Opportunities for Japan in the U.S. Defense Market Society of Japanese Aerospace Companies (SJAC) Tokyo, Japan October 17, 2014
Overview of the U.S. Defense Market The U.S. defense budget is the largest in the world, at some $500 billion Although declining, still larger then the next 8 countries defense budgets combined There is a window of opportunity for Japanese companies to enter the U.S. defense market Driven by the U.S. defense budget, change in Japanese policy and need for emerging technologies The U.S. system is rules-driven, but advocacy is important. Need to appeal to: The customers (Army, Navy, Air Force, OSD agencies) The purchasers (Over 50 buying organizations: Defense Logistics Agency, with 9 buying centers; the commodity commands, 11 in the Army, 10 in the Air Force, multiple Navy commodity command, joint service commands, Special Forces commands; the OSD Agencies such as MDA) The funders (Department of Defense, White House and Congress) The prime contractors (likely that Japanese companies will be a sub contractor to a U.S. prime) You may have to sell your product to four groups at once. Success requires: Knowing how decisions are made and who has buying authority Knowing competitor s prices, logistics costs, reliability information Having a performance, cost or reliability advantage Leveraging laws to mitigate advantages of domestic companies in the U.S. market Partnerships with U.S. companies (operate as a domestic U.S. company) Foreign Comparative Testing to demonstrate capability to U.S. buyers 2
U.S. Defense Market DoD Budget Changes DoD Annual Budget ($ billions)(blue bars) $800 $700 $600 $500 $400 $300 $200 10% 8% 6% 4% 2% 0% -2% -4% -6% %Annual Growth Rate (red line) Steady growth during Iraq and Afghanistan engagements Military withdrawals, domestic economic hardship and the resulting sequestration created a sharp downturn in defense spending Cuts have been uneven, with program cancellations and steep cuts to preserve budgets for priority programs such as F-35, and strategic needs such as cybersecurity and ISR $100 $0 2005 2006 2007 2008 2009 2010 2011 2012 2013-8% -10% Despite spending decline, the U.S. is still roughly half of the global defense market 3
U.S. Defense Market Investment Categories Weapons Category FY 2014 Enacted* FY 2015 PB Request* Aircraft and Related Systems $42.4 $40.0 C4I Systems $6.2 $6.6 Ground Systems $7.4 $6.3 Missile Defense Programs $8.7 $8.2 Missiles and Munitions $9.5 $9.0 Mission Support $48.5 $44.4 Science & Technology (S&T) $12.0 $11.5 Shipbuilding and Maritime Systems $23.0 $22.0 Space-Based Systems $6.2 $6.2 Total Investment $163.9 $154.2 With budget cuts, DoD seeks to protect key capability areas in support of DoD s strategy, including cyber; missile defense; nuclear deterrence; space; precision strike; intelligence, surveillance, and reconnaissance (ISR); and counter terrorism and special operations. * Dollars in Billions Source: US DoD FY15 Budget Request Overview, March 2014, http://comptroller.defense.gov/portals/45/documents/defbudget/fy2015/fy2015_budget_request_overview_book.pdf 4
Channels for Entry into the U.S. Market Foreign companies establish or acquire U.S. subsidiaries Operates with a Special Security Arrangement or Proxy Board to allow for day-to-day control by U.S. citizens and insulation of foreign owners from matters related to U.S. national security Organic entry through targeted programs, technologies and relationships Identify particular products and applications, and initiate dialog with DoD customer and teaming partner candidates to create a role as a critical supplier for programs Leverage existing business relationships to capture defense subcontract work Extend Boeing Commercial Aircraft relationships into Boeing defense products Capture work share on Lockheed Martin programs as part of ongoing loyalty for Aegis system purchases International Cooperative Development Programs cooperative effort between DoD and friendly Defense Ministries to develop new systems Requires government agreements up front Work share is split among participating countries Foreign Comparative Testing (FCT) program to test items and technologies of foreign allies that have a high Technology Readiness Level (TRL) in order to satisfy valid defense requirements quickly and economically U.S. buyers are incentivized to include foreign products in domestic testing Requires US buyers to sponsor a FCT Note: https://cto.acqcenter.com/osd/portal.nsf/infofct?readform 5
Archetypes for Foreign Company Success with U.S. DoD Model Business in US (revenue) US presence US activities Value chain roles Non-US developed subsystems in particular mission areas Home market approach where country subsidiaries have standalone end-to-end capabilities Technology-driven, offering a unique capability developed in maturity beyond US firms 9% 45% >80% (est.) 21 locations; 4% of global workforce Major products developed outside US; BD and some engineering in the U.S. Major subsystems sold to OEMs, some prime integration roles Semi-autonomous business unit with all functions Standalone operations in the U.S.: R&D, engineering, business development, program execution Prime integrator with numerous platform and technology specialties Small subsidiaries with limited production, engineering and R&D Technology and management in Israel; final assembly and limited R&D in the U.S. Teaming partner and subcontractor to OEMs; limited direct DoD sales 6
