Defense Partnerships in the US Market: Some Thoughts
Breaking into the American defense market can be lucrative, but it can be scary for firms based outside the USA. At AUSA 2013, DID Editor Joe Katzman sat down with RAFAEL’s consultant Lt. Gen. William H. Forster, PhD (ret.), and other RAFAEL personnel, to discuss some of the reasons for their success with products as diverse as the LITENING surveillance and targeting pod for jets, and the door-busting SIMON/GREM grenade.
Rather than present the interviews and discussions verbatim, we’ll focus on key takeaways.
Foreign Military Aid is an Opportunity
Israel receives significant foreign aid from the USA. That’s a spinoff of the Camp David peace agreement with Egypt, and of Israel’s value as a strategic ally. The catch is that the aid has to be spent in the USA, where it supports the American defense industrial base. At the same time, necessity has forced the Israelis to invest in, and develop, their own weapons.
Sometimes those imperatives collide, as they did during negotiations over the equipment in Israel’s initial F-35A fighters.
Sometimes, those imperatives work together more harmoniously. The Israelis quickly figured out that partnering with American defense firms to make things in the USA could let them buy some of their own inventions with someone else’s money. Once you have that kind of partnership in place, why not offer the results to the US military as well? Once you’ve demonstrated credibility and success as a partner in the American market, why not offer other Israeli inventions to your partners?
That’s the core of RAFAEL’s approach. They bring the product. Their American partner brings the customer, and is heavily involved in support and logistics after the sale is made.
This seems like a shortcut. It is. On the other hand, consider how many countries have received significant foreign military assistance funds from the USA. How many of them thought to do what the Israelis have done? Camp David even specified rough parity in aid rewards to Egypt, but there sure weren’t any Egyptian firms offering a wide array of weapons at AUSA 2013.
Speak the Language
Gen. Forster meant this in the simple sense of having good English skills. That matters a lot, but many Europeans have equally good English skills. There’s also a cultural element. Forster is a strong proponent of early and honest communication between the companies involved, which goes over well with Americans. This is not exactly a problem for Israelis.
It can be more of a shift for others, hence the existence of documents like the viral Anglo-EU Translation Guide for people dealing with British counterparts.
Development partnerships with American firms are a perfectly valid way to build one’s industrial base, and finish products that can be deployed in one’s home market and in the USA. With that said, already-finished products can open closed doors, by taking significant risks off of the table.
On the government side, there’s no commitment of faith required for a decision that could be controversial. “Here it is, test it!” Possibly followed by: “it clearly works, so did you really need that requirement it missed?” On the contractor side, the only hurdle to profits is cost of sales, since development is done. As the saying goes, the 1st 80% of your development project takes 100% of your budget, and if you’re even slightly unlucky, the last 20% will take the other 100%.
RAFAEL’s 1st partnership, in 1988, worked with Lockheed Martin to offer the IAF’s in-service Popeye/ AGM-142 Have Nap precision strike missile for installation on US B-52s. That partnership ended up exporting Popeye missiles to Australia and South Korea, while delivering over 500 of them to the USAF. In a similar vein, Northrop Grumman used the LITENING surveillance and targeting pod as a partnership example for the whole company to aspire to. Its finished status meant no risk, just profit, and continued development stateside has given Northrop Grumman a durable franchise.
When pressed, Gen. Forster admitted that RAFAEL’s best successes have involved products that opened new niches, rather than products that competed for programs with set requirements. He didn’t mean that as a comment on the American military’s tendency to pad requirements, even if that is a suggested conclusion.
The thing that foreign vendors need to understand is that US companies will not try to set requirements in an existing area. They’ve been strongly trained out of that behavior (q.v.: F-20A, among other examples). At best, they’ll try to shape requirements via limited waiver challenges. On the other hand, they may be open to something new that could create a future requirement. Management thinker Daniel Burrus’ admonition once explained it as:
“Giv[ing] your customers the ability to do what they can’t do, but would have wanted to do, if only they knew they could have done it.”
