Forum on the Defense Industrial Base
LtGen Donald J. Wetekam, Deputy Chief of Staff, Installations & Logistics
John W. Douglass, President & CEO, Aerospace Industries Assn.
Dr. Loren Thompson, COO, Lexington Institute
Air & Space Conference and Technology Exposition 2006
Sept. 26, 2006
Moderator: Let me just tell you the rules of engagement here. I’m going to introduce our speakers in just a moment, and following my introduction they each will give a brief presentation. Then following that we hopefully will have some time for some questions and answers.
I would ask that you write your questions on the slips of paper provided to you, pass them to the aisle, either center aisle or side aisle, and one of our ROTC cadets will pick those up. That will make the Q&A portion I think flow a lot smoother.
At this time I would like to introduce our panel. First I would like to introduce Lieutenant General Don Wetekam who is the Deputy Chief of Staff for Logistics, Installations and Mission Support, Headquarters, United States Air Force in the Pentagon. He’s commanded three maintenance squadrons, a logistics group and a logistics center and serves as Chairman of the Army and Air Force Exchange Service Board of Directors.
The second panelist is Mr. John W. Douglass who is President and Chief Executive Officer of the Aerospace Industries Association which represents leading manufacturers and suppliers of civil, military and business aircraft, helicopters, UAVs, space systems, aircraft engines, materiel and related components. He’s the seventh full-time chief executive of the association since 1998. Before this he served as the Assistant Secretary of the Navy for Research, Development, and Acquisition of Defense Systems.
Finally, our third panelist, Dr. Loren Thompson, is the Chief Operating Officer of the Lexington Institute. Dr. Thompson is a long-time adviser to high tech companies and the federal government and is widely quoted on military affairs in the national media.
At this time I would like to present to you our first presenter for this session, John Douglass.
John, welcome.
Mr. Douglass: Thank you, folks. Pat forgot to mention I’m a retired Air Force officer. That’s one of the things I’m most proud of. AFA member. I also happen to be Pat’s cousin, which is kind of an unusual thing. We didn’t find that out until both of us were general officers, though.
I’m going to walk you through some material on where we think the defense industrial base is today. A lot of it has statistics and things like that in it, and I’m going to go through that part of it really quickly, and then I’m going to turn to what I think are some interesting structural problems about the future of the defense industrial base.
But I want to say up front that as you write out your questions, nothing is off the record as far as I’m concerned. So if you see something in my charts and you want to ask about it, please do. Or if you have some other question about industry that I didn’t even cover. This is your conference. I’m here to help and serve you, so any questions that you might have are fine with me.
If I could have the first chart, please.
Our view in the future is somewhat counter-intuitive to what you might be going to hear from Loren or some of the other speakers because we’re looking at a period of time when we see maybe seven or eight years of steady growth in the industry. History has not gone that way in the past. The industry has usually gone about three years of growth, a flat period, and then maybe even a decline and then some more growth. Again, we’ve never had seven or eight years of steady growth in our recent history, but we think we see that from here through the end of the first decade of this century. By the time we get out to 2010 or 2011 we’re going to be an industry of about $250 billion. We’re at about $185 now, I’ll show you those statistics in a minute. And a big portion of this growth is going to be fueled by enormous demand in the commercial and civil aviation marketplace.
The biggest unknown in the future is what’s going to happen to the military budget. All of us know what’s going on in the world today and a lot of people who make projections about the military budget go back to these regression models and they think it will go through some sort of a down cycle. But if you look at the world today, it is getting more dangerous, not less dangerous. If you look at it from a political spectrum it is likely, in my opinion, that we’re going to see continued growth in the recapitalization of our military forces. We’re going to see obviously at some point some very very heavy pressure to recapitalize the Army, and there’s a lot of discussion about what that might mean to the Air Force. You’re also going to see continued growth in both military and commercial space as NASA really gears up to go back to the moon and continues its exploration program.
Can I have the next chart, please?
This is some of the data that we have here. You have to kind of look at it for a second because there are some things that will be added when she pushes the button again, but what you see on this chart is a series of projections that we made back in 2000. And remember, this was before 9/11 occurred. The red is our worst case, the purple is what we thought was most likely, and the gold was our sort of wildest dreams.
Then we had 9/11 and we had to reforecast and the green line is our reforecast. As you can see, those stars on the line are what is actually happening. I think if you hit the button you’ll see some circles come on. That’s our new forecast for the future. What you can glean from this is that given where we are today our forecast for sales in the aerospace and defense industry is actually going to hit what we thought was our most optimistic guess back in 2000.
If we go on to the next chart really quickly, this is the spread around those dots. It could be as high as $252 billion by the end of the decade. Even under a relatively disastrous decline in military spending we don’t think it will fall below about $200 billion. That’s a very very large amount of money going into this industry each year.
Moving on to what are some of the issues going to be, if you go to the next chart, please, I think one of the things that is going to be an issue for the industrial base in this latter part of this first decade of this century is going to be civil/military integration. The military is going to have to realize that Boeing and AirBus are over the next 10 or 20 years are going to build as many as 25,000 wide-bodied jets. That’s a lot of airplanes compared to the number of airplanes that the military builds each year which is going to put more and more pressure on the military departments to do civil/military integration. This is to use commercial products to the maximum degree that they can. It has a lot of benefits. When it’s a commercial product, obviously, the commercial vendors do the research and development and it allows the department to get more for its R&D budgets. They’re usually, time to market is much shorter than it is through the military so you actually can get modernization quicker and we’re seeing more and more use of global sources.
So this is a trend that I think is going to be a dominant factor probably in the next presidential administration, but there are some real barriers to this.
If you go on to the next chart, please. These are just some of them. For those of you who don’t know what TINA is, it’s Truth In Negotiations. That’s what defense contractors have to sign up to, and of course commercial contractors don’t have to sign up to that. If you have a system that was developed under commercial practices the contractors are not likely to have the data that they need to make their TINA certification.
There are other accounting barriers. There are the arms control regulations, that’s what ITAR is all about. Clearly commercial manufacturers are not going to sell to the Department of Defense if they think that product will then get caught up in the arms control or technology transfer rules and regulations and they won’t be able to sell their product into the global economy.
Finally there is the issue that we’ve had in the last few years which his over-zealous use of the buy-America clauses that exist in the law today. A quintessential example is the Barry Amendment which requires us to buy all of the specialty metals that are used in defense products -- and when I say all I mean a hundred percent. If any of you are statisticians then you know what six sigma is. A hundred percent is a million sigmas. That means if you have one atom of non-smelted in America specialty metals on a piece of avionics it’s non-compliant with the law, and I’m here to tell you that virtually every airplane that the Air Force is flying today is loaded with elements of specialty metals that weren’t smelted here in the United States. And if the Department of Defense were to absolutely clamp down on this with no exceptions we wouldn’t be able to deliver any equipment to any of the military services.
