holding the edge: maintaining the defense technology

Holding the Edge: Maintaining the DefenseTechnology Base—Vol. II, Appendices

January 1990

OTA-ISC-432NTIS order #PB90-253345

Foreword

OTA’S report “Holding the Edge: Maintaining the Defense Technology Base,” noted thatAmerica’s defense technology base has weathered significantly, with challenges to U.S.high-Technology firms from abroad, increasing dependence on foreign and civilian sources oftechnology for use in military systems, and growing technological sophistication of ouradversaries.

These challenges formed the basis on which the Senate Committee on Armed Servicesrequested an assessment of the defense technology base. The first report of that assessment,"The Defense Technology Base: Introduction and Overview” (OTA-ISC-374, March 1988),gave an introduction to the defense technology base, while the second, “Holding the Edge:Maintaining the Defense Technology Base” (OTA-ISC-420, April 1989), analyzed severalmajor problems in depth. It examined the management of Department of Defense laboratories,how technologies are introduced into defense systems, and the exploitation of civiliantechnologies for defense needs, keeping in mind the questions of encouraging rapid militaryaccess to civilian technologies, as well as maintaining the health of the technology base.

In the course of producing the “Holding the Edge” report, extensive analyses wereperformed that were too voluminous for inclusion in the report. I believe that those analysesare of sufficient interest to be presented in their own right, and they are included in this volume.Three of the appendixes deal with the DoD acquisition processes, three deal with industry casestudies (fiber optics, advanced composites, and software), and the remaining two appendixesconcern European and Japanese defense technology research, development and management.

The help and cooperation of the Army, Navy, Air Force, the Office of the Secretary ofDefense, the Department of Energy, NASA, and the National Institute of Standards andTechnology are gratefully acknowledged.

Defense Technology Base Advisory Panel

Michael R. BonsignorePresidentHoneywell International

William CareyConsultant to the PresidentCarnegie Corp. of New York

Thomas E. CooperVice PresidentAerospace TechnologyGeneral Electric

John DeutchProvostMassachusetts Institute of Technology

Walter B. Laberge, ChairVice President of Corporate Development

Lockheed Corp.

Robert FossumDeanSchool of Engineering and Applied SciencesSouthern Methodist University

Jacques GanslerSenior Vice PresidentThe Analytic Sciences Corp.

B.R. InmanAdmiral, USN (retired)Chairman and Chief Executive OfficerWestmark Systems, Inc.

Paul KaminskiPresidentH&Q Technology Partners, Inc.

Lawrence KorbDirectorThe Center for Public PolicyBrookings Institution

George KozmetskyExecutive Associate-Economic AffairsUniversity of Texas SystemUniversity of Texas, Austin

Ray L. LeadabrandPresidentLeadabrand & Assoc.

Jan LodalPresidentINTELUS

Edward C. MeyerGeneral, USA (retired)

Robert R. MonroeVice Admiral, USN (retired)Senior Vice President & Manager, Defense & SpaceBechtel National, Inc.

William J. Perry (ex officio)Managing PartnerH&Q Technology Partners, Inc.

Richard PewPrincipal ScientistBBN Laboratories, Inc.

Herman PostmaSenior Vice PresidentMartin Marietta Energy Systems, Inc.

Judith ReppyAssociate DirectorCornell Peace Studies Program

Richard SamuelsProfessorDepartment of Political ScienceMassachusetts Institute of Technology

John P. ShebellManager, RAMP EngineeringCustomer Service Systems EngineeringDigital Equipment Corp.

Michael ThompsonExecutive DirectorIntegrated Circuit Design DivisionAT&T Bell Laboratories

S.L. ZeibergVice President Technical OperationsMartin Marietta Electronics and Missiles Group

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for thereport and the accuracy of its contents.

iv

OTA Project Staff-Defense Technology Base

Lionel S. Johns, Assistant Director, OTAEnergy, Materials, and International Security Division

Peter Sharfman, International Security and Commerce Program Manager (through February 1989)

Alan Shaw, International Security and Commerce Program Manager (from March 1989)

Alan Shaw, Project Director

William W. Keller

Gerald L. Epstein

Laurie Evans Gavrin 1

Christine Condon2

Todd La Porte

Congressional Research Service

Michael E. Davey

Contributor

Administrative Staff

Jannie Home (through November

Cecile Parker

Jackie Robinson

Louise Staley

Contractors

P. Robert Calaway

Arnold Levine

MIT/Japan Science and Technology

1988)

Program

Workshop on the Relationship Between Military & Civilian Fiber OpticsJohn R. Whinnery, Chair

University Professor EmeritusDepartment of Electrical Engineering and Computer Sciences

University of California, Berkeley

James H. DavisDirector, Fiber Optics Program OfficeNaval Sea Systems Command

Brian HendricksonChiefElectro-Optics Technology BranchU.S. Air Force

Raymond E. JaegerPresident and CEOSpecTran Corp.

Donald B. KeckDirectorApplied Physics Research & Development LaboratoriesComing Glass Works

Tingye LiDepartment HeadLight Wave Systems Research DepartmentAT&T Bell Laboratories

John W. LyonsDirectorNational Engineering LaboratoryNational Institute of Standards and Technology

Alan McAdamsProfessorJohnson Graduate School of ManagementCornell University

William C. McCorkleTechnical DirectorU.S. Army Missile Command-Redstone Arsenal

Kenneth NillExecutive Vice PresidentLasertron

Paul PolishukPresident and ChairmanInformation Gatekeepers Group of Companies

Jan H. SuwinskiSenior Vice President and General ManagerTelecommunicationsCorning Glass Works

Robert W. TarwaterLight Guide Fiber & Cable ManagerAT&T Network Systems

Victor R. BasiliProfessorDepartment of Computer SciencesUniversity of Maryland College Park

Elaine BondSenior Vice PresidentThe Chase Manhattan Bank

Mike DevlinExecutive Vice PresidentRational

Barry BoehmChief ScientistTRW. Inc.

Workshop on the Relationship Between Military & Civilian SoftwareLarry E. Druffel, Chair

DirectorSoftware Engineering InstituteCarnegie-Mellon University

Jeffrey M. HellerSenior Vice PresidentElectronic Data Systems

Dana P. LajoieTechnical DirectorGovernment Systems GroupDigital Equipment Corp.

John A. LytleDirector of Technical DevelopmentPlanning Research Corp.

Allan L. ScherrVice President, Development& IntegrationApplications Systems DivisionIBM

vi

Mike Weidemer David M. WeissDeputy Director Principal Member-Technical StaffMission Critical Computer Engineering Software Productivity ConsortiumAir Force Systems Command

Workshop on the Relationship Between Military & Civilian PMCsDick J. Wilkins, Chair

DirectorCenter for Composite MaterialsUniversity of Delaware, Newark

Ric AbbottPrincipal EngineerAdvanced Composites ProjectBeech Aircraft Corp.

James N. BurnsVice President of MarketingHercules, Inc.

Samuel J. DastinDirector, Advanced MaterialsGrumman Aircraft Systems

Bernard M. Halpin, Jr.Manager, Composites Development BranchMaterials Technology LaboratoryU.S. Army Laboratory Command

James J. KellyProgram Area ManagerMaterialsOffice of Naval Technology

Robert ManildiManager, Advanced CompositesHexcel Corp.

Michael J. MichnoDirector of TechnologyAdvanced CompositesAmocoPerformance Products

Alan G. MillerUnit Chief, Chemical TechnologyBoeing Commercial Aircraft

Thomas F. O’BrienSegment ManagerAdvanced Composites DivisionDuPont Co.

Frances RensvoldPhysical Science AdministratorAero Mechanics Technology, Andrews Air Force Base

Douglas C. RuhmannChief Design EngineerManager, Materials & ProcessesMcDonnell Douglas Astronautics Co.

Nick SpenserSales ManagerComposites MaterialsCIBA-GEIGY

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the participants in theworkshops. The workshop participants do not, however, necessarily approve, disapprove, or endorse this report. OTA assumesfull responsibility for the report and the accuracy of its contents.

vii

ContentsPage

Appendix A: The DoD Acquisition System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Appendix B: Studies of Acquisition Times.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Appendix C: Acquisition Milestones and Phases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Appendix D: Case Study: The Fiber Optics Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Appendix E: Case Study: The Advanced Composites Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Appendix F: Case Study: The Software Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Appendix G: European Organizations and Policies for Research and Technology . . . . . . . . . 117

Appendix H: Strategic Technology Management in Japan: Commercial-MilitaryComparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175

. . .Vlll

Appendix A

The DoD Acquisition System

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Costs of Delay . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Growth in Acquisition Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Persistence of Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PRIVATE SECTOR ACTIVITIES: MODELS FOR DoD ACQUISITION? . . . . . . . . . . .Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Differences in Mission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Differences unaccountability and Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Differences in Size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Differences in “Market Forces” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EFFICIENCYV.EFFECTIVENESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Level of Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . .Responsibility for the Defense Industrial Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Low Production Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Unpredictability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Unacceptability of Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..

THE ACQUISITION PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Defense Acquisition Executive and Defense Acquisition Board. . . . . . . . . . . . . . . .Program Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Planning, Programming, and Budgeting System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Milestones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Appropriateness of Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . . ... . .

ANALYSIS OF THE ACQUISITION PROCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Program Variability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Requirements Generation and the Resource Allocation Process . . . . . . . . . . . . . . . . . . . . .Bureaucratic Paralysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Boxes

3334555777888899999

10111313151525273941

Box Page

A. Concurrency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16B. Multiyear Budgeting and the U.S. Constitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

FiguresFigure Page

A-l. Cost Growth in Major Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6A-2. Components of Defense System Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13A-3. Life Cycle of Major System Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14A-4. Chains of Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31A-5. Cost v. Regulatory Intensity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

TableTable Page

A-1. Defense Enterprise Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

.

Appendix A

The DoD Acquisition System

INTRODUCTION

The time needed to field new technology dependscritically on the time taken to complete the acquisi-tion cycle, from defining a requirement to deployingoperational hardware. Understanding how new tech-nology becomes incorporated in operational forcesrequires first understanding the acquisition process,which is the subject of this appendix. This appendixis the basis for the concluding section (The DefenseAcquisition System”) of chapter 8 of the mainreport.

The purpose of this appendix is to analyzeacquisition delays that in turn, delay the introduc-tion of new technology into the field. But, since nosingle aspect of the acquisition process by itselfcauses delays, shortening the cycle requires makingthe entire process more efficient and effective.Therefore, the discussion of acquisition in thisappendix takes a broad view.

After first describing the consequences of longacquisition lead times, Appendix A summarizessome studies that have tried to measure the problem.These studies show that the acquisition cycle is notsignificantly shorter now than it was several decadesago, and in some respects maybe getting longer. Thefact that the problem of a long acquisition cyclepersists-even with many studies over time identi-fying many of the same difficulties-is noteworthy.

In light of these findings, the discussion turns tothe issue of why defense acquisition problems are sodifficult to solve. In particular, it examines therelevance of private sector acquisitions to theDepartment of Defense (DoD) environment, in viewof the marked differences between the two ap-proaches. The remainder of the appendix thenanalyzes the major defense acquisition problems—together with proposed solutions-that precedingstudies have uncovered.

Costs of Delay .

For years, defense analysts have been frustratedwith the length of the acquisition process. Delays inacquisition lead to lost time in fielding new systems,which threatens our technological lead over theSoviets. Also, the expense of maintaining extendeddevelopment efforts leads to higher costs. Evenmore serious than the increased time and cost,according to a Defense Science Board (DSB) panel1

that studied the acquisition cycle over a decade ago,are the “second order effects’” of delays:

●

●

●

●

unsatisfactory results, with systems technologi-cally obsolete by the time they are fielded;increased technical risk, since system designersattempt to stretch the state of the art as far asthey can to avoid such obsolescence;loss of flexibility, since the extended approvalprocess makes it difficult to change the designof a system to meet changing perceptions of itsneed; andadded complexity, because delays aggravatethe tendency to want systems to do “every-thing.”

Finally, delays lead to even further delays. Ac-cording to the DSB panel, attempts to fix theproblem by requiring earlier and more frequentreviews only serve to extend the front end of theprocess and make the problem worse. Delays alsotend to be self-reinforcing. Costs escalate. forcingprograms to stretch out to stay within annualbudgetary ceilings. As the expected time for deploy-ment lengthens, planners magnify the anticipatedthreat, up the system’s requirements, and therebyextend development times further.

Growth in Acquisition Times

Several studies of acquisition lead times havetried to determine how serious delays are. andwhether the problem is getting worse. These studies.some of which are summarized in appendix B, havegenerally examined major aerospace systems. To the

-3 -

4 ● Holding the Edge: Maintaining the Defense Technology Base, Volume 2

extent that the acquisition process and/or the level oftechnology of aerospace programs is typical of othermilitary systems, their results may be generalized.The studies indicate that the development cycle—especially the portion preceding full-scale develop-ment (FSD)-has increased somewhat over time.However, this increase accounts for only a smallportion of the program-to-program variation indevelopment time over the years. Moreover, as oneof the studies points out, increases in the pre-FSDphase “should not automatically be deemed undesir-able,” since these increases were consistently ac-companied in the study data by reductions in costgrowth, schedule slippage, and performance short-fall. 2

These studies found that, once decisions had beenmade and approvals to proceed had been given, thefull-scale development period did not generallylengthen. Based on this finding, one can concludethat increases in technological complexity have not,in and of themselves, extended hardware develop-ment. However, production times are increasing asbudgetary limitations, coupled with increasing unitcosts, reduce the numbers of units purchased peryear.

Comparing the increases in decision time to therelative constancy in the length of hardware devel-opment, the 1977 DSB study concluded that “itdoesn’t take any longer to do something; it just takeslonger to obtain the necessary approvals and acquirefunding to do it and to get to the deployment stateonce the development is finished.”3 More recentstudies have-corroborated this finding.

Persistence of Problems

Making the acquisition process more efficient andeffective will not be simple, as the Acquisition TaskForce of the President’s Blue Ribbon Commission

on Defense Management (the Packard Commission). stated in 1986:

. . . present procedures are deeply entrenched. Ac-quisition problems have been with us for decades,and are becoming more intractable . . . In frustration,many have come to accept the ten-to-fifteen yearacquisition cycle as normal, or even inevitable.4

Shortly afterward, the Center for Strategic andInternational Studies (CSIS) concluded that:

. . . the process is in serious trouble . . . [it] hasbecome overburdened with exorbitantly expensivemanagement layers, excessive delays in programdecision approval, inordinate program changes, andcumbersome oversight and regulations

These pessimistic outlooks are not particularlynew. Studies over the previous decades have identi-fied many of the same problems and even proposedmany of the same solutions. However, these solu-tions have not been implemented-or not suffi-ciently to keep the same problems from cropping upin the next study.6

The possibility certainly exists, of course, thatnone of these studies identified the real problems,which therefore remain to be addressed. Alterna-tively, perhaps sheer intransigence and bureaucraticinertia within DoD keep it from substantially im-proving its operation.

More likely, however, is that many difficulties indefense acquisition stem from factors that arebeyond the DoD’s direct control and that no amountof unilateral activity can address. To the extent thatsuch external factors dominate, improving de-fense acquisition will require large-scale struc-tural and institutional changes that would not berestricted to the Defense Department.

Some of these changes are impossible within ourpresent system of government. Others would inter-

.

Appendix A-The DoD Acquisition System ● 5

fere with different objectives that the Nation has sofar-explicitly or otherwise-decided are at least asimportant as efficient defense acquisition. And stillothers involve resolving longstanding political dis-agreements and identifying common ground in theface of seemingly incompatible positions.

PRIVATE SECTOR ACTIVITIES:MODELS FOR DoD ACQUISITION?

Studies

Given the premise that the private sector canaccomplish tasks more efficiently and cheaply thanthe bureaucracy-encumbered Federal Government,previous studies have looked to the private sector toprovide a model for improving defense acquisitionand shortening the acquisition lead time. In somerespects, defense acquisition compares quite favor-ably to private sector activities. Figure A-1, showingaverage cost growth of major weapons systemsalong with that of large, complex civilian projects,shows that in general the major weapons systems doquite well by this measure. However, this compari-son does not address acquisition time or acquisitionprocedures, which studies and reports have assertedare far more complex and time-consuming in thegovernment than in the private sector.

The 1977 DSB summer study on the acquisitioncycle concluded that the acquisition cycles ofcommercial aviation programs, unlike those ofdefense systems, had not lengthened over thepreceding two decades. The panel attributed thestability of commercial acquisition programs to theirsmaller technical steps, a greater degree of concur-rency between development and production, andcompetitive market forces that place a premium ontimely delivery.

A later DSB summer study also compared DoDacquisition programs with programs of similarcomplexity and size in the private sector, The finalreport of this study7 qualitatively discussed differ-ences in program structure and management be-tween the commercial programs and various DoD

programs, but it did not provide a quantitativecomparison. Nevertheless, the Packard Commis-sion—perhaps relying on interim results or personalcommunications with study panelists-representedthe DSB study as concluding that each of thecommercial programs “took only about half as longto develop and cost concomitantly less” than equiva-lent DoD programs.8 With this premise, along withits own analysis of successful DoD programs thatwere developed under special streamlined condi-tions, the Packard Commission concluded that“major savings are possible in the development ofweapon systems if DoD broadly emulates theacquisition procedures used in outstanding commer-cial programs."9 The study went on to characterizethose features of successful commercial programsthat could be incorporated into defense acquisition:clear command channels; funding stability; limitedreporting requirements; small, high-quality staffs;communication with users; and prototyping andtesting.

While there are certainly lessons that the privatesector can offer the Federal Government-lessonsthat the Packard Commission sought to uncover—fundamental differences between the governmentand the private sector must be grasped before any ofthese lessons can be applied.

Differences in Mission

Private industry exists to make money. Althoughit is too simplistic to assert that the bottom linedominates ail corporate activities-indeed. compa-nies respond to a range of interests and motivationsthat are not adequately described by focusing on anyone measure-the premise underlying the genera-tion of capital for use by industry is that suchinvestments will be profitable. Even if profit andreturn on investment are not the only relevantindicators, at least they are quantifiable measures ofcorporate performance.

On the other hand. the government’s mission ofproviding services such as maintaining the commondefense has no corresponding measure-at least in

7Defense Science Board, “Report of the Defense Board 1985 Summer Study on Practical Functional Performance Requirements,” prepared for theOffice of the Under Secretary for Research and Engineering, March 1986.

8 President’s Blue Ribbon Commission on Defense Management, Op. Cit., footnote 4. p. 11.

9 lbId., p. 12.

6 ● Holding the Edge: Maintaining the Defense Technology Base, Volume 2.

