What a redacted protest decision says about the future; Pentagon competition declines; Bonjour, Silicon Valley.

Growing up on New York’s Long Island, I spent a lot of backyard time peering through binoculars at jetliners on final approach to JFK International Airport, looking for clues about make, model, and airline. Nowadays, the game is a bit different. Let’s see what we can make of a few bits of seemingly unrelated military-aircraft news…

First, about the Air Force’s $80 billion B-21 Raider stealth bomber project, awarded last year to Northrop Grumman and almost immediately protested by Boeing and Lockheed Martin. This week, the Government Accountability Office released a redacted version of its February decision to reject the protest. Why do we care about an eight-month-old protest decision? Keep reading.

Next, Raytheon’s announcement that if it wins the Air Force’s contract to build the T-X trainer plane, it will build M-346 jets, currently made by Leonardo in Italy, in Mississippi.

Why does this all matter? The bomber protest decision document pulled back the curtain just a bit on the service’s acquisition decision-making. We learned that several key factors tipped the award to Northrop, including the company’s decision to spend its own money on various development and risk-reduction efforts, and its plan to use lower-cost labor to lower the Air Force’s price tag.

“[T]hroughout this evaluation, Northrop’s proposed [engineering & manufacturing development] costs were substantially lower than Boeing’s due to Northrop’s corporate investment decisions,” says the bid protest decision.

Northrop apparently heeded calls by Pentagon leaders for the defense industry to spend more of their profits on internal development.

“[D]uring that time that we were working our design, it became really clear to us that affordability would be absolutely critical,” Wes Bush, Northrop’s chairman, CEO and president, said this week in an earning call.

Now let’s take what we’ve learned about Air Force acquisition decision-making and go back to that Raytheon decision to build the M-346 in Mississippi.

Mississippi is a right-to work state, which often means no unions and cheaper labor. Defense and aerospace firms, perhaps even more than other American manufacturing sectors, have been shifting work to non-union sites. Boeing, for example, has two 787 Dreamliner assembly lines, one in Seattle and one in Charleston, South Carolina. The employees at the latter site make less money than the ones on the West Coast.

Lockheed Martin has already started setting up a South Carolina factory to build T-X aircraft if the Air Force chooses its T-50, which is currently made in Korea.

Aside from setting up shop in right-to-work states, new types of manufacturing also are helping to lower labor rates. Northrop, which secretly built (and is now testing) a new-design jet training aircraft, has been touting its use of automated manufacturing techniques. It has teamed with KUKA, which builds assembly-line robots, so it’s fair to assume it is using similar manufacturing techniques on the bomber. The firm has not said where it would build the T-X, but it has a large presence in Melbourne, Florida, and has previously wanted to build Air Force tankers in Alabama.

Boeing has not disclosed where it would build its aircraft, although the prototypes were built partially in Sweden by Saab and assembled in St. Louis, where the decline of fighter jet manufacturing is freeing up space. But the company also has extra capacity in Jacksonville, Florida, where it turns old F-16s into target drones and does maintenance on Marine Corps F/A-18s.

Now back to company investment. All of the firms are shelling out lots of cash just to compete. As mentioned, Northrop and Boeing have built completely new planes, so fair to say they’re spending the most, but even Lockheed’s and Raytheon’s existing aircraft need modifications for things such as air-to-air refueling receptacles.

Even second-tier suppliers are falling in line. Ejection-seat maker Martin-Baker created a new seat on its own dime for the contest. The British firm has not disclosed which company is using its new seat, but it’s presumed that more than one of the bidders is interested.

As we wait to see just how the Air Force will judge the various T-X bids, the bomber project reminds us that one thing, particularly in the current budget climate, will matter big-time: cost.

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You’ve reached Defense One’s Global Business Brief, coming to you this week from Bradley International Airport in Hartford, where your correspondent is returning from perhaps the coolest assignment of his career. Come back next week to find out more! In the meantime, send your tips, comments, and random thoughts to mweisgerber@defenseone.com, or hit me up on Twitter: @MarcusReports. Check out the GBB archive here, and tell your friends to subscribe!


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Competition for Pentagon Work is Declining

The two-decade trends of bigger programs and defense industry consolidation have made it ever harder for the Pentagon to mount good price-dropping competitions for its contracts. This seemed to have reached its nadir a few years ago, when Sikorsky was the only company that bid for an Air Force search-and-rescue helicopter project.

And yet, after six years of acquisition reforms spearheaded by Frank Kendall, defense undersecretary for acquisition, technology and logistics, competition is actually declining, according to a new report.

“We’re putting some attention on that,” Kendall said last week. He said, “It’s not a huge shift … a few percentage points,” but “it’s just in the wrong direction for me.”

What’s driving this: high-value, sole-source foreign arms sales (see Saudi Arabia); fewer new projects; and a high percentage of expensive projects, such as ships and aircraft, already in production.

“I think that the reduction in competitions are an effect of the budget situation,” Kendall said. “We tend to do competition more at the earlier stages of the big programs.”

Another factor: “Increased bid-protesting also forces us to award sole-source contracts to bridge until we can let the new contract awards.”

Pentagon leaders have been trying to increase competition for gadgets and gizmos on aircraft, ships and vehicles as a way to drive down costs.

“We’re trying to break things out more. We’re trying to provide paths for more modern technology to get on to programs,” Kendall said.

Week of Earnings

We’ll start with Lockheed Martin, which is projecting a 7 percent increase in sales in 2017, to about $50 billion. “I would say the biggest growth area for us is the F-35,” Marillyn Hewson, the firm’s chairman, CEO and president, said this week. “Certainly we’ve got a lot of international sales on the F-35, and so that will be the largest one. The second one is on missile defense. We’ve seen a lot of demand expanding for missile defense in Asia-Pacific and the Middle East as well as in Europe.

Let’s shift to Boeing. Here’s Dennis Muilenburg, the firm’s chairman, CEO, and president: “We continue to anticipate modest defense spending growth over the next five years. Internationally, demand for our offerings remains healthy as well, in particular for rotorcraft, commercial derivatives, fighters, satellites, and services.” Muilenburg said the company is “continuing to reshape our defense business with a focus on dramatically improving our cost structure. This is further enhancing our competitive position and expanding profitability.”

Safran in Silicon Valley

Pentagon matchmaking notwithstanding, we’ve yet to see U.S. defense firms rushing to set up shop in Silicon Valley, but at least one European aerospace and defense is moving in. France’s Safran announced this week that it would open an office in Redwood City by the end of the year. While it’s not defense focused, per se, the “innovation center” will have “a specific focus on digital payment, digital identity and the Internet of Things.” The tech includes “biometric identification and authentication technologies, featuring fingerprint, facial recognition and iris biometric sensors, cloud-based solutions and software development kits for mobile devices.”