The Senate has come up with some reasonable changes that will make the Barry amendment workable this year. That’s hanging in the balance as we speak in the Senate/House conference, but if that kind of legislation doesn’t get fixed it’s going to be a major major barrier to civil/military integration.
Next chart, please.
This is a good example of, I tried to pick an issue that I could explain to you how I think this is going to work and air traffic control modernization is probably the best example that’s around.
Everybody knows what a good job the Department of Defense and Department of Homeland Security in certain cases does in developing high risk technology, systems of systems, and special things that the military needs like anti-tampering technology. If you can move that technology over to the civil aviation community and let NASA and FAA and all of the people that make up the air traffic control system use it, what they will do with it is turn it into high volume production, there will be lots of spin-off come out of this. The kind of avionics that would be in the air traffic control system has to work in the smallest of private airplanes that an individual might have as well as the biggest airliners. So in order to make that happen you’re going to have to build it in huge quantities, make it cheap. Then of course that feeds back low cost systems to the Department of Defense. I think we’re going to see more of this kind of technology flow from military to commercial, commercial back to military and probably be able to do that in a quicker cycle than we have in the traditional development projects in the past within the Department of Defense.
Let’s go on to the next chart, but there are some real structural issues for our defense industrial base here in the United States. The first one is in order for us to be competitive in the global economy we’ve got to maintain a very high level of research and development spending. We are lucky that compared to other nations today we have maintained a high level of research and development spending, but that’s got to go on. It’s like a treadmill. You can’t stop. It has to be maintained.
The second thing we’ve got to do is we’ve got to figure out how to deal with an aging work force. This is not just in industry, it’s all across the government as well. In the next few years something like 25 percent of the air traffic controllers can retire. Huge number of NASA’s engineers and scientists are going to be eligible to retire, a huge number of DOD’s civilian scientists and engineers are eligible to retire. So we’ve got to renew that work force and that means that we’ve got to have young people in the United States who are American citizens who can hold a security clearance, have got to study science, mathematics, physics and the other things that lead them into technical careers.
Another issue for our industrial base is that the commercial side of our industry, which as I said in my earlier chart I think is going to drive much of the sales in the next five to ten years is globalizing rapidly. We have to understand that globalization, we have to know how to take advantage of it without losing our technology in a global economy. That means that we’ve got to reform our export control system. In general what it means is we’ve got to focus on those technologies that are really important for America and quit worrying about the junk that’s on the ITAR list today. Things like nuts, bolts, screws, connectors and things that you can buy globally anywhere in the world, need to be taken off the list and we need to protect those technologies which are most important to us.
Finally, we need to make sure that we have a level playing field around the world. We can’t have a situation where we won’t buy foreign products or foreign nations won’t buy our products. The global aviation industry has got to be truly a global industry.
Next please.
We also have to kind of change our thinking a little bit about how we plan for the future. If you were to look back into the generation that Pat and I grew up in, for example, our technology within the Department of Defense was always threat driven. We knew who the bad folks in the world were and we had national policy to keep our technology ahead of that.
Looking forward into the future, it’s much much harder to predict where the national security challenges are going to be five or ten years from now. We know that the global war on terrorism is probably the new paradigm of the future. It’s going to require us, though, to change our strategy, so that our strategies and plans match. We’re obviously going to have to put a lot more money into intelligence, surveillance, reconnaissance capabilities and things like that. But we’re also going to have to spend a fair amount of resources on the low end threats, like countering IEDs. We’ve got to be able to move our technology to the marketplace quicker.
The American people, the Congress, everybody is frustrated that it takes us too long to get our technology together.
Tied to our export licensing issues, we probably are going to be in a long-term struggle against terrorism with a large number of Western allies. We’ve got to figure out a way to share both the burdens and the benefits that flow from the research that we do to deal with this global war on terror. That means that if we have allies fighting with us in a theater, then our technology transfer rules for those allies are going to have to be different than they are for countries that are neutral towards us or a threat to us. We cannot continue to treat our closest allies just like we treat our enemies when it comes to technology transfer.
We also need to get a handle on what is transformation. I’ve been hearing this now for four or five years and it has not sunk in to industry exactly what the Department means when it says it wants to go through this thing called transformation.
Incidentally, we spend, of our own money, out of our own profits, around $6 billion of independent research and development money a year trying to structure our programs for the needs of the department five, ten, fifteen years out, so we really need to have a better dialogue about where does the department see its future.
Another structural issue that is important to our country is -- go on to the next chart, please -- is the financial viability of this industry. I’ll bet most of you didn’t know that if you took the market cap, that is the value of the companies, of my ten largest companies in the aerospace industry today, they’d only come up to $188 billion. Remember, in one year we’re going to sell that much product this year.
But look at this, Google is $118 billion. An internet company is almost equal to the value of our entire defense industrial base; and WalMart’s $240 billion. Those are just two single companies versus the top ten national security companies in the United States.
It seems to me that our national security should be valued higher than what the market seems to value these companies.
Part of that is because we don’t make a lot of profit. Our profits since 1990 have ranged between three percent of sales and eight percent of sales. This year on $186 billion in sales we’re probably going to make about $12 billion of profits. That’s relatively small compared to the profits that come from most other places in the commercial sector. As a matter of fact, when you put defense industrial sales up against any other manufacturing part of our economy, we come in flat last in terms of return on sales. So that’s troubling over the long haul.
Finally, there are some really big misconceptions floating around about the cost of our systems. I saw an article in one of the weeklies a few weeks ago, and the title was “Defense programs have doubled in cost since 2001.” The implication meaning that somehow you, the Air Force, and your brothers and sisters in the other services and industry, have somehow just lost control of all of this and everything has doubled.
The inference was that if you were paying X for a C-17, today we’re paying 2X. Or if you were paying Y for an F-18, today it’s 2Y. That is, of course, not the truth at all.
When you looked at the major programs that are reported to Congress, 56 percent of the increase in those programs came from new programs that have been added since 2001. Sixteen percent from engineering changes, 16 from bad cost estimates, eight percent for schedule slips and four for other reasons.
Now some of these like 16 percent for engineering changes and 16 percent for cost estimating, bad cost estimating, are clearly areas where we do need to improve. The interface between industry and the government customers has got to get better, and we can do better. We have done better in the past, but we are far from out of control or doubling as some of the press in this country would lead you to believe.