Figure A-l —Cost Growth In Major Projects

Program cost growth (percent)

2 0 0

150

100

50

0 —1960s 1970s Highway Water Public very Non-pioneer Pioneer All

projects projects buildings large processMajor weapon (1972) (1972) (1972) construction plants

systems (1977) (1985)

SOURCE. Michael Rich and Edmund Dews, “Improving the Military Acquisition Process-Lessons From RAND Research” (R-3373-AF/RC), A Project AIRFORCE Report prepared for the United States Air Force, February 1986, p. 11

peacetime. As Secretary of Defense Weinberger ment seeks to satisfy. For example, pursuit ofstated in his fiscal year 1985 Report to the Congress, objectives such as fairness, environmental protec-“We can never really measure how much aggression tion, equal opportunity, and maintenance of Amer-we have deterred, or how much peace we have ica’s economic base may conflict with the ability topreserved. These are intangibles-until they are acquire defense systems efficiently. With govern-lost.” l0

ment purchases of goods and services constituting

Moreover, just as there is no single measure of close to a tenth of the 1987 gross national product ofgovernment effectiveness. neither is there a single— $4.5 trillion, the Federal acquisition budget offersor even a consistent—set of objectives that govern considerable leverage for achieving national socio-


economic goals—leverage that legislators have notrefrained from using.11

Differences in Accountability and Oversight

Government and industry have very differentrelationships with” their sources of funds. A taxpayeris not the same as a shareholder. The two have verydifferent attitudes regarding the uses to which theirfunds are put, attaching to the expenditure of publicfunds a sensitivity-and a standard of accountabil-ity—that goes beyond business accounting prac-tices. Consider how easy it is to set compensation fora member of a corporate Board of Directors com-pared with that for a Member of Congress.

One of the most significant differences betweengovernment and private sector activities, the role ofCongress, has no parallel in the commercial world.Congress serves as the “court of last resort” forsocietal issues that cannot be resolved in any otherforum. Issues of high congressional visibility are bydefinition controversial, and it is unrealistic toexpect the political process by which these issues areresolved to proceed efficiently or directly. Thisprocess, and the annual budget cycle, will alwaysintroduce an uncertainty to defense acquisition thatcommercial programs do not share. As JamesSchlesinger, former Secretary of Defense, has stated,

This is a society that based its system of govern-ment on the Constitution, which calls for a disper-sion of powers. That means that everybody has toagree, and under normal circumstances, most peopledon’t agree. As a consequence, we are never goingto have the kind of model efficiency in the Depart-ment of Defense, or in government generally, thatsome kind of theorist would want.12

Moreover, the U.S. Constitution gives Congressspecific responsibilities with respect to defense thatextend above and beyond its involvement in other

government activities, making defense activitieseven less comparable than other government pro-jects to private sector activities.

Differences in Size

● Although individual projects in the commercialsector may rival individual defense programs in size,the DoD as a whole is orders of magnitude largerthan most commercial enterprises. The DoD budgetfor fiscal year 1989 was roughly equal to thecombined annual sales of the top four Fortune 500fins-General Motors, Exxon, Ford, and IBM.

Bureaucratic complexity increases geometricallywith size. leading to inherent inefficiencies of scale.To some extent, these inefficiencies are unavoid-able. All military/defense work (except that involv-ing nuclear weapons) has been centralized in a singleDepartment of Defense precisely so that all claimson defense dollars could compete against oneanother. One possible way to reduce bureaucracywould be to fence off elements of what is now theDoD budget, eliminating them from the competi-tion.13

This situation existed before 1947, when theDepartment of War and the Department of the Navywere two independent Cabinet-1evel departments.Combining them into a single Department of De-fense made it harder for each component to operate.but in theory the combination benefits the taxpayerby permitting the allocation of available funds wherethey can most effectively be used.14

Differences in “Market Forces”

Ideally in a free market, competition among firmsrewards the most efficient ones and penalizes theunsuccessful ones. Duplication of effort-i.e. com-petition-ultimately serves to improve the quality ofthose who survive. The Federal Government. on theother hand, is a monopoly; there is only one


Department of Defense. To prevent duplication, theroles and missions of DoD components are designednot to overlap. There are, therefore, no correspond-ing “market forces” that provide built-in incentivesfor DoD to improve its performance. Moreover,DoD cannot sell off or disband a military service oragency that does not perform as well as hoped.

EFFICIENCY v. EFFECTIVENESSDefense analyst Edward Luttwak has stated that,

“The great irony is that the defense establishment isunder constant pressure to maximize efficiency, andthat its leaders believe in that goal when they oughtto be striving for military effectiveness-a conditionusually associated with the deliberate acceptance ofinefficiency.” 15 The nature of defense acquisitionimposes specific requirements that go even beyondthe disincentives to efficiency facing governmentactivities in general.16

Level of Technology

Much of the technology used in defense systemsis ahead of that in the commercial sector—if indeedany commercial analogs exist at all. Although thedefense lead is not as pronounced as it has been—and several areas of defense ‘technology now lagbehind their commercial counterparts-militarytechnology must nevertheless often be developedfrom scratch for a relatively limited production run.

Responsibility for the Defense Industrial Base

Since the Department of Defense is the onlycustomer for sophisticated military systems, produc-ers do not have the option of selling elsewhereshould they not be able to sell to DoD.17 If the

Defense Department wants to maintain a diversity ofsuppliers, ‘t must buy enough from each of them tokeep them in business, even if their products may notbe DoD’s first choice. As analyst Edward Luttwakhas put it:

When I go shopping for shoes, I can select themon the basis of price and quality. I need not buy moreshoes than I want simply to keep shoe-productionlines open. Nor do I have to ensure that this or thatshoe manufacturer has enough profit to pay for thedesign of new shoes. Above all, I have no reason topay more for my shoes to ensure that there is sparecapacity in the industry, to meet a sudden need I mayhave for a hundred pairs of shoes instead of just one.Yet those are all key concerns for defense purchas-ing.18

In-depth examination of defense industrial baseconcerns is beyond the scope of this study. Recentstudies looking at the interrelationship between DoDneeds and policies and the viability of the defenseindustry have concluded that there is cause forconcern.19

Low Production Rates

Aggravating the problem of maintaining a viableproduction base are production rates lower thaneconomically optimal because the required invento-ries are small and must be divided among firms. Topreserve competition, the most efficient producercannot be permitted to drive the others out ofbusiness. Moreover, production rates are typicallydetermined by externally imposed budgetary limits,rather than being derived internally according towhat makes sense for the program.


Unpredictability

There is no way to predict how, where, or whenwar might break out. Procurement needs are there-fore impossible to predict, and shut-down of produc-tion lines is risky.

Unacceptability of Failure

The inevitable consequence of competition in thefree market is the risk of failure, which entrepreneurswillingly accept as the price for the chance to strikeit rich. In the commercial arena failure translates toloss of investment or to reduced earnings. Substan-tial failure on the part of DoD could have far moresevere consequences.

The Department must therefore tolerate a fargreater degree of redundancy and risk aversion thana commercial enterprise would. This degree of riskaversion should not apply to individual defenseprograms; indeed, lack of failures would indicatethat the overall program was far too conservative. Inthe aggregate, however, the Department’s attitudetoward risk must be substantially different than acorporation ‘s.

Summary

In light of the features that characterize govern-ment activities in general and defense acquisition inparticular, it may well be true. as defense analystLeonard Sullivan has concluded, that “many effortsto make acquisition more efficient are simplysecond-order expedients to paper over largely insol-uble first-order problems.”20

THE ACQUISITION PROCESSThe Packard Commission’s report was not the

frost attempt to apply lessons from the private sectorto defense management. Seventeen years beforechairing the President’s Blue Ribbon Commissionon Defense Management, David Packard (the Dep-uty Secretary of Defense) established the present

DoD acquisition process to emulate industrial prac-tices of project management and sequential reviewand approval. The basic process is one of distinctphases separated by decision points or milestones.The Office of the Secretary of Defense (OSD)develops policy for major system acquisition pro-grams and conducts reviews to ensure that theseprograms respond to specific needs and are managedsoundly. The military Services and defense agenciesindividually (for the most part) identify those needsand define, develop, and produce systems to meetthem.

The Defense Acquisition Executive andDefense Acquisition Board

Regulations issued by the Office of Managementand Budget and DoD have codified acquisitionprocedures: OMB Circular A-109, “Major SystemAcquisitions”; Department of Defense Directive5000.1, “Major and Non-major Defense Acquisition .Programs”; and various implementing DoD Direc-tives and Instructions. These regulations specify themilestones that major defense acquisition pro-grams-those exceeding certain budgetary limits orhaving particular urgency, risk, congressional inter-est, or other special significance-must pass. TheSecretary of Defense conducts milestone reviews ofthese programs, unless he delegates review authorityto a Service or agency head.

OMB Circular A-109 directs the head of eachFederal agency that acquires major systems to“designate an acquisition executive to integrate andunify the management process for the agency’smajor system acquisitions.”21 The role of DefenseAcquisition Executive is now assigned to the UnderSecretary of Defense for Acquisition [USD(A)], anoffice created on the Packard Commission’s recom-mendation to consolidate responsibility for DoDacquisition. The Deputy Secretary of Defense or theUnder Secretary for Research and Engineering hadserved as Defense Acquisition Executive prior to theestablishment of the USD(A). (The rationale for

10 ● Holding the Edge: Maintaining the Defense Technology Base, Volume2.

establishment of this position is discussed later inthis appendix, under “Bureaucratic Paralysis.”)

The USD(A) chairs the Defense AcquisitionBoard (DAB), a panel of senior defense officials thatassists the Secretary of Defense in determiningacquisition policy and making program milestonedecisions. 22 DAB replaced the Defense SystemsAcquisition Review Council (DSARC), which hadhad a similar function but a somewhat differentcomposition. Upon completing each phase of aprogram’s progress, DAB reviews parameters suchas cost, schedule, performance, and affordability.programs whose oversight is delegated to theServices or defense agencies follow a correspondingseries of milestone reviews at the Service or agencylevel. These service reviews are conducted throughService Systems Acquisition Review Councils, orSSARCs.

Program Management

The DoD acquisition process is based on theprinciple of Program Management, in which oneindividual-the program manager-is responsiblefor integrating in a single office the diverse adminis-trative, professional, and technical capabilities re-quired to manage the development and production ofa major system. This concept was first formalized—

at least within DoD—by the Air Force SystemsCommand in the late 1950s,23 although its basicstructure originated within industry.24 The otherServices have adopted some version of this process.

The size and organization of program offices vary.The larger ones are self-contained, containing up toseveral hundred personnel. Others have “matrix”organizations, in which a small core staff is dedicated to each program, while shared support organi-zations carry out most of the effort.

Under DoD Regulation 5000.1, individual pro-gram managers are to be separated from the USD(A)by no more than two intermediate managementlayers. Program managers are to be given “fullauthority to manage their respective programswithin the scope of established program baselines. ”However, besides the program manager and pro-gram office,

. . . there are many additional senior managers andorganizations who also have management authorityand responsibilities within the overall DOD systemacquisition environment. Programs do not belongexclusively to [program managers]. They are DODand service programs, and represent investmentdecisions by the [Secretary of Defense] and service


secretaries who are also accountable for their man-agement and decisions.25

Study after study has identified the separation ofresponsibility and authority—the control exertedover a program’s outcome by people and officeswho are not directly accountable for it-as amajor problem of the defense acquisition struc-ture. Analysts differ as to the degree to which powerand accountability can be brought back together inthe defense acquisition environment.

The Planning, Programming, andBudgeting System

One of the most important factors external to theprogram manager is the allocation of resources forthe program. Resource allocation throughout theDoD is conducted via the Planning, Programming,and Budgeting System (PPBS) instituted by RobertMcNamara. Prior to McNamara, the Secretary ofDefense exerted little control over the budgetsubmissions of the Services. The result was thatbudget decisions were largely independent of long-term plans, Service budgets were prepared inde-pendently of one another with little rationalizationacross Services. and the Secretary of Defense had noanalytic basis on which to challenge Service re-quests. The situation has been summarized as one inwhich “requirements planning was being donewithout explicit regard to cost, and budget planningwas being done without explicit regard to need. ”26

Although there are formal links between the two,the PPBS is separate from, and largely independentof, the systems acquisition system. In theory, PPBSis supposed to start with assumptions and projec-tions concerning national strategy and future threats(planning) and lead to definition and analysis ofalternative force structures and weapons/support

systems, including resource requirements (program-ming). These programs are then translated intobudgetary terms and submitted to Congress (budget-ing).

In practice, the process has never worked thisclearly. In particular, criticisms leveled at theplanning stage are that the absence of fiscal con-straint makes the process somewhat irrelevant, andthat planning often justifies desired force levels andnew systems after the fact, instead of forming theanalytical basis for setting those levels and initiatingthose systems. The programming and budgetingstages of PPBS, from which the actual fundingrequest and ultimately the funds themselves derive,have a more direct impact on DoD activities than theplanning phase.27

The relationship between the acquisition systemand PPBS has been compared to that betweencongressional authorizations (programmatic review)and appropriations (budgetary allocation). However,this analog fails to recognize that PPBS aloneintegrates programmatic and budgetary considera-tions.% A better model is that acquisition programsproceed along a “dual track.”

This relationship poses complications for pro-gram managers. Under the acquisition system, theyreport through at most two higher officials to theUnder Secretary for Acquisition. Under PPBS,however, their resources are justified through amuch more complicated chain of authority, involv-ing a systems command of their military Service, themilitary headquarters staff of the Service, thecivilian Service Secretariat. and the Office of theSecretary of Defense. The PPBS process is managedand overseen by the Defense Resources Board(DRB), which consists of most of the DoD’s most


senior officials and is chaired at present by theDeputy Secretary of Defense.29 The Defense Re-sources Board, like the Defense Acquisition Board,seines in an advisory role to the Secretary ofDefense, who has final authority over both acquisi-tion and PPBS activities.

The directive implementing the PPBS specifiesthat coordination between the acquisition processand the PPBS is achieved through common mem-bers of the Defense Acquisition and Defense Re-sources Boards and “by the requirement to developan acquisition strategy for all major systems.”30 Theacquisition strategy is the basis of a programmanager’s system acquisition plan. Various mile-stones identified in the acquisition strategy tie intothe PPBS process; approval will not be given for aprogram to proceed to a new acquisition phaseunless its sponsoring Service or agency has plannedfor the program in its budget request through PPBS.

Despite the ties between the two, the relationshipbetween acquisition and PPBS has been controver-sial, especially concerning which path should “havethe last word.” According to a House ArmedServices Committee report, Richard Godwin, thefirst USD(A), proposed that “once a decision todevelop or purchase a system had been made by theDAB it could not be overruled by the DRB,”enabling the acquisition organization to bypass thePPBS.31

This proposal was not accepted. On September 1,1987, Deputy Secretary of Defense William H. TaftIV issued a revised version of DoD Directive 5000.1stating that significant changes in approved majordefense acquisition programs could not be madewithout prior approval of the Defense AcquisitionExecutive (i.e., the USD(A)) “unless made duringthe course of the Planning, Programming, and


"32 Under Secretary God-Budgeting System process.win resigned 2 weeks later.

Milestones

Taken in total, the acquisition process consistsconceptually of the four activities shown in figureA-2. However, only the lower two-definition ofsolutions and production of equipment—are specifi-cally associated with new systems. The two upperactivities of assessing operational needs and advanc-ing the technology base are ongoing and largelysystem-independent.

The formal process for major defense acquisitionprograms-those expected to cross a preset dollarthreshold or otherwise qualify as described in thepreceding section, “The Defense Acquisition Execu-tive and Defense Acquisition Board”-is normallydivided into five phases delineated by distinctmilestones. These phases and milestones are dia-grammed in figure A-3 and discussed in more detailin appendix C.

The diagram and the description are idealized inthat they assume a progressive linear process inwhich each stage is completed satisfactorily beforethe next begins. In reality-no matter what theorganizational structure-activities in each phaseoverlap and interact. Research and development is arisky process. Not only are surprises to be expectedin utilizing new areas of technology, but they oftencrop up in what had been thought to be straightfor-ward applications of established techniques.

Appropriateness of Oversight

Through this series of milestone reviews, the OSDexercises oversight over major Service acquisitions.The degree of OSD oversight in the past has variedconsiderably and remains quite controversial. TheDSARC (now DAB) process was originally justifiedas a means of decentralizing decisionmaking bylimiting OSD involvement in major programs tospecified milestone reviews. However, the extensivebriefings required before DSARC meetings and the

Figure A-2-Components of Defense SystemAcquisition

14 ●

Holding the E

dge: Maintaining the D

efense Technology B

ase, Volum

e 2

Figure A-3-Ufe Cycle of Major System Acquisitions

Milestone o

Milestone I

Milestone II

Milestone III

Milestone IV

.~ ~~ ~ u ~ E c ~

Milestone V

~ en >en

'-----I E 0 CD i ~ Mission ~ Concept ~ Concept ~ Full scale g Full rate ", ,/ Deployment & ~ ~ /. need • ~ exploration/ ~ ~e~,on-/ 0 development.g production ", operations '-. ¥ statement CD definition Ie. s r,a IO~ ~ e ", phase

~ __ -I~ ~ validation 5 Q..I----/------------r----.~ 8 ~ mlllal oeployment) ~ ~ ~ ~ ~ ~ ~ CD

'C

.3 ~

:::J

SOURCE: Defense Systems Management College. unpublished materials,


and PPBS processes are reasonable with respect tothe provision of external review and control overacquisition program budgeting and management.”35

However, the study panel did identify weaknesses inthe process that lead to delays. In particular, itworried that annual budget deliberations, and theease with which unfavorable decisions in one venuecould be reopened in another, had unnecessarilyextended the “front end” of the cycle. Moreover, thestudy predicted that things were likely to get worseunless changes were made.

It is certainly true that the DAB oversight processand the PPBS process-both inherently bureau-cratic, both involving the participation of a greatmany people, and both having significant impact onprograms-pose problems for the program manager.Commenting on the 1977 study, one analyst agreedthat “the endless sequence of reviews, interventions,and delays caused by the struggle for access todecisions both within and outside the Pentagon is aprogram manager’s nightmare.”36 However, thisindividual disagreed with the DSB study’s particularrecommendations for streamlining the initial stagesof the cycle. Although “compression of the front endof the acquisition cycle would be a program devel-oper’s dream,” he argued, “to all the other partici-pants in the process-OSD, OMB, and the Con-gress-it would be a nightmarish return to all theevils which brought McNamara to inject OSDforcefully into the process in the first place.”37

ANALYSIS OF THE ACQUISITIONPROCESS

Problems in defense acquisition can be separatedinto a number of categories, including programvariability (sometimes called program instability);the requirements generation process, including theprocess by which resources are allocated and weap-ons systems selected; bureaucratic paralysis; inap-propriate organization of the defense procurementsystem; and the quality of and incentive structurefacing acquisition personnel.

Program Variability

Constant changes in defense acquisition pro-grams-and the ensuing inefficiencies. cost in-creases, and delays they cause—have become therule. According to a study by the Center for Strategicand International Studies,

Few, if any, defense acquisition programs followeither the course for which they were originallyplanned or any other stable pattern of developmentor production. Many purists refer to this real-worldphenomenon as program instability—a term thatcaptures their frustration, but not the facts of thecomplex legislative/executive system.38

Program variability, the more appropriate term usedby the CSIS study, results from a number of factors:the requirements process; the risks inherent indeveloping new technology; the political/budgetaryprocess; and personnel turnover. While the disrup-tions introduced by these factors can be controlled tosome extent, their underlying causes cannot beeliminated.

Whereas the unwillingness to reexamine require-ments in the light of technological difficulties candrive up the cost and complexity of weaponssystems, changing requirements too frequently canmake sound management impossible. In the past,according to analyst Jacques Gansler, the militaryServices have “felt free to change their mindsfrequently” concerning the requirements and budg-ets for new systems.39 Now, in a process called“baselining,” internal contracts are developed be-tween program managers and the senior manage-ment of their Services concerning the cost, schedule.and performance milestones for new weapons sys-tems. Since changes to the baseline require equallyhigh level review, formalizing a baseline representsan attempt to reduce the amount of change thatprograms undergo within DoD.

