International Defense Industrial Cooperation – Acting on Opportunities in Testing Times

This excerpt is the introduction to a external pagereport originallycall_made published by the external pageAtlantic Councilcall_made on 16 September 2014.

Introduction

Equipment co-operation: a potted history

The P-51 Mustang was an iconic fighter aircraft in US combat service during the 1940s and 1950s. A global phenomenon, it was also pressed into service by allies including Australia, South Africa, the Republic of Korea, France and the Netherlands. It was born, however, out of a Royal Air Force requirement. It was the choice of the Rolls Royce Merlin engine, built under licence in the US by Packard, that provided the aircraft with its high altitude performance. Though the Mustang was faster than the Supermarine Spitfire that it succeeded, the engine was an iteration of the one that powered the Spitfire and the Hurricane to victory during the Battle of Britain in 1940.

The Mustang’s story is just one of many to have demonstrated the value of international cooperation in the fields of technology and manufacturing in achieving scientific break-throughs and operational success. Also of that era, the first operational sonar evolved from British and French prototypes with the influence of Canadian physicist Robert Boyle, and was subsequently transferred to the US as part of a British programme to secure exploitation routes for wartime innovation.

More recent examples include the AV-8B Harrier Jump Jet – built in the US by McDonnell Douglas as an evolution of the earlier British Hawker Siddeley model, and still in service with the US Marine Corps– the T45 Goshawk, again a McDonnell Douglass- manufactured variant of the British Aerospace Hawk, serving as jet trainer for the US Navy and US Marine Corps. On land, Chobham armour, developed in the UK in the 1960s was adopted for the M1 Abrams main battle tank. And, successive iterations of that technology have succeeded on the strength of existing close cooperation in that technology domain.

Winding forward to the present day, we have seen British technology at the forefront of counter-IED efforts in Afghanistan and Iraq, advanced surveillance systems and force protection. And the same goes for US-sourced technology and equipment in the UK’s capability mix: the Husky, Mastiff and Wolfhound armoured vehicles, Apache, Sea King, MQ-9 Reaper and shortly Rivet Joint and F-35, to name but a few. Looking to the future, the UK is investing in space, cyber, data analytics, energy and autonomy.

Bilateral defence trade also continues apace. Estimates of US purchases from UK defence contractors varied between $1.2bn and $1.5bn for 2013, while estimates of UK purchases from the US are about double that. The UK-US Defence Trade Cooperation Treaty signed in 2012 and the Reciprocal Defence Procurement Memorandum of Understanding are there to underpin trade and industrial base access.

Money: competing demands for public funds

Many of these examples date to eras of heightened defence expenditure linked to major conflicts and the necessity of the threat during the Cold War. However, in the present day, the economic climate and the contemporary experience of the post- financial crisis world and competing demands on national expenditure have curbed current defence expenditure while moderating the outlook for future years.

In the US, repeated battles over the federal budget, debt levels and demands on the public purse have led to cuts in from highs of $691bn (including overseas operations in 2010/11 to $575bn (inc. OCO) requested for 2015. The Ryan-Murray budget deal reached in December 2013 to secure government spending for FY14 and FY15 shielded the budget from the sequester budget cuts for a period, but the threat of further caps looms after 2016. Moreover, the Congressional Budget Office forecasts that during the coming decade mandatory spending –other than that for Social Security and health care, and discretionary spending (including defence) – stand to fall to their lowest percentage of GDP since 1940, as health case costs and interest payments ramp up.

In the UK, the independent Office for Budget Responsibility estimates that public finances will move into surplus after 2018 as the economy continues to recover and further planned spending cuts are brought to bear.

So the projections point to ongoing pressure on public spending, including defence. Yet, defence is not getting any cheaper. Intergenerational cost growth of defence equipment is well documented, with estimates from academic studies of annual cost escalation ranging between 7 per cent and 11.5 per cent per annum as the mean for all equipment types. Moreover, personnel costs are rising as a proportion of the cost of defence. This is observed in stark contrast with civil technology, where the trend is towards better performance at equal or lower cost year-on-year (automotive, smart phones, information technology, etc.). The US Department of Defense is now returning to technology offsets as a mechanism to deliver advanced capability within the financial envelope. Equally, both the US and UK are contending with the rising capitation costs of military personnel and taking steps, in some instances through collaborative projects, to reduce the through-life cost of ownership of military capability, especially externally driven costs such as operational energy.

Hard choices ensue, and while current measures to control the budget have cut back discretionary spending, including defence, growing healthcare and welfare entitlements stand to force difficult choices about the respective importance of these different areas of national policy.

At $495.6bn and £34.6bn respectively, US and British core expenditure on defence are an order of magnitude apart, yet both countries are among the top 5 global defence spenders and both uphold the NATO commitment to spend at least 2 per cent of GDP on defence (4.8 per cent and 2.7 per cent respectively). The UK remains the second largest spender in NATO in absolute terms. And while both countries continue to main the full spectrum of military capabilities despite the downturn, both have made tough choices in recent years.

Value: benefits of cooperation between allies

So the case for seeking the greatest value through partnerships remains strong, whether in cost avoidance, pooling capabilities, or leveraging foreign research and development. The examples enumerated at the top of this introduction reflect instances of cost and duplication being avoided, and time saved by using or building on the capabilities of a partner or combining requirements.

This is not always as straightforward as operating a uniquely national programme, and incurs additional risk and up-front administrative cost. Economists also argue that on-shore investment in defence capability effectively comes at a discount of up to 20 per cent once the effect of money flowing through the economy and tax revenues are taken into account. However, seen through the prism of the collective economic footprint of alliances, there is similar collective benefit to be had.

But when the alternative is that the capability remains beyond the reach of an individual country’s armed forces for want of affordability or access to desired technologies in within the financial envelope or time available absent cooperation, the incentives in favour of partnership begin to crystallise. In non- nuclear defence science and technology, current UK-US cooperation through joint programmes and information sharing delivers benefits to both countries in the order of hundreds of millions of dollars each year. This is a powerful example of return on investment.

Emergent thinking

So there is much that might be done, but looking back to past successes and failures it is sensible to think about the best way forward for the twenty- first century. The British Defence Staff asked a group of opinion formers from the American Enterprise Institute, Atlantic Council, Center for a New American Security and Stimson Center to reflect on some of the key points in that discussion, and present their views in this series of papers. While the British Defence Staff endorses and supports the discussion, the views expressed are those of the authors and do not reflect the view of the British government, nor does the British government endorse the recommendations contained.

To continue reading, the full report can be external pageaccessed herecall_made.