The Defense Industry Today:
Implications for Transatlantic Cooperation
Remarks by Vance D. Coffman,
Chairman and Chief Executive Officer,
Lockheed Martin Corporation

Before the Atlantic Council and the Centre for European Reform
Washington, DC
May 4, 2000
Introduction
Thank you, Christopher (Makins) for that generous introduction. And let me also thank the Atlantic Council and the Centre for European Reform for the opportunity to address this distinguished conference. I am honored to be able to discuss with you issues that are central to the future of our industry, and I welcome the give-and-take that will follow my opening remarks.

We at Lockheed Martin believe in strong transatlantic links, and we are determined to work with industry and governments, on both sides of the Atlantic, to overcome the numerous obstacles that make forging transatlantic ties so challenging.

I envision a future transatlantic marketplace that is integrated, open and competitive, and supported by a transatlantic defense industrial base that is innovative and robust. This would be a marketplace where governments would work together to define military requirements and seek best value in defense procurement; a marketplace where firms from Europe and America would cooperate and compete on an equal footing; and a marketplace where the military strength of the NATO Alliance is preserved and enhanced.

Achieving this vision is the challenge facing both governments and industry today.

Now, as we all know, the defense industry occupies a unique position in the industrial landscape. Defense companies are called upon to provide the essential capabilities and materiel to enable the NATO Alliance to defend its interests, deterring conflict where possible and winning military engagements where necessary. As the provider of these critical capabilities, the industry is expected to invest in the right technologies and to deliver products that perform as advertised. And all of this must be done at a fair price to the taxpayers.

This is not a trivial assignment, and meeting those requirements of national security while also running sound businesses with good returns to shareholders are the management challenges facing us in industry. If anything these challenges are growing larger in the face of the technological trends often called the revolution in military affairs." Essentially, this is a revolution of information, of a transformed military capability that could provide NATO Allies battlefield dominance against any adversary. Understanding, producing, and using these advanced military capabilities are the key tasks for our military forces and the industry that supports them.

War and Technological Change
Wars of the industrial age were waged by massed land and naval forces and typically lasted years. Winners were often determined by the ability of a nation's industry to out-produce the other side in the course of the conflict and, ultimately, exhaust the enemy.

As the Cold War ended, as if to punctuate the end of an era, the United States was involved in its last major land conflict of the 20th century, the Gulf War. After massing and mobilizing for a war that many thought would resemble previous industrial age wars lasting months and involving thousands of casualties, the United States and its allies conducted a campaign that achieved its objectives in weeks.

What was different about this war? The decisive edge of the allies was produced by two capabilities: better information and -- because of that information and weapons able to take advantage of it -- an ability to apply military force extremely effectively. Information in this context needs to be broadly construed: I am talking about surveillance and reconnaissance information - knowing where the adversary is, what he is doing, and, where possible, what he is thinking. I am talking about intelligence information - where are the targets and how can they be attacked.

I am talking about the application of information - precision strikes using guided munitions, air defense provided by linked systems of warning and communications. And I am talking about the disparities of information between the two sides - one side's ability to take away an adversary's ability to detect the opponent's own forces, to communicate with his own forces, and to mobilize effective defenses.

The Gulf War thus became the first decisive application of modern, information-based, technologically sophisticated warfare. Expectations have now shifted: Rather than long, bloody and costly wars, decision makers and citizens alike will expect short conflicts, decisive victories, and minimal casualties for the U.S. and its allies. These hopes may be unrealistic, or impossible to achieve in all settings, but, having once experienced this type of conflict, national decision makers - and their citizens -- are unlikely to accept the alternatives of lengthy wars, or ambiguous outcomes.

My purpose in reflecting on these developments here today is to make a simple but fundamental point about the marketplace for defense firms. Technology and military strategy are continually evolving in a process of interaction.

The defense industry is called upon to provide those technologies and military capabilities that the new strategies require. In turn, those strategies reflect how our military leaders assess the relevance, and utility of available advanced technologies. Our "market" is driven by military requirements, and our products are intimately tied to the directions that NATO, and allied militaries wish to go in the future.

That future will increasingly be one of information-based strategies - including networks that link "sensors and shooters," integration of ever-more-complex systems, and delivery of all this information to the commanders who need it, whether in national decision making centers, in cockpits, or on the battlefield itself. In other words, the provision of integrated systems of sensors, platforms, weapons and knowledge - so-called network-centric solutions -- will be key products of our industry.

Kosovo, the ESDP, and NATO's Future
"Operation Allied Force" over Kosovo also revealed some rather important lessons about NATO's ability to conduct the kinds of military operations likely to be required in the future.

