International partners in the Joint Strike Fighter programme must overcome some potentially divisive issues in the next few months
This month marks the second anniversary for the Lockheed Martin-led Joint Strike Fighter (JSF) programme's international industrial participation team. The original nine-government partnership survives intact as a new model for co-operative development, despite an air of frustration among its members. But a series of potentially divisive threats still faces the organisation over the next few months.
The development-phase team remains strained by protests over industrial participation ahead of negotiations in September on the shape of the vastly more lucrative production and sustainment phase of the programme. Looming contracts promise billions of dollars in manufacturing and maintenance over several decades, and threaten a level of argument over participation that will make the current system development and demonstration (SDD) phase complaints look mild.
Concurrently, the latest wave of "buy American" fervour in the US Congress, this time fuelled by the looming US election, concerned about the drift of USjobs to offshore suppliers, poses a significant new threat to the JSF co-operative development strategy. "There is no JSF international programme if this legislation passes," says one senior US defence official.
But after last year's debate on buy American, Lockheed Martin has a different assessment. Mike Cosentino, Lockheed Martin JSF international programme director, says the 2003 debate "really did not affect anything we were doing on JSF" and adds: "We expect a similar type of legislation will appear every year in committee and appropriate measures will be taken by not only us but other companies to keep that from affecting our business plan. But really it does not affect our day-to-day operation in outsourcing or providing international opportunities on JSF. It has not affected us one bit."
Meanwhile, a two-year schedule delay caused by redesign of the overweight F-35B short take-off and vertical landing (STOVL) variant is also causing trouble for some international development partners planning to buy the aircraft.
Australia, for example, needs to replace ageing fighters on its original schedule in 2012, and US officials are scanning options, such as delivering training aircraft on time, then upgrading these to mission-ready status a few years later. But Australia is also now examining a delay in its purchase. Chief of the Royal Australian Air Force Air Marshal Angus Houston says the service is studying whether the cost of its proposed 72-aircraft purchase could be reduced by shifting the in-service date back from 2012.
Other member nations are retaining the option of defecting from the programme, given continuing concerns about the success of the industrial participation strategy. Norway has backed off from a serious threat to withdraw from the partnership, but its silence is not a vote of confidence, only a reprieve, say US programme officials. Several partner governments have been openly critical of the programme, but only Oslo scheduled a debate and a vote in parliament on future participation.
Within two weeks of the parliament's debate on 9 June, Lockheed Martin managed to head off its critics in Norway by unveiling new work offers for Kongsberg, which would be one of four companies selected to offset a $1.2 billion shortfall of composite materials production capacity for Northrop Grumman's mid-fuselage. A final deal with Kongsberg is pending successful negotiations, but Lockheed Martin's offer appears to have helped prompt a clear vote to remain in the JSF programme for the time being.
Oslo is expected to revisit the matter later this year as it prepares its annual defence budget. Cosentino welcomes the June vote outcome, but appears to agree with the reprieve analysis. He suggests a discernible pattern is emerging in Norwegian domestic politics. "It usually comes up on the anniversary of when they joined the programme," he says.
Australia, Canada, Denmark and Norway form the ground floor of the industrial partnership, each having contributed $100-150 million towards development of the single-engined fighter. Italy, the Netherlands and Turkey are Level 2 partners that committed between $175 million and $1 billion to enter the programme. The UK is the only Level 1 partner and with the US Marine Corps is a launch customer for the STOVL F-35B. Late entrants Israel and Singapore hold the lesser status of security co-operation participants.
Despite its promise, the SDD phase may not have been kind to international companies, particularly from outside the UK. The other seven partners joined the SDD programme by contributing a combined $2.5 billion, or 6.1% of the revised, 12-year development budget of $40.5 billion.
"I don't think anyone will ever be happy with their workshare except the UK," says Cosentino. "Everybody wants substantial returns on investment and they are trying to project what they will get over a 22 test aircraft purchase. Over the life of the programme, that is very difficult to do.
"I think everyone is looking at what it takes to sell the acquisition of this weapon system to their parliaments and part of that is industrial participation. So some of this is nervousness and wanting to try to maximise their industrial participation. But we have had a lot of success around the world. We do focus on Norway and Turkey primarily because they have had less success, but we believe we will meet those expectations in the long run."
Lockheed Martin's own metric is the value of work awarded benchmarked against the value of the partner nations' investment over the 10.5-year life of the SDD phase. Cosentino says that, although this is a nominal measure, "we would like to stay ahead of that investment. We are ahead of that investment for every nation except Norway, where we are close to it."
