Monday, May 26, 2014

[RANT:] Canadian JSF Industry Group... Just... Ugh...

Godzilla facepalm.  It's that epic.
Late last week, a group representing "over 35" Canadian industrial partners involved with F-35 production carpet bombed sent a "open letter" to Canadian media outlets.  Predictably, they insist that an actual competition would be unnecessary, expensive, and time consuming.  They also warn of impending doom should Canada delay ordering the Joint Strike Fighter any longer.  Nevermind that these are the same companies that stand to profit from an F-35 selection and are certainly biased.

The open letter can be seen here at the Ottawa Citizen or here at Canadian Skies magazine.  I'm sure it is available a few more places as well.

The "Canadian JSF Industry Group" (CJIG for short) falls back on the same tropes and myths that most F-35 supporters do; claiming that Canada would lose out on billions of dollars worth of work and risk missing out on all that JSF wonderfulness.

Right...

Let us just go with a few of outstanding statements:


From a business perspective, the short term reality is that current Canadian F-35 contracts and jobs will very soon start going to countries that are today buying the aircraft. The decision delays to this point have already cost Canadian companies 100’s of millions of dollars in new opportunities.
Wrong.  Canada is a level 3 partner in the JSF industrial program.  We have been from nearly the start.  That means we have invested millions of dollars already into the program in return for the privilege of being able to bid on F-35 related industrial work.

Contracts and jobs are being doled out by Lockheed-Martin as they see fit.  This explains why Japan, South Korea, and Israel have gotten very lucrative offset deals despite not being early investors in the JSF program.  These contracts were dangled like a carrot before F-35 selection.  Since Canada committed early, why bother?

Consider this:  Australia is a Level 3 partner, same as Canada.  They have recently ordered 72 F-35s, possibly more in the future.  Yet Australia's economic benefits have been fairly anemic thus far.  Contrast this with Japan, which did not select the F-35 until only recently.  In return for a promise to order 42 F-35s, Lockheed has rewarded Japan with a final assembly, along with maintenance, repair, and upgrade capability.

Level 3 partner, The Netherlands, will only be able to purchase 37 F-35s.  Like Australia, their industrial offsets have been rather unremarkable.  Meanwhile, South Korea, which recently chose 40 F-35s over 60 F-15SEs, will have Lockheed-Martin's full partnership in a bid to replace the USAF's aging T-38 Talon trainer with the KAI T-50 Golden Eagle.  This could mean anywhere from 350 to over 1000 T-50s sold in return for buying 40 F-35s.  Not a bad deal.

Looks like holding out on the F-35 rewards that nation with a better offer.

"Bad Management" would be accepting these issues.
This is about making a good business decision not just conducting a competition – using a competition to simply delay making a decision is costly, unnecessary and not in the interests of Canadian taxpayers or Canadian industry.
That is bad management, bad policy and bad for business.
Do these companies make major purchases without comparing prices or products?  Do they simply rush out and purchase the first thing that comes along?  Do they hire the first person to show up to the job interview and tell the rest to go home?  Do they promote people based on whoever happens to coolest car?  If they do, maybe they shouldn't be making aircraft parts.

I'm no MBA, but I would think rushing into a decision without doing a cost/benefit analysis sounds more like bad management, bad policy, and bad for business.  Especially when preparing to spend almost $50 billion on a troubled product.

Unfair battle of the X-planes.  X-32 (left) and X-35.

The F-35 has won every competitive process it has been in:- US & 8 MOU Partner Nations – ‘Battle of the X-Planes’ (2001); Japan (2012); Israel (2012); Netherlands (2013); & Korea(2014).
Er...  Sort of.

The "Battle of the X-Planes" was hardly what one would call a fair competition.  Nor is the X-35 a fair representation of the the F-35.  Lockheed Martin was given a mulligan on the need to demonstrate an internal weapons bay.  Its competitor, the Boeing X-32, was not.   Not only did the X-35 not have the requisite weapons bays, but it didn't have a full radar, avionics package, helmet mounted display, or any of the other whiz-bang JSF equipment that's causing so much development trouble now.  It didn't even use the same engine as the F-35.

Lockheed Martin won the "Battle of the X-Planes" with the equivalent of a Pontiac Fiero wearing a Ferrari body kit.  That makes you wonder just how bad the X-32 must have been, doesn't it?

As for Japan, South Korea, Israel, and The Netherlands, re-read my response to the first quote.

Choices are hard.  
A ‘competition’ will take 3 years to run and the only significant outcome will be hundreds of millions of dollars of more lost opportunities for companies across Canada. 
Canada isn't making any military purchases until at least 2016.  The CF-18 replacement likely won't take place until 2018-2020 at the earliest.  This is convenient, as the F-35 won't be ready until December 2016, and even then, that will be with limited Block 3F functionality.  Even then, 2016 seems increasingly optimistic.

What about the outcome?  For one, Canadian taxpayers would get assurance that the RCAF is getting the best equipment based on their needs at the best possible price.  Better to spend a few million if it means possibly saving billions.  It also gives competing manufacturers a chance to match or exceed Lockheed-Martin's offset deals.  At the very least, it may encourage the JSF leadership to "sweeten the pot" a little bit, like it recently did with Turkey.

Canada's eventual CF-18 replacement has three priorities.

  1. Enable the RCAF to fulfill its needs in regard to air-policing and NATO commitments.
  2. Give the Canadian taxpayer with value for their money.
  3. Provide opportunities for Canadian industry to create jobs and economic growth.
These priorities are listed in order.  The RCAF has a job to do, it is important we let them do it by giving them the equipment they need.  Otherwise, what's the point?  Almost as important are the needs of the overburdened Canadian taxpayer, who do not exist solely to fatten the pockets of defense contractors.  We demand roads, schools, hospitals, clean energy, and telecommunications more than we demand fighter jets.  As much as we'd like to provide our folks in uniform the very best, we simply don't have the economic means to do so.

