James Hasik

In Texas and Ukraine, today is an Independence Day.

Today is March 2nd, Texas Independence Day. Each year on March 2nd, at the Texas Capitol, the Travis Letter is read aloud. For on February 26th of 1836, Lieutenant Colonel William Travis, commandant of the garrison at the Alamo of San Antonio, wrote thus to “To the People of Texas & All Americans in the World”:

I am besieged, by a thousand or more of the Mexicans under Santa Anna - I have sustained a continual Bombardment & cannonade for 24 hours & have not lost a man - The enemy has demanded a surrender at discretion, otherwise, the garrison are to be put to the sword, if the fort is taken - I have answered the demand with a cannon shot, & our flag still waves proudly from the walls - I shall never surrender or retreat. Then, I call on you in the name of Liberty, of patriotism & everything dear to the American character, to come to our aid, with all dispatch - The enemy is receiving reinforcements daily & will no doubt increase to three or four thousand in four or five days. If this call is neglected, I am determined to sustain myself as long as possible & die like a soldier who never forgets what is due to his own honor & that of his country - Victory or Death.

On March 2nd of 1836, at Washington-on-the-Brazos, assembled representatives of the Texan people declared their independence from the corrupt regime of a brutal dictator. On April 21st of that year, at San Jacinto, the Texan Army under General and future President Sam Houston defeated once and for all the Mexican Army under Antonio López de Santa Anna. Houston’s men captured the caudillo as he attempted to flee the battlefield, and in return for his (later broken) promise never to menace Texas again, they agreed not to shoot him on the spot as the war criminal he was. 

This entire episode seems somehow familiar, and particularly today.

For this year, March 2nd is also Ukrainian Independence Day, as will be August 24th, and every other day this year. For as their flags still wave proudly from their walls, Ukrainians fight for all of Europe, and beyond. They fight under Volodymyr Zelenskyy, a man whom I respect more than any so-called leader in any NATO capital, and whom I expect will come to be seen as William Travis and Sam Houston wrapped in one.

Today, their flag also waves from the front of my house. I have been embarrassed that I have not done more to help. For this year, in the West, March 2 is also Ash Wednesday. If we choose not to aid the Ukrainians in their time of peril, we will have much for which to atone.

I am disgusted that the governments of NATO member states have not done more. Thanks for the offer of the ride, as Volodymyr Oleksandrovych put it, and thanks much more for the ammunition, but really—actual bombing would be much better. NATO could end this tragedy quickly, with its overwhelming air power, by turning those comically inept assault columns into a second Highway of Death, all the way back to the Russian border.

Yet I can and do now resolve to do more. I learned of Texas Independence Day, and all that it means, during my many years living in Texas, culminating in my graduation from the University of Texas with a doctorate in public policy. To do more, I draw upon my skills as a political economist of international security, with long experience in the industrial, managerial, and technological tools that secure freedom. I can now turn my efforts to the study of economic warfare, to make pay the thugs who would assault the freedom of people in Ukraine, Taiwan, and yet more nations beyond. I reaffirm that I will not work with or on behalf of brutal regimes, regardless of who claims them as allies, and I call upon others to do the same.

For this reason, I am similarly rebranding my marketing efforts. I wrote my doctoral dissertation on marketing to the military during wartime, and over those years of research and writing, I learned the value of that function. Moreover, if I take anything from the events of the past week, it is that war is now upon us. As the American author Fannie Hurst famously said in November 1941, “we may not be interested in this war, but it is interested in us.” So I will market this war, this inescapable war, and the actions that we must take to bring economic warfare to the enemies of all that is good and right. I am now a wartime economist, for a world in which the peacetime tools are no longer appropriate.

God Bless Texas, and Glory to Ukraine.

Marketing Military Innovation: Lessons from the MRAP Program

This coming Thursday, I will be talking on a video seminar about my new book Securing the MRAP: Lessons in Marketing and Military Procurement, Texas A&M University Press, 2021). The event will hosted by our research center, the Center for Government Contracting, at George Mason University, and moderated by our Senior Fellow Stephanie Halcrow. I will be in the company of three of the people most responsible for making it happen: program manager Paul Mann, “Mother of MRAP” Susan Alderson, and marketing executive Damon Walsh. Registration is free, and available here.

 

 

The National Guard needs some Snowmageddon-mobiles.

