The Polish born Nobel laureate Madame Curie once said, "One never notices what has been done; one can only see what remains to be done." My sense is that it is important to stop and think about what has been done in order to see clearly what remains to be done.
In that vein, I would like to take a look at the evolution of our commercial and defense industries over the past 50 years. Exactly 48 years ago on June 21, 1948 Columbia Records released the first long playing 33 1/3 rpm record or what we call an "LP" in the United States. People who grew up listening to LPs now have to take their own children to a museum to see one. And as they go to the museum, all the children seem to be listening to portable compact disc players.
The breathtaking advances in the U.S. and Western European commercial economies have been spurred by technological advances like the leap from LPs to CDs. These technologies have been spurred by ever increasing investment in research and development. The nature of this growing investment has shifted, however. Defense spending used to be the driving force for technology innovation in the U.S.; today, the commercial sector has replaced it. In aggregate terms, the U.S. commercial industry surpassed the Department of Defense (DoD ) in research and development spending back in 1965, and the disparity between them has been growing wider ever since.
Over the past 30 years, the changes in the industrial base that supports the U.S. defense establishment have been as dramatic as the changes in the world order since the demise of the Soviet Union. U.S. and Western European defense purchases have declined while commercial markets have expanded. The rapid growth of the commercial industrial sector has been driven by a commercial market flourishing quite independently of the defense sector. This underlying trend in the economies of the NATO nations is nothing new. The collapse of the former Soviet Union has led to defense budget reductions that have helped speed this already well-established trend.
Now that I have outlined the past trends, I am going to talk about what we must do in the future. First, we must continue to move from separate defense and commercial industrial sectors to one integrated industrial base. Second, we must continue to pursue defense industry restructuring and consolidation. Finally, we must expand the opportunities for armaments cooperation, and use that cooperation to better integrate and rationalize our industries.
While the United States still has a very strong defense industrial base, the Department of Defense increasingly relies on commercial or dual use technologies, products, and processes as budgets decline and defense plays a smaller role in the U.S. economy. In some leading edge technologies critical to success on future battlefields including electronics, computers, information processing, and communications the commercial sector certainly has the advantage.
Today's global economy also allows everyone, including potential adversaries, to gain access to the same commercial technology base. To the extent that commercial technology can enhance military capability, the military advantage will go to the nation with the best cycle time to capture commercial technologies, incorporate them into weapon systems, and field new operational capabilities.
For these reasons, the DoD is pursuing a dual use strategy to break down the barriers between the commercial and the defense industries; to realize the benefits of commercial military integration in both research and development and in manufacturing; to increase the pace of innovation in defense systems; and to reduce the cost of such systems. The bottom line is that we have no choice but to move from separate industrial sectors and marry the momentum of a vigorous, productive, and competitive commercial industrial infrastructure with the unique technologies and systems integration capabilities provided by our defense contractors.
One of the principal objectives of our acquisition reform program is to open the defense market to commercial companies and technology not only the prime suppliers, but the sub tier suppliers as well. Our acquisition reforms have also increased the opportunity for international armaments cooperation. A good example is our policy favoring internationally recognized commercial specifications over DoD unique military specifications. As part of this policy we are adopting the ISO 9000 commercial series of standards as an alternative to the more restrictive military standard, the MIL Q 9858.
Our Joint Direct Attack Munitions program (JDAM) is one illustration of how effective our acquisitions reforms can be. Before we began our program of reforms, we released a work statement for JDAM, which is a program to upgrade with precision guidance systems the thousands of gravity bombs still in the U.S. inventory. The original work statement was 137 pages long and had 87 military specifications. The best bid we got predicted an average unit cost of $42,000. After we began our new program, we re released our work statement. This time it was two pages long and contained exactly zero military specifications. The contractor we chose will be producing the guidance kits at an average unit cost of $14,000, and a year ahead of schedule.
At the same time that the DoD is reforming and adopting commercial practices, our industry itself is changing significantly. I think we are all dealing with excess capacity in our industrial bases, and are having to rethink the fundamental structures of our defense industrial complexes. In the U.S., we are seeing many mergers and combinations of companies. In many countries in Europe, aerospace firms with long and distinguished histories have been privatized, merged, or even closed. Industrial base considerations are more and more important to our national and international security postures.
In the United States, we rely on the private sector to supply our defense goods and services, so we do not often insert ourselves into the industry. However, we have assessed some sectors of the defense industry to determine what capabilities are essential to support our defense needs, whether or not those capabilities are truly unique, and whether or not they are "endangered." To date, we have completed studies of the industry supporting conventional ammunition, tracked combat vehicles, bombers, helicopters, destroyers, nuclear power plants for submarines, expendable space launch vehicles, the D 5 missile, and torpedoes. These studies indicate that, although DoD programs will not be sufficient to sustain all of the companies currently engaged in defense related businesses, the scale and mix of the DoD programs will adequately sustain nearly every required industrial capability. There are virtually no sectors whose capability we determined to be endangered and that needed the Department to take direct action to preserve it.
Despite these successes, I believe we are not yet done with defense sector restructuring and consolidation. The U.S. draw down is nearly complete with the fiscal 1997 budget, and so, from fiscal year 1998 on, we plan to increase our investment to sustain the modernization of our military forces. However, because of our full funding policy, our investment outlays what industry actually receives lags budget authority by two to three years. The industry is actually working now on dollars appropriated for fiscal year 1994, and we will need to deal with a further contraction of funds of about 10 percent over the next three years.
