June 1, 2010  

Industry Pulse: Fewer forms

SecDef adds acquisition and export reform to his ‘to-do’ list

Defense Secretary Robert Gates has two wars to finish. But his most challenging mission may be here at home: reforming the Pentagon’s procurement and export control processes.

In April he proposed streamlining procedures for U.S. suppliers and loosening restrictions for allies on International Traffic in Arms Regulations (ITAR). Reform is clearly necessary. Gates also has the support of Secretary of State Hillary Clinton, whose department is one of two, with Commerce, that reviews ITAR compliance. President Obama also favors reform. The national security team supports it. But efforts in the past have run into opposition from national security hawks and key members of Congress.

The task is huge and so are the implications. In 2006, there were some 70,000 applications related to ITAR. Each took an average of 43 days to review. In the first eight months in 2009, there were 60,000 applications, although the average review process had been reduced to two weeks.

During the Iraq war, British allies were excluded from American briefings because they weren’t cleared on issues that had ITAR implications. More recently, Britain, a customer for the Lockheed Martin F-35 Joint Strike Fighter, complained about the U.S. restricting U.K. access to software source code covered by ITAR. Britain is a major JSF partner with manufacturing responsibilities.

“The problem we face is that the current system — which has not been significantly altered since the end of the Cold War — originated and evolved in a very different era, with a very different array of concerns in mind,” Gates said during an April 20 speech. “As a result, its rules, organizations and processes are not set up to deal effectively with those situations that could do us the most harm in the 21st century — a terrorist group obtaining a critical component for a weapon of mass destruction, or a rogue state seeking advanced ballistic-missile parts. Most importantly, the current arrangement fails at the critical task of preventing harmful exports while facilitating useful ones.”

The Sept. 11 terrorist attacks prompted key members of Congress to block export reforms in 2005. Rep. Henry Hyde, R-Ill., and Rep. Duncan Hunter, R-Calif., both since retired, cited these attacks as reasons to keep tight ITAR restrictions in place.

Furthermore, Boeing’s CEO, Jim McNerney, cited ITAR during the Round 2 competition for the KC-X tanker as a reason Northrop Grumman/EADS should not receive the contract, asserting that Northrop and EADS couldn’t meet ITAR compliance requirements — a position Northrop, which has since dropped out of the competition in Round 3, disputed. EADS, which is proceeding with a bid on its own, says it can comply with ITAR. EADS, an official notes, routinely complies not only with ITAR but also equivalent regulations in Europe and elsewhere in the world. Ironically, Boeing has scores of ITAR violations.

U.S. companies are losing business to European competitors who don’t have ITAR restrictions, say defense consultants. One, a contractor to the Defense Advanced Research Projects Agency, says he knows of instances where suppliers were stymied by ITAR regulations and instead turned to Israel or European contractors for key systems.


“ITAR is very confusing” for companies to comply with, the contractor said. “There have been systems approved on fighters and UAVs, but not commercial ships. ITAR is written by lawyers, not engineers. There are inconsistent rulings. Nobody knows how rulings will happen. A contractor can make a determination it complies with ITAR and months later the government might say otherwise and penalize the contractor.”

Gates underlined the inconsistencies, describing the bureaucratic apparatus that has grown up around export control as “a byzantine amalgam of authorities, roles and missions scattered around different parts of the federal government.”

“In theory, this provides checks and balances — the idea being that security concerns, customarily represented by DoD, would check economic interests represented by the Commerce Department and balance out diplomatic and relationship-building equities represented by State,” Gates said. “In reality, this diffusion of authority — where separate export-control lists are maintained by different agencies — results in confusion about jurisdiction and approval, on the part of companies and government officials alike.”

An example of how a company can trip over ITAR involved Boeing in a commercial transaction. Boeing sold the 737 commercial airliner (on which the P-8A Poseidon is based) to China, something it had been doing for decades, but the government subsequently determined there was an ITAR violation on a sophisticated part of that aircraft, and Boeing was fined.

“I think there is a sense of urgency,” said Michel Merluzeau, managing partner at defense consultancy G2 Solutions. “As the shrinking defense market becomes more of a reality over the next few years, something has to be done to increase the competitiveness of U.S. defense contractors overseas.”

Merluzeau said exportability of access to source codes, such as the British complaint in connection with the F-35 program, is the single biggest concern of foreign countries.

Not all companies see ITAR as unduly restrictive, however.

“AV respects the ITAR and operates within its boundaries,” said Steven Gitlin, vice president, marketing strategy and communications at UAV maker AeroVironment. “We have received export licenses for our small UAS, allowing us to sell to Italy, Denmark, Holland, Spain and other international customers. We support any effort to streamline the process as long as the appropriate measure of vigilance is maintained.”

Retired Vice Adm. Joe Dyer, president of iRobot’s Government and Industrial Robots Division, also says the company has no trouble with current ITAR procedures. The firm sells robots to 19 countries. “The robots are ITAR-controlled, but we have been very well supported by State and DoD in terms of being able to sell those to allied countries. Part of the success of that is we are very careful who we even ask to sell to,” Dyer said.

Still, Dyer supports the Gates initiative. “Any time you can sell globally, you get important returns. You get relationships and influence because people are using U.S. equipment.”

Will Gates succeed this time where previous attempts have failed? Dyer thinks so.

“Gates has the high ground. The influence we can have geopolitically says Gates is on the right track. I suspect, like most secretaries of defense, it will take a while for the message to reach the working level and to change the policies. It’s like turning an aircraft carrier, people don’t turn quickly. But they are loyal and will follow the rules.” AFJ

SCOTT HAMILTON is a consultant with Leeham Co. http://www.leeham.net