International Cooperative Development Examples F-35 MEADS SM-3 Block IIA Nine partner countries, with suppliers in each country producing parts for all aircraft, not just their own Japan is one of three FMS customers, and can compete for industrial participation opportunities IHI in contract with Pratt & Whitney to produce F135 engine components for Japanese fleet of aircraft Joint effort between the U.S., Germany and Italy to develop a next-generation air defense system to replace the Patriot missile system $3.4B contract issued in 2005 Overseen by MEADS Management Agency Co-development between the Missile Defense Agency and Japan s MoD Projected $3B development cost split evenly between US and Japan Mitsubishi Heavy industries working with Raytheon; MHI focused on the nose cone, second- and third-stage motors, staging assembly and steering control 7
Foreign Comparative Testing Examples Buffalo Mine Clearance Mine-protected clearance vehicle was developed by Denel-Mechem in South Africa U.S. conducted tests for mine clearing operations particularly for Improvised Explosive Devices (IEDs) System was acquired by DoD and deployed in Iraq to protect U.S. soldiers Naval Strike Missile Norwegian defense firm Kongsberg developed the fifth-generation long range precision strike missile for use on its frigates and corvettes U.S. Navy was interested in its use on the Littoral Combat Ship (LCS) platform FCT contract awarded for test of engagement of a surface target at 185 km 3D Audio Integration Danish company Terma made Pilot audio system upgrade for A-10 and F-16 aircraft Active noise reduction, spatial separation of multiple radio channels and 3D threat audio cueing from on-board system FCT funding for integration and field user evaluation 8
What U.S. Companies Are Looking For New technologies Looking for new and innovative technology to meet future performance needs Low cost suppliers Looking for Tier 2 or 3 suppliers who can provide a cost advantage over existing suppliers Partners who will invest their own capital Investing to mature a technology or a system, potential for joint development Access to overseas markets Bringing access to new domestic and regional markets and opportunities You need to know the strengths and weaknesses of the existing suppliers, and the source of your competitive advantage 9
How to access the U.S. defense market Be aware early of government buying opportunities Research FedBizOps (mandatory government buying announcements) Research congressional budget documents Create interest from the customers and buyers Research competitor s prices, logistics costs and performance to determine your advantage Visit and brief U.S. buying organizations and project offices, attend information sessions Develop relationships with specific buying commands Seek sponsorship for Foreign Competitive Testing Demonstrate your products at major trade shows Know U.S. Acquisition processes Seek sole-source procurement justification whenever possible Influence requirements early through customer demonstrations and briefings Seek partnerships with U.S. companies Access to opportunities and information Deals with many domestic regulations and concerns Don t be afraid to take the first step! 10
Our Biographies LTG (Ret.) Patrick O Reilly Senior Vice President, Strategic Initiatives SM&A +1 256 417 5378 Patrick.OReilly@smawins.com Drosten Fisher Director, International Business SM&A +1 202 538 2059 Drosten.fisher@smawins.com Patrick O Reilly, Lieutenant General, U.S. Army (Retired), is a senior advisor with SM&A, an international Defense Sector consulting firm, with expertise in strategic management of aerospace, automotive, and emerging technology programs. He is also a senior fellow at the Atlantic Council, a Washington DC think tank, engaging global government and business leaders on leveraging strategic technologies. He was the senior technical negotiator on over twenty international agreements including those with Japan, Poland, Romania, the United Kingdom, and Australia. During his thirty-four year Army career, Patrick served as the Director of the U.S. Missile Defense Agency, and as Program Manager of the following missile defense programs: Ground-based Midcourse Defense, Terminal High Altitude Area Defense, Patriot Advanced Capability-3, and directed energy programs. He was also responsible for acquiring all U.S. Army vehicles and combat engineering equipment. He served in command and staff positions and as an Associate Professor of Physics at West Point. Patrick is a West Point graduate and has Masters degrees in Physics, National Security and Strategic Studies, and Management. Drosten Fisher is Director, International Business, for SM&A. His focus is working with both US and international clients to grow their business and access opportunities. He joined SM&A from Bridgewater Associates, a hedge fund, where he worked with their international and Sovereign Wealth Fund (SWF) clients. Previously, he was a Senior Engagement Manager at Monitor Group serving corporate and government clients in the US and Middle East, and led a research series on SWF investment. His work has been quoted in Newsweek, BusinessWeek, and MEED. In 2010, Drosten headed Monitor s work in Abu Dhabi, where he ran a major competitiveness project for the Abu Dhabi government. An Arabic speaker, he has carried out projects throughout the Middle East and Europe, including in Saudi Arabia, Israel, the United Arab Emirates, the United Kingdom and Switzerland. Earlier in his career, Drosten was a policy analyst at the UK Ministry of Defence and taught English in Saudi Arabia. He received a Masters degree in International Relations from Georgetown University and a BA in English Literature from Oxford University. Drosten has also been a researcher and ghostwriter on books by former CIA Director George Tenet and the King of Jordan. He was a Term Member of the Council on Foreign Relations. 11
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