Return on investment
However, a report published by the US General Accounting Office (GAO) last month is the first official document to offer a glimpse of what the seven other partner nations received in return for their SDD phase investment. Up to the end of 2003, companies based in those countries had landed only 1.6% of the total value of subcontracts awarded by the JSF primes - Lockheed Martin and engine suppliers Pratt & Whitney and General Electric. In other words, of more than $14 billion awarded up to 31 December 2003, about $224 million went to companies in partner countries outside the USA and the UK. A further $44 million, or 0.3% of the total, was claimed by eight countries outside the SDDpartnership - France, Germany, India, Israel, Poland, Russia, Spain and Switzerland.
In sharp contrast, US and UK firms have fared far better in the first two years of JSF development. UK businesses had earned $3.4 billion worth of subcontracts up to 31 December, or 24.2% of the total. The UK contributed $2 billion to the development phase, or about 5%. US companies, whose government pays about 89% of the development costs, took home 73.9% of orders, valued at $10.3 billion.
The GAO report also shows that partners hoping to increase their share of JSF subcontracts also face pressure from small US businesses, which can claim preferred status in most government contract decisions. Such small companies are likely to claim a large chunk of the programme. "The JSF programme office has requested that the prime contractor strive for 20-30% small business participation through the third tier of the supplier base for the life of the JSF programme, including the development phase and production," says the report.
Although the other international partners never expected returns on the same scale as US and UK industry, most are bitterly disappointed that the value of their work has not come close to matching their initial investment. Canada, for example, has been credited by US programme officials with having the most successful participation strategy among the international partners, but the GAO report says even its share of the industrial benefits has fallen short of first expectations.
Cosentino says Canada remains the benchmark for success in comparing how second- and third-tier partner nations have approached the industry programme. But he acknowledges it is worried other partners are being given priority in contract awards. Canada has launched co-operation talks with Australia on bilateral teaming arrangements to secure more contracts. Cosentino suspects the Canadians are "worrying we are focusing less on Canada and more on Australia, so they figure they would get more by assisting Australian industry".
Winning orders
Interestingly, Cosentino says a co-operative effort between Canadian, Danish and Norwegian firms has had little real impact in winning orders. "We have not seen too much come from that, though we support the initiative." The problem, he says, may be because many of the Danish and Norwegian companies seeking work are inexperienced in working in joint ventures. "A lot these industries are privately owned and it is difficult to go from being 100% in control of your business to sharing that and developing a legal business relationship with somebody else." However, Denmark has experienced a major turn-around in orders over the past two months, says Cosentino, with orders to Terma and initial agreements with Systematic, a small software house.
Other third-tier nations have also seen a progressive flow of contracts over the past year. Australia has secured JSF work worth more than A$140 million ($100 million), with A$28 million already under contract and the rest to be finalised in a few months. Cosentino says the value of work packages on offer to Australia exceeds A$700 million.
Proponents of Lockheed Martin's international programme point out important qualifiers in response to the GAO findings. They note, for example, that while international partners have pledged to contribute a combined $4.5 billion during the SDD phase, actual contributions to date are far below that. Also, the partnership was not conceived solely as an industrial participation opportunity. Joining the programme also offers a number of non-industrial benefits to international participants, such as direct access to the programme offices, some design planning and, ultimately, discounts on JSF purchases and royalties on all sales. But even Jon Schreiber, director of JSF international programmes at the Joint Programme Office (JPO), concedes that industrial participation is what matters most to the USA's eight international partners.
The wide disparity in competitive awards for work is partly a side-effect of the programme's "best value" bidding policy, which offers no set-asides or favoured status to international firms. Lockheed Martin acknowledges a legacy of its internationalF-16 sales here, having groomed many of its international suppliers through the industrial offset system. The result is that many firms are unprepared for a best-value bidding approach.
Cosentino says JSF has seen a clash between "entrepreneurial versus an entitlement-type mentality among industry and, quite honestly, we have seen that in any nation where you have had offsets. Companies that have embraced entrepreneurial attitude versus entitlement have made the changes. They are not dramatic, but they are being aggressive versus complacent, and having the proper expectations."
Some firms, Cosentino says, had thought they should get contracts "just because they were an important company" and so failed to secure initial wins. "The entitlement attitude has not served some companies well. But we have also seen some companies who started out that way make a mid-course correction, a 180¡ shift, and have begun to win work."
Level playing field
Cosentino says critics of the international programme should appreciate that "US industry has lost to international industry in a head-to-head competition". However, US government officials are beginning to acknowledge more work should have been done early by the JPO to establish a level playing field for international companies seeking contracts. Maj Gen John Hudson, a two-year JPO commander until he stepped down on 16 June, says his "one regret" was failing to act sooner.
Work began in earnest on the JPO's international directorate soon after the SDD contract was awarded to Lockheed Martin in October 2001, says Hudson, but staff really needed a two-year head start to tackle the range of issues that bedevilled the international participation strategy early on, such as clearing the export licensing restrictions and negotiating the eight individual bilateral agreements with the SDD partners. He advises that future co-operative development programmes should learn from the JSF's example.