You May Have an Edge
On a related note, American firms are very large, but you may have an edge in a particular field. Israel is an unusual case, with more patents per 100,000 people than any country in the world, and a technology sector that plays a critical role for firms like Intel and Cisco. Sometimes, that leads to breakthroughs.
Explosive Reactive Armor was developed in Israel shortly after the 1973 Yom Kippur War, and RAFAEL has been partnered with General Dynamics Land Systems to co-produce it for American armored vehicles since 1994.
Still, you don’t have to invent a new technology to have something an American partner wants. RAFAEL is partnered with General Dynamics to pursue the potential Individual Squad Munition program, which could replace a number of weapons including the AT4 and the M72 LAW. GD has very deep ammunition expertise, but in this area, RAFAEL and Dynamit were clearly superior, with a combat-proven product that’s well suited to urban warfare.
In a similar vein, BAE’s naval integration expertise needed RAFAEL’s greater expertise in Remote Weapon Systems and sensors to create the MK 38 RWS that equips a number of US Navy ships.
Sometimes, You Can Go Direct
The Simon/GREM door-breaching rifle grenade was a success for RAFAEL, but it wasn’t a partnership. They were originally going to partner with General Dynamics ATP for manufacturing, but the math didn’t work out. Too much extra investment, too much extra cost added, and too small a production run. RAFAEL had built relationships, infrastructure, and a reputation that allowed them to present their solution. The US Army decided that it met an urgent need, and didn’t seem to have any issue with direct sourcing. So they bought thousands of rounds directly from RAFAEL in Israel, which still isn’t a big order in dollar terms.
Partners Enhance AND Compete
RAFAEL offered Northrop Grumman a finished product with LITENING, but it was also a modular product. Fast forward 20 years, and NGC’s LITENING-SE is significantly more advanced than RAFAEL’s LITENING-III, but relations remain co-operative and friendly. Craft agreements that include arrangements for those kinds of scenarios.
In contrast, RAFAEL offered Raytheon a finished product with its famous Iron Dome rocket defense system, which was developed by Israel alone. The partnership hasn’t resulted in any American sales yet, though it may have helped keep Iron Dome production grants coming from the US Congress. The thing is, Raytheon just unveiled the Ai3, which is a complete system in the same niche. It was featured prominently in their AUSA booth, alongside RAFAEL’s “Stunner”/ David’s Sling missile.
Ai3 was a response to a US government program, not a corporate investment. Things like this will happen. RAFAEL representatives said that cooperation on Iron Dome and its higher-end David’s Sling/Stunner counterpart remained good, which is what one would expect them to say. Neither system has American orders yet, and Lockheed Martin is entering the field with its own EAPS. Time will tell.
Silicon Valley understands “co-opetition” well. Accept it as a serious possibility in any US partnership, especially given the Pentagon’s huge absolute volume of financing for R&D programs.
Sometimes, You Roll the Dice and Lose
Sometimes, you set a partnership and it runs into initial trouble gaining traction. The low commitment required for a finished product, which helped you form the partnership, now begins to work against you. Humans have less commitment when they’ve invested less.
The best response to that reality? Forster suggests that it may be to accept it and move on. If circumstances change the equation later, it’s easy to revive cooperation.
The Bottom Line is the Bottom Line
Good terms and a strong business case get attention, and close a deal once development risk is factored out of the equation. If foreign aid means that the business case also includes a pre-existing buyer budget that’s independent of Pentagon approval, so much the better.
Could it be worth it for other companies and countries to use similar mechanisms, trading some domestic acquisition spending for a shot at the US market? That’s a local decision, but the success of Israeli firms like RAFAEL suggests that it’s worth asking the question.
DID thanks Ishai David, Dr. Zeev R., and Lt. Gen. William H. Forster, PhD (ret.) for their time and assistance.