For years, the US has discussed how to integrate more closely with foreign partners to support the defense supply chain, with little success. But the global situation since Russia’s invasion of Ukraine may have finally provided the window for serious change. Below, Oliver Wyman’s Aleksandar Jovovic explains how he thinks Americans can seize this moment.
In the aftermath of the invasion of Ukraine, we are seeing a wave of support for innovation in the defense supply chain, both domestically and, increasingly, internationally. While “friend allocation” or “close supply” (supply diversification to allies or close friendly nations) is far from a new idea, this moment seems especially poised to promote the concept, if the US and its allies are willing to seize the opportunity. moment.
This current attention is the result of an unusual combination of developments impacting the sector. Over the past five years, defense has been affected by politics and reduced funding as involvement in the Middle East and Afghanistan has declined and the US role in NATO has been openly questioned. Amid these policy and operational changes, COVID has dealt a heavy blow to the global defense workforce and supply chain. Then, when the situation seemed to normalize, Russia’s invasion of Ukraine put enormous pressure on the production of defense equipment and consumables.
Thus, for the first time in the recent past, US policymakers and industry and their allies seem genuinely aligned on the need to look beyond established national supply chains toward cross-border sourcing and collaboration, with the intention of stabilizing and improving defense supply chains throughout the life cycle. . While haste and capability may be front and center, load sharing and joint financing also drive efficiency and better planning, as well as incentivize partner capabilities and entrench interoperability.
There are already pathways that model how to move forward and show opportunities for expansion. The most notable:
- Major military powers like the US have occasionally supported development and production partnerships with allies, which has led to the industry. The successful SM-3 missile collaboration between the US and Japan fits perfectly into this category and is reportedly now spawning further cooperation on hypersonics. The US is also taking advantage of Australian funding and development of the Wedgetail Airborne Early Warning & Control aircraft, which will soon be the replacement for the USAF’s aging E-3 AWACS fleet. The benefits are not limited to funding and industrial contributions: future US E-7 crews are already training in RAAF Wedgetail aircraft.
- Major defense spenders that have traditionally relied on imports, such as the GCC countries, have long advocated offsets and industrial participation as a way to bring defense dollars and know-how back home. While these programs were originally heavy support services, the current emphasis and requirements are heavily in favor of gaining a foothold in the defense production supply chain.
- Some advocacy programs or initiatives, depending on size, importance, or geostrategic context, were conceptualized as international from the outset, drawing on vendors and support providers around the world. The F-35 is the most prominent among a modest number of similar efforts, but joint acquisition programs—both binational and multinational like Scandinavia’s NORDEFCO or unique defense industrial ties like the U.S. and Canada—have been around for years. decades.
But the episodic and unsystematic nature of these efforts is not just the result of naturally inward-focused defense ecosystems. Collaboration creates risk (eg, protection of classified technology), uncertainty (dependence on foreign budgets and approval processes), and an element of handover (development programs like AUKUS and Europe’s FCAS are circumventing some of these complications). ). These challenges are potential death blows to international sourcing for national policy makers and understandably wary industry leaders alike. Nowhere is this more prominent than in the United States, and until the revealing aggression against Ukraine snapped in, these headwinds may have prevailed.
Armed with lessons learned and best practices from sourcing and occasional international partnerships, and keenly aware of the risks that cooperation inherently carries, where do policymakers and industry go from here? A natural first inclination is to plug the holes, with defense procurement agencies scrambling to source defense products (most prominently 155mm shells and components) from abroad or to procure them jointly. The next steps are less obvious and more complex, but could yield bigger rewards in the long run.
Think “international” at first. As a result of the modest size of their domestic market, defense industries in small countries have exportability built in from the start. But this thinking must extend beyond traditional exports (or efforts like the well-intentioned but underfunded DoD Defense Exportability Features pilot program) to truly international sourcing. New international supply chain partners can inject more competition, reduce costs, and avoid other risks. By identifying, qualifying and/or incorporating non-domestic suppliers into the supply chain, the industry can also open up prime international export markets. By engaging even earlier in the defense program life cycle, defense departments or industry must seek international partners as potential R&D funders and implementation partners, at a time when resources and capabilities are scarce, particularly when EE. Porcelain.
Create incentives for industry and government. Put this effort into practice by incentivizing and rewarding industry sourcing innovation and corresponding government procurement support. Well-structured and intentionally international supply chains that can withstand potential system shocks like COVID or major conflict should be rewarded from a funding standpoint, while forward-thinking procurement officials support such collaboration. international are to be commended. Too often, internationally enhanced supply chain solutions are seen as inherently risky or a burden to manage and monitor. However, if done correctly, it can reduce risk and cost (both for defense buyers and industry OEMs), increase quality and improve profitability, directly, as well as incentivize future international sales and satisfy customer demand. demand for “industrial participation” in major export markets.
Don’t stop at two. An additional single international point of failure may not be enough. Seeking a small cohort of key suppliers, geographically distributed among key allies and major importing nations, can be key in some segments, given the complexity of qualifying and maintaining suppliers. The more OEMs have a developed, documented, and repeatable international sourcing methodology, the smoother the process will be. Seek and take advantage of any assistance offered by partner government agencies (eg, vendor matching resources) to defray the costs of these exercises.
Start small. Look for programs that provide quick wins (eg, higher demand, less sensitive offerings such as precision munitions or C-RAM systems and counter UAVs that prove the concept to stakeholders across the national government and industry, and also encourage international suppliers.With a Proof of Concept, international suppliers are likely to learn and adapt more quickly to the requirements and safeguards of defense OEMs Ultimately, this is no different than introducing a new domestic supplier.
There are no easy solutions to the stress facing defense development, production or maintenance suppliers and purchasers. While emergency measures (transactional acquisitions of foreign partners) may solve some immediate needs, structural challenges remain in NATO and allied defense markets.
Governments and industry have an opportunity to make a systematic shift to boost international defense sourcing and collaboration, because the next potential crisis, which we all hope to deter, is likely to be even more important.
Aleksandar Jovovic is a director in Oliver Wyman’s aerospace, defense and government practice.