In practice, however, baselining requires that theprogram manager have the authority to rejectchanges to his or her program that are imposed from


BoxA—Concurrency 1

One method that has been used to shorten acquisition times is to overlap some of the phases in the process,specifically y those of full-scale development and procurement. In highly concurrent programs, production starts wellbefore fill-scale development is completed on the assumption that, although changes will inevitably be made asdevelopment proceeds, it will be possible to accommodate these changes without disrupting production. Overall,a significant amount of time can be saved.

Besides shortening the time needed to field new systems, concurrency can in principle achieve cost savingsand management efficiencies because reduced development time means lower overhead and more continuity andstability in the labor force. Concurrency can also reduce program changes that would otherwise force cost increasesand delays. However, the principal risk of increased concurrency is that significant problems uncovered afterproduction has begun may necessitate major design changes, forcing extensive rework on completed systems. Thesechanges lead to cost overruns and schedule slippages, countering the very goal of concurrency in the first place. Ifadequate solutions cannot be found, the program must accept diminished technical performance or even facecancellation and the consequent writeoff of sunk costs.

Concurrency has historically been emphasized during wartime or periods of national emergency (e.g., depthcharges developed in World War 1, the Manhattan Project in World War II, the missile programs undertaken in the1950s, and’’ smart” weapons developed for use in Vietnam). But, until the 1960s, concurrency was rare in peacetimedefense acquisition programs. Since then, the practice has gone in and out of favor as the time savings have beenseen to outweigh, or conversely not to justify, the risks. Problems encountered with systems developed in a highlyconcurrent manner in the 1960s led DoD to establish a “fly before buy” system that emphasized prototypedevelopment and testing prior to production decisions. The 1977 DSB study nevertheless concluded that “the policyof ‘no concurrency’ is being applied too rigidly and is inefficient and costly in many cases.”2

Despite this recommendation, pressures against concurrency appear to be increasing after major problems wereencountered with two recent weapons systems, the B-l B bomber and the Division Air Defense (DIVAD) gun,developed in a highly concurrent manner. The Packard Commission has urged that prototypes be built and testedbefore full-scale development, let alone production, begins.3

The current regulatory and legislative environment provides no clear direction concerning concurrency. Whileexisting DoD regulations do not prohibit and in places encourage concurrency, legislation has constrained it. Onone hand, Directive 5000.1 states that “commensurate with risk, such approaches as. . . reducing lead time throughconcurrency. . . shall be considered and adopted when appropriate.”4 On the other, the 1987 Defense AuthorizationAct stated that “a major defense acquisition program may not proceed beyond low-rate initial production untilIOT&E (initial operational test and evaluation) of the program is completed.” This Act also stressed competitiveprototype development that will likely have the effect of inhibiting concurrency.5

In attempting to determine the effects of concurrency, the DSB study found that “there is no convincingevidence that concurrency necessarily adversely affects program outcome in terms of cost, performance, or fieldutility.” Therefore, the blanket ban on concurrency should be eliminated since “the acquisition time span . . . canbe minimized if concurrency is properly employed.’6 A Congressional Budget Office study 10 years later foundthat “no strong relationship exists between concurrency and schedule delay” but that “a modestly strongerrelationship exists between concurrency and cost growth.” The more highly concurrent programs experiencedhigher cost growth.7


sources outside the program. Granting this degree ofauthority would be extremely difficult within thepresent DoD environment. For example, althoughspecified in a program’s baseline, one of the mostimportant program parameters-its budget—is ulti-mately established by a PPBS system external to theacquisition process. Moreover, it is often changed(i.e., annually) by Congress.

Increased emphasis on technology demonstra-tions and prototyping can be expected to help controlprogram changes caused by technological risk. If,however, such demonstrations further extend theentire cycle, they could increase uncertainties due tochanges in the threat and in projected programbudgets.

Changes imposed on defense acquisition pro-grams by the political process-e.g., battles overprogram budgets, policies, and control-originate atevery level of activity within DoD, the executivebranch of government, and Congress. The keydifficulty here is politics-not in the pejorativesense of backroom deals, influence trading, and porkbarreling that the word has come to acquire. but inits true definition as a struggle between competinginterests. Examining major strategic weapons sys-tems such as the MX and Trident, analyst EdwinDeagle illustrates the larger context in which de-fense acquisition fits:

The MX and Trident are not simply expensiveprograms deserving of careful management. Theyare also: major commitments to specific solutions ofthe complex problem of strategic nuclear deterrence;affirmation of roles and missions within and amongthe military services; explicit choices about theimportance of strategic weapons relative to othermilitary activities: explicit choices about the impor-tance of strategic weapons relative to other publicinitiatives such as urban housing, national healthinsurance, energy security or middle class tax relief:and, by no means least commitments to particularcommercial enterprises which, as a result, willemploy people in specific places. In short, theseweapons systems and the R&D process which yieldsthem lie in the center of the competition amongvalues, purposes, and programs inherent in the

process of public choice—by nature a politicalprocess. Organizational and procedural imperativesdesigned to support this political process are likelyto be vastly different from, and perhaps in conflictwith, those designed to yield efficient manage-ment.40

Granted, the programs Deagle has chosen todiscuss are among the largest and most politicallyvisible of defense programs. Nevertheless, the pointhe makes-that political judgments are inherent inresolving competing demands on public resources—applies to all defense programs.

Even without political influences, change isinevitable:

Development will always be difficult, uncertain,time consuming, and more expensive than expected.Threat, doctrine, and resources will change, requir-ing constant reevaluation of the system. That is howit should be, and efforts to isolate the acquisitionmanagement process from such pressures in thename of coherent and sound management aresure to introduce crippling distortions into thepolitical structure of the process.41

The fact that the political process necessarilyintroduces uncertainty into defense acquisition doesnot, however, mean that nothing can be done tomitigate the effects of this uncertainly. Actionswithin both Congress and the DoD can improve thecoupling between the political and the acquisitionprocesses,

Congress

The” level of congressional oversight-manywould say micromanagement—has risen dramati-cally over the past 20 years. A few statistics reflectthis growth: In 1970, the defense authorization actwas 9 pages in length and was accompanied by a33-page conference report. Congress made 180adjustments to the authorization, and 650 to theappropriations bill, during that year’s budget review.By 1985, the authorization act grew to 169 pages andthe conference report to 354; congressional adjust-ments to defense authorization and appropriationlegislation totaled 1,315 and 1,848, respectively.42


Today, 29 committees and 55 subcommittees over-see defense activities in both houses, and over20,000 congressional staffers and employees ofcongressional agencies deal with some aspect ofdefense.

This growth has not occurred in a vacuum. TheDSB Acquisition Cycle task force concluded in1978 that:

A significant portion of the “blame” for thisincreasing congressional “micromangement” canprobably be laid to the fact that the DoD hasexhibited a chronic inability or unwillingness toadequately forecast program, cost, schedule, andperformance information and projections to theCongress.43

The Defense Systems Management College, theorganization that trains DoD program managers,includes the following interchange in a discussion ofcongressional oversight:

Senior DoD acquisition official, appearing beforean authorizing committee:

“Gentlemen, what we’d like to know is when areyou going to stop micromanaging our business?”Senior, veteran professional staff member of thatcommittee:

“Sir, when you start."44

Congressional action on the defense budget isoften an extension of debates conducted in otherarenas.

Much of the so-called Congressional micro-management is, in fact, stimulated by factions withinthe Pentagon hying to reverse, through selectivelyleaked information to Congress, unpalatable deci-sions made within the executive branch. In this sensemany Congressional actions on weapons programsare an extension of internal decision making by theDepartment of Defense.45

Underlying much of the congressional interest indetails of the defense budget is, of course, its directimpact on a great many congressional districts-those having major defense contractors, defensebases, or large numbers of defense workers. Al-though Members of Congress are responsible for

national policy, they are accountable to their indi-vidual constituents. It should not come as a greatsurprise that Members of Congress therefore lookout for their constituents’ interests in the course oftheir legislative responsibilities. To put it bluntly,they have every incentive to pork barrel. Damagingas this practice may be on the national level, it isdifficult to see how changes in congressional proce-dure can substantially reduce it, given the underlyingincentives built into the United States Constitution.

In specific cases where national consensus existson a matter of high priority, Congress has shown thatit can rise above parochial tendencies. A goodexample is the recently enacted legislation that willpermit the DoD to close down unneeded defensebases. Although every Member of Congress wants toeliminate waste from the defense budget, noneconsiders bases in his or her own district to bewasteful. Moreover, many Members of Congress areconvinced that DoD uses base closures to threatenlegislators considered insufficiently “pro-defense.’*Therefore, Congress has enacted legislative road-blocks over the past decade or so, effectively makingit impossible for DoD to close any bases. To breakthis impasse, Congress established a commission todraw up a list of bases to be closed on an “all ornothing” basis, forcing any legislator seeking toremove a particular base from the chopping block totorpedo the entire package. By this means. Congressand DoD cut through the storm of political contro-versy surrounding individual closures.

Congressional review of the defense budgetpresently deals more with artificial accountinginputs (dollars, personnel slots, buildings, etc.) thanwith defense outputs (mission capabilities or strate-gic goals). The inputs are easier to count and tocontrol, and unlike defense mission capabilities theypermit comparisons to other programs across theentire Federal Government.

A report to the Senate Armed Services Committeedescribed how the budget request needed to fulfill aparticular defense mission-developing the capabil-ity to deploy 10 combat divisions to Europe within

Appendix A—The DoD Acquisition System ● 19

10 days of mobilization-was divided by account-ing categories into separate pieces parcelled outamong the committee’s subcommittees. Althougheach different piece—storage site construction,spare part supply, updating airlift capability, trans-porting materials to Europe, etc.-was part of anintegrated whole, each was treated as an independentitem. Each subcommittee compared the items in itsjurisdiction to similar ones wholly unrelated to themobilization mission. “In a short time, the emphasison policy implementation of a major defense com-mitment was lost among thousands of minor deci-sions on accounting inputs.”46

Although many have recommended that Congressserve as a board of directors for DoD as a whole, itspresent budget process tends to push the examina-tion to a much lower level. Moreover, Congress hasdifficulty entering into a dialog with the DefenseDepartment on strategic objectives because there isno clearly identifiable counterpart within DoD withwhom such a discussion can be conducted:

There is no appropriate forum at the OSD [Officeof the Secretary of Defense] level in which strategy,policy, and operational concepts and capabilities arefully debated and translated into specific acquisitionprograms. The thrust of the current process is toconcentrate on procurement, management, and allo-cation of resources for individual systems rather thanon the overarching rationale and purposes that definethe need for and the operational capabilities of thosesystems. . . . Ideally, the Joint Chiefs of Staff (as acollective body) and the Secretary of Defense couldfurnish this longer perspective, but they are ham-pered by process, schedule, and organization fromdwelling on many of these broad operational consid-erations.47

It might be added that much of the “process” keepingthese officials from taking a broad view consists ofresponding to numerous congressional inquiries anddirectives.

Additional factors complicating congressionalreview of the DoD budget are major proceduralchanges that have been introduced over the last 15years. In 1974, the Congressional Budget and

Impoundment Control Act established a new budg-etary process within Congress. Prior to that act, thetwo-stage process of authorization and appropriationdealt with Federal agencies and programs individu-ally. There was no mechanism whereby revenuesand expenditures could be examined across theentire Federal Government. The 1974 Act prefaceda third “budgeting” stage in which Congress estab-lishes income and expenditure targets for the Federalbudget as a whole and specifies spending targets ineach of 15 mission areas. These targets are supposedto guide, but not formally bind, the authorizingcommittees. Later in the budgetary cycle, the budgetguidelines are reviewed and new targets are speci-fied that are binding upon the appropriations com-mittees.

Under this new process, review and appropriationof the DoD budget takes significantly longer. Finaldecisions for the defense budget are made bycongressional conference committees as (or, inmany recent cases, after) the new fiscal year starts,late in the executive branch’s budget-formulationprocess for the following fiscal year. Last-minutechanges in the appropriated funding levels requirelast-minute changes to next year’s request andinfluence planning estimates for the following fiscalyear. The Packard Commission found that the timingand scope of changes introduced late in the appro-priations process “prevent the DoD from makingcoherent linkages among the three defense budgetsthat it manages at any one time—the budget beingexecuted, the budget under review by Congress. andthe budget that DoD is developing for the upcomingfiscal year.”48

The Balanced Budget and Emergency DeficitControl Act of 1985 (Public Law 99-177, morecommonly known as the Gramm-Rudman-HollingsAct) placed further constraints on congressionalbudgetary process. Besides reinforcing the “zero-sum” nature of the Federal budget, the major impactof this legislation was its emphasis on Federal“outlays,” or money actually spent, during a fiscalyear. The appropriations process prior to Gramm-Rudman-Hollings dealt not so much with actual


spending but with “budget authority,” or permissionto enter into contracts that obligate the FederalGovernment to future expenditures.

Deficits are created not by budget authority but byactual expenditures. Since funds appropriated fordifferent purposes are spent at very different rates,the relation between budget authority and outlaysdepends on the purposes for which the funds are tobe used. Salaries, for example, are essentially spententirely within the year for which they are appropri-ated; cutting one dollar of budget authority forsalaries will reduce that year’s outlays by a dollar.Funds for building ships, on the other hand, can bespent more than a decade after their appropriation;cutting a dollar off a ship procurement appropriationtrims as little as two cents off that year’s outlays.

Due to this variation in outlays versus budgetauthority, Gramm-Rudman-Hollings outlay controlsmake it even harder to review the defense budget.Increasing appropriations in one area may require fargreater cuts in another to keep outlays from chang-ing.

As a final point concerning the role of congres-sional “micromanagement,” the prospects forchanging the relationship between Congress andDoD to one of greater strategic oversight weredamaged by the years of tension and confrontationthat existed between Congress and DoD in the early1980s.

Department of Defense

Actions within the DoD contribute as much toprogram variability as do those by Congress. Al-though congressional line item changes certainlycomplicate program management, changes gener-ated within the many layers of DoD managementadd significantly to the problem. The cuts that arepassed down are due to DoD’s inability to forecastprogram costs accurately, to defer new starts untilsufficient funding to cover the actual (rather than theoriginally estimated) costs is available, or to elimi-

nate programs-rather than stretch them out—in theevent of funding shortfalls.

In 1981, then-Deputy Secretary of Defense FrankCarlucci offered 32 management initiatives to im-prove the defense acquisition process, with number4 being to “increase program stability in theacquisition process.” Program stability was also oneof six areas cited for high-level management atten-tion in 1983. Nevertheless, a General AccountingOffice (GAO) review of the Defense AcquisitionImprovement Program in 1986 found that “despitelarge budget increases, DOD has reported essen-tially no progress in stabilizing major weaponprograms. “49 GAO found that although the impact ofunderfunding programs is “well-recognized anddocumented, a workable and effective method formatching DoD’s needs with budgetary constraintshas not been developed.” 50 The Office of theSecretary of Defense, according to GAO, “hasreported that the inability to cancel low priorityprograms continues to be a fundamental obstacle toimproving program stability.”51

Limiting the number of new programs and termi-nating low priority ones will be required in order toprevent the remaining programs from being under-funded. Although DoD has claimed progress inlimiting the number of “major new programs,’” GAOfound this reduction to be due in part to a doublingof the minimum cost threshold that defines a majorsystem. “Consequently, fewer new starts are consid-ered major under the revised higher thresholds.”52

These funding issues are discussed further in the“Affordability” section of chapter 8 of the mainreport.

Too often, desire for “funding stability” waneswhen the possibility of funding growth presentsitself. According to the Comptroller General of theUnited States. the boom and bust cycle that the DoDbudget experiences “encourages managers to pro-cure as much as possible when funding is relativelyplentiful and not attempt to develop a stable and


realistic procurement plan.”53 Although he doubtedthat “defense budgets will ever be as stable as DoDmanagers would like,” the Comptroller Generalnevertheless argued that steps could still be takenwithin DoD and Congress to “create as muchstability as possible in an environment which willalways be uncertain to some degree.”54

Personnel Turnover

Another contributor to program variability isturnover in acquisition personnel. Although typicaldefense programs have lifetimes measured in dec-ades, the average tenure of program managerssurveyed by GAO in 1986 was less than 2 1/2 years.Such short tenures make it difficult to increase theauthority of program managers because they hinderany attempt to assign accountability. Moreover, theycan generate pressures to sacrifice long-term qualityfor short- term results.

The contribution of high turnover rates to programvariability is only one of the many issues concerningthe acquisition workforce. Additional issues arediscussed in the section on “Acquisition Personnel,”below.

Reducing Program Variability

Analysts disagree as to which of two managementfailures is the more serious in the light of unexpectedchange: failure to plan and budget flexibly, or failureto hold to a fixed schedule in the light of perform-ance and budgetary uncertainties. Writing for theCSIS Defense Acquisition Study, Leonard Sullivannotes that acquisition plans during the ReaganAdministration “have gone through a boom and bustcycle that totally defies rational planning.” “Thesegyrations . . . make fixed planning for ‘stableacquisition’ an unachievable ideal.” His conclusionis that “inescapable fluctuations in White House andCongressional budget expectations and tactics de-mand the development of an acquisition system that

responds resiliently to the inevitable changes inlong-range projects in America’s short-range politi-cal environment.”55

On the other hand, participants in the DSBsummer study on Practical Performance FunctionalRequirements believed that every effort must bemade to hold to a fixed schedule in the event ofunexpected changes. “Upon commencement ofFSED [Full Scale Engineering Development],schedule should be considered as the dominantprogram driver and the program contracted andfunded accordingly . . . In the event that technologi-cal opportunities or operational requirements war-rant change, block upgrades [deferring a set ofchanges for a later production series rather thanredesigning and/or retrofitting changes into theentire production run] should be the primary solu-tion to avoid schedule delays.”56 If a block upgradeis not acceptable, “it’s probably better to terminatethe program and begin the process over again.”57

Several techniques have been proposed to lessenprogram variability and/or plan in the face ofuncertainty, among them baselining, multiyearbudgeting, and increasing management flexibility.

Baselining-The Defense Acquisition Improve-ment Act of 1986 (Public Law 99-661) mandatedbaselining for major acquisition programs-a re-quirement incorporated in DoD Regulation 5000.1as of September 1987. The Act also requires eachmilitary Service to designate selected high priority.major acquisition programs as “Defense Enterpriseprograms” having streamlined reporting proceduresfor program managers. For these programs. congressmay authorize funding for the full-scale develop-ment or production stages “in a single amountsufficient to carry out that stage, but not for a periodin excess of five years . . .“58 Such multiyear authori-zations would eliminate annual congressional re-views for these programs, at least by the Armed


Services Committees. Four programs-the Army’sMultiple Subscriber Equipment (MSE) and Ad-vanced Tactical Missile System (ATACMS) pro-grams and the Navy’s Trident II missile and T-45Trainer System programs-have been given Mile-stone Authorization status by Congress. However,Congress has neither received nor approved theactual authorizations for these programs.

Multiyear Budgeting-Multiyear budgeting goesbeyond multiyear authorizations for selected pro-grams to provide authorization and appropriation ofthe entire Department of Defense budget for periodslonger than one year. With a longer planning horizonand less frequent congressional review, the hope isthat programs can enjoy greater stability, withcongressional oversight directed more towards stra-tegic guidance and away from individual line items.Following the Packard Commission’s strong recom-mendation, the Department of Defense submitted a2-year 1988-89 budget to Congress early in 1987.

