The Evolving Nature of the Transatlantic Defense Relationship

The presentation we have just heard from Dr. Linnenkamp was an excellent and succinct summary of the goals and focus of the European Defense Agency. I think it illuminated a number of issues, and I am going to comment on a couple of them.

CREATING AN INTEGRATED AND COOPERATIVE INDUSTRIAL BASE

At Lockheed Martin we believe that the transatlantic marketplace should be integrated, that ultimately it will be integrated, and that the amount of spending available for defense in Europe will not be sufficient to achieve the objective of a strong and autonomous industrial base. Given that, we believe that the best course is to create an integrated and cooperative industrial base as rapidly as possible, with emphasis on the “as possible.”

There is a major reason for this and it was illuminated by the comments on numbers that we heard. The figure given was 2.3 billion euros for R&T (research and technology). I use a figure based on a broader definition of R&D (research and development), which is based on U.S. Department of Defense budget categories. According to this definition, the number would be about $12 billion on research and development in NATO Europe compared to approximately $70 plus billion in the U.S. So the procurement ratios are 2 to 1, that is, twice as much procurement spending in the United States as in all of NATO Europe, and 7 to 1 for R&D—seven times as much R&D spending in the United States as in Europe. The figure I heard Tom Enders (Co-CEO of EADS) use at ILA was 12 billion euros, and that corresponds roughly to my figure. So that’s an industry view of what has been spent on R&D in Europe.

Now, with that kind of quantitative imbalance, the inevitable reaction of European industry will be to try to access the U.S. market, because that is where the money is. The imperative for industry is to be cooperative and to be integrative, because the European industry obviously wants to be able to access as much of the available resources as possible.

OPENING THE TRANSATLANTIC MARKETPLACE

If this desire to integrate the marketplace and access the collective spending is real and if it is the future, the question becomes, how far in the future is it? I must confess I am not optimistic. I believe that Europe is currently in a phase of trying to modernize and support its industrial base with an old intellectual model, which is a state-supported and state-directed industrial policy. It is designing weapon system requirements that make it impossible for American companies to compete. It is protecting local markets. It is using all kinds of informal barriers to prevent competition. I welcome, as does all American industry, the efforts by the EDA and the European Commission to open up the European defense market. This is terrific. Butt they are opening it up to each other, i.e., trying to create a competitive market within Europe, not with transatlantic competition and cooperation.

So we need to see the next step, which is a truly open transatlantic marketplace. And to those who would say “The American market is closed to Europeans so what you really want is both markets,” I would say, I recognize the basis for that statement. I recognize that it has some historical validity. But I would also say that industry, my company in particular, is working to break down those barriers. We are bringing as many European partners to the American marketplace as we possibly can, and we are working to set up cooperative programs in which American technology flows to Europe without the European taxpayer having to pay the full price of that technology. We are working to make the American marketplace as open as we possibly can.

In other words, we have an open business model instead of the closed business model that I am afraid I see a little too often on this side of the ocean. Just as an example, in the American littoral combat ship—the next generation of surface vessels that will operate near coasts for the U.S. Navy—Lockheed Martin, which is one of the teams that has a ship in the competition, has more than 20% European content on it. We have an open business model and are sourcing globally, and that is what we think the future should be.

U.S. cooperative programs, such as Joint Strike Fighter and the medium-extended air defense system (MEADS) in which Germany, Italy, and the U.S. are all cooperating, is the other way to achieve transatlantic cooperation and integration. In cooperative programs, however, we could face some significant challenges in the next couple of years. We always face the political challenge of whether governments, including the U.S. government, are committed and whether they are committed to the cooperative approach. We also face the issue of technology sharing, technology release, and cooperative technology development. In addition we face a problem of burden sharing, a difficulty that arises in programs in which one partner is spending 90% and the other partner is spending 10% but the 10% partner wants 100% access to the technology. That is going to create problems as we go forward.

REDUCING BARRIERS AND PROVIDING ADEQUATE RESOURCES

What is the solution? I think the solution lies in reducing barriers to competition. I think it also frankly relies on reducing state ownership. European industry would be much better off and well served if the state would give up its ownership and permit industry to operate as industry, free of political interference and free of the political objectives of politicians, which do not always coincide with those of businesses. I do not mean give up the relationship because, after all, governments are our customers and our regulators—we are totally involved in the government-business relationship. But when government is the owner selling to itself with an obligation for industrial base and employment issues as well as capabilities and technology, then you have a pretty vicious circle. This is what SACEUR Jim Jones was referring to when he addressed this conference and referred to a 26-nation industrial base competition each time there is an available NATO procurement.

The other thing I think we need, which I believe is the least arguable point I am making, is adequate resources to meet the requirements. My estimate of Germany’s defense budget is that it is 25% underfunded for stated requirements—Germany needs an additional billion euros in its procurement accounts just to meet its stated requirements. If that money is not going to show up, then something has to happen: the requirement must be restated or work must be done on the budget issue. This is true not just in Germany but in every country, including the United States. We all know that Defense Ministries’ appetites are always bigger than Finance Ministries can satisfy.

CONCLUDING REMARKS

Having said all that, the two things I think we could most profit from are 1) cooperative sharing of R&D and of the requirements side of the budget—the more harmonized the requirements and the more cooperative the programs, the more efficiently we can spend the resources that are available—and 2) allowing industry to form transatlantic teams and participate in this marketplace in a cost-effective and efficient way. Industry, if permitted, will deliver more cost-effective solutions to governments than are currently being provided—in other words, more capability for very limited resources. These two initiatives would do a great deal to enhance our common security capabilities and, at the same time, to preserve the health of our transatlantic industrial base