Export Control Regulations Will Undermine DoD Effort to Engage Silicon Valley
(Source: Lexington Institute; issued Sept 17, 2015)
In his most recent foray to Silicon Valley, Defense Secretary Ash Carter sought new ways of engaging innovative commercial electronics companies in his effort to create a 21st Century U.S. military. This time he offered more than just nice words. The Secretary announced the creation of a manufacturing innovation institute to work primarily on flexible hybrid electronics. Over a five year period, DoD together with the FlexTech Alliance, a consortium of private companies, universities, laboratories and state and local governments, will contribute some $165 million to this effort with a $75/$90 million split.

Secretary Carter rightly sees enormous benefits for both U.S. national security and economic competitiveness from investments in this area. For the military, he said it means, for example, lightweight, flexible structural sensors printed right onto the surfaces of ships and aircraft, sensors and electronic gear embedded in combat clothing and smart prosthetics for wounded warriors. Commercially, there could be smart bandages, stretchable sensors on cars, bridges and buildings to help keep people safe, flexible medical diagnostics for x-rays and breast cancer, and flexible electronics coupled with new, revolutionary fibers and textiles to create embedded washable, wearable, featherweight sensors. Goodbye Google watch.

Sounds like a win-win for the Pentagon and the private sector, right? Wrong! When you are dealing with the Federal government it is never that simple or straightforward. Sometimes it is in the fine print, such as the bizarre way the Pentagon is attempting to define the price reasonableness of what private companies charge for commercial items. Other times it has nothing to do with the policies and practices of the sponsoring/contracting department but with those of other parts of the federal government. In the latter case, private companies can go down a collaborative path for years only to get sandbagged at the 11th hour.

That is what could well happen with this new initiative. International trade in defense-related items is governed by something called the Munitions List which is overseen by the Department of State. Every time a U.S. company wants to export something on this list, even to close allies, it has to make an application and have it reviewed. This can easily take weeks and for advanced technologies, months or even years. This doesn’t happen just the first time a sale is made. A company goes through this process each and every time, even on prosaic items such as truck tires that have been exported to the same customer for decades. Just talking to a foreign citizen, private company or government entity about an item on that list can be restricted.

What does this have to do with flexible hybrid electronics? Secretary Carter left out of his speech one little, seemingly insignificant fact. As reported last July by Sandra Erwin in National Defense, a recent rule classified as a “defense article” any electronics developed with Defense Department funding, regardless of whether the technology is a sensitive military system or intended also for civilian applications. A straightforward reading of this new rule would naturally lead to the conclusion that any flexible hybrid electronics developed with funding from the FlexTech Alliance would be export controlled.

For some FlexTech members such as defense giant Lockheed Martin this shouldn’t be a problem or at least not a new one. It deals with the export control bureaucracy almost every day. But for many of the Alliance’s members, commercial companies that have never taken government money much less worked with the Pentagon, it will come as a shock. They will have to hire compliance specialists, train their engineers and sales force in what they can and cannot say and do, develop a tracking system for each item they sell, and bear the expense associated with waiting on the State Department to decide if selling clothing with embedded flexible sensors to French or Italian fashion houses is permissible. As long-suffering defense companies will tell their “newbie” compatriots, you can lose a sale to a foreign competitor simply on the basis of the customer’s concern regarding the time the State Department could take to make a decision.

It’s not that the Pentagon is being disingenuous. This is just the way things work in Washington. Or don’t work as the case may be. The question is why a private company able to earn hundreds of millions or even billions of dollars from global sales of innovative flexible hybrid electronics would want to risk such a prospect in return for a few dollars in DoD funded research or even an uncertain production contract?

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