Biennial budgeting has not been readily acceptedby Congress. One reason is obvious—one of thepurposes behind biennial budgeting is to lessencongressional influence. The matter is not thatsimple, however, since Gramm-Rudman-Hollingsplays a role. Facing fixed deficit targets for futureyears, Congress is reluctant to commit itself to futureoutlays when it has no firm idea of what thecorresponding revenues will be. Estimating reve-nues for the ongoing fiscal year is difficult enough,given their dependence on economic conditions thatcannot be predicted in detail. Doing the same thingfor future fiscal years becomes highly problematic.

The CSIS Defense Acquisition study points out anumber of other practical disadvantages and compli-cations of the biennial defense budget.59 Unlessimplemented government-wide, it would give DoDa preferential status within the executive branch.Government policies and procedures-especiallywith regard to personnel—emphasize uniformityacross the board. If the 2-year cycle enabled the

Defense Department to resist budget cuts, it couldcome under strong political attack.60

Second, while a 2-year budget reduces opportuni-ties for congressional micromanagement. it alsorestricts DoD’s flexibility. A supplemental appro-priation adjusting the second-year amounts wouldrestore some of this flexibility, but it would thereforealso reintroduce opportunities for congressionalintervention.

The CSIS study goes on to describe timing difficulties that the 2-year terms of members of theHouse of Representatives and the 4-year term of thePresident present when coupled with a biennialbudget. If the 2-year budget were submitted andapproved during a presidential election year, theincoming President would not be able to execute hisor her own defense budget for 20 months after takingoffice. If the budget were submitted and approved inodd-numbered years, Members of Congress runningfor reelection would be doing so on the basis ofdefense budget votes made more than a year ago.The CSIS study believed that Members would notwant to put themselves in this position. However, thereport does not make clear why a Member ofCongress would find it much harder to justify adefense budget decision made the previous year onthe basis of conditions at the time, than it would beto defend any other decision made during the firstyear of a 2-year term.

The CSIS study does not discuss the root causeof these timing problems, which is that absoluteprogram stability is fundamentally incompatiblewith holding elected officials accountable atperiodic intervals for their actions. Every time anelected official is replaced, there is—and mustbe—the opportunity for the new official to changethe way things have been done.

There are two ways to handle the timing problem.One is to permit a new President to make significantchanges in a previously submitted 2-year budget,


thereby vitiating the advantages of long-term budg-eting. The other is for the new President to leaveessentially intact the budget he inherits upon assum-ing office, concentrating instead on the budgets thathe will submit This latter approach, of course,counts on the new President’s successor to respectthose future budgets when they extend into asubsequent Administration.

For whatever reason, the first submission of abiennial budget in 1987 for fiscal years 1988 and1989 did not go far. Neither the House nor the SenateArmed Services Committees authorized very muchof the DoD 1989 request. More significantly, the1988 authorization act specified that “authorizationsof appropriations and of personnel strength levels inthis Act for fiscal year 1989 are effective only withrespect to appropriations made during the firstsession of the One Hundredth Congress’ ’-i.e.,appropriations made that year. The appropriationscommittees of the House and Senate, even lessenthusiastic about multiyear budgeting than theArmed Services Committees, did not appropriateany 1989 funds.

Although no funds were appropriated for 1989during the 1988 budget cycle, one effect that the2-year submission did have was to make DoD’sout-year plans more visible to Congress than theyhad been before. Although some might fear that thisvisibility just gives Congress that much moreopportunity to meddle, it is also plausible thatimproved communication between Congress andDoD might give Congress the confidence in DoDplanning it needs to relax its level of “micro-management. ” Good communication extends theplanning horizon, enabling both parties to take alonger view.

Management Flexibility—A further way to reducethe variability of DoD programs is to increase theability of the DoD to adjust to changing circum-stances without having to come back to Congress.Such techniques-which would make DoD manage-ment easier just as they would lessen congressionalinfluence-include increasing DoD’s ability to

transfer money from one program to another (i.e.,reprogramming); using funds in one appropriationtype (e.g., procurement) for another purpose (e.g.,research and development); and including unspeci-fied management reserves in program budgets.

Congress now grants DoD the ability to makesome such changes without prior notification of orapproval by Congress. However, in other cases.either notification or prior approval of the Appro-priations and/or the Armed Services Committees is


required. 61 Furthermore, each fiscal year’s budgethas associated with it a maximum amount of transferauthority. If the sum total of all reprogrammingssubject to the transfer authority limit reaches themaximum, no further reprogrammings can be made.

These requirements, along with the emphasis inDoD budgeting on specific program elements,restrict DoD’s ability to respond to changing cir-cumstances. The DSB Acquisition Cycle Task Forcepointed out several DoD needs that do not neatly fallwithin existing line items and that therefore requireadditional funding flexibility to address:

●

●

●

The

Getting started with technology and systemexperiments in areas that DoD has alreadydecided to submit to Congress in the followingyear’s budget. (This problem would be aggra-vated by a biennial budget cycle.)Purchasing good ideas from the losing biddersin competitions.Providing extra support to programs perform-ing better than expected.

Task Force recognized the belief within Con-gress that too many reprogrammings were alreadybeing used to evade congressional intent. “Negotiat-ing new and higher thresholds will thus require arestoration of DoD’s credibility with the Con-gress.” 62

The decomposition of the defense budget intodifferent accounting categories restricts DoD flexi-bility. It also can impede efficient program manage-ment objectives such as maintaining a smoothtransition from development to production. A DSBTask Force concluded in 1983 that “the Design toProduction transition is a process and not a fixedevent,” and that DoD funding rules prohibiting theuse of R&D funds for production make it “very

difficult to apply resources [during full-scale devel-opment] to producibility, manufacturing planning,tooling and test equipment and other actions leadingto production.’"63

A Final barrier to sound program management,and the biggest obstacle towards giving programmanagers greater authority over their own programs,is the lack of management reserves. Although thefunds required to fix unexpected problems obvi-ously cannot be estimated for any particular pro-gram, they can be determined statistically in theaggregate. Supervisors who oversaw several pro-gram managers, if provided with these reserves andthe authority to allocate them, would be able toaddress problems as they arose. According to theAcquisition Cycle Task Force,

, . . the important thing to keep in mind is that this isnot “contingency” money that is simply budgeted“in case something happens.” It is a necessarymanagement resource that should be provided be-cause it is well known, and experience amplydemonstrates, that something will happen and it mustbe fixed quickly if the program is to remain onschedule and within “planned for” costs.64

However, the intense competition for funds wi-thin DoD, as well as the degree of scrutiny appliedto defense budgets by Congress, both mitigate against providing such reserves. In an environmentwhere there are already far more claims on defensedollars than available funds, there is every incentiveto underestimate the costs of programs when Servicebudgets are prepared. Even if contingency reservesare initially provided for, they are one of the firstitems to be trimmed.

Were management reserves somehow to surviveDoD’s internal budget preparation process, they


would probably not fare well on Capitol Hill. from which the company’s chief executive officerAccording to Leonard Sullivan,

Reserve funding wedges, if identified in thebudget so that congressional staffers can find them,end up spotlighted, renamed “slush funds,” to protectthe taxpayer from waste, fraud+ and abuse.65

Requirements Generation and the ResourceAllocation Process

Description of the Problems

In 1985, a DSB summer study examined theprocess by which requirements for new militarysystems are generated. The task force concluded that“although promising efforts are underway in all ofthe Services to improve their requirements proc-esses, deficiencies in this process are still likely to besignificant contributors to continuing increases inboth the cost and the length of time required to fieldnew defense systems."66 The report identified threeproblems in particular:

. Users are not involved directly and continu-ously in determining and ranking their militaryneeds.

. Requirements are expected to be observed toorigidly.

. Acquiring organizations do not go over theirrequirements often enough with their suppliers,before making them formal.

The study proposed emulating the organizationalstructure of successful commercial programs tostreamline DoD acquisition, a proposal whichformed the basis of the Packard Commission’srecommendations regarding acquisition organiza-tions.

According to the DSB report, deciding what toacquire in the commercial world—at least for thehighest priority, “bet-your-company” programs ex-amined by the study panel—is essentially a one-stepoperation. Balancing requests from users againsttechnological opportunities and available resources,the program manager advances realistic proposals

(CEO) can select. -

The PM [Program Manager] is motivated to berealistic about performance, cost and schedule, bothbecause he will have to carry out the program if it isapproved and because his job is dependent on themerits of the proposal and not simply on whether itis accepted.67

The DoD, on the other hand, decides what to buyin two stages. First, a highly political competition forfunds involves the military Service, the OSD, OMB,and Congress. After funds are reserved. as denotedin the milestone process by a DRB decision toinitiate a new program, a second stage of competi-tion selects the actual supplier.

There are great pressures to overpromise in orderto survive the [funding] competition. Since thedecisions are made by political processes among alarge and diverse group of people, there is littlepressure to discipline the process and to enforcerealism. Clear-cut designs to meet the requirementsare not allowed because they would interfere withthe next step—competitive source selection. Theresult is a firm over-stated requirement which toofrequently can neither be met nor changed.68

Leonard Sullivan describes a little more bluntlysome additional factors within DoD that lead tooverstated requirements:

The twin siren songs of “nothing is too good forour boys” (sung by the Services) and “nothing isimpossible” (crooned by the technological commu-nity) have produced a deeply embedded Americandefense culture and guarantee the perpetuation of amilitary force that is at or beyond the leading edge oftechnology in the factory, and at or behind thetrailing edge of any realistic sustainable warfightingcapability .69

“Another myth popular among amateur ‘require-ments’ generators,” Sullivan adds, “is that since thedesired system is going to be expensive anyway, themarginal costs of adding a few more capabilities will

26 ● Holding the Edge Maintaining the Defense Technology Base, Volume 2

be small . . . [However, these] add-ens become ‘thestraw that breaks the camel’s back’ in terns ofdesign complexity, {development scheduling, andproduction costs.”70

Sullivan, the DSB panel, and the Packard Com-mission all attribute much of the pressure foroverstated requirements to insufficient interactionbetween those who know what is needed and thosewho know how to provide it. According to thePackard report, “Generally, users do not havesufficient technical knowledge and program experi-ence, and acquisition teams do not have sufficientexperience with or insight into operational prob-lems.’71

The DSB panel recommended that the Command-ers in Chief [CINCs] of the operating forces be givena more significant role in requirements generation.72

The CINCs “do not participate with the services inmaking requirements tradeoffs even though theymay be the most qualified to judge the trueoperational value of a particular requirement.”73 ThePackard Commission agreed that much greateremphasis should be placed on “an informed trade-offbetween user requirements, on the one hand, andschedule and cost on the other.”74 The DSARCprocess. according to the Packard Commission, wasunable to strike this balance. Although DSARC wasable to determine whether proposed new systemswould meet the requirements set for them, it “lacksa viable mechanism for challenging those require-ments.”75

The 1985 DSB panel on requirements that recom-mended the CINCs play a greater role in generatingrequirements also called for them to be moreinvolved in-or at least, more aware of—the subse -

quent development process. Admiral W.J. Crowe—at the time of the DSB study the Commander inChief of the U.S. Pacific Command-believed thathis input into the requirements process was suffi-cient until the system entered development. “Fromthat point, however, I have little influence over theprocess because feedback on affordability, priori-ties, and any tradeoffs made by the developingService is almost non-existent. I do not want thecapability to design or build systems, but I do needsufficient involvement in the development processto be able to point out major design changes ofomission or commission which would affect mycapabilities and/or strategy.”76

According to the DSB, even the program manag-ers who are immediately responsible for developingmajor systems do not have sufficient ability or desireto reexamine requirements once development hasstarted. Should meeting a particular requirementprove more difficult than expected, leading to costgrowth or schedule slippage, program managers alltoo often fail to reconsider the need for it. Moreover,since program offices are established after therequirements have been ratified, managers generallyarrive too late to affect requirements at ail.

Improving the Requirements Process

Changes in the requirements process can come intwo different areas. One is in the process by whichthe Services first establish requirements for newsystems or upgrades. The existing two-stage processis a recipe for producing the wrong system too lateand at too high a cost. Moreover, Services may notfully evaluate non-traditional means of meeting theirrequirements, especially if they involve changingthe respective roles and missions of the Services.

. . .


Improvements to the initial requirements genera-tion process involve strengthening the role of theUSD(A) in these early stages, ensuring an objectiveevaluation, and preserving a role for Defense Ad-vanced Research Projects Agency (DARPA) toexplore nontraditional solutions outside of Serviceprocesses.

The report of the Project on Monitoring DefenseReorganization, charged with reviewing the im-plementation of the Packard Commission’s recom-mendations, concluded that “although the PackardCommission’s objectives pertaining to ‘require-ments’ are far from fulfilled, there has been materialprogress.”77 Most important, according to the study,was the establishment of the Joint RequirementsOversight Council (JROC) under the newly createdpost of Vice Chairman of the Joint Chiefs of Staff.This council is charged with reviewing all programsthat are candidates for joint development becausethey can be used by, or affect the operation of, morethan military Service. JROC has also served toincrease the role of the CINCs in decisions onweapon characteristics, according to the study.

With respect to the Packard Commission’s recom-mendation that requirements be better balancedagainst cost and schedule and that affordability betaken more seriously, the implementation studyfound that “the organizations and procedures thatcould make possible such a change have been setup,” but “their effective operation will requirecontinued high-level attention.”78

The requirements process can also be improved atthe point where program managers review them withthe ultimate users: the CINCs and others serving inoperational capacities. Here, managers can bringconsiderations of cost. schedules, and technicaldevelopments into play to change those require-ments.

Bureaucratic Paralysis“When I took over procurement responsibility for

General Motors, the guidelines for running theacquisition activities was 154 pages. I gave them atarget of 10. We ended up with 13 pages to run allGeneral Motors acquisition efforts.

“I was interviewing a General from the Air Forcefor a job and he said, ‘You cannot run an organiza-tion with only 13 pages. ’ I said, ‘We are. He said,‘1 have 3,650 pages,’ and I said, ‘General, you cannotrun an organization with 3,650 pages. “

—Robert Costello, Under Secretaryof Defense for Acquisition79

Documentation

Perhaps the most discussed problem with defenseacquisition is the bureaucratic burden that individu-als and companies involved in defense acquisitionmust carry to do their jobs. On the way to a DABmilestone review, a program manager may have tomake as many as 100 briefings. Attention must bepaid to thousands of regulations, specifications, andstandards. As the Packard Commission described,

The program manager finds that, far from beingthe manager of the program, he is merely one of theparticipants who can influence it. An army ofadvocates for special interests descends on theprogram to ensure that it complies with variousstandards for military specifications. reliability,maintainability, operability, small and minoritybusiness utilization, and competition, to name a few.Each of these advocates can demand that theprogram manager take or refrain from taking someaction, but none of them has any responsibility forthe ultimate cost, schedule, or performance of theprogram. 80

Increasing complications in the job of the programmanager have been accompanied by lengthening thetime needed to complete contracting actions andincreased regulation, oversight, and auditing ofdefense contractors.


A recent RAND Corporation study tried toquantify both the increased regulatory activity inrecent years and the effects of those regulations oncost, schedule, and performance.81 They found nearunanimity among those who work in acquisition thatcomplying with regulations, management review,audits, etc. is much more difficult now than in thepast. However, the indicators RAND chose tomeasure that difficulty-growth in staff sizes, re-quests for DoD testimony, numbers of DoD regula-tions, numbers of GAO reports, etc.-did not clearlyconfirm the increase.

Of the indicators sought to identify the effects ofthe regulatory burden-cost, schedule, and perform-a n c e -RAND found that cost shows the clearesteffects:

We conclude, on the basis of the sparse dataavailable, that the sum of all incremental costs whichcan reasonably be charged to regulatory controlsprobably amounts to between five and ten percent oftotal program costs.82

These numbers are lower than some that havebeen cited by defense contractors, possibly becausethey address only the incremental effects of recentregulation and not the cumulative effects. Onecontractor in a dual-use (military and commercial)business told OTA that the constraints imposed bydoing business with the DoD are responsible for 20to 50 percent of the total price of the defense product.Other estimates go even higher. The president ofGrumman Corporation has stated that “only about athird of the time and money spent in developing newweapons systems has anything to do with design,development, and testing. The rest of it is the cost ofreview and oversight.83

This estimate is almost certainly high, sinceGrumman Corporation would surely conduct somereview and oversight activities for its own use evenif DoD did not mandate them. In fact, according to

a senior executive at another aerospace corporation,DoD imposes no administrative burden above whatthe company would want to do anyway. Accordingto Albert D. Wheelon, for 16 years the head ofsatellite production at Hughes Corporation,

Our experience is that similar spacecraft costabout the same, whether they are bought undermilitary or commercial arrangements . . . Complyingwith DoD systems for cost and schedule control,contract management and quality control was notparticularly burdensome. In fact, we used theirprocedures in our commercial programs by choice.In essence, DoD asked us to do no more for itsprograms than we would want to do for ourcommercial customers and ourselves.84

Even if cost penalties can be unambiguouslyattributed to regulation, it is hard to consider them asmeasures of government waste. As the RAND reportmakes clear,

. . . to sustain an interpretation that all, or even most,of these costs are “wasted” money would requiredemonstrating that no benefits derive from thereporting and oversight activities that account for thebulk of the cost.85

For reasons discussed earlier in this chapter, defenseacquisition is clearly not managed solely to mini-mize cost and maximize efficiency. Congress, theServices, the OSD, and the regulatory agenciesapparently have found the value of their respectiveinvolvement in defense acquisition to be worth theadditional cost.

Analysis

Whether or not red tape can be quantitativelyshown to affect defense procurement, and regardlessof the degree to which it has increased over the years,it is unambiguously greater in government than inthe private sector. The RAND study noted that:

Military program managers are frequently sepa-rated from the senior OSD-level acquisition execu-

●


tive by five or six administrative layers. Each layerdemands a right to review all progress reports andmajor program change proposals. Not so apparentfrom the literature is that some of those layers havean extensive horizontal structure, so that the views ofseveral different offices must be accommodated inorder to pass through a particular layer or “gate.’86

Not only do program managers devote much of ‘theirtime towards preparing for these reviews, but theregulations-and their increasingly strict interpreta-tion, a point not amenable to RAND’s analysis-have the effect of limiting the initiative and discre-tion that program managers are allowed to exercise.

Note, however, that if the present hierarchyrequires five or six management layers between aprogram office and the senior Defense AcquisitionExecutive, any compression of the command chainwill be accompanied by increasing the burden onthose at the top-unless the total number of acquisi-tion programs is cut proportionally. Bringing anyone program to the attention of the most seniormanagement will ensure that it moves rapidly ahead.Bringing every program to that level. without someway of ranking them to determine which ones trulydeserve the attention, will create grid lock.

The 1985 DSB Summer Study on PracticalFunctional Performance Requirements devoted aconsiderable amount of analysis to the differencesbetween the organizational environment of a DoDprogram manager and that of an equivalent positionin non-defense-related private industry. Successfulcommercial programs examined during the summerstudy shared a number of features:87

●

●

A Program Manager (PM) who has continuity,authority, flexibility, accountability for deci-sions, and direct access to the key decisionmaker (CEO).A powerful executive (sometimes the CEO)who has authority to make unchallengeabledecisions, settle disputes, and allocate addi-tional resources. The CEO can directly support

the Program Manager and insulate him or herfrom external pressures as critical needs arise.