US authorities have taken an incremental approach to technology transfer and data export restrictions on the JSF programme, which has sometimes led to unusual arrangements. Cosentino says it is only in the current year that BAE Systems, a core team partner on the project, has secured two amendments to its technical assistance agreement (TAA) to enable it to "execute all activities required under the teamingagreement with Lockheed Martin". Also, Lockheed Martin is "now working on a TAA to apply for technology transfer that would allow the UK to get the data and technology necessary to realise the expanse of the exchange of letters agreements".
As the senior international partner, Cosentino says, the UK is effectively acting as a "test case for everybody - they go first and everybody rides their coat-tails. We see that export policy changes are small incremental events. It is not as quick as we would like, but it has so far not affected our ability to execute our business plan."
Lockheed Martin is now developing a technology disclosure roadmap that identifies all release requirements across the rest of the SDD phase. Cosentino says the approach is intended to ensure there are "no surprises to the State Department and the DoD and we are going to meet them to talk about what is required in all of those if they were to be fulfilled to their maximum extent".
As part of that roadmap, Lockheed Martin has launched a process of engaging with partner nation governments to gather detailed information on specific JSF purchasing requirements and the technology release implications. Australia hosted one of the first team visits in May, and a joint US DoD/partner nation summit is being planned for next month at Fort Worth, Texas to review the combined requirements of all programme members.
Cosentino says the releasability roadmap will need to be finalised and approved before partner nations sign their production and sustainment memoranda of understanding (MoU)in mid-2006. "Our timeline is clear between now and then - we have to define these requirements, have the reviews and have some kind of output so the governments have enough information to make an acquisition decision."
A draft of the framework agreement for international participation in the JSF production and sustainment phase is planned to be unveiled to partners in late September, but initial discussions between the partner nations kicked off with a meeting in the UK in mid-June.
Formal negotiations on the contents of the MoU are planned to begin in January, leaving almost two years for the partners to complete an agreement before low-rate initial production of the JSF begins in fiscal year 2007. In one way, the negotiation process will be simpler than the SDD phase because only one agreement will be signed, rather than a bilateral deal with each partner. However, the agreement will cover industrial participation throughout the production and sustainment phases of JSF, which means many of the issues seen in the SDD phase will arise again. Cosentino says it is already clear the partners have "certain concerns that must be addressed" in the production and sustainment MoU.
"When you look at the list, none of them is surprising, but not all of them fit the current JSF model. For example, industrial participation - it is what it is. Supposedly in the best-value world what you win in this phase would multiply out in the production phase, but some countries clearly are still in the offset mentality of what their own workshare should be in relation to how much money they will have to spend to procure weapon systems. There is still some education needed.
Technology transfer
"I think what the US government has found is that there needs to be more flexibility on its part, because a lot of this is about technology transfer. There has to be some willingness on the contractors' part to understand the need for industrial participation because that does relate to support for politicians who vote for this, and there have to be some amenable terms and conditions that show why partnership is of benefit versus just buying aircraft. Those are the kind of negotiations going on, and that is why we are participating, to try to find a win-win for everybody."
Sustainment is also proving a major focus for several partner nations, particularly the need to decide on where to base logistics and maintenance centres for the worldwide JSF fleet. Australia, for example, sees its greatest potential to reap industrial benefits from the programme as becoming a Pacific-region logistics base for JSF. With Singapore and other local countries seen as likely JSF customers, and the US Pacific Fleet paying regular visits, there could be steady work in maintaining and overhauling JSF parts and machinery for several decades.
By contrast, interest in secondary production lines appears to be diminishing. Cosentino says initial UK interest has seen no significant action. "Quite honestly we have felt very little, heard very little comment about a UK assembly lineÉthe UK has not pushed us hard on that. We have had some dialogue with the Italians and even the Turks on that desire, on what it would take to have an assembly line, but nothing further than that."
Turkish interest is based on potential re-use of Tusas Aerospace Industries facilities established for licensed production of Lockheed Martin F-16s for the Turkish air force, says Cosentino. The local assembly option was also specifically included in the original exchange of letters on Turkish membership of the JSF project. However, "there is no action other than that they have stated an interest".
Cosentino acknowledges Lockheed Martin has "done some back-of-the-envelope-type studies just to give some round ideas of what that would mean, but I think there is more desire from nations to have a regional support centre than just to build aircraft. Really there is not a lot of dollars when you optimise your production process and you reduce your touch labour from hundreds to dozens."
PETER LA FRANCHI / CANBERRA & STEPHEN TRIMBLE /WASHINGTON DC
Source: Flight International