It is fair to say that none of these lessons is particularly surprising, but when demonstrated so vividly on the field of battle, they take on an entirely new and more dramatic reality. "Operation Allied Force" demonstrated clearly that the ability to operate in all types of weather, at night, and with advanced capabilities for precision strike, enables a military force to engage an adversary and inflict significant and possibly decisive damage while suffering very few losses to one's own forces.

Kosovo also demonstrated, unfortunately, that these capabilities are not widely distributed throughout the Alliance. As a result, the American role in the actual bombing operations was predominant.

The Alliance learned a few other lessons, such as the priceless value of good and timely intelligence (and the unfortunate consequences when that intelligence is faulty, as happened in the case of the bombing of the Chinese embassy); the importance of secure communications (which, too often, were not available); and the difficulties of deploying and employing forces rapidly - some of the obstacles to true interoperability of NATO's forces.

These potential weaknesses had, of course, been identified in theory prior to Kosovo. The Alliance adopted the Defense Capabilities Initiative (DCI) at the Washington Summit precisely to address some of the shortfalls in the ability of Alliance members to operate effectively and together. Kosovo simply reinforces the urgency of implementing the goals of the DCI.

The importance of the DCI cannot be overemphasized. It needs to be successful not just to help the allies operate more effectively the next time the Alliance chooses to project NATO's military power. It is also needed to ensure that all the allies keep pace with one another and, especially, keep pace with the rapid changes occurring in U.S. military power.

As American forces adapt to the revolution in military affairs and deploy these new capabilities, Allied forces must do the same if they are to be able to work and fight together with American forces. And the ability to fight together, should that become necessary, is the very essence of a military alliance.

Of course, not all Allies will field forces comparable to one another or to American forces.

For this reason, NATO's forces need an "open architecture" enabling the military forces of all NATO nations to connect technologically. This implies a sharing of technology and of military capabilities, matters that the Defense Capabilities Initiative is designed to address. As all of these events have been unfolding, the European Union has been steadily pursuing its attempts to create a European Security and Defense "Identity," which is now known in Europe as the European Security and Defense Policy (ESDP).

The basic idea is that Europe should have the capability to pursue unified foreign policy and security objectives and, if necessary, conduct autonomous military operations in situations where NATO as a whole is not engaged. If the ESDP becomes a vehicle by which European countries are able to address critical defense needs and provide additional resources to address them, it could contribute to transatlantic cooperation.
If, on the other hand, European governments get bogged down in theoretical debates or attempt to create military structures that duplicate those already available in NATO, then already scarce defense resources risk being spread even more thinly, and the capabilities of ESDP and of NATO itself will be weakened needlessly.
For a transatlantic marketplace to operate effectively, it will be necessary for the goals of ESDP and of NATO and the DCI to be harmonized.

Market Trends and Their Impact on Defense Companies
Having described some of the changes in technology and policy with implications for NATO's future military requirements, let me now turn to the economic and industrial issues at play.

In Europe, the defense industrial consolidation process accelerated in the past year and has now produced two major groupings: BAE Systems in the UK and the European Aeronautics, Defense and Space Company (EADS) on the Continent. EADS, when it is formally approved later this year, consolidates major players in Germany, France, and Spain into one company. With the recent decision of Italy's Alenia Aerospace to join EADS in a joint venture for military aircraft and aerostructures, many of the major moves in European consolidation have been made.

While other, highly capable companies, especially sub-system and component suppliers, remain independent in Europe, it is clear that BAE Systems and EADS (or their joint ventures) will enjoy a dominant position as prime contractors for much of the European defense market.

The European defense industry has traditionally pursued forms of cooperation and cross-linkages among companies that bind them together in complex ways. Thus, under the new structures, BAE Systems will do nearly one-third of its total business with EADS, and EADS will do nearly two-thirds of its business with elements of BAE Systems. The challenge for European firms now - as it has been for the past five years for the consolidating American industry -- will be to make these new businesses viable as private-sector entities. In the face of the resource constraints facing the Europeans, this challenge is daunting.

European companies and governments confront a somewhat different set of issues in defense consolidation than we face in the United States, but the fundamental truth is the same for all of us: the amount likely to be spent on defense by NATO governments in the coming ten years is far from sufficient to sustain the existing defense industrial base.

Even in the United States, after considerable consolidation, we retain excess production capacity. In Europe, the restructuring process has just begun. No significant relief in the form of increased spending for defense is in sight.

NATO governments in Europe - whose combined annual defense spending is approximately 50% of the United States' total - do not show any indications that spending will be significantly increased. In the United States, while defense spending for procurement appears headed up over the coming five years, these increases are unlikely to be sufficient to prevent further shrinkage in the defense industry.