● Active user involvement. The commercial user,not committed to a single supplier, is free topurchase from other producers. Therefore, theProgram Manager has a strong incentive toinvolve the user throughout product develop-ment, and emphasizes adherence to schedule(e.g., by modifying requirements with userconcurrence) in the event of difficulties.

There are many “minor players” in this commer-cial model, including inside staffs, governmentregulators, consumer groups, etc., but “one of themajor advantages of the Commercial Model is thatthe minor players play a minor role.”88

In its planning stage, according to the DSBsummer study, the commercial model is essentiallya one-step procedure. The Program Manager, bal-ancing user needs, foreseeable resources, and avail-able technology, prepares a realistic proposal for theCEO to consider. The CEO, weighing this proposalagainst other alternatives such as having the pro-posal revised or rejecting it in favor of other uses forcorporate resources, makes the decision to go ahead.“His future depends on whether programs he ap-proves are ultimately successful, not on whether ornot he goes ahead with them.”89

The plan’s execution is marked by a close, directworking relationship between the PM and the CEO:

The CEO must be kept informed and the PM mustbe able to get help rapidly and reliably if he needs it.The principle is one of a joint activity towards acommon goal. A program failure is a failure of bothCEO and PM.

The staffs and inspectors, test groups and “ilities”[reliability, maintainability, supportability, etc.],groups exist, but are insulated from the PM by theCEO. The staffs can talk to the PM and comment andadvise but cannot direct the PM without goingthrough the CEO. Only the PM and the CEO canmake decisions; they have the responsibility andtherefore the authority.90


The summer study sought to emulate thesepractices within DoD acquisition programs. Specifi-cally, they recommended that DoD establish whatthey called “surrogate CEOs’’—individuals whohave been delegated authority and responsibility toserve as the ultimate decisionmakers for one or a fewprograms. To implement this recommendation, theMilitary Departments would have to reduce thenumber of people involved in the decision processes,reduce the number of layers through which theprogram manager reports, and reaffirm programmanager responsibility for all phases of programexecution. They would also have to provide programmanagers with access to those senior managers (thesurrogate CEOs) who would have the authority andresources sufficient to “make and enforce decisionsregarding tradeoffs between performance, schedule,and cost. ”

The Packard Commission cited this DSB study asthe basis for its recommendations to streamline theacquisition process. In particular, the Commissioncalled for “unambiguous authority for overall acqui-sition policy, clear accountability for acquisitionexecution, and plain lines of command for those withprogram management responsibilities."91 At the topof the acquisition structure recommended by thePackard Commission would be a new position, theUnder Secretary of Defense for Acquisition(USD(A)) who would serve as the Defense Acquisi-tion Executive. Reporting to the USD(A) would becomparable to Service Acquisition Executives(SAEs) in the Army, Navy, and Air Force andequivalent positions in the defense agencies. EachSAE would appoint and oversee a number ofProgram Executive Officers (PEOs), who in turnwould oversee Program Managers. The PEOs, “likegroup general managers in industry, should beresponsible for a reasonable and defined number ofacquisition programs. Program managers for theseprograms should be responsible directly to theirrespective PEO and, on program matters, report onlyto him."92 It would be the responsibility of the UnderSecretary for Acquisition to ensure that “no addi-

tional layers are inserted into this program chain ofcommand.”

Through the Defense Reorganization. Act of 1986and concomitant Executive Orders and DoD Direc-tives and Instructions, the organizational structurerecommended by the Packard Commission wasestablished. However, the new structure supple-mented-and did not replace—any existing chainsof authority and command. According to a study ofthe implementation of the Packard Commissionrecommendations and associated legislation,

, . , the purposes of the legislation have not been met.Our sense is that the new positions were simplysuperimposed on top of the existing structure.93

The new acquisition chain is at present a communi-cations link, and does not control funds. Figure A-4shows the new acquisition lines of authority alongwith the existing organizations for command andbudget.

Regardless of how effectively the implementationof the Packard Commission recommendations wi-thin DoD captured the intent of those recommenda-tions, it is clear that the actions taken to date do notaddress the original concerns of the DSB summerstudy.

Nor is it clear that they could. At the same timethat it recommended changing DoD practices to putthem more in line with commercial ones, the DSBsummer study also acknowledged that:

There are inherent and basic differences betweenthe DoD and non-DoD processes which certainlyinhibit and may even prevent the direct mapping oflessons learned [from the commercial examples] intothe DoD requirements process. For example, there isno counterpart to the role of Congress in industry,nor are there any unifying quantitative measures ofsuccess in DoD corresponding to profit or [return oninvestment]. Furthermore, some personnel con-straints in DoD have no counterpart in industry.Finally, DoD does not operate in a free market asbuyer or seller, and can only imperfectly approxi-mate free market competitive conditions.94

Appendix A

—T

he DoD

Acquisition System

●

31Acqu isition

,---- --- ---

Figure A-4-Chalns of Authority

Command

Secretary o;-j

defense .J Deputy secretary

of defense

Financial

Deense ac qu lsi t on

executive

~---r----~l

Under secretary --------------+------------------------------ DOD

comptroller acquisition I Service

secretary

I Service I ---------------- u nde r sec re t~j

Service Asst. sec I I

Army. Navy

acqu sltlon t research. development I executive & acquisitive

Alr-----------------

Service comptroller

(Army. Air Force)

Force Service chief of I Service j 8tall (4-) J comptroller (Navy)

Program

executive

officer

Commander. material! systems command (4*)

Commander. system command

product division (3 or 2*)

I Deputy for programs

(2 or 1*)

Program

manager

SOURCE: Defense Systems Management College, unpublished materials.

Systems commandl ·.l product division

comptroller


Neglecting the inherent and essential involvement ofthe political process, in particular, will lead toinappropriate solutions. Edwin Deagle’s analysis,cited in the previous section of this appendix on“Program Variability,” is particularly relevant todiscussion of the acquisition (or, more accurately,the military R&D) process:

. . . organizational and procedural designs are unusu-ally important. . . since they determine the structurewithin which massive managerial and politicalcontrol problems intersect.” Moreover, there can beconflict between organizational strategy designed toproduce efficient political decision processes andmanagerial strategy designed to achieve coherentcontrol of weapon system development. Yet theorganization for control of military R&D inevitablyis a mixture of both purposes. It is argued here thatthe failure to cope explicitly and well with thisparadox is the central public policy problem ofmilitary R&D.95

The DSB summer study acknowledges the impor-tance, but not the inevitability, of political influ-ences within DoD in a passage on DoD decision- ‘making that could equally well describe Congress:

No one person has the authority to make firmdecisions. Decisions are made by a large, diffusegroup that acts something like an extended commit-tee and that lacks clear-cut responsibility and ac-countability. The DoD itself exists in a politicalenvironment that further smears out the decisionmaking process. As a result, decisionmaking islengthy and uncertain. The players change and thedecisions tend to change with them. The programManager is separated from the top level of the DoDby many intermediate layers, all of whom must bedealt with, none of whom can say yes, but most ofwhom can say no. Decisions are late, inconsistentand untrustworthy.96

And in an earlier passage,

Although the DoD is nominally a hierarchicalauthoritative organization, it is very difficult in a

democracy for anyone to make a controversialdecision stick.97

The key to the direct decisionmaking processesand lines of authority in the DSB summer study’scommercial model is the close and direct linkbetween the program manager and the CEO. How-ever, the commercial programs analyzed by thesummer study—the ESS-4 automated electronicswitching system for long-distance communicationdeveloped by Bell Labs, the Boeing 767 airliner, aSatellite Business Systems communication satellitesystem, the IBM System 360 computer series, andthe Federal Aerobatics Administration national airtraffic control system-were not run-of-the-millactivities. They . . .

were of great importance to the companies involvedand therefore to the CEO. There is hardly any singleprogram in DoD of equivalent importance to ServiceSecretaries, let alone to the Secretary of Defense.DoD has too many important programs for suchofficials to keep track of them in detail.98

***Increasing the authority of the PM alone will not

solve the problem. Attempts to streamline theprocess and to connect the PM more directly to thetop of the DoD have not been successful except inextraordinary cases. There are too many programsfor the top level to understand in detail. They mustrely on their staffs and authority rediffuses in thebureaucracy. 99

This was to be the role of the “surrogate CEOs”which the DSB summer study called for establishingwithin DoD. The success of the Surrogate CEO . . .

will depend on how much authority he really has toadjust performance and schedule, provide additionalresources if needed, make or approve tradeoffs.100

It was this recommendation that led the PackardCommission to call for the establishment of ProgramExecutive Officers. However, since the acquisitionchain of authority established by the military Serv-ices in response to the commission’s recommenda-


tion has no real control over resources, it isquestionable how well it fulfills the Commission’sintent. In the Navy and the Air Force, the Com-mander of the System Command product division towhom a program manager reports has been desig-nated as his Program Executive Officer—despite theconclusion of the DSB summer study that:

A supervisor or commander in the current DoDstructure is not equivalent to a Surrogate CEObecause he does not have the necessary delegatedauthority . . . He does not have any more authorityover performance, cost, and schedule of his pro-grams than his PMs do. He cannot transfer fundsamong programs and he has almost no discretionarymoney under his control. His control of staff andmonitoring groups is minimal. He is overcommittedand has almost no flexibility.l0l

In the Army, PEO offices have been establishedseparate from the commanders of the System Com-mands within Army Materiel Command, but eventhese offices have no real control over resources.

Truly implementing the recommendations of theDSB summer study and the Packard Commissionwould require drastic changes in the operation ofDoD. Given the inherent involvement of the politicalprocess within defense acquisition, true implemen-tation may not be possible at all. The essence of theSurrogate CEO/Program Executive Officer conceptlies not in rearranging who reports to whom, but inconcentrating real authority in an individual posi-tioned to make decisions about a program and seethat they are implemented. However,

The law of conservation of authority says that thisdelegated authority must come from somewhere andit must come, in fact, from the Surrogate CEO’ssuperiors and from the staffs and regulatory bodiesin the government. These people, in the manner of allhuman beings, will resist giving up authority evenwhen they understand that their previous activitieshave been harmful rather than helpful. If the mostsenior people will really delegate their authority andinsist that it be further delegated to Surrogate CEOs,there is a chance the idea will succeed. There willstill be plenty of other things for the senior people todo.102

“Successful” DoD Models

Certain programs within the Department of De-fense—in particular, highly classified “special ac-cess” or “black” programs,103 and high-prioritystrategic programs such as the Minuteman missile,the Air-Launched Cruise Missile, and the Navy’sStrategic Systems Program Office that developedthe Trident system-have been held out as modelsthat have successfully conquered DoD bureaucracy.Special access programs, due to extreme securityrequirements, bypass much of the review andapproval process that ordinary, “white” programsmust contend with. Exempt from normal procure-ment and oversight operations, they are significantlyless encumbered with bureaucracy.104

According to Bernard McMahon, former Execu-tive Director for the Director of Central Intelligence(responsible for reviewing all intelligence programsand operations) and subsequently staff director for


the Senate Intelligence Committee, special accessprograms do have a number of advantages:105

●

●

●

speed of deployment-equipment is generallydeveloped and deployed faster than in normalprograms;exceptional stability, both in personnel and inconcept andbetter program managers and personnel thannormal programs of the same cost have.

Many senior officials with experience in bothspecial access and ordinary program managementreport that the streamlined management approachesand freedom from bureaucracy that characterizespecial access programs make possible the speedwith which these programs can field hardware.Others, however, argue that the advantages pos-sessed by black programs are not necessarily due tobureaucratic shortcuts. McMahon argues that sincemanagement and oversight of these programs aretightly restricted, those who perform these functionstend to be the most senior management of themilitary Services:

Because special access programs are reviewedonly by top management-their review boards arecomposed of flag officers and senior DoD civilianexecutives-they tend to get “special status” whenfunding priorities are established. Top managerstend to view the programs as their own, sponsorthem, defend them, protect them in the competitionfor dollars with regular programs, and favor them insetting priorities. Seldom are they terminated, re-duced, or stretched out nor is the economic rate ofproduction considered.106

The exceptional stability enjoyed by these programsis therefore due, at least in part, to their high priorityand the high level at which they are reviewed.“Management obstacles are cleared for specialprograms in ways normal program managers neverexperience.” 107 Similarly, their advantages in per-

sonnel are partly due to their priority. Admittedly,managers also have the advantage of being able tospend more of their time managing and less handlingbureaucratic overhead and advocacy.

The advantages enjoyed by special access pro-grams also come at a price. Procedures used inspecial access programs “significantly increase therisk of failure, both of program hardware and ofaccomplishing what we paid the money to do.”108

Part of the increased risk reflects the fact that specialaccess programs tend to be technically riskier.However, risk is further increased by eliminatingreviews and by short-circuiting the political processin which normal DoD programs operate:

The short cuts taken in the special access pro-grams , . . are dangerous. In the special access worldone hears horror stories of equipment that was tooexpensive, did not meet design expectations, was notsupported, was unreliable, and duplicated othercapabilities. 109

Those who attribute some of the successes ofspecial access programs to their management ap-proaches argue that these approaches should beextended to other DoD procurements. McMahon,however, argues that the model offered by blackprograms should not be extrapolated to the rest ofdefense procurement.

We simply cannot conduct a defense wideprocurement system using special access programprocedures. Top management does not have time toreview all programs with the degree of oversight itmust give to special access programs. Programs thathave succeeded have done so because they weresmall and few in number. . . .Efficiency alone is notsufficient. In rare, important cases we may choose totake risks and skip important steps; it should notbecome general defense practice. 110

The strategic systems also held out as examples ofsuccessful management share some of the same

1.


characteristics of successful special access pro-grams: viz., high priority and high visibility to seniormanagement. According to a critique of the PackardCommission report by an ad hoc committee of theAmerican Defense Preparedness Association, thesestrategic programs use “high quality but rather largestaff"—as opposed to the Packard Commission’srecommendation for small, streamlined staffs—andthe programs have “established sufficient priority toavoid the normal budget drills and priority-settingdisruptions.” The committee’s critique “questionsthe feasibility of achieving these objectives on allprograms.” 111 In other words, given a long line ofclaimants, those at the head of the line move faster.This does not mean everyone should be at the headof the line.

Overregulation and Public Opinion

Those who decry the inefficiencies imposed byregulation, audit, and oversight must realize thatthese penalties may be intentional; taxpayers placestringent requirements on expenditure of publicfunds. Figure A-5 illustrates the cost of doingbusiness as a function of regulatory scrutiny. Withminimal regulation or oversight, the government isdependent on the goodwill of contractors and publicofficials. Honest officials and corporations couldoperate very efficiently in this region, but dishonestones would take advantage of the lack of oversightto defraud the government.

At the other end of the spectrum, tight regulatorycontrols deter or detect those defrauding the govenr-ment, but they also drive up the cost of doingbusiness for everyone else. As was noted earlier,analyses by the RAND Corporation and othersimply that the existing regulatory regime imposesadditional costs of between 10 to 50 percent on thecost of doing business with the Department ofDefense. How much fraud this regulation deters isimpossible to estimate, but it must certainly be lessthan the $15 billion to $75 billion represented by 10to 50 percent of the procurement budget.

Most likely, the current regulatory regime isconsiderably more stringent than that which, accord-

Cost

Figure A-5-Cost v. Regulatory Intensity

I

I

ing to strict economic considerations, would resultin minimal cost. It may be the case that the publicwould not demand such stringent controls if it fullyunderstood the costs. If so, making the costs ofoverregulation clearer could lead to a relaxation ofunnecessary constraints. It may be possible, how-ever, that the American taxpayer prefers to pay the“tax” that overregulation imposes rather than permitthose in positions of public trust to misappropriatelesser amounts. If public demands for overregulationconstitute avoidable waste, then perhaps waste mustbe considered the price of curbing fraud and abuse.

Reducing Paperwork and Bureaucracy

Arbitrary measures to cut red tape or streamlinethe bureaucracy will fail unless they take intoaccount the reasons for establishing a bureaucracy inthe first place. For one thing, regulations area meansof preserving institutional memory in an environ-ment where presidential appointees have a medianlength of service of just over 2 years 112 and wheremilitary personnel are regularly rotated. They incor-porate the political oversight and review procedures

111“Quick Reaction Assessment of the President Blue Ribbon Commission on Defense Management,” an ad hoc Study conducted under the auspicesof the Undersea Warfare Systems Division of the American Defense Preparedness Association, October 1986.

112’’Leadership in Jeopardy,” National Academy of Public Administration, November 1985, p. 4. This figure applies to the entire Federal Government.


that come with the expenditure of public funds. Theycodify management procedures for large and un-wieldy organizations. Finally, they further impor-tant policy objectives that may be in the Nation’sor DoD% collective best interest even though theymight interfere with the most efficient executionof individual programs. As has been stated before,the government has many goals-environmentalprotection, occupational health and safety, fair laborpractices, equal opportunity, etc.-that may conflictwith any individual program manager’s ability torun a program. Just because a program manager doesnot believe his or her program is the appropriatevehicle to implement national policy does not meanthat that policy should be ignored. Although regula-tions have been criticized as attempts to solveyesterday’s problem by impeding today’s progress,those problems are certain to be repeated in theabsence of some way of institutionalizing thelessons learned.

A number of different approaches can be taken toreduce bureaucracy and regulation within DoD.Implementing any of them, however, presumes anatmosphere of trust among the DoD, the rest of theexecutive branch, and Congress. Our political sys-tem guarantees that the executive and legislativebranches will compete for power and influence.However, this competition can be carried out inmore or less confrontational terms. The relationshipbetween DoD and Congress in the early 1980s wasone of confrontation, substantially aggravating thelevel of mistrust.

In such an atmosphere, Congress chooses tolegislate rather than persuade because it has noassurance that persuasion will have any effect. TheDoD prefers to err on the side of strictness, for fearof incurring a congressional investigation and stillstricter legislation.

Major Legislative and Administrative Reform—One approach would be to replace the existingstatutory and administrative framework in whichfraud and abuse are deterred by extensive reportingand auditing requirements with one in which greaterresponsibility is placed on voluntary compliancecoupled with vigorous enforcement and severe

punishment for those who get caught. Enacting sucha system would involve a major overhaul of theexisting defense acquisition system and the environ-ment in which it is conducted. Moreover, it wouldrequire (and also follow from) reducing what manyin government and industry see to be the existingadversarial relationship between the two.

Bottom-Up Review-Since regulations (or atleast guidelines) are inevitable in so bureaucratic aninstitution as DoD, one approach to alleviating theregulatory burden might be a bottom-up review of allregulations to ensure that only absolutely necessaryones are retained. However, the definition of “abso-lutely necessary” is highly subjective, and differentgroups or factions within the Department of De-fense, the executive branch, and Congress areunlikely to agree. Every DoD regulation was origi-nally instituted for what seemed to someone to be aworthy purpose. This point is acknowledged by thePackard Commission in describing the “army ofadvocates” for various special interests that belea-guer program managers:

None of the purposes they advocate is undesirablein itself. In the aggregate, however, they leave theprogram manager no room to balance their manydemands, some of which are in conflict with eachother and most of which are in conflict with theprogram’s cost and schedule objectives. Even moreimportantly, they produce a diffusion of manage-ment responsibility, in which everyone is responsi-ble, and no one is responsible.113

Before any of these advocates or excess regulationsare eliminated, those who instituted them will haveto be satisfied that the goals they advocate will bepreserved. Moreover, those with the time to reviewthe regulations would most likely not be the onesadversely affected by them, and it is unlikely thatthis approach would effect significant change.