"Digging out from almost two feet of snow in Washington DC today..." Wait—that's what I wrote six years ago this month. This past week it was a mere seven inches, and I'm mostly thankfully living across the river in Virginia. Mostly, because as Omar Abdel-Baqui and Alexa Corse of the Wall Street Journal reported this morning, the resulting traffic "Jam [on Interstate 95] Left Virginia Drivers Stuck for Over a Day." Fredricksburg further south got a full fourteen inches, and that led to fiasco.

 

Fiasco could have been partially averted if the gubernatorial administration of King Ralph Lord Northam had thought to activate our intrepid Virginia National Guard (since 1607!) on one of those classic national guard missions. See the comments in the article by Todd Gilbert, the incoming speaker of our House of Delegates. We have but ten days until Governor Glenn Youngkin takes over; I've got my red sweater vest around here somewhere.

 

Our National Guard has plenty of five-ton trucks, and those are rather better in the snow than the over-the-road tractor trailers that jack-knifed into the problem. But had anyone cared in 2016, or even after Hurricane Rita in 2005, then the National Guard Bureau could have made the case to the Pentagon that something better than a truck should respond to such climatological disasters. State legislatures could have spent their own money, for their National or State Guard forces. What both should have been buying was military-grade, amphibious snowmobiles like the BV series from BAE Systems Hägglunds in Sweden, or the Bronco from Singapore Technologies.

 

I would go on, but you can just read my column of six years ago. It's linked and reproduced below.

 

—————

 

Snowzilla, 24 January 2016

"Where is the Beowulf or the Bronco in Snowmageddon 2016?"

Corrective point: Snowmaggedon was an earlier storm in January 2009.

https://www.jameshasik.com/weblog/2016/01/where-is-the-beowulf-or-the-bronco-in-snowmageddon-2016.html

 

Digging out from almost two feet of snow in Washington DC today, I am remembering a remarkable gap between how the National Guard in this country is equipped, and the requirements of the missions it sometimes must undertake. To assist with emergency services weekend, the District of Columbia Guard mobilized about 100 troops, and pulled about 30 Humvees from their pre-positionings at fire houses and police stations around the city. The Humvees are solid domestic response vehicles, and probably at least as capable in snow as my all-wheel-drive Subaru. But neither is really suitable for blizzards and floods. DC has had plenty of snow, but heavy snow and coastal storm surges have been afflicting points all the way to New York. Dealing with those most adverse conditions requires a whole other category of conveyance: articulated, tracked, amphibious, air-portable, all-terrain vehicles.

 

Swedish firms have been in this business since 1954, and since the late 1970s, BAE Systems Hägglunds has sold over 11,000 Bandvagns (literally “tracked vehicles”) to customers in 37 countries. The Canadian Army took its Bv206s to Afghanistan. The US Army has a few that it calls the Small Unit Support Vehicle (SUSV, pronounced susvee, because US Army vehicles need awkward and anodyne acronyms). But neither the Army nor the National Guard really much of a fleet of these vehicles, and they’re mostly in out-of-the-way places.

 

About ten years ago, Hägglunds followed the 206 with the much larger BvS10 Viking, selling hundreds to the British Royal Marines, the Dutch Royal Marines, the French Army, and the Swedish Army. Last September, the company followed that with a logistical variant it named the Beowulf. As I wrote back then, Beowulf was a certified badass who (by the marketing pitch) “would travel immense distances to prove his worth against mortal enemies.” It’s all awesomely Nordic, because somehow, England’s national hero was Dano-Swedish. The company’s video makes for a good visual display of how the monster-slayer works.

 

Finland’s Sisu Automotive and Norway’s Narvik Technologies were once in this market too, but today the other main contender is Singapore Technologies. ST has sold its Bronco to the Singaporean Army and the Royal Thai Army, and substantially the same vehicle as the Warthog to the British Army. The Warthog was purchased specifically for Afghan service, as the Singaporean vehicles at the time offered heavier armor against landmines. On this blog back in May, I noted how the during the 2010 floods in Thailand, the Army made great use of its Broncos, to include driving the prime minister around washed-out streets. I don’t see that happening in New York right now.