I’ve been up here probably longer than my time. Let me quickly summarize if you’ll give me the next chart, please. I’ll just summarize what I told you.
We think the sales are going to continue to grow throughout the decade. There is rationale for growth in all three sectors. We know that the commercial aviation part of our industry is going to grow like crazy. I mentioned the number of big airplanes that Boeing and AirBus are going to build, but we’ve got a huge growth in business jets, a growth in air taxis, growth in the smaller recreational air vehicles. So it’s just straight across the board.
Military, we think the world is getting more dangerous and when the world tends to get more dangerous, in the end the political system responds. I don’t see drastic cuts in the military coming over the next four or five years unless something completely that nobody has anticipated came along and peace broke out in a way that we can’t see today.
Finally there’s a pretty strong national consensus. They’ve given all that the United States has done to lead humanity in bringing human beings into space and that that program will continue. The President has laid out a step by step program to take us back to the moon. It’s not likely that the political system will dismantle that program, and it is going to be more costly than we are spending on space today but it’s likely to continue.
I think commercial military integration is one of the things that’s going to allow us to bring costs of military systems down. We’ve got to fix the barriers. And our industry, the thought that I want to leave you with is, it is robust. We had the highest sales we’ve ever had in the history of the industry this year. Our profits are good by past standards, not so good by commercial standards, but they’re okay. But we’ve got some structural problems that I talked about. We need to fix those. Those should be the agenda that industry and the Air Force and industry and the Department of Defense and the Navy and the Army and the Marine Corps and the other parts of our government are working on as we take this wonderful part of America’s economy and develop it and move it forward to meet the national security challenges that we all see in the global war on terrorism.
So I hope that kicks us off and gets us thinking here, and I’ll turn it over to Loren.
[Applause]
Dr. Thompson: Thanks, John.
I really appreciate the opportunity to be here and participate in the forum today. When AFA invited us they said we were going to be meeting in a salon, and I kind of had this visualization of one of those intimate dinners at Senator Clinton’s house that John gets invited to. Instead, we got the only room in America with its own zip code. [Laughter]. I will try not to sound like I’m giving a speech, but I must say this is a dauntingly large room. In fact isn’t that a C-5 in the back of the room?
I suppose I should start by commending the Air Force Association for sticking with this phrase “defense industrial base”. Since we’re living in a time when policymakers are under the spell of transformation, I think the very word industrial has overtones of being retrograde and irrelevant.
Seven years ago in the biggest defense speech of his first presidential campaign, candidate George Bush gave what turned out to be the biggest speech of the campaign about national defense and he complained that America’s military was organized for “industrial age operations rather than information age battles.” That was the same speech in which he said that he would empower his Secretary of Defense to envision a new architecture for American defense and he called for skipping a generation of military technology.
Now candidate Bush’s point was that threats had changed, and in fact it turned out he was all too correct. But in describing industrial age operations as a vestige of the past and information age battles as the future of warfare, he embraced a trendy theory of conflict that neglected the economic foundation of American military power. That foundation was an industrial system that Franklin Roosevelt had called the arsenal of democracy. That system was already beginning to slip into history when Mr. Bush took office as President.
By proposing to skip a generation of technology Bush was signaling that he would be no more attentive to the nation’s military industrial sinew than his predecessor had been. And sure enough, that’s what we have seen on Secretary Rumsfeld’s watch.
If Mr. Rumsfeld and his advisers have their way, every major production line that is turning out fixed wing military aircraft in the United States today will be closed by early in the next decade. They don’t seem to care.
It’s true that the defense sector has been a big beneficiary of the global war on terror, but that’s essentially a by-product of increased defense spending. It is not the product of a conscious policy to protect our industrial base.
Perhaps you saw Secretary Rumsfeld’s comments on the Verbatim page of this month’s Air Force Magazine where he said he had 50 million things on his desk and management of acquisition programs wasn’t one of them. I think that kind of captures his approach to this subject area, to weapons procurement and to the industrial base. He just doesn’t think it’s important enough to warrant his attention.
Against that backdrop I would like to spend the next 15 minutes talking about three aspects of the industrial base. First I want to examine what the continuous erosion of US manufacturing means for future military preparedness.
Second, since I’ve already credited increased defense spending rather than industrial policy for the health of the defense sector. I want to explain why spending on weapons is likely to decline steeply in the future. Sort of a counterpoint to John’s remark.
Third, I would like to describe the military space portion of the industrial base to illustrate why even when defense spending is high if you don’t have coherent policymaking, if you don’t have good management, you still might end up with an unhealthy industrial base.
Beginning with the decline of American manufacturing, it seems to me that there is an important fact about our defense industrial base that a lot of folks like myself who came of age during the Cold War don’t really understand. For most of our history the weapons needed in war time were produced by retooled commercial plants rather than by dedicated military facilities. Yes, there were always Navy shipyards and Army canon foundries, but historically defense spending only averaged about one percent of the economy in peacetime and that just wasn’t enough to sustain a big, dedicated defense sector.
So the typical pattern from the beginning of the Republic until about 1950 is that if a threat came along we would mobilize the commercial manufacturing sector for war production, and then once the threat passed we would then demobilize, go back to making cars or whatever. You’ve all seen those pictures of auto plants turning out bombers and tanks in World War II, so you know what the traditional model looks like.
That model changed in the mid 20th Century because for the only time in our history a threat came along that didn’t go away quickly. In fact it lingered for two generations, for 40 years. The threat of global communism.
During the Cold War the United States spent between six and ten percent of its economy every year on national defense. Because it was so much higher than the historical average, it became possible to sustain a robust, dedicated defense industry.
Now because that sector thrived for two generations, discussions of military preparedness became more about what the state of the defense industry was than what the health of the overall economy was. But once the Cold War ended, defense spending began to revert back to its historical average which was, as I said, one percent of the economy.
Frankly, there wouldn’t be much left of the defense industry today if Osama bin Laden’s atrocities hadn’t arrested the downward drift in US defense spending.
The Clinton administration could see where we were headed as early as the mid 1990s, and it tried to devise ways of maintaining military production, skills, competencies, in the commercial sector.
For example, John Douglass when he was Assistant Secretary of the Navy, argued strongly that we should fashion a shipbuilding sector that would produce both military and commercial ocean-going vessels so there would be sort of a critical mass in terms of demand for maintaining key skills. As you may know, the United States no longer produces any ocean-going commercial vessels for international trade.
In general, though, the locus of technology innovation and development shifted out of the defense sector after the collapse of communism and the military now looks to commercial enterprise for a lot of its new ideas, its new warfighting technologies.
