Stephen Trimble / Fort Worth, Texas & Washington DC
Differences in business practices between the USA and the eight-nation international JSF partnership is making the award of contracts anything but straightforward
In mid-October, F-35 Joint Strike Fighter prime contractor Lockheed Martin hosted a "how-to" course in Rome on standard US-style bidding practices. Fifteen Italian companies sent representatives. A Lockheed Martin instructor broke down each line of a standard request for proposal (RFP). Twenty real bids were examined, and winners compared to losers. A key ingredient for success, the delegates were told, is documentation: US companies want more than a line-by-line reply - they want volumes of corroborating evidence.
It was hoped the course could help address Italy's glaring lack of prized contract awards during the JSF's development phase - an effort backed by a $1 billion pledge on the part of an increasingly agitated Italian government. But the session's message was not entirely welcome.
Bob Haskell, Lockheed Martin programme manager for Turkey and Italy, says: "The Italian companies said: 'Well, you only give us 30 days [to respond], so it's really hard to do that in the English language in the format you want. Oh, and by the way, we're designing a product in 30 days, not just pumping out a proposal. Why can't we just sit down and talk about it, answer your questions, and negotiate the pricing?'
"Even after we went through all this they still said: 'Why do we have to do it that way. Why can't we just negotiate?'."
It was a reality check for the US prime contractor and overseas suppliers alike and helps illustrate the challenge of managing an eight-country partnership that is producing $4.5 billion towards the F-35 system development and demonstration phase.
At stake is workshare access on a programme that a June report by First Equity, commissioned by the US Department of Defense, says "could be the most important driver of financial success well into this century" for many aerospace companies. It adds: "Those companies that are not JSF suppliers may see their tactical aircraft business dissipate as JSF comes to dominate the market."
Lockheed Martin admits that workshare shortfalls in some participating nations are forcing a shift in subcontracting strategy, from strict adherence to the company's hallmark best-value strategy, to merely "ringing the cash register" for disappointed partners - in other words, the goal now is to set aside just enough work for pre-qualified companies to ensure that each partner nation is able to recoup an initial investment ranging from $100 million to $2 billion during the $33 billion system development and demonstration (SDD) phase that ends in 2012.
Partners are divided into three classes, according to the size of their investment. Level 3 includes Canada ($100 million). Denmark ($125 million), Norway ($125 million), Turkey ($150 million) and Australia ($150 million). The second tier is formed by the Netherlands ($800 million) and Italy ($1.02 billion). The UK ($2 billion) stands alone at Level 1.
Royalty benefitsBeyond industrial participation, partners stand to benefit by sharing royalties on F-35 sales. If a partner decides to buy the JSF, the USA has agreed to waive research and development costs of between $5 million and $7 million on each aircraft. "We're trying to make sure that all our partner industries hit a minimum level so we can get the programme sold," says Mike Cosentino, Lockheed Martin F-35 international marketing director.
Two of the most successful partners - Canada and the UK - were quick to grasp the best-value strategy and capitalise on it. First Equity's report says Canada's SDD awards, if continued into production, could offer a return of $3.9 billion, or 4,116% more than its SDD investment. The UK stands to reap a 2,114% return.
But there has been an almost unanimous complaint about the quality of work available to non-US companies within the eight-nation partnership, amid problems with transferring information under US export restrictions and the kind of business culture differences highlighted in Rome.
Now, with around 85% of the F-35's developmental RFPs claimed, including all but a few remaining design bids, it is too late for some partner nations to recover under the best-value system.
"It was probably late last year or early this year that we realised we were going to have more difficulty in some of our partner nations than others in trying to meet industrial expectations due to the size of their aerospace industry, the variety - or lack of variety - in their competencies, and their competitiveness," says Cosentino.
In response, Lockheed Martin has tinkered with its best-value policy, earmarking contracts for lagging partners under a "strategic" best-value programme and, more recently, reassigning future production work under a second-sourcing plan. Both schemes compensate for the abrupt transition some national industries faced under the best-value system from the offset culture that Lockheed Martin says had become embedded among its European partners.
The hurdles also include manufacturing efficiency. "We can't have any weakness anywhere in the supply chain," says Lockheed Martin manager of international programmes Mike Demetz.