 

Both BAE and ST know something about amphibiosity, as they are the second-round contenders in the US Marines’ Amphibious Combat Vehicle program. That ACV will be a very different vehicle—an 8x8 armored car—but still capable of swimming ashore from a landing craft. For many combat applications, the higher road speed, greater driving range, and heavier armor of an 8x8 make a lot more sense. But in the worst conditions, amphibious, air-portable, and all-terrain offer a whole lot of capability in one package.

 

I should disclose that I sometimes advise BAE Systems on marketing matters, though not at the moment. Perhaps I too would have missed that the company—either company—could have usefully had a handful of all-terrain vehicles prepositioned on the East Coast this week. Driving a few Beowulfs or Broncos on volunteer emergency missions around some of the hardest-hit counties might have made a difference on the ground, and certainly could have made an impression in the huge market of the United States. Of course, if anyone in the National Guard Bureau is reading, you might just send them a check, to make ready for next time with a small demonstration.

About that fighter jet—did Boeing’s trade protest really hurt Bombardier?

Patrick Host, the Americas reporter for Jane's Defence Weekly, recently asked me what I thought of the provision in the latest Canadian federal budget bill that companies doing economic harm to Canada would be penalized in upcoming military procurement competitions. Actually, he asked three experts and got three opinions. Mine was the slightly crazy notion that this was preparatory messaging for a decision to buy Saab's Gripen. As he reported, 

    Hasik said that the Gripen E, in the long run, would be the most affordable aircraft when compared with the other two offers, and that Canada would not be able to afford to buy the F-35A while it is acquiring 15 ships for its Canadian Surface Combatant (CSC) procurement. This programme, awarded to Lockheed Martin Canada, is estimated to cost CAN56–60 billion (USD44.8–48 billion). As of February, Canada has awarded five contracts totalling CAN739 million (USD591.5 million) for the CSC effort.

    “[CSC] is so much money that they are not going to have any money for anything left over,” Hasik said. “They cannot buy [CSC], and F-35A, and fit it into the budget.”

 

He subsequently asked me "did Boeing’s trade protest really hurt Bombardier?" I have not run the numbers on this, though with enough time I could and would. The short answer is almost certainly yes. What follows is the still-not-quantified but fairly convincing explanation.

 

The US is the largest market for civil aircraft. Bombardier rather bet the company on its C-series jet. At the end of 2016, Bombardier had 243 orders for the airplane, which is likely not nearly enough to break even on the program. At the end of 2017, it had 360, and 75 of those additional 117 were from Delta (in the US), ordered in April 2016. At this point, the aircraft had just entered service, and to rather rave reviews, so further orders were looking quite possible.

 

Boeing, however, really wanted to sell 737s to Delta, at a much higher price. So, Boeing complained to the Commerce Department in April 2017, and Commerce decided that Bombardier was "dumping" the aircraft—pricing them below the total cost of production, including past fixed costs. I use quotes because that's not a term that economists recognize as valid. Amongst the United States, if the pricing is not designed to remove a rival from the market (an anti-competitive move), then it's just an enterprising effort at gaining a foothold in a market. But from outside the US, it's somehow offensive? Please.

 

So Trump's Commerce Department, under the fiercely anti-competitive Wilbur Ross, gradually increases tariffs from 0 to 80 to 300 percent tariff on this one type of jet from July through October 2017, because its "analysis" showed that each was somehow the number. At hearings, Sun Country and Spirit Airlines, both from the US, speak up for Bombardier. In December 2017, it scaled that number back to 290 percent. I strongly doubt that the Commerce Department knows what Bombardier's costs were, but that didn't matter to them. A separate issue is how such an imposition of a tariff—a tax, after all—is constitutional. The executive branch isn't supposed to levy taxes all on its own. Even George III didn't have that power.

 

Ten days later, on 16 October 2017, Bombardier sold half the program to Airbus, for one Canadian dollar. So here's the event study, in a nutshell: 

 

1. (Summer 2017) Bombardier finally starts selling C-series jets, and mostly in the US.

2. (6 October 2017) Boeing get a huge tariff imposed.

3. (16 October 2017) Bombardier sells half that business for almost nothing.

 

I do not have another explanation beyond Boeing and Wilbur Ross conspired to take out Bombardier. What happened, though, was almost comical.

 

First, Airbus buys the business, and relocates production of the aircraft (now the Airbus 220) for US customers to Alabama, to avoid the tariff.