So what does it mean that at precisely the moment the military is looking more and more to the commercial sector, our commercial manufacturing capability is withering away?
Let me cite a few indicators to make my point. I remember reading an article in The Economist about the time I finished my undergraduate studies in the ‘70s that said year in and year out, decade after decade, manufacturing is 22-23 percent of the national economy. It never changes.
In fact since The Economist wrote that article -- You may have noticed if you read The Economist, eventually everything they say turns out to be wrong. This is one of those things that turned out to be wrong. Today it is half of what it was during the bicentennial year.
Manufacturing as a percentage of our economy has gone from 22 percent in 1976 to 11 percent today. The US trade deficit, which results not mainly from oil flows but from a negative flow in manufacturing goods, our trade deficit has increased from $100 billion a year ten years ago to $400 billion in the year 2000, to $600 billion in 2004, to $800 billion this year. By the end of the decade at the rate we’re going our trade deficit, no joking, will be a trillion dollars.
During the six years of the Bush administration, the United States has lost an average of 43,000 manufacturing jobs every month. Forty-three thousand manufacturing jobs have gone away every month.
While the pace at which old factories are closing is pretty much the same as in the past, the rate at which new factories are opening is at a historic low.
In other words, Franklin Roosevelt’s arsenal of democracy, that vast industrial colossus that helped us to win World War II, it’s disappearing. But I didn’t need to tell you that, did I? All you have to do is go out to Connecticut Avenue and stand there and watch the kinds of cars that are going by. Or go a couple of subway stops up, walk into Best Buy, walk up and down the aisles and see if you can find anything made in the United States.
The United States is de-industrializing. It’s not just electronics, it’s not just cars. In general manufacturing is going away in this country.
Let me give you an example from outside the areas we normally talk about. The United States today has plans to build exactly one billion dollar chemical complex over the years ahead. One, that’s worth a billion dollars. China has plans to build 50, that’s five-zero. Even Lazy Boy has closed its domestic plants and has moved its furniture production to China.
Now the consequences of collapsing commercial manufacturing capacity for our trade balances are bad enough, but when you combine that with the administration’s indifference to the defense industry you really have to wonder how the nation would mobilize for a prolonged conflict.
Whatever the benefits of military transformation may have been, our obsession with networks has distracted the policy community with the security consequences of de-industrialization. We really don’t know what would happen if a peer competitor arose, let’s say China, that cut us off from access to our industrial suppliers in the Western Pacific.
What we do know is that the last time we were in a big, long war we depended very heavily on an industrial infrastructure that is not going to be there in the future.
I could go on talking about de-industrialization all day long, but I only allotted five minutes for each of my three topics, so let me move on to the next one.
I said at the outset that the current health of the defense sector is a by-product of increased Pentagon spending rather than industrial policy. I also said that the commercial sector is losing its capacity to support industrial mobilization in a protracted war.
It follows from those two points that if we are to retain an adequate defense industrial base we have to maintain a relatively high level of demand for defense goods, for military products.
I don’t think that’s going to happen. At least I don’t think it’s going to happen in the absence of some timely market stimulus from Osama bin Laden or some other world-class nut.
Those of you conversant with the Air Force’s proposed spending plan for 2008 and beyond know that the budget cuts are coming for A-10, for C-17, for F-35, for space radar, and any number of other investment programs. The cuts are going to continue for some time to come because the Office of Management and Budget today is projecting that between 2006 and 2011 defense spending as a percentage of the economy will fall from four percent to three percent. That’s a loss of one percent of GDP in just five years.
But there’s a much bigger story to tell here in terms of the budget. I’d like to present it in terms of four structural constraints on weapons outlays.
First of all, we tend not to think about this, but defense spending is really the only part of the national economy that is driven by non-economic forces. Military spending rises and falls in response to perceived threats. Threats that we often can’t predict in advance. Think about it. Pearl Harbor, North Korea’s invasion of the South, the Tet Offensive, the Cuban Missile Crisis, you often don’t see these things coming.
In the current decade defense companies have benefited hugely from the surge in demand, military demand, associated with the global war on terror and the campaign in Iraq. But what would have happened if some timely police work had averted the attacks of 9/11? I’ll tell you what would have happened. There never would have been a global war on terror. There never would have been a campaign in Iraq.
In other words, demand for military goods in this decade could have been just as depressed as in the previous decade.
Going forward, we need to recognize that threats don’t just arise unpredictably, they also recede unpredictably. Despite all the talk of a long war against terrorism, which as you may recall we weren’t planning when it started, we really don’t know how long the current threat posed by al-Qaida is going to last. Some experts, if you get the current issue of Foreign Affairs for example, some expert thinks the threat is fading away already. And from a domestic political point of view, memories of 9/11 are fading just as fast. So who knows whether we’ll be able to maintain the political will for military modernization with all of those pressing domestic needs facing us in the years ahead.
A second structural constraint on weapons outlays concerns how the character of these perceived threats shapes defense spending priorities. A lot of people have forgotten today, I certainly got the impression that people who did the threat matrix for the QDR had forgotten that we actually faced terrorists and insurgents during the Cold War. They were out there. Remember Vietnam? We faced insurgents before. But back then the policy community was much more concerned about the conventional and the nuclear capabilities of the Soviet Union so that’s what shaped our defense posture. Those things are gone now, so it is possible that in the years ahead our spending posture, our military will be a mirror image of the Cold War priorities.
In other words, we may pour most of our resources into coping with unconventional threats rather than what Secretary Rumsfeld’s advisers call traditional threats. That certainly is the presence of the crew that’s running the Pentagon today and if we get a carry-over of those preferences into a new administration, Republican or Democratic, then we’ll find there’s not very much demand for the competencies that traditionally have defined our defense industrial base. We could end up pouring money into counter-insurgency warfare and language skills rather than into tactical aircraft and satellites.
A third structural factor at work in the defense budget is what I will call the trading range in deference to Byron Callen of Prudential Securities sitting in the audience who for my money is the best analyst of this sector that I’ve ever come across. Trading range is the way that stockbrokers talk about how a stock varies within fairly well defined boundaries up and down. It turns out there’s actually a trading range or a spending range for the defense budget too.
If you go back to the year I was born, 1951, and standardize the numbers between then and now, all 54 years, into 2006 constant dollars, you find that the numbers almost never go below $300 billion and almost never go above $500 billion. That’s a pattern that persisted through the Korean and the Vietnam Wars, through the Reagan defense build up, and it persists today.
