Arming the Bug Hunt: Industry Changes & Opportunities
Guest Article by James Hasik
The start of 2009 seems to be viewed with some ease by most military contractors. In the United States, Barack Obama has selected a so-called “centrist” team of top national security lieutenants largely from Bill Clinton’s administration, plus continued service from Republican Robert Gates. The signals of continuity seem so unavoidably clear that Obama’s most leftist benefactors are upset.
Throughout the rest of the Western world, the settling global recession has thus far led at worst to mere program delays, while small bursts of spending meant to fill immediate battlefield needs continue. There is a widespread feeling that most existing procurement programs will remain on course for some time, and perhaps trend downward later.
This conventional wisdom is unconvincing. Rather, it is quite possible that financial constraints, conventional overmatch, and constabulary impulses may combine to significantly reorder military spending priorities throughout the western world in the next few years. Procuring the right kit for small wars, cost-effectively and on-time, means following the economics demonstrated in the procurement of their decisive weapons: the Predator, the JDAM, and the MRAP…
Significant future cuts are not impossible. If the US government’s vast and vague Keynesian stimulus projects fail to change the Fed’s forecast of difficult times until 2011, government funds and Mr. Obama’s government could both find themselves on short strings. This may very well lead to a frenetic search for savings everywhere.
It’s not hard to imagine where those savings will be found. Despite prattling to the contrary, the conventional overmatch of the allies is absolute. The United States alone accounts for more than 40% of all global military spending. That should be enough to repel any plausible conventional threat, whether (as Mr. Gates puts it in the January 2009 issue of Foreign Affairs) “on the Korean Peninsula, in the Persian Gulf, or across the Taiwan Strait.”
Further, despite grousing about Iraq and indifference about Afghanistan, the constabulary impulse is now firmly rooted throughout the Western world. In the United States, Mr. Gates has made clear that he views preparation for counterinsurgency to be every bit as important as preparation for conventional conflict. In Europe, Canada, Australia, and elsewhere, the shift has been underway for much longer. The Danish government’s recent white paper, finding no near-term territorial threat to Denmark, asserts that its regular forces should be configured entirely for overseas operations. And as Robin Laird recently put it to Defense News, “Afghanistan is France’s real defense white paper.” Only a few allied countries, such as South Korea and Israel, face meaningful landward threats.
The problem is that the back office has not caught up with what’s happening on the front lines. As Mr. Gates wrote in Foreign Affairs:
“…the Department of Defense’s conventional modernization programs seek a 99 percent solution over a period of years. Stability and counterinsurgency missions require 75 percent solutions over a period of months. [The question] is whether these two different paradigms can be made to coexist in the U.S. military’s mindset and bureaucracy.”
If money gets short, we believe it’s the 99% solution that will go. Governments around the world will continue to want to do something about global instability. Their opponents will continue adapt their operations and technologies relatively quickly, and this will continue to induce rapid obsolescence in the kit that the allies bring to the fight.
In the near future, therefore, military customers will generally seek revolutionary improvements under what we can term “JDAM economics”: where they are based on a small set of advances so inexpensive and compelling that they suppress old ideas about quality constraints.
Boeing’s design for the JDAM family of guided bombs has been dominant, and JDAM later morphed into the Small Diameter Bomb (SDB), which RAND termed the single most marginally valuable line item in the entire US military budget. Stealthy attack aircraft with small bomb bays can now engage and hit half a dozen targets, on a single sortie, with fire-and-forget weapons. Because GPS accuracy is independent of range, they can do so by lofting bombs from the safe standoff of scores of miles. What’s more, all this comes at roughly the price of a pickup truck, because the GPS itself is installed, separately paid for, and available to an unlimited number of users.
Laser, infrared, and pattern-matching seekers still make interesting additions to weapons with GPS-plus-inertial guidance, but they have become much less expensive given the proximity to the target into which they will be delivered. Even the specifications for the inertial guidance systems themselves have been relaxed, given the short times of flight in which they might need to perform independent of GPS.
More commonly, customers will look for new kit under “MRAP economics”: evolutionary improvements that are both relatively inexpensive and essential, and based on the selective relaxation of old constraints. The MRAP vehicle program acknowledged that today’s battlefields feature only three key threats: the Kalashnikov, the rocket-propelled grenade (RPG), and the improvised mine.
Vehicles like BAE Systems’ RG-31/33 families and Force Protection’s Cougar do not resist cannon shells or wire-guided missiles well, but guerrillas don’t carry the former, and almost nothing stops the latter anyway. Lighter cage armors are being fielded against simple RPGs, and spall liners can reduce hits from basic RPGs to single fatalities.
By designing for ballistic resistance to nothing heavier than a machine gun rounds, MRAP makers could concentrate on the critical attribute: blast resistance. The v-shaped steel hulls could then serve as anything from a bomb disposal vehicle to a mortar carrier to an armored ambulance – and have.
Plenty of systems, like General Atomics’ MQ-1 Predator drone, already today show aspects of both economic models.
The Predator’s midcourse guidance and operator workload problem required the breakthrough of GPS, but subsequent development has been mostly evolutionary. Moving the pilot from the plane to a cubicle outside Las Vegas lowered both expectations of and requirements for survivability, which permitted a more cost-effective and longer-loitering design. In the process, General Atomics’ business grew from a staff of a dozen to thousands.