 

In any case, the tariff gets removed four months later, in January 2017, by unanimous vote of the US International Trade Commission, to which Delta and Bombardier had appealed. So either the entire ITC was in Trump's pocket (highly unlikely, as the current chairman was initially nominated by Obama), or the Commerce Department is staffed with hacks or cronies (more likely).

 

Those orders then do indeed materialize—the program is now up to 649 aircraft, more than enough to break even. That is possibly because the A220 is said to be a great airplane, and customers trust Airbus to deliver on time.

 

Fast-forward to 2021, and the Canadian federal government disqualifies Boeing from its competition for the RCAF's next tanker, and signals hard about the same regarding its fighter.

 

Net-net, the big losers were Boeing and Bombardier, and the big winner was Airbus. How's that for strategy from 100 North Riverside Plaza? What's really amazing is that no one seems to have considered the possibility that Airbus would want to enter that market segment. How, I cannot imagine. 

 

For what it's worth, I am typing all this up because I am planning to eventually write a teaching case study on the episode, for a course that I eventually want to offer on the political economy of the international aircraft market. There may just be a market for better thinking on strategy in that line of work.

 

James Hasik is a senior research fellow in the Center for Government Contracting at George Mason University, and a senior fellow in the Scowcroft Center on Strategy and Security at the Atlantic Council.

James Hasik is a senior research fellow in the Center for Government Contracting at George Mason University, and a senior fellow in the Scowcroft Center on Strategy and Security at the Atlantic Council.

A Few More Thoughts on Bailing Out Defense Contractors

After posting my recent article from Defense Acquisition Research Journal (“How to Bail Out a Defense Contractor”), I received and posted the following comment from Seth Weissman, a professor of economics at the Eisenhower School of the (US) National Defense University, where I too was on faculty across two academic years:

    Interesting article, as I expect from you. [JMH: thank you, Seth!]

    I was surprised that you didn’t mention/consider second-order effects. The (often reasonable) expectation of some form of bailout incentivizes risk-taking, which increases the probability that some form of bailout will be required.

    There is an alternative to bailout, which is buyout. I’m not in favor of government production in general, but the threat of buyout (in special cases) might both mitigate concerns about the industrial base and counter incentives for industry that might otherwise seek to “gamble for redemption.”

    Re: government ownership: I don’t see evidence firms like Fincantieri (50% Italian government owned) are less profitable/efficient than fully private-owned peers. Do you have any insight into that?

I promised (in the comments as well) a thoughtful response. Here goes.

I think that Seth is quite correct about the second-order effects. I thought that I had indirectly addressed that on page 173 of the article, in this passage:

    The affair has been cited as evidence that defense contractors can shake down governments by citing the risk of their own financial leverage. Indeed, from the 1950s through the 1990s, U.S. contractors generally carried twice the debt load of comparably sized non-defense U.S. firms. This commitment to future debt service limited room for renegotiating procurement contracts, which paradoxically increased the value of the firms by increasing the ex ante costs of bankruptcy, and transferring those to the government (Spiegel, 1996).

The reference, of course, is Yossi Spiegel's "The role of debt in procurement contracts," in the Journal of Economics and Management Strategy, vol. 5, no. 3. Over at Tel Aviv University, Spiegel has done some other interesting work on the economics of procurement and regulation, which is available at his website: https://www.tau.ac.il/~spiegel/. It’s quite possible that management at Lockheed realized that the company could shake down the government if the C-5 and L-1011 development programs went badly, and figured on the gamble. Similarly, would Airbus have actually launched that remarkably unprofitable A380 project without its governmental backstop? And as comfortable as I have found that jet (thanks, Lufthansa!), did the world really need a double-decker super jumbo? Probably not.

But as for second-order effects generally, I could and should have made my narrow point more clear. I would have liked to have explored the question further, but I ran out of space for an article in DARJ. I will aim for that the next time I write on the subject, and I should mention it the next time I teach on it.