I’m not proposing some iron law of defense spending, but when you see a market that has never exceeded half a trillion dollars, even though it’s tested that limit four times in the last 50 years, you have to ask yourself how likely is it that we’re going to break the pattern this time? Like I said earlier, it’s not likely unless some nut like Osama comes along and does something insanely bad -- In fact the past is prologue. The technical chart, as Byron might put it, the technical chart calls for a top in the buying power of the defense budget either this year or next year, followed by a decline of approximately 25 percent over the following ten years. Oddly enough, this is precisely what OMB is projecting.
Now that decline doesn’t necessarily have to devastate the defense industrial base but it probably will. That’s due to my last structural factor which I refer to as elasticity. The elasticity of defense accounts.
Elasticity is a term that economists use. I’m sort of mis-using it here, but basically what I mean is the relative likelihood that spending in an account will go up or down depending on the overall availability of resources for defense. It’s kind of abstract, but basically what I’m driving at is this.
We say there are some things in our defense budget that are, well, some things that are in our federal budget that are mandatory and some things that are discretionary. We say all of defense is discretionary, but the truth of the matter is, there are some things in the defense budget you just plain can’t cut. The budget experts can call it discretionary if they want, but see what happens if you cut health care expenditures or military compensation or some of the operational accounts. If it doesn’t have immediate devastating affects in the field it will certainly have that affect on Capital Hill.
Because the political and operational consequences of cutting weapons programs are far less immediate than the consequences of cutting pay, it is usually the investment accounts that get cut first and get cut deepest. That’s what happened after Vietnam, that’s what happened after the Cold War, and we can probably assume a similar pattern if the global war against terror starts winding down.
Even if the buying power of the defense budget stabilizes rather than declines in the balance of this decade, we’re probably still going to see a significant hit to the investment accounts because health care costs keep going up and up. Gordon England told me by the end of the current defense spending plan, cumulative defense health care costs are going to be $90 billion a year. That’s more than any other country even spends on defense.
I’m sorry to report that none of the structural factors I’ve cited are mutually exclusive, so they all could come into play during the years ahead. The statistical probability that none of them will come into play, that they all can be held at bay I think is darn close to zero.
So the bottom line on budget trends is that they are likely to take a considerable toll on the industrial base during the rest of the decade, even if we get an administration that cares about the health of the defense industrial base.
Which brings me to my final topic, the industrial base supporting our national security spacecraft.
As you know, the Air Force is the lead service for providing the joint force with reconnaissance satellites, weather satellites, com sats, navigation and so on. It’s an even bigger deal today than it was during the Cold War because our concept of military transformation relies rather heavily on orbital systems in order to give us a warfighting advantage in the future.
So I thought it would be useful for just a couple of minutes to talk about what the state of the industrial base is in what is called national security space. It is not a very big industrial base. It’s about 100,000 people scattered across a handful of system integrators and several dozen key suppliers. The dollar value of what those 100,000 workers produce represents at most one-tenth of one percent of the gross domestic product. Without them, we wouldn’t have global connectivity, we wouldn’t have GPS, we wouldn’t have missile warning, we wouldn’t know when the storms were coming. So it’s a pretty important one-tenth of one percent.
Unfortunately, we have not treated this vital national asset very well in recent years. The Clinton administration made a series of ill-conceived changes designed to save money that robbed the sector of managerial talent and technical expertise. The Bush administration then came along determined to leap ahead into a bold new future, and although they added a lot of money to space, they also added a lot of turmoil to the sector.
Some insiders will tell you that what really went wrong in space is we had a dot-com meltdown and all the commercial demand we were planning to piggyback on evaporated. There is something to that but it’s only part of the story. Most of the rest of the story is just plain old bad management at NRO, at its weights-based counterpart in California, and of course in the Congress.
I don’t think we can blame the dot-com bust for the fact that every national security spacecraft currently under development is over cost, behind schedule, and facing unexpected technical challenge.
Let’s take the example of cost overruns. Several years ago Booze Allen and Hamilton did a study of some of the biggest military space satellites like SIBRS and AEHF and said why do we have cost overruns in these programs? Here’s what they found.
Twenty-one percent of cost growth was due to demanding performance requirements. We might say excessively demanding performance requirements. Another 21 percent of overruns was caused by funding delays and cutbacks. Eighteen percent of overruns resulted from inaccurate government cost estimates. Fifteen percent from flaws in the acquisition process. Thirteen percent from contractors basically lying because they were in such heavy competitive circumstances. Ten percent of cost growth was caused by high turnover, inadequate skills in the work force. And the remaining two percent was industrial base factors.
What those numbers show you is, aside from the tendency of the contractors to understate what their costs are likely to be, almost all the cost overrun is explained by mismanagement in the government. One consequence of that mismanagement is that we’re operating no more national security spacecraft today than we did ten years ago. Surprise. It’s no more than we had ten years ago when you count both the black and the white, yet somehow they’ve got three times as many parking spaces at NRO and we’re spending a lot more money.
All the second-guessing and instability has to be bad for the industrial base because so much money gets wasted on activity that is not related to production. Nonetheless, for all the administration’s efforts to fix the problems inherited from the Clinton years, it can’t seem to change its ways.
Let’s look at the Air Force’s 2008 spending plan. I know it’s not out yet, but there are some things that I think are fairly well known.
Funding for the third SIBRS geosynchronous missile warning satellite is deferred, even though the existing missile warning constellation is getting old and there are no alternatives waiting in the wings.
The next generation AEHF communication satellite is funded for premature termination to make room for a TSAT, transformational communications. Instead of spiraling our existing research, what we’re going to do is we’re going to leap ahead again into some unknown system. Money for the next generation NPOS weather satellite is so poorly distributed against the pending plan that we’re probably going to get another possibly fatal but completely avoidable cost overrun.
I don’t know if most of you realize this, but the reason why we went through a big Nunn/McCurdy on NPOS wasn’t because somebody made a mistake at Northrop Grumman or a subcontractor, it happened because they decided to change the way they costed the program in the government. All of a sudden the price went way up. It had nothing at all to do with the status of the satellite. It had to do with a change in accounting methods halfway through the program.
We do this stuff constantly, and the bottom line here is, let’s face it. The way we go about building and buying military space systems is a mess. It wastes talent, it wastes manpower, it wastes money, and in the end the warfighters don’t get what they need when they need it.
We really need to get more stability in the requirements process, the annual budgeting cycle, and the federal work force before we destroy the industrial base that builds the world’s best satellites.
That’s another subject I could go on talking about all day, but I think I’ll do the audience and my fellow panelists a favor by stopping here.
Thank you.
[Applause].
General Wetekam: Good afternoon.