In my opinion, U.S. national security and the national security of our friends and Allies as well will increasingly rely on getting the most for our defense investments. This means more bi and multi lateral armaments cooperation. It also means giving greater importance to the economic and industrial considerations of material acquisition programs in the future. The convergence of two trends the increasing likelihood of committing forces to coalition operations and reduced defense budgets makes the case for greater armaments cooperation with friends and Allies. Deploying our forces in coalition operations will also place a high premium on interoperability ensuring that U.S. and allied systems are compatible and can be sustained through a common logistics support structure.
In such an environment, it is clear to me that we will have to leverage the technology and industrial base of all our nations to modernize the equipment of our defense forces at an affordable cost and to obtain the "best value for the money." We will need to avoid duplicating each other's capabilities, and instead build on developed capability where possible. To do this, we need to better harmonize requirements from the start and increase the incentives for teaming of our industry including removing the barriers to international teaming and barriers to commercial industry as well. We must start doing this much earlier in the very initial stages of our new programs.
To help promote new cooperative arrangements, we have initiated four International Cooperative Opportunity Groups (ICOGs). The goal of these groups is to plan in advance to create opportunities earlier in the acquisition process. The ICOGS are chartered to identify individual programs with high potential for international cooperation in one of three areas:
Each ICOG has compiled a list of programs nominated by our military services and by our embassies around the world. These lists are available for review by our friends and Allies, and I encourage our Allies to develop similar lists.
While considerable work is already under way to develop armaments cooperation now, it is apparent to me that we also need to look ahead 5, 10, or 20 years and envision the international environment of the future. To address this challenge, the Defense Science Board (DSB) Task Force began work on future international armaments cooperation in October 1995. The task force is specifically chartered to identify:
This forward thinking is an essential component of ensuring future success in international cooperation. While the task force's efforts are still in progress, their deliberation is focusing on a model that promotes international cooperation and maintains competition throughout a program's life. Cooperation on common mission problems is central to this new model, and should focus on such coalition security needs as extended air defense, combat ID, coordinated logistics, and interoperable communications. The task force believes, and I agree, that greater involvement by international industry teams is crucial to the model for 21st century cooperation. There also needs to be more involvement in subsystems and components.
Effective industrial cooperation with the former Warsaw Pact nations has created some challenges. In many cases, their defense industries are operating at a fraction of their capacity, are in need of work, but produce products incompatible with Western standards. These problems are further exacerbated by the state of the Western defense industry, an industry that is also in the process of shedding its excess capacity. Consequently, the willingness of the Western defense industry to invest capital and technology in Central and Eastern European production capacity has been significantly limited.
Now, as the economic reforms in this region are starting to show some significant success, and there is a promise by the region's militaries to invest in NATO compatible systems, the situation is changing. American and Western European companies are becoming more willing to invest capital and technology in areas where they can identify an excellent opportunity for long term success for joint ventures. Some of our Workshop industry speakers will describe the decision making process and their rationale for entering into cooperative ventures in Central Europe.
On the government side, the strengthening of our political relationships with the nations of the former Warsaw Pact over the past six years has caused us to open new opportunities for all concerned. The industrial partnerships that are forming are enabled by this emerging relationship.
Bosnia and IFOR have also made a difference in how we view interoperability with our friends in the Central and Eastern European region. Even before IFOR, our Warsaw Initiative was aimed at improving interoperability of command and control systems with the nations of Central Europe. IFOR has now demonstrated that this need was real.
Fundamentally, our command, control, communications, intelligence, and logistics systems must all be interoperable. Generally, we are achieving this in IFOR by setting common standards, for example, in our supply coding system and in our grading and classification of fuels. We are also achieving this by encouraging the teaming of our industries. We are releasing hundreds of standards that provide the information necessary for manufacturing NATO standard equipment. We have also invited the NATO Partners to join the CALS effort so that they can move toward a common single use data system for defense armaments.
One program that I am very optimistic about is the Regional Airspace Initiative, or RAI. The goal of RAI is air traffic control and air sovereignty systems that are interoperable region wide to include NATO nations. Using commercial off-the-shelf technologies and commercial standards, RAI will help the Czech Republic, Hungary, Poland, Slovakia, and Romania modernize their systems.
In short, we are providing the tools Partner industries need to convert to modern systems and standards. But it is a long and difficult road, and one that needs to be paved with the successes of Partners who have traveled the road before. The industries in the United States and in NATO Europe must continue to reach out to the best and the brightest of their counterparts. Their success will cement friendships, and help build bridges to broaden relationships.
I know it will not be easy. Defense industrial sectors on both sides of the Atlantic are downsizing. In the U.S., we still face another 10 percent reduction and we will continue to face pressures to reduce our defense budget. To deal with this, the U.S. Department of Defense is implementing a dual use strategy and a broad program of acquisition reforms to better integrate our defense and commercial industrial base
We are also taking steps to create an environment in which international partnerships can flourish. I believe we all recognize that we must reach out and exploit technological advances being made at home and abroad. However, unilateral policy changes by the DoD will not be sufficient to fully engage international industry in the U.S. defense market.
In addition to international partnerships, industry to industry partnerships must play a key role, since they form the underpinning for international cooperation. Creating these partnerships will be central to the defense trade in the future. This new approach must include cooperation at earlier stages of the acquisition cycle.
Because of their research and development investment patterns, many industries in both NATO and Partnership for Peace countries have developed a superior comparative advantage in particular areas and can fill needs at the major component and subsystem level. To engage these firms, we must all continue to make U.S. companies aware of these industry pockets of excellence.
Armaments cooperation true cooperation is a complex and challenging business that will require our best thinking and perseverance to see it to full fruition. I believe we can provide these requirements, and that we can be successful by bringing together the best talent in government and industry from each of our countries.
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