Evolutionary Review—The DoD is testing anevolutionary process to relax unnecessary bureau-cratic requirements. Pursuant to the Defense Acqui-sition Improvement Act of 1986, DoD has desig-nated selected high-priority, major acquisition pro-grams to be “Defense Enterprise Programs” havingstreamlined reporting procedures (table A-1 ).


Each Enterprise program is being reviewed to seewhat regulatory relief would be useful. As soon asthese reviews are completed, it is expected that theServices will request waivers of certain regulationsfrom the USD(A). Complicating these reviews,however, is the scale of the problem. Programofficials can find it more trouble to petition forwaiver of the numerous regulations that are thoughtto be inappropriate, inapplicable, or obsolete than itis simply to ignore them and see if anybody noticesor cares.

Evaluating the success of these programs may bedifficult because some of them are already amongtheir Service’s highest priorities. At least one (theC-17) was the Air Force’s model program for aprevious initiative on Acquisition Streamlining, andhas therefore already received special attentiontowards streamlining.

The same approach of setting up a structure bywhich waivers to particularly obnoxious regulationscan be solicited and acted on is used in two otherDoD efforts, the Model Installations Program (MIP)and the Pilot Contracting Activities Program(PCAP). In each of these-one aimed at DoD basesand installations and the other at organizationsengaged in significant amounts of contracting—requests for waivers are forwarded to the individualswho can approve them, and if appropriate they aregranted on an experimental basis. If the experimentshows that the waiver should be extended in time orto a wider audience, proposals recommending theappropriate change are prepared.

Note that none of these processes has the power toremove constraints originating outside DoD-suchas legislation—because nobody within DoD has theauthority to waive those constraints. However, incases where outside constraints are identified, DoDcan request relief from the outside agency or fromCongress. Waivers to such outside constraints areencouraged so that the ones most limiting DoDactivities can be identified.

Shifting the “Burden of Proof"—Another possi-bility, more along the lines of the Packard Commis-sion and the DSB summer study recommendations,is to shift the “burden of proof" from the programmanager to those who wish to overrule the program

Table A-l-Defense Enterprise Programs

Army. . . . . . . . . . . . . . . Multiple Subscriber Equipment (MSE)communications system

TOW II missile● ATACMS missile

Navy . . . . . . . . . . . . . . . Trident II missileT-45 trainer systemSSN-21 submarine

Air Force . . . . . . . . . . . Medium Launch VehicleC-1 7 TransportSRAM II missileTitan IV booster

● The program has also been granted Milestone Authorization status byCongress. See preceding discussion of “Baselining,” beginnlng on pg. 21of the appendix.

SOURCE: Office of the Secretary of Defense.

manager. In this approach, most regulations wouldbe made advisory, rather than mandatory. Programmanagers would be free to decide which ones couldbe overridden in their particular circumstances. The“special interests” and “advocates” would still existand would still be free to make recommendations tothe program manager. However. the program man-ager would be free to disregard their advice—unlessthey could persuade the program manager’s supe-rior.

This system could only work if program managersand their superiors were evaluated not only on howwell individual programs fared but also on how wellthe programs on balance supported the intent of theregulations—which, after all, serve to incorporateDoD and national policies that senior policy makershave decided are important. Program managerswould have to realize that their goal is not simplydevelopment and deployment of a weapon systembut furthering national policy as well.

It is not clear that this approach could be pulled offsuccessfully. First of all, it requires a stable andhighly professional work force. Government by fiatand decree removes individual initiative. and for thatreason can compensate to some extent for anuntrained work force. The requirement for restoringinitiative is having people capable of exercising it.

Another, more intractable, problem is deciding onthe irreducible core of regulations that would remainmandatory. Discretion cannot be permitted in areasaffecting safety, for example, or in regard to matters


that are specified by law.114 It is not clear thatdeciding on an irreducible set of minimum, absoluteregulations would be any easier or more effectivethan the “bottom up” review of all regulationsdiscussed above.

Any implementation of a program of this sortwould have to be flexible. As time progressed,feedback as to which mandatory regulations neededrevisiting or which advisory guidelines were beingsystematically ignored would be used to makeadjustments. Every level of authority would have tosupport the program and cooperate to make it work.In an environment where tensions exist betweenCongress and the executive branch, between DoDand industry, between the military Services and theOSD, and within the Services, that maybe too muchto ask for.

Reducing Delays

Many of the delays built into the acquisitionprocess follow from the implementation of regula-tions and the operation of the bureaucracy asdescribed above. No particular delay can be ad-dressed in isolation. However, two problems inparticular seem to be mentioned frequently. They aresingled out for discussion below.

Reducing the Delays in Contracting-Much ofthe time and complexity of the contracting processstem from requirements and regulations that serve toenhance competition, to ensure that all potentialbidders capable of doing the work are given anopportunity to bid on it, and to support socioeco-nomic goals. The last two of these items-fairnessand socioeconomic goals-are policy goals thatCongress has found worth pursuing even if theyimpede defense acquisition. Like any other politicaldecisions, these judgments could be reversed ifCongress were to find that the benefits of pursuingthese goals did not justify their cost to the acquisi-tion system.

The first factor, however, stems not so much froma political judgment that competition is inherently

good as from the fact that competition-at least in acommercial market-is the mechanism that pro-vides the buyer better quality at a lower price.Competitive purchasing in defense procurement isoften misinterpreted to mean competition on thebasis of price alone. While this might have been truein the days of “formal advertising” or sealed bidsthat used to characterize government procurement.passage of the Competition in Contracting Act of1984 extended the concept of competition to includenon-price factors. Some argue that price is still tooheavily weighted, but it is clearly not the only factorthat can be considered.

The debate concerning competition in defenseprocurement concerns how well the concept can beextended from the free market-where it clearlymakes sense—to the highly regulated defense indus-try, which is characterized by few sellers, a singlebuyer, and the requirement to create new systemsthat press the state of the art.

The Packard Commission very strongly endorsedthe concept of competition:

Commercial procurement competition simultane-ously pursues several related objectives: attractingthe best qualified suppliers, validating productperformance and quality, and securing the bestprice . . . we believe that DoD should greatly in-crease its use of truly effective competition, using asa model the competitive buying practices of majorcorporations and their suppliers. 115

However, 2 years later, Commission chairmanDavid Packard appeared to have changed his mind—at least as far as competing major acquisitionprograms is concerned—when he said, “One coulddo as good a job awarding major contracts bythrowing darts at the names of qualified bidders.’’116

The contracting and bid award process has comeunder increasing scrutiny recently amid allegationsof serious improprieties in bid preparation andselection. This area will certainly be looked intofurther. However, nobody has yet come up with amechanism by which all the benefits of competing

114 Note that this statement does not imply that all existing laws should necessarily be retained under this approach. Indeed, to alter the present regulatoryregime, substantial legislative change would be required. Nevertheless, those laws that remain in force cannot be waived at the discretion of a DoDofficial.

115 President's Blue Ribbon Commission on Defense Management, op. cit., footnote 48, pp. 64-65.116 Quoted in James Flanagan, “Competition in Defense Buying Costly to U.S.,” Los Angeles Times, July 31, 1988.

Appendix A—The DoD Aquisition System ● 39

major acquisitions can be preserved in a lesscumbersome process.

Contracting mechanics should pose less of aproblem in procuring research than in procuringsystems. The Competition in Contracting Act ex-empts “research” form many of its provisions, andDoD had previously taken this exemption to applyonly to budget category 6.1. However, a letter fromMembers of Congress to the Secretary of Defensemade clear that this exemption applies to technologybase activities-research and exploratory develop-ment—in general. 117

Reducing the Delays in Review-Considerabletime is taken in preparing for oversight reviews bythe DAB or Service equivalents. With poor plan-ning, activities of the program under review grind toa halt while the necessary documentation is preparedand analyzed. Appropriate planning should providefor delay, using the span between submission ofdocumentation (3 months prior to the DAB meeting)and the review’s outcome for work that does notcommit large sums of money to anticipated out-comes of the review.

These reviews almost never lead to programcancellation, so in practically every case, programofficials can foresee activities to be conducted afterthe board review no matter what the review outcomeis. Obviously, major full-scale development con-tracts should not be let pending the decision toproceed to full-scale development. However, manyactivities that would facilitate the FSD process-orthat might occur during full-scale development butdo not involve commitment to a major FSD con-tract—could be conducted while awaiting an FSDgo-ahead.

Some funds might be jeopardized because manag-ers conducted activities judged inappropriate in thelight of subsequent oversight board decisions. How-ever, these expenses would almost certainly beoutweighed by the savings made possible by permit-ting large development teams to do useful work,rather than wait idly by, during the period pendingan oversight review.

Organization

. . . good organizational design alone will not exor-cise all the demons in the weapon system acquisitionprocess, but the lack of it is almost sure to keep themthere.

—Edwin A. Deagle l18

So far this appendix has discussed acquisition‘ procedures within the existing DoD organization.

However, there are other organizational models,some of which were proposed in various pieces oflegislation introduced in the 100th Congress. Thesebills run the gamut of acquisition structures fromthose similar to current practice to substantialdepartures from it:

●

●

●

●

Not

H.R. .3898 (Kasich): Gives the USC(A) prece-dence over the Service secretaries. This prece-dence is asserted by DoD regulation in acquisi-tion matters, but regulations do not make clearwhether the Service Acquisition Executivesreport directly to the Under Secretary of De-fense for Acquisition through the ServiceSecretaries.S. 2621 (Dixon): Centralizes procurementauthority under the USD(A) but permits it to bedelegated back to the Services.

S. 2732 (Roth) and H.R. 4950 (Hertel): Estab-lishes under the USD(A) a Defense AcquisitionAgency or Corps that receives requirementsfrom the Services and then completes theacquisition process, giving the USD(A) finalauthority over procurements. Terminates theprocurement authority of the Service Secretar-ies and prohibits delegation of certain USD(A)authority back to the Services.

H.R. 5048 (Boxer): Establishes an IndependentProcurement Corps outside the Department ofDefense to research. develop. and producemajor weapon systems for DoD.

included in this list—yet—are even morefar-ranging ideas such as regulating the defenseindustry as a public utility, or even nationalizing it.


The approach suggested under the third of these:alternatives—consolidating all procurement activityunder the USD(A)-was considered but rejected bythe Packard Commission.

. . . such centralization would not serve the cause ofreducing the bureaucracy, because it would tend toseparate further the acquisition staff from the mili-tary user. We believe that it is important to maintainthe Services’ traditional role in managing newweapons systems.119

The program manager, argued the Commission,must understand the operational uses to which thesystem will be put and the environment in which itwill operate.

However, some analysts share the viewpoint ofLeonard Sullivan, a civilian writing for the CSISDefense Acquisition study, who argues that militaryinvolvement in acquisition is far too extensive:

The U.S. acquisition system is laced withusers . . . they are almost anyone in uniform exceptthe equipment operators in the field. And they havedone a poor job keeping the acquisition process onthe straight and narrow.

A military person’s judgment about technicalfeasibility, costing and budgeting, quantitativeanalysis, affordability, and supportability is no betterthan, and may be worse than, that of a professionalcivilian . . . The role of user is a convenient mythperpetuated by the military to increase its presenceand by civilians to rationalize dubious decisions.120

Proponents of a centralized civilian acquisitionagency argue that only such a mechanism can fosterthe professional, stable, qualified work force neededto implement true reform.

Taking acquisition away from the Services andturning it over to a civilian agency would representa radical change. Most individuals involved indefense procurement-within DoD and in industry,military and civilian-do not favor such a sweeping

change at present. Most studies of the issue have,like the Packard Commission, recommended againstit. One major exception is the President’s PrivateSector Survey on Cost Control, or Grace Commis-sion. The Grace Commission recommended that“consolidation of the management of the acquisitionprocess within the Office of the Secretary of Defense(OSD) would improve efficiency and provide oppor-tunity for significant cost savings.”121

A somewhat more tenuous endorsement of theidea was provided by the Project on MonitoringDefense Reorganization, a study of the implementa-tion of the Packard Commission recommendations.This study stated a preference for leaving acquisitionauthority with the Services, but recommended con-sideration of an independent organization under theUSD(A) in the event that the Services refused tocreate specialized “acquisition corps.” The studyconcluded that “radical steps, such as the establish-ment of a single procurement organization withinthe department [of defense], should not permanentlybe ruled out.’’ 122

The GAO found that the prevailing opinion itencountered in a study of centralized acquisition layagainst establishing such an agency.123 Some of theadvantages to such an agency cited by GAO were

. reducing Service parochialism and fosteringmore common/joint system development;

● improving the quality and continuity of theacquisition work force; and

. reducing the size of the work force and elimi-nating administrative layers by consolidatingduplicate acquisition functions.

Some of the more significant disadvantages were:

. Inability to address acquisition problems thatwere not organizationally related. Many prob-lems with the existing system were thought tobe in this category, such as those involving


●

●

●

If a

identifying what weapons to buy and tradingoff military requirements against cost.Possible disregard of military operational expe-rience that could support claims that the newequipment is operationally suitable and effec-tive for military use.Adding an additional layer of bureaucracy.The potential large size of such an agency,which could render it unmanageable.

centralized acquisition agency were formed,GAO recommended that it remain within the DoD.GAO reported the “overwhelming opinion” of thosewith whom it spoke that the Secretary of Defenseshould be accountable for all resources dedicated todefense.

A RAND Corporation study concluded that thereis no reason to believe a centralized acquisitionagency would operate more effectively than theexisting system. Inputs from military users “prob-ably receive insufficient attention even today, and itis difficult to believe that the interests of the userswould be better represented by a more civilianizedmanagement.” 124 The study recommended changesin the acquisition process, rather than the acquisitionorganization.

Although study of European nations that usecentralized procurement systems might illuminatethe successes or failures of such a plan, factorsbesides their centralized procurement systems makesuch analyses difficult. One important difference isthat their defense programs are small compared tothat of the United States. Other differences, aspresented in a recent study of European weaponsacquisition practices by The Analytic SciencesCorporation, 125 are that:

●

●

European military Services do not dominateacquisition.Multiyear defense plans dominate fiscal plan-ning in Europe and make it impossible to obtainprogram funds not in the multiyear plan.

. The annual defense procurement budget isapproved by the legislature with minimalchanges.

. The government imposes minimal “how-to”requirements on the defense industry.

. Industrial policy is a major consideration indefense contracting.

According to this study, the U.S. approach toacquisition, when compared to the European one,results in considerably more sophisticated andcapable weapons developed over a shorter period athigher cost, but with lower cost per unit perform-ance. The advantages of the European model-earlyanalysis of cost v. performance, adherence to long-range fiscal plans, and concern for affordability--donot require a centralized acquisition agency toachieve. Moreover, if U.S. acquisition activitieswere centralized in a single agency, that agencywould have about 15 times the staff and budget ofthe largest European acquisition agency.

Personnel

There has always been an implicit assumptionwithin the Defense Department that people with littleor no advanced training and experience in themanagement of large industrial programs couldfunction effectively at any management level. Thisassumption has been a key factor leading to thedisappointing results of virtual] y every improvementprogram in the last twenty years.

—J. Ronald Fox, with James L. Field 126

Documentation

Successful implementation of many recommen-dations for improving defense acquisition-severalof which have been cited in previous sections—requires a high-quality, stable, and well-trainedacquisition work force. In a letter to PresidentReagan one year after the publication of the PackardCommission report, David Packard stated that:

Personnel policy is the keystone of virtually all ofthese reforms. With able people operating them,even second-rate organizational structures and pro-


cedures can be made to work; and without ablepeople, even first-rate ones will fail.127

Improvements recommended by the PackardCommission included reducing the barriers to re-cruiting senior-level executive branch personnel,128

attracting qualified new personnel, improving thetraining and motivation of existing personnel at themiddle management levels, and continuing therecent improvements in defining military careerpaths in acquisition.

The Commission thought that civilian acquisitionpersonnel needed much more attention than military,and cited many of the deficiencies of the federalCivil Service system that are described in the contextof national laboratory personnel in chapter 5 of themain report. Recommendations particular to theacquisition work force included enhancing the statusof the contract specialist job classification. Atpresent, this classification is an “administrative”series position, prohibiting establishment of anybusiness education requirement; the Commissionrecommended moving this position to the “profes-sional” series. The Office of Personnel Manage-ment, which classifies Civil Service positions, hasresisted this change on the grounds that DoD is freeto require a business-related college degree for anyparticular contract specialist position, but that re-quiring such a degree for all such jobs is arbitraryand unnecessary.

In a major study of defense acquisition, ProfessorJ. Ronald Fox of the Harvard Business Schooldistinguished between two prevailing attitudes to-wards the government’s role. Those holding what heterms the liaison manager view believe the govern-ment program manager seines primarily to promotea program, prepare progress reports, negotiate withvarious parties within DoD, and resolve conflictsbetween these parties and the contractor. Costcontrol is solely the responsibility of the contractor,and there is no need for the program manager to haveextensive training or experience with industrialmanagement and cost control methods. Program

management is therefore a reasonable rotation formilitary officers between operational assignments.Those holding the liaison manager view, accordingto Fox, are widespread in both government andindustry. They see the present acquisition process asessentially well managed, with few problems.

Fox himself believes very strongly in an alterna-tive that he terms the active manager view. In thisformulation, the program manager’s role is one ofplanning, rigorous oversight, negotiation with, andcontrol over the contractors. Responsibility for costcontrol is shared between government managers andthe contractor; by establishing and implementingincentives, both formal and informal, the programmanager has significant opportunity to reduce coststhroughout the life of the program. The existingsystem of staffing and training military programmanagers cannot produce individuals capable oftaking this role:

As in industry, the development of highly quali-fied program managers requires focused careerpaths, progressing from technical work to assign-ments at laboratories, program offices, and plantrepersentative offices, to full program managementresponsibility for small programs, and ultimately forlarge programs. There is no time left to becomeexpert in a military operational specialty as well. 129

Civil Service personnel share few similaritieswith military officers in acquisition assignments,according to Fox. Whereas the short tenure ofofficers in acquisition rotations severely impedestheir ability to match their industrial counterparts,many civil servants “remain for so long that theyresist innovation and change.”130 Fox recommendsreforming civil service regulations to establishhigher standards and permit removal of mediocreperformers. Absent these changes. “defense acquisi-tion programs will appeal primarily to those satisfiedwith the present low level of responsibility. ”

The DSB 1987 Summer Study on TechnologyBase Management recommended establishing a trial“Senior Scientific, Technical, and Acquisition Exec -


utive Initiative” to investigate means of improvingthe quality of personnel involved in defense acquisi-tion and DoD technology base program executionand management. This program would provide up to100 non-tenured positions for senior managersserving 3-year, renewable terms. One of the keyfeatures of this program would be to providecompensation comparable to equivalent positions inacademia or industry through a special mechanismthat would be outside conventional Civil Serviceregulations and limits. Poor performers would not berenewed. The summer study saw conflict of interestregulations, which restrict interchange of seniorpersonnel between government and industry (the“revolving door”), as the most serious impedimentto instituting such a program. “Some form of conflictof interest waiver-requiring legislative action—will be required to make the demonstration trulyeffective. ”131

Analysis

All proposals for reforming personnel policies runinto conflicts between competing objectives. Sig-nificantly increasing the tenure of military personnelin acquisition assignments, and weighing thoseassignments more heavily in promotion reviews,would probably improve acquisition. However,those actions would require making significantchanges to what senior military officers now con-sider to be requirements for successful militarycareers.