I want to thank the Air Force Association for first off sponsoring this panel this afternoon. I’m not quite sure why I’m included here, particularly with the two eminent experts on the subject, but I do appreciate the invitation. I also want to thank the AFA for its continued support of our United States Air Force. We clearly could not do it without you and so this event that is sponsored every year up here in Washington that gets better every year is absolutely vital to our national defense.
So to Pat, thank you, and to all the members of AFA.
One thing I have learned, whether I consider myself an expert on the industrial base, defense industrial base, or not, is I have learned over the years to stay in my lane, so I think I’m going to do that here this afternoon.
What I’d like to do is in the interest of time, and hoping to get to a few questions, is offer a few thoughts from a slightly different perspective on what constitutes the defense industrial base and then I’ll sit down and we’ll have a few minutes for questions and answers.
Typically when we talk about the defense industrial base we tend to think of the manufacturing sector. It can be different aspects of manufacturing, but it’s the products, it’s the stuff if you will, and how we acquire the stuff. Clearly that’s a large part of it. But I will also offer that there is another large segment of the defense industrial base which we sometimes tend to forget about and that’s what I’ll call the services sector. It includes things we turn base operational support, for example, systems integration, engineering support -- manufacturing in some cases, but also in the case of sustainment. Then that whole sustainment world which is where I spend my time in terms of repair and sustaining our weapon systems. That’s all part of the defense industrial base.
Particularly when it comes to that services sector. We don’t do manufacturing in the public sector, but when you think about services in the defense industrial base there is a large part of that that’s in the private sector, but there’s also a very large part of that that’s in the public sector. So let me just offer that up as a thought to expand your horizon a little bit in terms of what constitutes the defense industrial base.
The title of this particular discussion this afternoon I believe is revitalizing the defense industrial base. I would offer to you that within the services sector, and particularly within the public portion of that, the piece that I deal with, we’re doing a relatively good job of that, particularly in the last five years or so. What am I talking about there? I’m talking about things like our laboratory structure. I’m talking about things like our ranges, and particularly in my world our logistics support centers, our logistics centers, our ALCs as we call them in the Air Force.
I think that clearly in terms of revitalization or transformation, I’ll throw that term out of here, that we are doing a relatively good job of bringing those activities and that infrastructure back from a point where it was almost becoming irrelevant, and it was certainly very inefficient.
If I might, and I’d like to kind of confine my remarks here to the Air Logistics Centers, we have accomplished a lot, particularly since about the year 2000. If you went to one of our Air Logistics Centers in the ‘90s or in the year 2000 -- and it wasn’t for lack of effort, by the way folks, but if you went there in that time what you would find is constant struggles in the business side to achieve our financial targets.
In the year 2000, for example, we produced a net operating result of $100 million below what the Air Force had targeted. So essentially what happened was we brought in a bill at the end of the year of $100 million. That was not uncommon during that period. We were typically, long lead times or long production lead times on things that we produce on our aircraft, on the commodities that we produced. In the year 2000 approximately one-third of the 700-plus aircraft that our ALCs produced were late to schedule. And by the way, those schedules were not particularly aggressive, but we were late against that model. And we just weren’t doing well.
There was a perception that we had to do something or we had to shut them down. In fact one of my predecessors in this job, I heard that remark one day. He says we’ve either got to fix them or we’ve got to shut them down. We are just not getting it done.
I think that a transformation or a revitalization, and I’ll use that word because I think it has a little more specific connotation, has occurred in our Air Logistics Centers to a large degree in the last five to six years. It’s because of a couple of things. It’s because of some investments that the Air Force understood. In the year 2002 we came out with a depot maintenance strategy and a business plan to go along with that that committed the Air Force to investing, reinvesting at a commercial rate in our Air Logistics Centers.
Specifically what we found is that we had been investing throughout the decade of the ‘90s at a level about equal to three percent of sales, and we knew that the commercial model was in the neighborhood of about six percent of sales in terms of reinvestment, so we committed to do that beginning in 2004. So this is the third year now that we have been investing an additional amount of Air Force capital into our ALCs.
I would contend that there is a very positive return on investment for that money in the sense that that $100 million per year that we have seen or that we saw in 2000 and throughout the ‘90s, the typical losses that we would incur has now turned around. Since the year 2002 when we began that investment we’ve achieved approximately $700 million over our targets, cumulative, during that period of time. And we will get at least half that amount just this year alone.
So we’re returning to our Air Force some capital. So instead of coming in at the end of the year with a bill to the corporate Air Force, we are coming in with a profit, if you will, that enables us to go meet some other needs for our Air Force.
So there’s an investment piece of this.
By the way, I mentioned the on-time delivery rates, about a third late. Well, those are 98 percent on-time today. The last two years in fact have been 98, 99 percent.
So there’s been a significant turn-around in the performance of our depots. I think it’s one of the remarkable success stories in our Air Force.
But in addition to the investment there’s also been, what I like to focus on is the process piece of this. I don’t think it’s any great secret to many of you that I’m a process-centric thinker. You can agree with that or disagree with it. But I have been a long and loud advocate within our Air Force for adoption of commercial process improvement techniques such as lean and six sigma, to be specific, within our Air Force. Not just within our sustainment sector, within our ALCs, but within our Air Force as a whole. I’m pleased to report that our Air Force is indeed moving in that direction as a whole.
But the successes that you can see in the Air Logistics Centers over that last five to six years I think are largely the result of those two pieces -- the investment piece which has clearly made a difference, but also the process focus because our Air Logistics Centers is really where what we now call AFSO 21 was born. We have many results across a wide variety of products and really across all three of our ALCs that in my mind tells me that this stuff works.
I think what I’ll do at this point is just conclude my opening remarks with that so that we can get to some Q&A.
I’d just summarize by saying this, when you think about the industrial base there is clearly the manufacturing piece, the product piece, but there is also the services piece as well and that services segment has parts of it that are both in the private sector but also in the public sector. I think your Air Force is being a good steward of the money that has been put into there in recent years and we have the results to show for it.
I’ll be happy to take questions at this point along with my panel members.
[Applause].
Moderator: Thank you very much, panel. We do have some time for questions.
Let me start out with a question that deals really with what Dr. Thompson talked about but it was also touched on by John Douglass just a little bit.
I think it’s fair to assume that as we look to the future and anticipate the types of equipment that we’ll need for our defense that we want to make sure that we have a defense industry, a defense industrial base that has the capability to quickly and reliably and affordably provide that equipment.
One would think that if that is our objective, if that’s what we need, that the Department of Defense would apply the normal kinds of problem-solving techniques to achieve that. You would identify what you want, you would then identify the policies and the strategies needed to achieve and maintain that capability, and then implement and fund those strategies. That appears not to be the approach that is taken, but rather the approach that is taken is to rely on our free market society and the normal competition and so forth that comes about with that to provide that capability. Assuming that if an industry or a segment of an industry wants to remain competitive, it will invest its own money to the extent that it needs to in order to remain competitive.
