial, low-intensity and counter-insurgencyoperations.

Still, it is hardly ar-etched to imagine that othergreat powers might arise which will challenge theUnited States across entire regions where it hasongoing security interests. Tis means that thePentagon might well wish to buy an option that

Table 1: US and Global Defense Spending

Cont 2007 GloalSpending rank

United States 660.0 1

China 144.5 2

Russia 85.3 3

United Kingdom 65.8 4

France 63.1 5

German 43.8 6

Japan 42.7 7

Ita 39.3 8

Saudi Arabia 36.9 9

South Korea 27.6 10

Israe 12.1 17

Taiwan 10.0 20

Iran 7.7 23

North Korea 6.6 28

Pakistan 4.7 33

Veneuea 2.9 49

Source: Travis Sharp, Center or Arms Contro and Non-Proieration, 2009.


11/16


12/16


12 |

appreciated in Washington; ironically, it is betterunderstood overseas, where many oreign suppliershave thrown in their lot or now at least withthe Pentagon. Ensuring that Americans understandwhat is really at stake in deense spending debates

will become increasingly vital as uture budgetreductions begin to reduce the Pentagons share ogovernment spending.

While it is unlikely that Americas hub strategy will

be threatened anytime soon, deense planners mustalso engage in scenario building o potential long-run threats. Tis means that the time has come tothink seriously about how to maintain and improveU.S. systems integration capabilities in light oglobalization on the one hand and diminishing

resources on the other. I history is any guide, theprocurement account will bear most o the burdeno any uture deense-related budget cuts, whichmeans skilled workers will continue to exit thedeense industry. Further, should oreign nationsdoubt Americas long-run commitment to F-35,

among other collaborative projects, it will only bea matter o time beore the hub strategy alls on itsaxle. I that occurs, some uture President could endup demanding as Franklin Roosevelt did moreships, more guns, more planes only to nd thatAmerica has lost much o its capacity to provide

them.


13/16

| 13

E N D N O T E S

U.S. Department o State, Radio address delivered by President Roos evelt1

rom Washington, December 29, 1940, http://www.mtholyoke.edu/acad/

intrel/WorldWar2/arsenal.htm, emphasis added.

See Jacques Gansler, Trade War (29 March 2009), www.oreignpolicy.com.2

For a succinct discussion o this strategy, see William Schneider, Jr.,3

Testimony to the House Armed Services Committee: National Security

Industrial Program: Implications o Globalization and Foreign Owner ship

or the Deense Industrial Base (16 April 2008), http://www.as.org/

programs/ssp/asmp/issueareas/us_arms_export_reorm1/Schneider_

Testimony041608.pd.

See U.S. Department o Deense, International Cooperation (last4

updated 2 February 2010), http://www.acq.osd.mil/ic/.

Ronald ORourke,5 F-35 Joint Strike Fighter Program: Background a nd

Issues for Congress (October 2009): 1, http://assets.opencrs.com/rpts/

RL30563_20090916.pd.

I thank Jacques Gansler o the Universit y o Maryland (and ormer6

Undersecretary o De ense or Acquisition and Technology) or

highlighting this point.

Oce o the Deputy Under Sec retary o Deense (Industrial Policy), JSF7

Industrial Participation: A Study o Country Approaches and Financial

Impacts o Foreign Suppliers (June 2003), http://www.acq.osd.mil/ip/

docs/js_international_industrial_participation_study.pd.

For more details see Ethan B. Kapstein, Capturing For tress Europe:8

International Collaboration and the Joint Strike Fighter, Survival 46:3(Autumn 2004): 137-159, http://www.ethankapstein.com/articles/

capturing_ortress.pd.

ORourke,9 F-35 Joint Strike Fighter, 13-14.

Christopher Drew, Boeing Buys Plant That Makes Crucial Part o10

Dreamliner, New York Times (7 July 2009), http://www.nytimes.

com/2009/07/08/business/08boeing.html.

This is a point requently emphasized by ormer UnderSecretary o11

Deense or Acquisition and Technology Paul Kaminski. See Earl L ane,

At AAAS Briefng, US Deense Expert Urges More Nimble Military

Acquisition System, AAAS [American Academy or the Advanceme nt o

Science] News Release (27 January 2009), http://www.aaas.org/news/

releases/2009/0127kaminski.shtml.


14/16


15/16

About the Center for aNew American Security

The mission o the Center or a New AmericanSecurit (CNAS) is to deveop strong, pragmatic,and principed nationa securit and deensepoicies that promote and protect Americaninterests and vaues. Buiding on the expertiseand experience o its sta and advisors, CNASaims to engage poicmakers, experts and thepubic with innovative act-based research,ideas, and anasis to shape and eevate thenationa securit debate. A ke part o ourmission is to hep inorm and prepare thenationa securit eaders o toda and tomorrow.

CNAS is ocated in Washington, D.C., and wasestabished in Februar 2007 b Co-oundersKurt Campbe and Michee Fourno. CNAS isa 501c3 tax-exempt nonproft organiation. Itsresearch is nonpartisan; CNAS does not takespecifc poic positions. According, a views,

positions, and concusions expressed in thispubication shoud be understood to be soethose o the authors.

2010 Center or a New American Securit.

A rights reserved.

Center for a New American Security1301 Pennsvania Avenue, NWSuite 403Washington, DC 20004

TEl 202.457.9400FAX 202.457.9401EMAIl [email protected]


16/16

1301 Pennsvania Avenue, NW

Suite 403

Washington, DC 20004

STRONG, PRAGMATIC AND PRINCIPlEDNATIONAl SECURITy AND DEFENSE POlICIES

TEl 202.457.9400

FAX 202.457.9401

EMAIl [email protected]

www.cnas.org

Documents

F-35 Joint Venture