The disparities between Europe and America on overall defense spending are reflected in spending on defense research and development as well. With R&D expenditures in the U.S. exceeding those in all of Europe combined by a factor of approximately 3-to-1 annually, a growing gap between technologies and capabilities in the United States and those in Europe could pose a threat to Alliance interoperability and to transatlantic partnership.

Because of the simple fact that the defense expenditures in European countries are not sufficient to sustain the existing industrial structure, European industry looks to export markets for additional business. The American market is especially attractive, of course. We in American industry understand this dynamic and welcome our European colleagues as partners and competitors in the U.S. market.

We do so, however, with the understanding that European markets will be open to American industry. On both sides of the Atlantic, the solutions selected by NATO governments to improve their collective ability to deter and if necessary defeat military threats should be those that are best technologically and most cost-effective.

In addition to the problem of excess capacity, defense companies have had difficulty devising effective business strategies to compete in this new environment. The share prices of major companies - on both sides of the Atlantic - have been battered over the past year. The annual revenues of the top seven defense contractors in the United States are now together less than half those of Walmart. Dot.com companies with no profits have larger market capitalizations than defense companies with billions of dollars of revenue and millions of dollars of earnings. These circumstances could have a bearing on the upcoming stock market offerings of European defense companies.

These may be temporary phenomena, at least in their severity, but they may also be part of much broader trends, where a combination of low government spending and investors' preferences for the stocks in other sectors of the economy combine to keep the defense industry weak and undercapitalized.

Under these circumstances it will be very hard for European industry to invest sufficiently to develop and maintain the types of high technology military capabilities that the forces of the future require. This "requirements-capabilities gap" could, if allowed to persist, ultimately defeat NATO's objectives of having forces able to operate together across the entire spectrum of combat capabilities and to prevail decisively with minimum casualties.

I see only three options to avoid NATO becoming trapped in this requirements-capabilities gap:

**Governments (especially European governments) spend considerably more on defense;

**European militaries buy more of their high technology equipment from the United States; or

**Transatlantic partnerships enable industry to make military capabilities available on a broad basis throughout the Alliance.

If you agree with me that the first two options are highly unlikely, then the challenge we face is to make the third option -- improved transatlantic partnerships -- work.

The Search for Solutions
Today, Lockheed Martin is engaged in three programs that could serve as models for cooperation: the MEADS program for air and missile defense; our partnership to produce a new class of frigates for the Norwegian Navy; and the TRACER program for a future armored scout vehicle in the United Kingdom and the United States.

Each of these programs holds great promise, but two of them have encountered obstacles that are representative of the challenges to making smooth transatlantic cooperation a routine feature of NATO defense acquisition.

In MEADS (Medium Extended Air Defense System), a promising transatlantic cooperative effort, the issue is technology sharing. Part of the problem has been disagreement among the governments over how the program should be structured.

Having reached a consensus last year that the American PAC-3 missile would be the missile for the MEADS, despite some European misgivings and objections, the United States was then reluctant to share information on certain of the missile's characteristics with the allies.

Allied disappointment over this issue has spilled into the public press in Europe, leading to calls for withdrawal from the program. I am happy to say, however, that thanks to some hard work and leadership from the office of the Secretary of Defense, a way forward has been found, and I believe the MEADS program should now move out smartly.

MEADS may provide the experience base we need for continued success on future cooperative programs, and we are committed to making this program a success.

The key lesson here is that governments and industry must work together to create the framework for transatlantic cooperation by grappling with these difficult issues. As we think about these programs in the future - and the Joint Strike Fighter is a most promising example - the technology policy hurdles must be addressed seriously and solved early. In JSF, we will be seeking levels of cooperation and sharing of technology that are unprecedented. Again, for our part, we will do everything in our power to make this program a transatlantic success.

On the Norwegian frigate program, we are excited to be involved in a multinational team with our Spanish and Norwegian partners (Bazan, Kongsberg, and others). We serve as a subcontractor on the frigate team in the role of systems integrator, and we believe the industrial relationships we have created offer an example for successful multinational partnerships in the future.

On TRACER, the key promise of the program was that it represented an opportunity for governments on both sides of the Atlantic to develop a set of common requirements for modernization, enabling the formation of transatlantic teams.

In the face of these commitments, the U.S. Army last winter restructured its plans for modernization of future armored combat vehicles without fully considering the commitments that had been made up to that point to our British partners on TRACER -- and without fully taking into account the requirements for the program from the British side.

The result is that we now are faced with grave uncertainties over the future of the program and its funding. Needless to say, if these issues are not resolved between the two governments amicably and soon, industry will not be able to sustain its teaming arrangements. The precedent for future cooperation would not be promising.