Under the strategic best-value model developed in May, the competitive bidding process is discarded. A JSF prime picks a company in a specific partner nation to do a job, and defines the criteria for price, schedule and quality. It is not intended to be skilled work, but low-risk, build-to-print machining or production.
The second-sourcing plan also pre-selects companies, but may not lead to work until the start of low-rate initial production of 465 aircraft in 2008 - or even full-rate production after 2012. Lockheed Martin and other JSF primes are expected to identify other sources for low-risk work in areas of production that exceed existing capacity. For example, a recent Northrop Grumman market analysis concluded that machining capacity in US factories will become limited by 2010-12 as the JSF and Boeing 7E7 programmes move into high gear, forcing some companies to outsource this work.
Outsource planning"When you reach the point where your factories are full, we'd like you to outsource this work to company 'X' in Turkey in, for example, 2008," says Cosentino, describing how the system would work. "Sometime in the future, we would write a [memorandum of understanding] with this company and say: 'In 2008, you will get this kind of machining work as long as you meet these criteria'."
Lockheed Martin says such outsourcing was planned as part of the overall strategy.
Second-sourcing and strategic best value walk a fine line between being recognised as contracts under the original JSF blueprint rather than as offset agreements. But the measures also point towards Lockheed Martin having little room left to manoeuvre in fulfilling partner nation expectations.
The strategic best-value plan has been slow to catch on despite being in place for six months. Objections from US industry, in particular, delayed the roll-out of the awards and limited the policy to build-to-print contracts, rather than the more prized design work. The plan has also been caught up in the US debate over "Buy American" policies.
Since then Lockheed Martin has been working to get strategic best-value on track. It says none of the offers for such work has yet been rejected, but only one contract had been signed by late October.
Strategic best-value offers no panacea for the workshare ills that dog the international participants. "This is a very, very small fraction [of awards] that has gone this way," says Haskell. "It's almost not worth the attention it's getting in terms of its value to the programme, but it can be very significant in terms of its political impact."
The revised workshare goals are a long way from the lofty industrial objectives that initially spurred eight nations to pledge a combined $4.5 billion investment.
Lockheed Martin estimates show each of its partners should be assured of recouping their SDD investments by 2012, but the timing of partnership agreements and a long delay in approving a programme-wide export control licence have limited business opportunities for new suppliers.
Seven of the eight partners signed up after 95% of the major system contracts was awarded to US or UK suppliers, says Lockheed Martin. Lower-tier contracts for machining and build-to-print work was almost all that remained.
Canada became the first country to sign, in February 2002. Five more countries joined between May and July of that year. Australia was the last to sign, in October 2002. Since then, Israel has joined at a lower level as a security co-operation participant and Singapore is close to a similar agreement - but neither are eligible for partnership-level support on workshare.
Cosentino says that Australian, Italian, Danish, Dutch and UK design engineers working on JSF integrated product teams in the USA are important elements of technology transfer. However, after coming on board, non-US suppliers often found that some bidding opportunities were lost as a result of data transfer restrictions.
Standard licensing reviews also moved too slowly for companies to turn around bids in Lockheed Martin's 30-day windows.
The promise of global project authorisation (GPA), allowing free transfer of data between pre-approved parties during the bidding process, was held back by Lockheed Martin's legal concerns over liability issues. It was approved early this year, but has suffered from lack of use. By mid-October, the GPA had been invoked only 20 times to speed data transfer requests on contract opportunities.
GPA shortcomingsDespite the potential of GPA, the measure has fallen short. It can be used for only around a third of the bidding opportunities, as classified or protected technologies or information are excluded from the authority. Also, it does not not extend beyond the bidding process, leaving some companies disappointed at an inability to sustain long-term relationships after bidding ends.
The strictness of the export control regime was clear when US state department regulators moved to block a request to transfer data between BAE Systems and Lockheed Martin on short take-off and vertical landing technology. Cosentino had to tell the State Department: "We're not exporting data - we're importing it."
If the international partners were slow to adapt to the JSF business model, US primes have also been slow in accepting the international supply chain concept. When GPA was not available, contacts between US and overseas suppliers were inconsistent and restrictive.
"Sometimes it's easier to go down the street than shop all over town for the best price," says Steven Briggs, Northrop Grumman vice-president and F-35 programme manager. He learned in October that his own staff were not taking account of GPA access when determining strengths of rival bids - that has now been corrected.
Source: Flight International