Making fundamental reforms to Civil Serviceprocedures— or even exempting groups fromthem—would also pose substantial political difficul-ties. Federal employees already feel as if they have240 million supervisors, and it sometimes seems—at least while reading “Letters to the Editor”columns when civilian pay raises are debated inCongress-that there is nothing so despised as acivil servant. proposals that would increase compen-

sation or other benefits of Federal employment in aneffort to attract more senior and more highlyqualified employees would be seen by others asadding slots to the Federal trough.

Conflict-of-interest regulations provide a case inpoint. Some argue, as did a panel of senior industryofficials advising the Senate Armed Services Com-mittee, that:

There can be no question about the need to attractcompetent industry-trained men and women intovital upper-middle level appointee positions in thePentagon. “Revolving Door” legislation, howeverwell intended, defeats this need. The stigma of evilassociated with the “revolving door” issue is mostunfortunate and largely unwarranted. 132

Contrast that attitude with the following:

Weapons makers and weapons buyers shouldhave different perspectives, and therefore differentskills. Thus. there should be no tendency to share thesame labor pool . . . Whether or not these people[who go back and forth between government andindustry] are bribed, or promised future employ-ment, they will be caught up in a loyalty to theproject(s) they work on. They have lost theirconsumer’s perspective.133

It will be difficult, if not impossible. to reconcilethese two points of view. Those insisting on strict“revolving door” legislation to prevent officialsfrom consciously misusing their public office forprivate gain might be satisfied that extraordinarilysevere penalties could deter blatant conflict ofinterest violations. However, those more concernedabout the “loss of perspective’ ’-the suspicion thatthe interests of government and those of industryshould not be so closely aligned that individualswould be able to work just as effectively in one as inthe other-would probably not agree that tougherpenalties for violations of law would help clarify thismore ambiguous situation.

131 U.S. Department of Defense, “Report of the Defense Science Board 1987 Summer Study on Technology Base Management,” prepared for the Officeof the Under Secretary of Defense for Acquisition, December 1987, p. 21.

l32"Report to the Subcommittee on Defense Industry and Technology, Senate Armed Services Committee,” by the Ad Hoc Defense Industry AdvisoryGroup (13 senior defense industry officials), p. A-1.

Appendix B

Studies of Acquisition Times

ContentsPage

Defense Science Board 1977 Study on the Acquisition Cycle . . . . . . . . . . . . . . . . . . . . . . . . 47Air Force Affordable Acquisition Approach (A3) Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47RAND Corp. Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

FiguresFigure Page

B-1. Increase in Pre-FSD Development Times From the1950s to the 1970s . . . . . . . . . . . 48B-2. Time From Program Start to FSD Start . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50B-3. Time From FSD Start to First Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51B-4. Time From Program Start to First Delivery, Along With Exponential Best Fit . . . . . 52

Appendix B

Studies of Acquisition Times

This appendix summarizes three studies of acqui-sition cycle times for in aerospace sector. The issueis difficult to address quantitatively because pro-gram milestones are hard to identify and compare inprograms undertaken in different decades underdifferent organizational structures. Moreover, thedata are widely scattered and not plentiful. Compar-isons restricted to similar systems acquired atdifferent times (tactical fighter aircraft, for example)do not provide many different data points, so it isdifficult to obtain statistically significant results. Ifa broader range of systems are lumped together (say,missiles and aircraft together), there is a risk that thedifferences between programs will be too great topermit meaningful comparisons. On the other hand,a broader base of comparison may permit differ-ences due to factors other than time to be averagedout.

Defense Science Board 1977 Study on theAcquisition Cycle1

This study concluded that the “frontend” of theacquisition cycle—the time between conception ofa system and approval to enter full-scale develop-ment (FSD)-increased from about 2 years in lengthin the 1950s to about 5 years by the early 1970s(figure B-l). However, the particular programs orsources of data represented in this figure are notspecified. Establishing a time for a program’s“initial conception” can be difficult, especially forthose initiated before the present system of formalprogram reviews was initiated in 1969. A RANDanalysis (see following section) has noted that “thestructured DSARC review approach to initial devel-opment may make the process appear to take longer[today]: early design efforts that were once notassigned to any mission are now recorded as part ofan incipient mission which later evolves into aweapon system.”2

Looking primarily at Air Force tactical aviationprograms, the DSB study also found that the timeneeded for full-scale development itself had notchanged significantly over the same period, but thatthe length of the production cycle (from productiongo-ahead until the delivery of an initial operationalcapability) had grown longer and longer. Thisgrowth appeared to be due not to the inability toproduce systems more rapidly but rather to theinability to pay for them.

Air Force Affordable Acquisition Approach(A3) Study3

Completed in 1983, the A3 study examined 109Air Force programs representing space systems(boosters and satellites), air-to-air and air-to-groundmissiles, ground-to-ground missiles, aircraft, radars,and command/control systems. Development inter-vals (total development time4 and duration of thefull-scale development phase) were analyzed as afunction of the time required to start FSD. Only fourcategories-space systems (satellites plus boosters),fighter aircraft, surface radars, and command/controlsystems—provided enough data for statistical analy-sis.

Of the four, space systems showed the strongestand the most statistically significant increase indevelopment time as a function of calendar date.Between the 1950s and the 1970s, total developmenttime for space systems increased at a rate of over 4months per year; this increase over time explainedmore than half the total variance in developmenttime from system to system over that period.

Fighter aircraft showed a statistically significantincrease in development time as well, growing by alittle over 1 month per year. Essentially all theincrease occurred in the pre-FSD period; the A3

study (agreeing with the 1977 Defense ScienceBoard analysis) showed no significant increase in

48 ● Holding the Edge: Maintaining the Defense Technology Base, Volume 2.—

increased faster than their annual production budg-ets. For several types of missile, actual or projectedproduction rates had increased over the studyinterval; these increases were attributed to theprojected increasing Air Force role in anti-armorwarfare and depended heavily on holding to futureAir Force funding projections.

RAND Corp. Studies

In 1980, the RAND Corp. published its analysis of

Appendix Studies of Acquisition Times ● 4 9

panoply of decision review and ratification proc-esses.”5 Agreeing with the DSB 1977 summer studyand the Air Force A3 study’s conclusions for tacticalaviation, RAND concluded that “the central phase ofthe acquisition cycle [full-scale development] hasremained fairly unchanged and the early and latephases have been lengthening.’% The study went onto conclude that increases in the pre-FSD phase“should not automatically be considered undesira-ble,” since these increases were consistently accom-panied in the study data by reductions in costgrowth, schedule slippage, and performance short-fall.

RAND found strong evidence that the portion ofthe pre-FSD phase constituting formal “planning”(excluding the earliest period of concept formulationthat is difficult to define for the earliest systems) hadincreased in duration at an average rate of 6 to 10months per decade. In the 1970s, this phase averagedfrom 50 to 80 percent longer than it had in the 1950s.However, the greatest part of this increase took placein the 1960s, with only a modest addition in the1970s.

The RAND work was updated in 1987, extendingit to “the vast majority of aircraft and a solid majorityof the missiles and helicopters developed since1945.”7 Analysis of the updated data had not beencompleted when the update was published, but itsinitial conclusions-that the data provide “sometenuous support” for increases in the pre-FSDperiod-appear weaker than those of the originalstudy. The strongest correlations between develop-ment time and year of program start showed up inmissile programs. Even for these, however, thecorrelation was not strong, with less than 15 percentof the program-to-program variance explained bydate of program start. For all programs takentogether, the update concludes that “calendar datealone explains little of the program-to-programvariance,” a point that figures B-2 and B-3 makeclear. Figure B-4 shows the total time from programstart to first delivery for aircraft, missiles, and

helicopter, with an apparent growth in acquisitiontime of about 15 percent per decade.

Given the scatter in the data in figure B-4,interpretations could vary. The best-fit trend lineshows a modest but steady growth. However, onemight be persuaded that a “U’’ -shaped curve, with aminimum somewhere around 1955-1960, better fitsthe points. The rationalization for such a fit would bethat immediately after World War II, urgencyrelaxed and acquisition slowed down. However, theKorean War and the Cold War increased the urgencyfor acquisition, speeding up the system. During the1960s, McNamara procurement policies, the cost ofthe Vietnam War, and regulation and micromanage-ment began to take an increasing toll. By thisreading, the situation now is considerably worsethan would be indicated by the steady but modestlyincreasing trend. The data to date do not indicatewhich of these models is better, but a continuation ofthis analysis through the 1980s and beyond couldindicate whether either one provides a valid explana-tion.

Differences between the RAND study and the AirForce A3 study, which found a stronger correlationbetween year of development and developmenttime, may be due to RAND’s larger database. RANDfound that data for aircraft entering FSD before 1950prevented them from establishing a relationshipbetween development pace and calendar date; theseearlier planes were not included in the Air Forcestudy. Moreover, RAND considered data frombombers and cargo planes along with fighters,whereas the A3 study examined fighters alone. Thisaggregation makes little difference in the analysis,according to RAND. The variations in developmenttime among systems within a single aircraft typemask out any obvious difference from one type toanother, even if there were significant differencesbetween subcategories, the small size of eachsubcategory would prevented RAND from analyz-ing the data at that fine a level.

5G.K. Smith and E.T. Friedman, “Analysis of Weapon System Acquisition Intervals, Past and Present,” the RAND Corp., R-2605 -DR&E/AF,

November 1980, p. v. This study was a follow-on to earlier RAND work that had addressed acquisition intends but had not analyzed them in depth:Edmund Dews, Giles K. Smith, Allen Barbour, Elwyn Harris, and Michael Hesse, Acquisition Policy Effectiveness: Department of Defense Experiencein the 1970s, the RAND Corporation, R-2516- DR&E, report prepared for the Office of the Under Secretary of Defense for Research and Engineering,October 1979.

6G. K. Smith and E. T. Friedman, op. cit., footnote 5, p. v.7M. B. Rothman, “Aerospace Weapon System Acquisition Milestones: A Data Base,” prepared for the Office of the Under Secretary of Defense for

Aquisition, the RAND Corp., N-2599-ACQ, October 1987, p. 3.

50 ●

Ho/ding the E

dge: Maintaining the D

efense Technology B

ase, Volum

e 2.

Figure 8-2-TIme From Program Start to FSD Start 80

60

140

0

00 V> .r: c 0 ~

80 I • r

.f+- • 60 rt • • .

. + + • +

40 • + • • of . +. +

.. f+- • • •

0 • • • • :,.

~. • + + • + • + + + +

0

45 50 55 60 65 70 75 80

Year of program start

+ Aircraft

• Helicopters

• Missiles

SOURCE: RAND 1987 Update, figure 5, p. 19.

Appendix B—Studies of Acquisition Times ● 31

I


Figure B4-Time From Program Start to FirstDelivery, Along With Exponential Best Fit

1945 1950 1955 1960 1965 1970 1975 1980

Year of program start

o Aircraft

● Helicopters

• Missiles

SOURCE: G.K. Smith, J.A. Drenzer, W.C. Martel, J.J. Milanese, W. Mooz,and E.C. River, A Preliminary Perspective on RegulatoryActivities and Effects in Weapons Acquisition, R-3578-ACQ,prepared for the Office of the Under Secretary of Defense forAcquisition, March 1988, figure 2, p. 19. This figure uses datafrom the RAND 1987 report on Acquisition Milestones.

Appendix C

Acquisition Milestones and Phases

Appendix C

Acquisition Milestones and Phases

The acquisition process described below is dia-grammed in figure A-3 in appendix A.

Milestone O: Mission Needs Determination—Milestone O approves the initiation and authority tobudget for a new program. It marks the point atwhich the mission analyses and technology baseactivities conducted by the Services on an ongoingbasis first become focused through identification ofa requirement for a system that might plausibly bedeveloped.

A mission need may result either from a defi-ciency in existing agency capabilities or from thedecision to establish new capabilities in response toa technologically feasible opportunity. Prior toinitiation of a program, a military Service conductsanalyses of projected threats and possible newmissions, given the performance of its currentsystems. If this process identifies a deficiency, ifplausible solutions can be envisioned, and if theService considers those solutions to have a highenough priority to justify a claim on future re-sources, it prepares a Mission Needs Statement toinitiate the acquisition process. Office of Manage-ment and Budget (OMB) Circular A-109 specifiesthat mission needs should be defined in functionalterms, “independent of any particular system ortechnological solution.”

Establishing priority within the Service for solv-ing a mission need generates what can become anintense competition within the Service’s budgetpreparation process. If the mission need survives thisinternal competition, the Service reserves fundingfor meeting the need in its long-range financial planand its Program Planning and Budgeting System(PPBS) budget submission. Reviewing the Services’overall submissions, the Defense Resources Boarddecides whether or not to approve new programs. Ifapproved, the program is assigned a program ele-ment number and is submitted to Congress as part ofthe Department of Defense (DoD) budget.

Primary considerations for Milestone O approvalare: adequacy of the mission area analysis; afforda-bility; ability to acquire or modify existing U.S. orAllied systems to provide the needed capability; andprojected operational utility of the proposed solu-tion.

Concept Exploration/Definition Phase— Ap-proval of the mission need grants the authority toexplore alternative system designs for new systems.It does not automatically mean that a new systemwill eventually be acquired. Other means of satisfy-ing the need, such as changes in doctrine or trainingor increases in personnel, may prove to be the bestsolution. During the concept exploration/definitionphase, the program office is established and aProgram Manager (PM) is selected. One of the PM’sfirst tasks is to develop an acquisition strategy, amajor part of which is structuring an industrialcompetition to create, explore, and evaluate alterna-tive designs. This phase typically takes from 0 to 2years.

Milestone I: Concept Selection-Results of theconcept exploration/definition stage are summa-rized in a System Concept Paper, which describesthe acquisition strategy; identifies the best conceptsto be carried into the demonstration phase; explainswhy other concepts were eliminated; and establishesbroad cost schedule, effectiveness, and sustainabil-ity goals to be reviewed at subsequent milestones.Upon Milestone I approval, these goals become theprogram “baseline” within which the PM is free tooperate-provide the resources are indeed madeavailable.

The primary considerations evaluated by theDefense Acquisition Board at Milestone I includetradeoffs between various alternatives; trade-offsbetween performance, cost, and schedule; the needfor development of a new system versus buying ormodifying existing systems, whether military orcommercial; appropriateness of the acquisition strat-egy; the need to prototype systems or components;affordability, including life-cycle costs; and plansfor test, evaluation, logistics, and support.

Concept Demonstration/Validation Phase—Concept demonstrations are intended to verify thatthe chosen concepts will operate in a realisticenvironment and are technically sound. This phase,typically lasting 2 to 3 years, must provide sufficientinformation to permit decisions to proceed tofull-scale development (FSD) to be made withconfidence. Prototypes are built and evaluatedduring this phase, providing the eventual users with

-55-


their first opportunity to see a realization of a systemthat can meet their needs-some 5 years after theiroriginal request.

Funds spent during this phase are generally inbudget category 6.3B, system-specific advanceddevelopment. Designs and decisions made beforeapproval for FSD will determine most of the futuresystem’s total life-cycle cost, with the great majorityof that cost actually spent following the FSDdecision.

Milestone II: Full-Scale Development Ap-proval—Defense Acquisition Board (DAB) ap-proval at Milestone 11 not only permits the start ofFSD, but also implies approval for production uponsuccessful completion of FSD. Consequently, pro-duction of certain long-lead-time items may beauthorized, and low-rate initial production of se-lected components and complete systems may beapproved as well to verify producibility and providetest articles.

In its Milestone II review, the DAB considers anumber of factors including: affordability (in termsof cost versus value); technical risk; producibility;results of prototyping and demonstration/validation;manpower, training, and safety assessment: procure-ment strategy; logistics support; and additionalrequirements for command, control, communica-tions, and intelligence. The Decision CoordinatingPaper that summarizes the results of the demonstra-tion/validation phase must “show [that] all signifi-cant risk areas have been resolved” and discuss “theextent to which technology is in-hand and onlyengineering (rather than experimental) efforts re-main.’” More specific program cost, schedule, andperformance thresholds are established, becomingthe baseline governing both program developmentand reporting to Congress.

Since successful completion of FSD implies thatproduction will be approved, the Defense ScienceBoard 1977 Summer Study recommended that “FSDshould be limited to those programs that are intendedto be, and can be afforded to be, procured within thetotal defense budget (on the basis of realistic andcredible cost estimates).”2 At the time of the study,

far more programs were in FSD than could beproduced within any reasonable budget. The samesituation is true today. The consequences of thisfinding shortfall are discussed under “Affordabil-ity” in chapter 8 of the main report.

Full-scale Development Phase-During full-scale development, typically lasting 3 to 6 years, thesystem is fully developed and engineered for pro-duction, and initial models are fabricated for devel-opmental and operational testing. Developmentaltesting and evaluation (DT&E) helps the developercomplete the design and engineering of the systemand verifies that technical specifications are met.Operational testing and evaluation (OT&E) deter-mines the suitability or effectiveness of the systemwhen operated by typical military users in anoperational environment.

During FSD, engineering and design changes areinevitable. If not appropriately anticipated, thesechanges increase the cost and length of the FSDphase. Although some of these changes may benecessitated by changes in the threat that the systemis intended to address, according to one analyst, theimpact of changes due to “improper, inadequate, orunrealistic definition of operational requirementsand insufficiently critical evaluation of candidatesystem concepts” is often greater. Such changes latein” the development cycle, he claims, are likely “thelargest single source of delays and cost overrunsencountered in advanced and full-scale systemdevelopment.” 3

Milestone III: Full-rate Production Approval—Upon review of the results of FSD, approval is givento proceed to fill-rate production. In cases where theMilestone II thresholds have not been exceeded,approval authority is typically delegated to themilitary Services. By statute, production approvalcannot be given until the Director of the DoD Officeof Operational Testing and Evaluation has certifiedthat the results of operational testing are acceptable.If the interval between low-rate and full rateproduction is long enough, an additional MilestoneIIIA decision for low-rate production maybe brokenout from the full-rate production decision.

Appendix C-Acquisition Milestones and Phases ● 57

Full-rate Production Phase-The productionphase of a system can last for many years. Thesystem first enters service when the user judges thatenough have been produced to provide an initialoperational capability, a point typically reached after3 to 5 years of production. Several additional yearsof production may be needed before the systemreaches full operational capability.

In the past, production has been undertakenconcurrently with FSD in the hope of saving time.The risks and benefits of this approach are discussedin the box on “Concurrency” in appendix A.

Milestone IV: Logistics Readiness and SupportReview-DoD Instruction 5000.2 specifies that theDAB review the logistics and support requirementsof the new system 1 to 2 years after initialdeployment. However, no such review has ever yettaken place.

Deployment and Operations Phase-Deploy-ment of a major new defense system typically occurs

10 to 15 years after initiation of the program.Systems can remain operational-albeit with up-grades-for decades. The lifetime of major systems,from the beginning of FSD until the retirement of thelast model from National Guard/Reserve invento-ries, can easily last 40 years. Deploying, operating,and supporting the system over its lifetime can havea cost comparable to the cost of developing andproducing it.

Milestone V: Major Upgrade or System Replace-ment Review-Five to ten years post-deployment,according to Instruction 5000.2, DAB is to reviewthe system’s current operational effectiveness, suita-bility, and readiness. This review should determinewhether major upgrades are needed or whetherdeficiencies warrant system replacement. However,as in the case of Milestone IV, no Milestone Vreview has yet taken place.

