Mattis outlines defense-budget planning; Lockheed lets an F-35 appeal deadline pass; Talkin’ tech with NATO; and more...
The Pentagon generally doesn’t discuss its annual budget request before sending it to Congress, trial balloons and other advance leaks notwithstanding.
But all bets are off this year. One week into the Trump administration, the Pentagon has already released a lot of paper (actually PDFs, but you get the gist). Yesterday came the official release of a four-page memo that Defense Secretary James Mattis sent to...well, just about everyone laying out the department’s 2018 budget planning process. It solidifies some of the rumors that have been circulating for months and details how the Pentagon will prepare cap-busting spending plans to Congress.
In the Jan. 31 memo, Mattis outlines three grand goals to be tackled in successive phases: improving readiness, “achieving program balance by addressing pressing shortfalls” and building a “larger, more capable, and more lethal joint force.”
He also writes:
- Military leaders will propose a budget amendment that would add to the Pentagon’s 2017 budget with the goal of boosting readiness. That’s why unfunded priority lists are already floating around.
- The 2018 budget will propose buying more stuff, investing in advanced capabilities and growing the size of the military.
- The Pentagon will also build a National Defense Strategy, which will coincide with the Trump administration’s new National Security Strategy. Those strategies will inform the long-term, five-year budget plan.
Side note: Mattis’ budget and strategy reviews don’t appear to have acronym nicknames yet. Remember the SCMR, pronounced “skimmer” by officials and “scammer” by critics?
Lockheed Lets An F-35 Appeal Deadline Pass
Lost in the hubbub and hullabaloo of Donald Trump’s second week in the Oval Office was something that didn’t happen. January 31 was the deadline for Lockheed Martin to appeal a deal forced upon it by the Pentagon: $6.1 billion for 57 F-35s. It came, and Lockheed let it go.
“We did not file an appeal under the Armed Services Board of Contract Appeals in the 90 days,” Michael Rein, a Lockheed spokesman, said in an emailed statement.
But Rein pointed out that the company still has options: filing a certified claim under the Contract Disputes Act, filing a Request for Equitable Adjustment and requesting Alternate Dispute Resolution under the Joint Strike Fighter Memorandum of Agreement.
“I have no decision on whether we will pursue other avenues,” he said.
Here’s some background. Pentagon officials imposed the jet deal on Nov. 2 after 18 months of fruitless negotiation on Lot 9 of the Joint Strike Fighter program. At the time, Lockheed officials said in a statement that they were “disappointed with the decision by the Government” and “will evaluate our options and path forward.” It’s incredibly rare for defense companies to criticize the Defense Department, the “customer” they never want to upset. Less than a week later, Trump was elected president. Then came the tweets, and more tweets, then a meeting with Lockheed CEO Marillyn Hewson’s at Trump’s Mar-a-Lago resort, another meeting at Trump Tower, and ultimately a third one at the White House.
Days before the Jan. 31 appeal deadline, Hewson had hinted at action. “We are just going to continue to look at our options,” she said in a quarterly earnings call the previous week. Lockheed didn’t appeal, but as noted above, it still has several options.
Rein, the Lockheed spokesman, said the firm will deliver the jets “in 2017 as outlined in the program of record.”
What about the next order, Lot 10? Just before Christmas, Lt. Gen. Christopher Bogdan said negotiations for that batch of 90 planes would commence in mid-January. Trump already claimed victory on Monday, saying the firm cut $600 million off the price.
Fair to say, these negotiations are moving much faster than the prior round.
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NATO Official Talks Tech
I wasn’t expecting to discuss DIUx when I interviewed Peter Scaruppe, the acquisition director for the NATO Communications and Information Agency, the group that oversees cyber, IT and command-and-control for the alliance. But the Pentagon’s Silicon Valley outreach office came up more than once.
Like DIUx, Scaruppe’s agency works with tech startups and companies who don’t do traditional defense business.
“We provide NATO forces, NATO installations and nations, if they want to, with the capabilities in these areas,” he said.
The agency typically issues contracts worth about €1 billion each year and has deals in the works totalling about €3 billion, real money in anyone’s military.
“Our problem is that due to the NATO procurement regulations, we still have the same procedures for…cyber capabilities that another NATO agency has for procuring the European fighter aircraft,” Scaruppe said. “This of course needs to be adapted. Especially in the IT world, we need to be faster.”