Today, drones are truly, finally achieving prevalence and acceptance. The year 2009 may come to be seen eventually as a watershed: the first in which the US Air Force requested more unmanned than manned aircraft in its budget. To be fair, the amount of money requested for the latter greatly exceeds that for the former, but this is quite the point. The US Air Force and Army could have 500 Predators, Reapers, and Sky Warriors, and battlefield commanders would want still more. What’s different is that at current prices, they could actually afford them.
If spending patterns continue to shift towards solutions like the JDAM and the MRAP, we could be heading for a structural break: a profound discontinuity with the past in the bases of competition. The fortunes of firms throughout the industry could be drastically affected. But whether change comes rapidly or not, it will come.
Companies that want to remain successful in a range of possible futures ought to be asking themselves how their enterprises can thrive in a contracting market driven by JDAM and MRAP economics. This requires at least three steps:
# An intense, practical analysis of the market;
# Applied corporate development that tailors corporate architectures to these emerging product architectures; and
# Execution that demands mastery of the business akin to the industry’s mastery of its engineering.
Each of those steps requires efforts too numerous to name here, but a few salient tasks stand out.
Start by improving planning. Managing the business with rapidly changing customer requirements requires sophisticated tools. The point forecasting and simple discounted cash-flow analysis to which most of the industry is accustomed are clearly analytically inadequate. Real options analysis, even in its simplified decision-tree form, is necessary to capture the real value of managerial flexibility. Managers intuitively know they have it; analysis should give them credit for it. It’s hard work, but it’s essential. Figuring out what the future will hold means identifying which constraints (as in the MRAP and the JDAM) will be relaxed under which scenarios. It means determining who will be relatively advantaged under which combinations of demanded product qualities. It requires serious scenario analysis and stochastic forecasting.
It also requires critical oversight: if someone brings you a single sand chart of what he calls the most likely scenario, and nothing else, throw him out of your office. In this uncertain world, he will have provided you nothing probative.
Second, source globally. Despite nationalistic noise to the contrary, there is no alternative to sourcing globally. No one has a monopoly on good ideas, and not even the United States military could cost-effectively develop all systems domestically. It’s also militarily meaningless. For years, the JDAM drew its timing circuits from Swatch of Switzerland. When the owner of the company tried in 2003 to withhold shipments in opposition to the campaign in Iraq, the neutral Swiss government ordered him to uphold his contract. If any example proves that industrial security concerns are overblown, it’s this one.
But if global sourcing has been useful for the JDAM, it has been more so for the Predator, and critical for the MRAP. The Predator’s forerunner at Leading Systems (the company that General Atomics acquired to enter the market) began as an imitation of an Israeli design, and most of the more prominent MRAP-type designs on the market originated in South Africa. Common to these two examples is development in industrial clusters with selective factor disadvantages. Long experience with guerrilla war in and around South Africa provided an excellent live-fire laboratory for many competing companies making blast-protected vehicles, and long distances between Cape Town and northern Namibia forced a reliance on wheeled (and thus highly marketable) designs. Cultural and demographic concerns for manpower and dense belts of anti-aircraft defenses around Israel led to a prominent role for unmanned aircraft as early as the 1982 Bekaa Valley campaign. Today, if vehicle hulls hold under the stress of roadside bombs, and missiles fly without endangering pilots, no one can reasonably claim to care where the engineers sit. And to be part of these networks of supply, you need to invest in the right relationships.
Finally, and always, improve products constantly. For all the advantage they have brought, the MRAP and Predator in particular have each been procured with a low proportion of government-funded development money. The original MRAP-type vehicles (Force Protection’s Cougar and BAE Systems’ RG31) were off-the-shelf offerings, whose value some in the Pentagon had the good sense to recognize. The first Predator took flight just 6 months after the DARPA awarded the contract, and funding for much of the subsequent refinement of the aircraft has come from General Atomics itself. Much of the success of both has come through a long series of commercially-funded improvements.
At the same time, many recent procurement debacles have occurred within lengthy development programs designed to roll back multiple technological frontiers. In a fiscally constrained, constabulary future, customers may need to make programmatic tradeoffs, but they’ll be less likely to gamble on unproven promises of exotic engineering.
Constant product improvement sounds like a managerial mantra, but it’s essentially missing from those drawn-out, traditional programs. With product cycles measured by the decade, it’s no wonder that the F-22 today relies on Intel i960MX microprocessors that went out of production in 1997. Meanwhile, Chinese air defense commanders are communicating amongst themselves with late-model Lenovo laptops, Blackberries, and VOIP telephone connections.
Rapid adaptation, after all, is not an endemic feature of irregular forces. Big programs do sometimes produce great leaps forward, but when they fail, they can leave wide gaps in capability. In the near future, customers’ tolerance for failure – in preparing kit for wars big or small – is likely to drop. Recovery will have to be quick and self-funded.
That’s a very different dynamic for this industry. The companies that are ready for it, or prepared to take fast advantage of others’ failures, will make the fortunes of the next precision weapon, blast-proof truck, or hunter-killer drone.
James Hasik is a principal of Hasik Analytic, and a founder of the firm. The firm’s site contains the complete 11-page, PDF version of the article from which this was excerpted: “Arming the Bug Hunt: why the economics of the JDAM and the MRAP are changing customer demand, and how military contractors can adapt to succeed.”
- Pentagon DefenseLINK (Oct 7/09) – Future Weapons Need to be Adaptable, Cost Less. “Now, weapons systems are going to have to be adaptable enough to fight across several fronts, and cheap enough to be fielded in large numbers, [Marine Gen. James E. Cartwright, the vice chairman of the Joint Chiefs of Staff] said. As an example, Cartwright cited the unmanned aerial vehicles now in high demand…”