I would appreciate the panel’s views on what you see coming down the road. Can we continue to allow this free market society kind of approach, and we’ve seen what happens as Dr. Thompson pointed out, what happens or has happened in the commercial sector for consumer goods. Can we continue to use that same approach for defense and be confident that our defense industrial base will be there when we need it to be there? Or do we need to do something different? If we do need to do something different, what would that be?
Dr. Thompson: This is a dilemma. I work, mostly with conservatives and every time I show them pictures of our deteriorating trade balance, which actually gets worse with every passing year. It was on the front page of the Wall Street Journal yesterday, they say okay, Loren, so what do you want to do about it? I don’t know what to do about it.
The fact of the matter is, globalization and free trade is giving us a collapsing trade balance and we are de-industrializing in many of our key sectors.
Now aircraft is not one of those sectors, but I find it a little troubling that if Boeing gets one generation of bad management, at the end of that generation we’ll be out of the sector. It’s just our dumb luck that the one company that survives in the commercial transport sector happens to be well run. I’m not sure you should base your entire future in that part of the industrial base or global trade on the assumption of one company under free market principles will always be well run.
I don’t know what to do about this, but I will say this, whether we have a war or not, whether there’s a peer competitor or not, if our trade balance continues on the vector it’s on right now, two, three, four years from now the whole free trade movement will be over because you cannot sustain our currency or our economy on the trends we see unfolding today.
Mr. Douglass: Let me make a comment on that.
If you were to go back and look at history, in 1989 the aerospace and defense industry in the United States produced a little over $100 billion worth of product. We did it with 1.3 million workers. This year, in 2006, we’re probably going to come in between $184 and $190 billion and we’re going to do it with 600,000 employees. So we’ve increased our output from a little over 100 to up in the 180s, and we’ve done it with less than half the work force. So we’ve become enormously more efficient.
The aerospace industry in the United States last year, in 2005, enjoyed a $40 billion positive trade surplus. $40 billion positive trade surplus.
So while it’s true that the other parts of the commercial economy in the United States have suffered a lot under globalization, it’s not necessarily true that the aerospace and defense industry has suffered under that. We are the largest exporter of military systems in the globe by a factor of I think two or three.
So if you look around, today the situation doesn’t look that bad. It’s what are we going to do in the future? This Pat, comes to your question. One of the answers is that you have got to maintain research and development spending.
Now one of the interesting things politically is that if you were to look at where the Clinton administration was, which was an administration I was a part of, and where the Bush administration has gone, despite fighting a war in Afghanistan and Iraq, the Bush administration has put about $100 billion more into military research and development than the Clinton administration said it was going to do. So you can’t fault the current administration that much for ignoring completely the defense industrial base.
Some of the points that Loren made are true. One of my CEOs and I were discussing this, a bunch of us were discussing this the other day, and he sort of pushed his chair back and said, you know, it’s really amazing. I’ve met with every Minister of Defense in what would be considered the industrialized world including the ones from our former communist adversaries, but not with the American Minister of Defense, who won’t meet with anybody from industry. And there is some sad truth to that. We don’t tend to go around wearing that on our sleeves, but one can argue that the current administration to a certain degree has relied heavily on the commercial part of the industry to manage things and to kind of get along on its own. That part of the industry has done remarkably well.
It was only a couple of years ago people were writing off Boeing, everything was AirBus, this is the greatest thing since sliced bread. Now you look at the serious development problems on the A-380. If that was an Air Force program I guarantee you the program manager would be now cashiered and buried somewhere, and so would everybody else associated with the program. It’s been a mess for them. And they missed badly on their new smaller airplane, the A-350. It’s way behind schedule.
So Boeing is really hitting on all cylinders right now. I think the American producers of the new what we call air taxi size airplanes is a whole new part of our industrial base. So I’m not particularly a pessimist that believes that the aerospace and defense industrial base of the United States is following where the automobile industry, for example, went. I don’t agree to that direct correlation.
Dr. Thompson: Can I just add one addendum to that. I am a pessimist, but because the trends -- some of you may not have figured that out. [Laughter]. I think one thing that’s important to keep in mind is that Boeing is a pretty unique company. It is not our national leader in this business because there are no other companies that make commercial transport in this country.
It’s true Boeing’s gotten a lot more efficient in recent years, but what’s the biggest single reason they got more efficient? Pressure from AirBus. Boeing was facing death in the face.
The interesting thing about that fact is that if we really had a world in which free trade and free market philosophy always prevailed, AirBus wouldn’t exist at all. It was created by foreign governments.
John’s completely right. Boeing has really cleaned up because of mistakes made by AirBus, but it came right close to the edge in terms of staying in the airliner business, and if it had decided to walk away we’d be out of that business just like we’re out of the global steel business, out of the global shipbuilding business, out of the consumer electronics business.
I don’t know whether we can sustain the type of economy we want on the philosophy we have if the rest of the world isn’t on that same sheet of music.
General Wetekam: If I might add something here. I said I was going to stay in my lane. I lied. [Laughter].
I think that the aviation industry, the aircraft manufacturing industry, can serve as a pretty good model, though, for some of our other manufacturing industries. I don’t subscribe to the philosophy that we are necessarily doomed in some of these other industries. I think we’re in bad shape in many cases, but from what I have seen on a rather limited basis, there is still the possibility I still hold out hope for the possibility that we can revitalize some of these industries in terms of, and I won’t get on my high horse here relative to -- Well, yes I will. I lied again. Relative to lean manufacturing, but that stuff works.
Toyota 20 years ago didn’t have any manufacturing plants in North America. Today they’re building their fifteenth. That tells you something about it’s not just the labor rate overseas.
The first time I toured a Toyota plant was the Numi Plant out in Freemont, California. I went through and saw all their stuff, and I just kind of had this revelation that it was about process, and that they got it at Toyota. What they were doing there was remarkable. They’re producing the Toyota Corolla which is an entry-level sedan. They’re doing it with the same work force.
That plant, by the way, was built by GM and had closed within five years. They rehired essentially the same work force back. They’re in the same plant using the same equipment, in Silicon Valley, California, with all the California environmental regulations, and they’re manufacturing an entry level sedan profitably with a labor rate that’s eight times higher than Mexico and 30 times higher than China.
How do they do it? They do it by process. They do it by process. It’s that simple, and it’s also that complex.