Here’s an excerpt from my interview:
Q. What type of hardware or services are you looking to buy with that €3 billion?
A. “A huge chunk is in the cyber security area. We’re renewing NATO’s cyber shield. We’re also procuring satellite communication transmission services in the amount of €1.5 billion for the next three years. A lot of this is in the command and control and communications … systems for land, sea and air. We provide the IT systems for NATO’s ballistic missile defense and NATO’s air command-and-control systems. Those are two huge programs. A lot of our stuff is also for software intensive procurement. Here, especially cyber acquisition is where we are running a number of projects with opportunities for industry.”
Q. What type of capabilities are the member nations asking for?
A. “It’s across the board. It’s communication, essentially from secure smartphone communication through handheld radios through more sophisticated communications systems like radios that are built into larger defense systems up to cyber capabilities and satellite communications. It’s really everything. It’s not that we are procuring for nations exclusively — the acquisition is mostly for NATO operations and for NATO capabilities that are provided and will be provided to NATO operations.”
Q. Do you have any plans for tech incubators, like we’ve seen here in the U.S. of late?
A. “We have our own cyber incubator at one of our locations in The Hague in The Netherlands. The thing is, our system of funding is a little different from the U.S. The U.S. can make available money for the DIUx for the fast acquisition of stuff. We here — for each little project — have to go back to the nations, make a business case regarding how much funding we would need for that project. Then this will be approved, or not approved, or the [amount] will be changed by the nation and then we can start working. The acceleration of the procurement, we still need to achieve. What DIUx can do fairly quickly, we’re still trying to convince the nations that they need to give us more flexibility to do this work. We have launched a cyber acquisition study where we want to show the nations that faster procedures and easier procedures will lead to better, more efficient and also cheaper acquisition of cyber services.”
Q. What will be the focus of your April business conference in Ottawa?
A. “The theme is innovation. Last year’s conference was dedicated to why do we need more innovation in a foreign organization like NATO and in the nations. This year it’s about the application of innovation — to make it work in real life. This is where we have half of the conference time dedicated. The other half is our business opportunities — the technologies where contracting opportunities are coming toward industry. On top of that, we provide information and interaction with the audience on how to bid in a smart way, how to be successful in NATO bidding, mistakes to avoid, how to get in touch with NATO, [and] how to team up with bigger companies.
Under Trump, Arms Exports Might Slow While Mergers Rise
That’s according to two new reports. Let’s look at each separately.
A slowing of foreign weapon sales would be a big deal for defense companies, considering the vast number of arms exports approved by the Obama administration, many which still haven’t been put on contract. Foreign sales made up more than 20 percent of American defense firm sales in 2015 and 2016, according to a Jan. 30 report from consulting firm Avascent. “With a reinvigorated focus on adding domestic jobs and a potential reset in American defense and security relationships in Europe and Asia, the Trump Administration may portend significant changes for industry export strategies,” the report from Avascent warns. Read the entire report here.
The second report, from Standard and Poor’s, predicts mergers and acquisition across a host of sectors might see an uptick under Trump. Specifically in the aerospace and defense sector: “Both acquisitions and divestitures by larger firms could pick up given the improving outlook for U.S. military spending. However, this could be constrained by uncertainties surrounding the Trump administration’s defense-spending priorities. In commercial aerospace, some [merger and acquisition] is possible, as OEMs prefer to deal with fewer—and larger—suppliers.”
New Head of Pratt & Whitney Military Engines
Pratt & Whitney said it would name Matthew F. Bromberg to lead its military engines division in May when current president Bennett Croswell retires in May. A former president of the firm’s commercial engines aftermarket business, Bromberg will serve as senior vice president of the military business until Croswell retires. Pratt builds the engines for the C-17, F-15, F-22, F-35, and most F-16s.
Defense Firms Using RallyPoint to Find Workers
RallyPoint began as a social network for active-duty military and veterans, a mix between LinkedIn and Facebook. It now has more than 1 million members and has become a place where defense, aerospace and logistics companies are recruiting.
“All too often, military veterans are told to translate their skills out of military speak into civilian speak. That loses a lot of the details of what they did on active duty,” said Dave Gowel, an Army veteran who is the CEO of RallyPoint. “Because we have our members put in exactly what they did with detail on their military service, and then exactly what they’re doing as civilians when they become veterans, we can provide actual data to our customers so that they can hire intelligently for the roles that they’re looking for,” he said.
Among the defense companies using the site for recruiting and marketing are BAE Systems, Ball Aerospace, Sallyport, Engility and Vinnell Arabia. Looking to the future, RallyPoint is looking to expand the number of customers, aka the companies, that use the site.