On the next point, governmental buyouts give me pause as well, but I do think that Seth makes an important suggestion. These happen, even in the United States. The US federal government took control of Government (er, General) Motors in 2008, concluding that the company was more useful recharged (that’s my electric vehicles pun) than liquidated. The government made its money back, and it is once again doing some interesting work in defense contracting. On the other hand, the federal government’s consolidation in the 1970s of passenger rail service into Amtrak has left the country saddled with a cash-devouring perk for well-to-do intercity commuters in the Northeast (I’m talking about you, Joe) at the expense of the rest of the country. That has been the situation for about 50 years and running. Now, with about a third of the country working from home, and quite successfully, the Biden Administration wants to dump a bunch more money into such “infrastructure” (and not-so-infrastructure), including that beloved Amtrak. Politics what they are, these things have a tendency of going zombie, and for the long run.

But what if the firm is more tailored to production intended for the government—say, for the military or intelligence services? Is there less risk of zombification of industry if the need is narrower? My trepidation continues here as well. Just think of the US military’s depots, arsenals, laboratories, and shipyards. They’re not exactly engines of efficiency and innovation, but they soldier on, year after year, as the leadership of the military cannot quite say “basta!” in a public hearing before members of the Depot Mafia (er, Caucus) in the US Congress.

And yet, we now have some very beneficial examples of organic industrial capabilities provided with efficiency and innovation, in the form of the military’s software factories, like the US Air Force’s Kessel Run and the US Space Force’s Kobayashi Maru. One has to admire the branding, or at least the cheekiness of the branding. Perhaps these will grow into sprawling, cash-devouring jobs programs, but I do not sense that they are fated so. If these two military services can maintain the right culture in those relatively small units, they may continue to do great work for years to come. How to know what’s essential for that culture over the long run is another important research question in defense economics and military sociology. In any case, it is likely that we successfully create such organizations ab initio, and not through fire-sale buyouts.

Regarding profitability, I can address the particular case of Fincantieri, and for that matter, the sole larger Italian defense firm, Leonardo (née Finmeccanica). It is not impressive. Let us consider their EBIT margins (earnings before interest and taxes, divided by revenues) before extraordinary items, as this will get at the overall, ongoing utility to the company to those with claims on its residual output (that is, the bondholders, the stockholders, and the tax people). In 2018 and 2019, Fincantieri made 7.6 and 5.5 percent, and Leonardo 5.8 and 8.4 percent. Deduct what you owe the bondholders and the tax authorities, and there is not much left over for those holding equity. Defense contractors in the United States generally do much better.

And yet, even here, there may be value in that lack of value. Last year, Fincantieri won the US Navy’s FFGX competition, for ten to twenty new frigates, with a version of its much-admired Fregata Europea Multi-Missione (FREMM). That the American admiralty loved that ship was no surprise; I had been hearing that from retired officers and officials for some time. The surprise was the bid, which probably beat that of all competitors, for what may have been the most capable ship on offer. Fincantieri is an efficient shipbuilder, but really—how did our Italian friends do that? The answer may be found in Fincantieri’s victory-lap press release, which thanked the Italian government for its support. The terms are not publicly known, but one can imagine that Fincantieri decided to bid at or below cost on the first few, gambling that a good learning curve would lead to profits later. If not, hey, our big shareholder is offering to cover us, just for the value of the Italian-American defense-industrial relationship. Profits may not be the government shareholder’s sole source of value. In most of the economy, that would be very, very bad. In defense, there may occasionally be another answer.

On a side note, for the United States, a country in which people love to complain about Europeans not spending enough on their defense, this is a delightful outcome. Italians are spending directly on American defense. Really—it’s a net transfer of value ex ante from Italian taxpayers to anyone in the United States who values its navy. What’s not to like? Well, you could be one of the losing bidders, talking about level playing fields, and a lack of that offers its own problems in the long run. But even in the United States, losing money for market access is not generally an anti-competitive issue for the antitrust authorities.

The question of Fincantieri, of course, begs Seth’s broader question: what systematic evidence do we have on the comparative profitability of privately-owned versus partly publicly-owned defense contractors worldwide? I have not seen such a study, but it would be easy enough to effect. Just download the financial data and run the tape, so to speak. I would be interested in examining the full panel of data for trends over time, particularly to test for the effect of changes in the percentage of private ownership, whether by privatization, public acquisition, or just additional private or public investment. When I have some time, I may look into this—which means, unfortunately, not this week. Or month. Or maybe in 2021 at all. I have a few things going on.

James Hasik is a senior research fellow in the Center for Government Contracting at George Mason University, and a senior fellow in the Scowcroft Center on Strategy and Security at the Atlantic Council.