Canadian industry is a very distant third priority.  While "jobs, jobs, jobs" make for great headlines, tag lines, and talking points; in the end, defense contracts are little more than glorified public works contracts, with a profit margin going to the winning company.  In the case of the JSF, Canadian aerospace firms are bidding on manufacturing work.  Basically, we are aggressively trying to make widgets.

Foxconn, one of Apple's "Industrial Partners".

Making widgets is great and all, but doesn't offer much in terms of growth.  Canada isn't developing any intellectual property for the F-35, nor are we developing software.  These Canadian firms are the equivalent to Foxconn, the Chinese manufacturer that assembles iPhones and iPads.  Apple still owns all the intellectual property rights, provides all the software, and collects the profits.  Apple also gets to relocate manufacturing whenever it so desires.

[NOTE:  I'm a bit of an Apple fanboy, and I love the fact that they are moving production back to North America.  I just think it makes a great example of how manufacturing jobs aren't as awesome as some would have you think.]

Detroit.  How manufacturing jobs pay off in the long term.
If you ever want to see how a predominantly manufacturing based economy works out, go to Detroit. (Just don't leave your car, and keep your doors locked).  Don't get me wrong, some parts of Detroit are still quite nice, especially now that the "Big Three" automakers are recovering from the recession.  It is the surrounding areas of what used to be "The Motor City" that have become akin to a third-world country.

Detroit used to be the 10th largest American city.  Since 1950, its population has dropped more that 60%.  In 2013, it declared bankruptcy.

What happened?

In the 1950s to the 1990s, Detroit and the surrounding areas didn't just make cars, they made parts for cars.  Door panels, spark plugs, windshields, you name it.  Manufacturing jobs were plentiful, high-paying, and didn't require much more than high school education.

Then, as free trade agreements relaxed the barriers to foreign outsourcing, those plentiful, high-paying jobs dried up.  Profit hungry automakers and parts suppliers shut down factories in favor of building new factories in countries with lower wages and lower standards of living.  This is now so common place that a "Japanese" Toyota Sequoia has more U.S. content than an "American" Jeep Patriot.  This process repeats into an eventual "race to the bottom" where parts suppliers are squeezed into paper thin profit margins if they manage to survive at all.

This is why Canada's industrial participation in the JSF is ultimately a fool's crusade.  We may spend billions on acquisition, while Canadian aerospace firms spend millions on training employees and buying new equipment in order to make F-35 widgets.  In order to win JSF work, Canadian firms would have to competitively bid relying on paper thin profit margins, hoping volume will make up the difference.  If another firm comes along offering to make those widgets slightly cheaper, Canadian manufacturers will have to cut costs to match or simply lose out.  Even then, Lockheed-Martin may decide to award contracts as ways to sweeten the pot to prospective F-35 buyers.  Since the Canadian firms don't actually own the intellectual rights to whatever widgets they are making, there is little they can do as long nobody breaks a contract.


Canada's aerospace industry can do more than simply make widgets.  A lot more.  Why fight for scraps, when we clearly deserve the steak dinner with all the trimmings?

6 comments:

  1. Doug, I enjoy reading most of your posts and find them interesting however, this has to be the best thing you have written, IMO. This entire process the JSF have been trying to force at us completely turns around the whole free market economy. A process that is unlikely to favour Canadians as our leaders seem to be willing to bend on their knees to comply. Thus, any other nation who flexes their open market power will likely receive what we sacrificed.

    I've often wondered why countries who have committed to purchasing the F35 seem to receive offsets comparable to Canada and we haven't even confirmed our intentions yet. It seems leaders in nations like Australia are in a "field of dreams" if they are expecting a windfall of economic offsets if they haven't negotiated them already. I don't mean to criticize the citizens of Australia I am just concerned we would be in the same position.


    When you consider this with your "razor thin margins" perspective, the whole process certainly does not seem to favour Canadians at all. Furthermore, how much of the materials necessary for production of the contracts are actually coming out of Canada. My hunch is a great deal of the offsets are going back to Lockheed or other American military suppliers.


    In regards to our eligibility to bid on contracts as part of the JSF program. As noted we can bid however, I read where Alan Williams suggested even without being part of JSF we will benefit as the American and Canadian economies are so integrated. For example, Pratt and Whitney Canada would either directly make engines for the F35, indirectly make parts or take on extra work load. Sorry, I can't find the quote on this although, the comment was in regards to his book Canada, Democracy, and the F35 (http://www.queensu.ca/dms/claxton.htm).


    I know you prefer to stay away from political discussions but it looks like you have moved in that direction with your 'Rant". This is good though as it highlights the flaws of this program and that Canadians can seek better options for Canadian defense and economic needs.

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  2. Ditto for sure, well said Shawn, I completely agree........

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  3. Is there a petition at change.org or democracy watch to demand from our government a competition for fighter jet procurement? I suspect a fair number of Canadians are concerned about the lack of due diligence in making an expensive purchase.

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  4. Thanks for the kind words!


    I don't mind going political if it means getting an honest and fair fighter competition. I won't go so far as to blame or endorse a particular political party, as there is plenty of blame for all sides.

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  5. Boy it is ring to hurt you when Canada announces that they will still get the F-35. Of course, then you will rant on that it wasn't fair etc.

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  6. As a Canadian taxpayer, yeah... It will hurt me.


    My biggest concern is that increasing costs will result in the RCAF getting less fighters than what they need and getting hobbled with reduced fight hours. At the end of the day, these aircraft are just tools. Proper training makes more of a difference than what fighter we get.

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