In some small related industries or other pocketed industries, there are other examples outside of -- and Boeing is a good example, I would agree with you, but there are other examples of American companies in manufacturing today that are doing this and doing this successfully.
So it’s not easy, but I’m not quite as pessimistic that we’re doomed to failure in that regard.
Mr. Douglass: One other data point that I think is interesting, if you look around the world at the competing aerospace and defense systems around the world, the one that’s next to us is the European Union. They have about 600,000 workers, like we do. The size of the work force now is approximately the same. With their 600,000 workers they produce a little over $100 billion worth of stuff. With the same work force we produce $186 billion. So our work force still is the most efficient in the world.
There are some parts of it that involve fairly low-skilled laborers and so forth that you see going overseas, but at the same time the high end, high integration systems, America is still the leader in the world.
Dr. Thompson: Maybe we should leave room for a second question. This is what, my twelfth addendum?
But in 1996 the Chinese sent $5 billion worth of computer and electrical equipment here. Today it’s $50 billion. I tend to think of that stuff as being high end.
Now it is true that Toyota has successfully operated very efficient, reliable auto plants in the United States, but there’s two addenda you have to add to that particular thing. A, they pay lousy benefits; and B, they don’t have Byron Callen and a bunch of institutional investors looking over their shoulder for every move they make. That does make a difference.
Moderator: John, this next question is for you.
What do you expect will happen in the Air Force tanker competition with regard to WTO issues?
Mr. Douglass: That’s a really fascinating question.
First of all I want to say I have a lot of confidence in the Air Force and I think the Air Force has been grossly mistreated about tankers. One of my favorite tanker stories is that, I was giving a press conference one day and I had about 20 reporters in the room. This one reporter started really getting on me because I was defending the previous Air Force tanker lease program. I said okay, okay, okay. Let’s have a little test here.
How many of you reporters have read the Air Force lease? Have actually seen it and read it? No hands went up.
I said how many of you have ever seen a commercial airplane lease, like the way Delta Airlines leases their airplanes, or United Airlines? No hands went up.
I said now, you guys are sitting here, you’re criticizing the Air Force, you're criticizing me, but you don’t know what the hell you’re talking about. None of you have ever seen a real lease. One of you writes a story that you basically make up, pull it out your ying-yang, and then the rest of you report on the other guy’s story and it’s just everybody reporting on everything else, and the facts go down the tubes.
So that’s my first point, is I really have a lot of confidence in the Air Force’s ability to do this right. I think you’ve got a great new Secretary. I think he understands the issues. You’ve got a new acquisition official, and I wish her the very best.
What is most important about this competition is that it be done on a level playing field. The compliance with international treaty organizations issue is an important issue. It is why Europe can compete with us when they aren’t as efficient as we are, because they’re heavily subsidized by their governments.
So somehow in that competition you have to find a way of leveling the playing field.
One of the areas, for example, that has to be leveled is the Barry Amendment. How unfair would it be for the American producers to have to make sure that every inch of everything in the airplane were completely remanufactured? That means you can’t use a commercial airplane any more. You’ve got to build all special parts for the Air Force. You can’t take them off the production line. Everything had to be specialty built in very small numbers. And the other guy doesn’t have to do that.
Now that’s not going to be fair, and we’re going to have some more of those kinds of issues as they work their way through the RFP, but I’m hopeful that the Congress will give the Air Force a chance to show that it can do a fair and impartial competition and if under those circumstances, whoever wins that has the best program for our young Airmen, should win. As long as it’s a level playing field. That’s how I see it.
Moderator: Thank you, John.
We’ve got time for one more question. This will be for General Wetekam.
We’ve heard engineering support in the Air Force is changing. Is there a change, and what is it? And how can engineering firms be best positioned to help?
Don, I think this includes both civil engineering as well as the industrial kinds of engineering that we were talking about here earlier.
General Wetekam: I’m not sure what the nature of the sea change is here that’s being referred to in the question, to be honest with you.
Moderator: Let me ask you a different question then.
You mentioned earlier a number of things that are going on in the depots with regard to changing of processes to reduce flow times and be more efficient in the flow and so forth. How can industry help in that process as well, those things that are going on in the depots?
General Wetekam: I do think, and I talked about our Air Logistics Centers like they were separate entities. The truth is our depot system really consists of not only our three organic ALCs and our sister service ALCs, but our industry partners out there. Places like San Antonio; Greenville, Texas; Greenville, South Carolina; Lake Charles; et cetera, et cetera. So it’s really part of an entire depot system.
I think what we can do and indeed what we’ve seen in recent years is a strengthening in many areas of the partnership that we have there, and indeed what I’ll call a healthy competition when we partner on certain workloads or we share certain workloads, and we indeed focus on the process, if you will, on the sustainment processes we employ. We learn from each other and get better in that regard. There’s clearly some examples of that, many examples in recent years where we’ve done that.
So what I would say there in that regard is, I’m a public/private partnership advocate. I also know how difficult it is. I used to be a little bit more naïve in that regard, I guess, and I’ve learned the hard way. Nonetheless, I haven’t changed my opinion or my advocacy of that because I have seen it employed successfully. Where you see that across our depot system, as I’ll call it, both in terms of our public sector depots and our private sector depots where we share process improvement, knowledge, and gains, we have indeed seen us be able to raise the bar for each other significantly and thereby improve our sustainment support to the United States Air Force.
Whoever asked the engineering question, I’d be glad to talk to you afterwards, by the way. I’m just not sure I understand the nature of the question.
Dr. Thompson: If I can just add one thing to that, and I agree with everything General Wetekam has said about public/private partnering at the ALCs and at other depots. This is probably the closest thing we’re going to get to integration of the production and the post-production industrial bases given the political constraints.
However, we have seen in the past what happens when the dollars get tight. When the budget’s going up people are more than happy to partner because there’s no sacrifice. When things start to get tight, the organic depots and other government facilities tend to want to pull more of the work in-house. I just hope this time isn’t going to be like the last time, and having established these relationships we keep them going, even if it means a little bit of sacrifice on the public sector side.
General Wetekam: I’ll just comment from the present leadership, we’re committed to doing that. You’re correct about that.
But quite frankly, we’ve gotten to a point of interdependence right now where it’s not all that easy in terms of capabilities to pull workload from one to the other. That’s certainly true in some cases, some workloads, but in many cases, particularly with commercial derivative products, be they aircraft or commodities, we have to depend upon the private sector sustainment organizations to support us, and indeed that’s where those partnerships come in handy.
Mr. Douglass: The one comment I have on that is that we probably should not as a nation be under an arbitrary mandate from Congress that it has to be 50/50, the 50/50 rule.
(END OF RECORDING)
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