Here again, I am hopeful that in the next few months we can -- together with our partners and the two governments - overcome these difficulties and continue to develop promising technology and options for future vehicles.

Aside from budget issues, the key determinant of whether such cooperative programs have a future lies in the area of technology transfer, technology sharing, and technology controls. For the long run, it is absolutely imperative that NATO governments work out the rules of the road on military technology sharing. These rules must protect sensitive technologies as well as outline arrangements for sharing.

In this regard, the recent statement of principles between the United States and the United Kingdom is an effort at a balanced approach. The real question is whether similar agreements can be reached with other NATO allies. For our part as industry, we are more than prepared to work with governments to formulate and carry out these cooperative arrangements. We enter into these arrangements because they make good business sense, and they promote the national objectives of NATO governments. They enable us to deliver a product to customers at good value, as well as providing the benefits of participation in a larger program to our European partners.

Sometimes neither partner could produce the product without the assistance of the other. The point is: partnerships on programs serve a variety of purposes and, when done well, these programs can be very attractive to all participants. Too often, however, this is not the case. A maze of bureaucratic red tape, politically-influenced decisions by governments, or disagreements over technology often make the costs of partnerships prohibitive, sometimes even discouraging the attempt.

We are now at a critical juncture. Will governments and industry be able to take the necessary steps to make transatlantic defense cooperation meaningful and attractive for all concerned? Will governments receive greater military capabilities for the amount of resources expended?

Will industry be able to enjoy the benefits of larger markets and economies of scale? Will research and development spending be more rationally allocated across the Alliance as a whole, resulting in more efficient spending of those resources? Will governments agree to procedures for technology sharing in such a way that cooperation is fostered?

Will industries take the difficult decisions and actions necessary to restructure and reduce capacity? How these questions are answered will determine whether greater transatlantic defense cooperation will become a reality -- and not just a vague hope.

Steps to Improve Transatlantic Defense Cooperation
Now I turn to the prescriptive part of my remarks. I believe action is necessary in a number of areas, but let me focus on two areas that are of most interest, I believe, to this audience.

With regard to Technology Policy, the U.S. government must streamline its export control regime and improve the timeliness of the decisions on exports of technology.

This has now become a widely recognized need, and I am pleased that government officials are working hard to improve procedures. We in industry recognize the importance of protecting technological advantages, and we understand the considerations involved in decisions on export licenses.

We also recognize the responsibility that we in industry have to improve the timeliness and quality of our export license requests.

We will continue to work with the government wherever possible to assist in this process, including providing our own automation and technical solutions to improved processing. We are also prepared to work with the U.S. government to further refine the list of those technologies requiring the most stringent controls and to develop self-policing mechanisms for industry where such mechanisms are appropriate.

This is not only an area for the U.S. government. NATO must also accelerate its progress toward agreeing on principles for technology sharing. I cited the examples of MEADs and JSF as those where this issue needs more attention. But the model of cooperation being discussed between the United States and Britain needs to be extended as much as possible to the rest of the Alliance.

I propose a transatlantic government-industry leadership dialogue be convened at senior levels to pursue these matters further. We need to impart a sense of urgency to these issues, not business as usual. A good starting objective would be to ensure that all technologies required to implement the Defense Capabilities Initiative can be made available to all Allies using expedited review procedures.

In the area of Market Access and Reciprocity, successful transatlantic industrial cooperation in the future must be based on principles of equality and fairness.

This is not rhetoric - it is the core issue of defense industrial cooperation. Governments need to examine carefully positions on offset, industrial participation, technology controls, cooperative research and development, and exports to third markets.

Just as U.S firms cannot expect to export products to Europe if we are not prepared for our European partners to share in the benefits of partnership, European firms cannot expect to enjoy privileges of access to the U.S. market that are not reciprocated in Europe. The transatlantic government - leadership dialogue I referred to earlier should focus on developing a set of principles to guide the creation of a transatlantic defense industrial marketplace based on principles of equal access and fairness.

To achieve this vision of an integrated transatlantic marketplace, our emphasis in the near term should be on practical partnerships - that is, specific projects or lines of business where transatlantic partnership can add value and benefit to all parties concerned.

The programs I mentioned earlier are examples of what is possible. There are many others.

Lockheed Martin remains fully committed to exploring cooperation with all potential partners in Europe - and we're confident our European colleagues are interested as well. From the practical experience of our working together on critical projects over the years, let us all renew our focus on building successful transatlantic industrial alliances for the future. Our companies - and our countries - could well depend on how successful we are in this important endeavor.

Thank you again for the opportunity to share some thoughts with you. I look forward to our discussion.




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