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Industry News

News From Washington

May 1, 1997
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Industry Organizes to Handle Shrinking C4I Market

The recent Frost & Sullivan report, "US Military Command, Control, Communications, Computers and Intelligence (C4I) Markets," addresses the likely development of funding priorities for theater and national missile defense, tactical communications and information warfare under Secretary of Defense William Cohen and the new Congress. The report reviews the effects of the acquisition reform and industry consolidation, which occurred under former Secretary of Defense Perry, and the relationship between the Department of Defense (DoD) and defense contractors. The report points out that while a large number of contractors compete in each of the market segments, few are active in more than two or three markets. The major consolidations of the companies competing for defense business and the frequent strategic alliances formed are considered serious barriers to the efforts of small companies trying to compete in the market.

C4I is increasing its share of overall defense spending even as its total funding is decreasing. The report estimates the total C4I market was $7 B in FY 1996, down from $7.6 B in FY 1995. The funding is forecast to drop to $6.6 B by FY 2000 before it begins to rise. The negative compound annual growth rate for the market from 1995 to 2002 is estimated to be 1.1 percent. The funding decline for continental ground-based surveillance systems is expected to end in 1998 and remain constant through 2002. Funding for global command and control equipment is projected to decline this year and then become level at approximately $50 M in FY 2001 and FY 2002. The tactical reconnaissance and surveillance market, funded at $2.4 B in 1996 compared to $2.7 B in FY 1995, is expected to continue its decline through 1998 and then remain at $2 B through FY 2002. For more information, contact Kimberly Barney, Frost & Sullivan, (415) 237-4383, fax (415) 903-0915.

F/A-18E/F Strike Fighters to Receive Upgraded Radar

According to Aerospace Daily, the Navy is proceeding with its effort to install an active electronically scanned aperture (AESA) in some of its first F/A-18E/F fighters, a move that could give the fighters a radar with twice the range of the F/A-18s in service currently. Reportedly, the Navy has always been interested in an AESA for the F/A-18E/F and has provided the aircraft with the space, power and cooling to accommodate such a system. However, prior to the work performed for the Joint Strike Fighter on the multifunction integrated RF system, both the cost and the risks involved with such equipment were considered too high.

GAO Reports on Soviet Union Defense Industry Conversion

In a recent report, "Status of Defense Conversion in the Former Soviet Union (GAO/NSIAD-97-101)," the General Accounting Office (GAO) reviews the DoD's program to help convert defense industries in the former Soviet Union to commercial enterprises. The report considers the progress made in 20 conversion projects that have been undertaken and the agreements completed by the Defense Enterprise Fund to undertake an additional four projects. The DoD program to convert former Soviet Union defense industries to commercial enterprises is part of the Cooperative Threat Reduction program to reduce the weapons of mass destruction (WMD) threat. The program's primary objectives are to help destroy nuclear, biological and chemical weapons; transport and store weapons for destruction; and prevent weapon proliferation. The Cooperative Threat Reduction Act of 1993 also authorized the DoD to establish a program to demilitarize former Soviet Union defense industries and convert their technologies and capabilities to commercial activities.

With the assistance of several other agencies, the DoD developed a candidate list of 150 WMD-related enterprises in Belarus, Kazakstan, Russia and Ukraine. The Defense Special Weapons Agency (DSWA) implements the defense conversion programs and awarded contracts in 1994 and 1995 for the DoD-managed projects. In most cases, the DSWA contracted with US firms to assist specific Soviet Union firms. Each of the pairs of companies established a joint venture typically to provide civilian goods or a service using US private and government funds, and former Soviet facilities and labor. The Cooperative Threat Reduction Act of 1993 also created the Defense Enterprise Fund (DEF), a private nonprofit fund that would continue the defense-conversion work started by the DSWA.

Noting the size of the former Soviet Union's weapons complex and the inherent difficulty of assessing and quantifying military production capacity, the GAO was unable to confirm that the conversion projects have had any impact on eliminating or reducing WMDs or military production capacity in the former Soviet Union. However, it did find that 20 of the 24 projects reviewed included former Soviet Union firms that had produced WMDs and that one of the projects was in the process of converting resources that had been devoted to that kind of production. Eleven projects used buildings related to WMD production and at least eight employed workers in new enterprises who were engaged formerly in WMD activities. Five of the 24 projects studied were no longer operating at the time of the review. The other 19 have made progress but eight have not yet begun production. The GAO found that the DEF has been in compliance with many elements of its agreement with the DSWA but the agency has not enforced compliance in some respects. Further, neither the agency nor the fund has established the required evaluation benchmarks necessary to measure the success of the Fund's operations. The GAO recommends that the DoD's oversight of the DEF be strengthened, that performance benchmarks be established, that a long-range plan for attracting private capital be prepared by the DEF and that the required periodic reviews and field visits be made.

GAO Recommends Better Use of DoD Funds

In its report, "Better Use of Limited DoD Acquisition Funding Would Reduce Costs (GAO/NSIAD-97-23)," the GAO finds that the DoD places too high a priority on buying large numbers of untested weapons during low rate initial production (LRIP) phases of procurement cycles. The practice ensures commitment to new programs at the expense of other, more fully tested, systems - in some cases requiring that full production rates of the tested weapons be cut in half. In many cases, the practice also leads to the need to modify large numbers of the untested weapons at high cost before they are usable. The combination of buying the large quantities in LRIP and subsequently having to modify those quantities stretches out the full-rate production schedules of proven systems for years due to lack of funds.

The GAO finds that annual full-rate production rates of 17 of the 22 proven weapons reviewed were reduced to the point at which their production runs were lengthened by an average of eight years. DoD records also reveal that the weapons involved would have cost nearly $10 B less if their original production rates and cost estimates had been maintained.

Among the cited examples of programs with elongated production schedules and accompanying increased costs are the Army's Black Hawk helicopter and the Navy's Tomahawk missile. At its present production rate, the Black Hawk will take nearly 54 years to complete, 43 years longer than planned originally. Tomahawk production was scheduled to be complete in 1992 but will be six years over schedule at the present rate of 276 missiles a year, a decrease of over 50 percent from the planned rate of 600 per year.

The GAO recommends that the DoD's acquisition policies be revised to require that annual quantities of weapons procured during LRIP be limited to the minimum quantity necessary to complete initial operational test and evaluation, and prove the production line. It also recommends that rate and quantity increases during LRIP for the purpose of easing the transition to full-rate production be prohibited unless there is clear evidence that such increases are critical to achieving efficient full-rate production and will not affect the efficient funding of proven systems.

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