Appendix D

Case Study:The Fiber Optics Industry

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61GLOBAL FIBER OPTICS MARKETS AND THE HEALTH OF

THE U.S. INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62CONVERGENCE/DIVERGENCE OF CIVILIAN AND MILITARY

FIBER OPTICS TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66BARRIERS TO MILITARY ACCESS TO CIVILIAN FIBER OPTICS

TECHNOLOGY AND VICE VERSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68The Problem of Specifications and Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Is Governmental Undesirable Customer? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Easing the Banders.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Appendix D

Case Study: The Fiber Optics Industry

Note: This case study, along with those in Appendixes E and F, was presented in condensed formin chapter 9 of the main report, Holding the Edge.

INTRODUCTIONNot until 1963 did Corning Glass Works, Bell

Laboratories, and Standard TelecommunicationsLaboratories recognize the possibility that glassfibers could be used to transmit information fromone place to another. In that year, all three groupsinitiated research on guided-wave optical communi-cations. 1 In 1970, Corning demonstrated the neces-sary breakthrough by achieving a radiation loss of 20dB/km, using a vapor deposition process.2 It was notuntil 1977 that the state of the art had advancedsufficiently for AT&T and GTE to install the firstcommercial fiber optics systems. Since then, fiberoptics technology and the extensive internationalindustrial structure that supports it have matured ata dizzying pace, causing one of its early inventors toobserve that “fiber optics went much faster fromresearch to use than any big project ever before.”3 By1988, the U.S. fiber optics and optoelectronicindustries included about 700 firms and had reachedan annual volume of sales in fiber optics systems ofapproximately $568 million.4

Fiber optics has realized exponential growth, notonly in production and sales, but also in the potentialscope of the technology itself. It has been defined,broadened, and redefined variously over the pastseveral years. A recent study by the NationalResearch Council included fiber optics as a subset ofa larger field called photonics. That report describedphotonics as a “critical, emerging technol-ogy . . . [that] has been building a technologicalarmamentarium of proven science and advanced

technology throughout the past three decades.” Itfocused broadly on telecommunications, informa-tion processing, optical storage and display, andoptical sensors-four “technical areas where theoverall worldwide market for equipment approaches$400 billion per year.”5

This perspective echoes the assessment of inde-pendent analysts who believe that fiber optics andrelated optical disciplines will eventually exert animpact on the world economy comparable to that ofelectronics in the 1970s and 1980s. They expectintense international competition, with governmentsdesignating the new technologies as necessarynational assets. This may well involve strategies foreconomic defense of photonics-related industries,similar to those that Japan and some EuropeanCommunity member states have already installedfor optical fiber and optoelectronic devices.

OTA is examining fiber optics as a dual-usetechnology, from the perspective of its contributionto defense needs in the United States. It is importantto note, however, that fiber optics technology is farmore widely used in the civilian sector than it is inthe military. While significant research is takingplace in the military sector, few fiber optic systemshave been fielded to date. The rule of thumb is thatfiber and optoelectronic devices are installed onlywhen no other adequate solution to a problem exists.

Fiber optics is a vital technology that has strongimplications for national security, as well as foreconomic competitiveness. A primary purpose ofthis case study is to assess the availability of fiber


optics technology developed in the civilian sectorfor military use. For this reason, this appendixfocuses on commercially available optical technolo-gies for which there is demonstrated military need.It concentrates on fiber optic communications sys-tems, including the fiber itself, cables, and relatedoptoelectronic devices (transmitters, connectors,switches, repeaters, and receivers). Because of theirmany military applications, fiber optic sensors arealso discussed.

This case study is designed to address threecentral questions: First are the civilian fiber opticsand optoelectronics industries—especially thosethat are critical to the military-eroding in theUnited States? Second, do military applications offiber optics technologies diverge significantly fromtheir dual-use counterparts in the civilian sector ofthe economy? And third, what are the principalbarriers, both technical and institutional, that inhibitmilitary access to civilian fiber optics technologyand vice versa? Each of these areas is addressed ina separate section below. The last section concludes‘with a summary of policy problems specific to fiberoptics technology.

GLOBAL FIBER OPTICSMARKETS AND THE HEALTH OF

THE U.S. INDUSTRYThe first major boost to the fiber market came in

the late 1970s when the regional Bell Telephoneoperating companies ran into problems pulling morecopper wire through already established conduits.Because of this congestion, they had to choosebetween building more ducts or substituting fiber forcopper. Thus, interoffice trunking became the firstlarge market for fiber optics in the United States. Asecond big boost for fiber extended from 1983through 1986, as long haul fiber trunks wereinstalled across the United States. With deregulationof the telecommunications industry and competitionfor long distance carriage, demand for fiber in-creased by 100 percent per year and its cost droppedprecipitously. By 1985, U.S. telephone companieshad installed more than 2 million kilometers of fiber.Between 1986 and 1988, the price of fiber cable

decreased 70 percent. The completion of theselarge-scale projects caused worldwide sales of fiberoptics to stabilize, and has encouraged major fibermakers to look for new markets for their products.

The U.S. market for fiber optics is the largest andmost open in the world, accounting for over 50percent of world consumption in 1984.6 Over thepast four years, however, the relative size of the U.S.market has decreased; it is forecast to drop tobetween 35 and 40 percent of the world market by1989. Near-term installation of fiberoptic systems inJapan and Western Europe is expected to exceed thatof North America. At the same time, overall worldconsumption of fiber optic systems is expected toincrease by a factor of four by the year 2000.7 Themajor market for fiber optics has been, and continuesto be, the supply of fiber and optoelectronic devicesfor telecommunications systems. Although flat, thismarket could expand dramatically if financial andregulatory barriers to bringing fiber to the home areremoved. While potentially substantial, militarymarkets are not expected to mature until the middle1990s—and even then, DoD technology plannersand the U.S. Congress would have to designate andsupport fiber optics as a critical military technology.This scenario is by no means assured, given theimperative to reduce budget deficits and the contin-ued strong competition within the Department ofDefense (DoD) for a decreasing pool of funds.

Telecommunications applications now accountfor as much as 90 percent of the world market forfiber optic components and cables by some esti-mates. The U.S. consumed about 1.6 million kilome-ters of fiber in 1987, while the world market reachedapproximately 3 million kilometers. Europe com-prises about a third of the market, with Japan andKorea accounting for about 16 percent. The overallinternational market for fiber grew about 20 percentin 1987,8 North America and the Far East are netexporters of optical fiber, while Europe is a netimporter. The difference between production andconsumption of fiber is not large in any region.

Since the end of the long haul market boom, theworldwide fiber optic industry has been character-ized by overcapacity and intense competition, with

“A Competitive Assessment of the U.S. Fiber Optics Industry,” September1984, p. 32.

7U.S. Department of Commerce, International Trade Administration, “International Competitiveness Study: The Fiber Optics Industry,” September,1988, pp. 24.

8Figures provided by Corning Glass Works.

Appendix D-Case Study: The Fiber Optics Industry ● 63

most Organization for Economic Cooperation andDevelopment (OECD) countries designating fiberoptics as an essential national capability. By 1980,a pattern had begun to emerge in the way that OECDmember governments and their corresponding in-dustries would respond to the strong growth poten-tial of the fiber optics markets. In the United States,large, vertically integrated firms like ITT and AT&Tbegan to invest heavily in fiberoptic R&D. CorningGlass Works, which held many of the importantpatents in the field, established an early lead in fiberdevelopment. Major cable companies became takeo-ver targets by firms that had not been principallyassociated with the telecommunications industry,and that now sought to position themselves forfuture fiber optics business.9

In Japan, NTT, MITI, and KDD (the Japaneseinternational communications agency) initiated acarefully orchestrated campaign. NTT (then anofficial government agency) led the effort, conduct-ing and promoting fiber optics and optoelectronicsresearch. At the same time, KDD initiated a long-term program to develop all aspects of technologynecessary for submarine fiber optic systems. AndMITI10 initiated two substantial research projects,the Hi-OVIS program and the Optical Measurementand Control System R&D program.11 Most Euro-pean countries generally appeared to take a middleground, with the national PTTs (state-run publictelecommunications monopolies) establishing R&Dprograms (such as BIGFON in West Germany) andactively seeking to promote the interests of theirdomestic industries. In Sweden and the Netherlands,the private sector appears to have taken a strongerrole.12 The differences in the development of fiberoptics industrial structure and markets in the threeregions require further explanation.

In Europe, most European Community (EC)member states have designated fiber optics as acritically important technology, and the nationalPTTs have tended to favor a few domestic suppliersof equipment and cable. More importantly, becausethe PTTs provide centralized planning and control ofthe telephone networks, they can (and do) support

the introduction of new technology into thosenetworks by arranging for trials and demonstrationprojects. This has resulted in highly fragmentednational markets. Nevertheless, Corning GlassWorks, an American firm, has been able to penetrateEuropean markets by entering into joint venturesand licensing agreements-usually with cable man-ufactures, who then sell to the PTT monopoly buyer.Other companies, including the Japanese, partici-pate in joint ventures with European firms toestablish a presence in a changing market environ-ment,

Concern over the anticompetitive aspects ofcentrally planned and regulated domestic marketshas led EC officials to create programs designed tohelp European industry keep pace with innovativeU.S. and Japanese industries. They believe that theeventual merging of communication and informa-tion technologies will require dynamic changes inthe structure of the independent and isolated nationalindustries and markets. With an eye to Europe’s1992 unification. they have instituted such programsas RACE (Research in Advanced Communication inEurope) and ESPRIT (European Strategic Plan forResearch and Development in Information Technol-ogies). 13 While representatives of large U.S. fiberoptics companies believe that European markets areessentially open to all, they are concerned about thepossible consequences of a pan-European policy.

In fiber optics and optoelectronics, the Japanesegovernment has pursued a strategy of sponsoring adomestic industry, insulating home markets fromforeign competition, building up a highly capable,vertically integrated industry with significant over-capacity, and encouraging export of quality systemsto Europe and the United States. By the late 1970s,Coming and AT&T had established strong positionsin world markets, due to the advanced state of theU.S. technology and to Corning’s ownership of themajor fiber optics patents. At that time, MITIidentified optoelectronics as a key technology forJapan, and was very active in focusing the industryand getting development started. Specifically, NTTwas tasked with designating industrial partners and


forming a consortium to conduct the R&D worknecessary to develop a domestic optoelectronicsindustry. 14

In close consultation with MITI officials, NTTselected three major companies, Sumitomo,Furukawa, and Fujikura, essentially picking winnersfrom among a larger pool.15 While NTT providedsome R&D funds, the most significant funding wasinvested by the companies themselves. What NTTdid was to guarantee that it would purchase the fiberthat was produced at over twice the world marketprice, and in proportion to the investment that eachcompany made.16 By guaranteeing a market, and bydiscriminating against companies like Coming andSiecor, 17 NTT effectively eliminated risk for thethree companies as well as for the financial institu-tions that backed them. By the middle 1980s, theJapanese optoelectronics companies had developedtechnology on a par with the best in the world. andhad established a major position in world marketsfor fiber optic systems.18 Indeed, their ability toproduce total fiber optic systems has led someanalysts to suggest that they will soon achieve astrong-and perhaps dominant-position whenfiber reaches into the local area network and into thehome.

One pervasive effect of these differences in policyand approach is that U.S. firms must face stiffcompetition at home, while they are effectivelybreed from substantial penetration of some foreignmarkets. Nevertheless, U.S. fiber makers believethat they lead the world competition across a number

of vital areas. Product performance for U.S. fibermakers is presently superior to that of Japan and themajor EC member states (including France, GreatBritain, and the FRG), and is superior to that ofKorea and ether producers such as Australia. Ameri-can fiber companies assert that for fiber, the U.S.leads the world in R&D and innovation, and thatmajor new advances are in the offing. The cost tomanufacture fiber is lowest in the U. S., but Japaneseand some European producers are narrowing the gaphem. Many representatives of American fiber andoptoelectronic companies believe that the U.S.presently maintains a technological lead in virtuallyevery area of fiber optics, but that this lead iseroding. 19 The American position was establishedand is still based on intense competition for sales toAmerican telephone companies. Many believe thatthe industry is robust, and that for this reason,official Washington should stay on the sidelines andallow market forces to favor an industry in which theU.S. has already proven itself to be particularlysturdy and capable.

Others are less sanguine about the future competi-tive status of the fiber optics and optoelectronicsindustries in the United States. A 1984 CommerceDepartment assessment predicted that although theU.S. fiber optics industry “urrently enjoys a signifi-cant competitive advantage, the limited access ofU.S. firms to markets in Japan and Western Europewill adversely affect the performance of these firmsin the future”20 Four years later, a second CommerceDepartment report provided a somewhat more so-

Appendix D— Case Study: The Fiber Optics Industry ● 65

bering view. It concluded that the future competi-tiveness of the U.S. fiber optics industry is by nomeans assured, but instead will hinge on a variety ofcritical factors, a view strongly endorsed by the U.S.International Trade Commission in a recent report.21

An OTA workshop held in Washington on July 25,1988 reflected these, as well as other, concerns, themost important of which are summarized below.22

The future health of the U.S. fiber optics industrydepends largely on its ability to sell fiber andoptoelectronic devices to the telecommunicationscompanies, and this in turn depends on the develop-ment of a fiber-to-the-home market in the U.S.Legislators and regulators have tended to shiftresponsibility for the development of the nationaltelecommunications infrastructure to market forcesand the courts. And the courts have established aregulatory regime that effectively separates tele-phone and television delivery systems and inhibitsthe spread of telematic (online) services. The Belloperating companies are limited to providing localexchange communications and to permitting accessto long-distance (or interexchange) companies.They may not provide additional information serv-ices or manufacture telecommunications equip-ment.23 While AT&T and the other long-distancecarriers are not restricted in manufacturing, theydepend on the local Bell networks to access individ-ual homes. Accordingly, there is little economicincentive for either the local Bell operating compa-nies or for the long distance carrier/manufacturers toinvest in fiber-to-the-home networks. This situationmay retard the development of the optoelectronicsindustry in the United States. At the same time, largeJapanese and European firms are gaining experiencein the development, production, and commercializa-tion of overall fiber optic systems in their homemarkets.

Many analysts expect that the future demand willbe for fiber optic systems, not for fiber or isolateddevices. Some believe that firms that sell systems

may be willing to give away the fiber in order toobtain the contract. They believe that such a demandstructure would tend to favor companies that arevertically integrated.24 At present the only U.S. firmthat can produce whole systems is AT&T. As manyas six Japanese firms are thought to have thiscapability. Unless the structure of the industry isdramatically altered, U.S. companies will have tocooperate with other suppliers to be able to constructentire systems. Some foreign firms-which lead inan overall systems approach—have even developedlarge-scale integration through government-supported demonstration projects, moving farther“down the learning curve” in integrating theirproducts into functioning systems. When NorthAmerican markets for local area networks andsubscriber loops do open in the 1990s, it is likely thatvertically integrated foreign firms will have signifi-cant experience and a comparative advantage assuppliers.

A second area of concern focuses on the lack ofinternational standards for fiber optic systems andassociated optoelectronic devices. While interna-tional standards are developing, especially for inte-grated system digital networks (ISDN), progress inthis area is very slow and cumbersome in an industrythat is innovating quickly. Different countries havetended to adopt different standards, and standardshave sometimes been used as non-tariff barriers toprotect home markets for developing industries.Some industry representatives believe that Japanand the European nations are more advanced insetting standards than the United States, and that thiswill give them a developmental advantage. Theybelieve that U.S. firms are reluctant to makeextensive capital investments in optoelectronic de-vices that may be obsolete before they can beinstalled. Large firms that can offer complete fiberoptic systems are at a distinct advantage in thisrespect. With well-developed national standards,large, vertically integrated Japanese firms may be


able to set de facto world standards, thus forcingU.S. and other component makers to meet thosestandards if they wish to Participate.

Third, foreign markets-especially in Japan butalso in some EC member states-still presentsignificant barriers to American firms. This disad-vantage to U.S. companies is compounded becausefuture expanded demand for fiber optic systems isexpected to occur first in foreign markets, wheredomestic manufacture are favored. At the sametime, the U.S. market remains wide open to allsuppliers, and U.S.-based companies face intensecompetition for their share. As the U.S. market forfiber optics shrinks in relation to the world market,so too will the proportionate share of world sales forU.S. firms. As the market for fiber optic systemsexpands in the future, foreign firms may achievelarge market shares and realize economies of scaleunavailable to the American competition.

Fourth, most European producer nations and theJapanese government have designated fiber optics asan essential technology of the future, and subsidizeresearch and development in the optoelectronicsfield. In the U. S., government assistance has beenlargely confined to the military, and U.S. companieshave tended to pursue such R&Don an ad hoc basis.American firms lack the subsidies, the protectionisttrade policies, the experience developed from dem-onstration projects, and the government-led stan-dard-setting that their foreign competitors enjoy. Onthe other hand, U.S. firms have benefited from earlyand extensive patent acquisition, superior R&D, andthe largest domestic market for fiber optic productsin the world. However, these advantages appear tobe eroding, and some will expire shortly. Forexample, some of the key patents held by ComingGlass Works will expire in the next several years,threatening the American position in both thedomestic and international fiber optics markets.25

Already, a number of foreign fins-especiallyFrench and Japanese—have had considerable suc-cess in the American market. The leading Americancompanies, AT&T and Corning Glass, face consid-erably greater obstacles in attempting to penetrateforeign markets.

And finally, the U.S. continues to maintain aregime of export controls for fiber optics that is morerestrictive than that of its CoCom partners andnon-CoCom nations such as Sweden and Finland.The result is that U.S. companies often experienceunnecessary delays, and have even been barred fromexporting products that can easily be obtainedthrough the European and Asian competition. Forthis reason, some executives of foreign companieshave instructed their managers not to include Amer-ican-made parts in their systems on the basis thatsupply may be unreliable in the future.

CONVERGENCE/DIVERGENCEOF CIVILIAN AND MILITARYFIBER OPTICS TECHNOLOGYMilitary planners recognize a number of advan-

tages inherent in deploying fiber optic systems in amilitary environment. Fiber optic systems are im-mune to electromagnetic interference, including theelectromagnetic pulse that would emanate from anuclear blast. They are considerably more securefrom eavesdropping than traditional electron-basedcommunications systems. It is comparatively easy todetermine if a listening device has been attached toa fiberoptic system, and fiber itself has no electronicsignature. Communication systems that use fiber canspan longer distances without repeaters than can atwisted copper wire or coaxial cable. In addition,fiber optic systems are much lighter and far lessvoluminous. This is of extreme importance, forexample, in Army tactical communications thatmust be strung out over a large area in a matter ofhours or minutes, and in the Navy’s ships, whereweight and volume are especially critical factors.Fiber optic systems can function in intense heat andare able to withstand severe vibration, shock, andother mechanical stresses. Extensive testing by allthree Services indicates that under most battlefieldconditions, optical fiber systems are superior. It is atechnology that appears to be inherently better suitedto military environments than the technologiespresently employed.26

Shipboard application demonstrates these pointswell. When the U.S.S. Stark was struck by missilesin the Persian Gulf last year, the communications

Appendix D-Case Study: The Fiber Optics Industry . 67

systems were immediately disabled. The electricalwire physically melted in the ship. Wire that was runon the deck melted in place. Under these conditions,a fiber system would be far more likely to survive.Experimental data have shown that fiber will con-tinue to transmit information when it is heated up to1200 degrees Centigrade, a temperature at whichcopper or aluminum would long since have disinte-grated. There are other advantages. The Navyindicates that for one of its ships, 47 copper wirecables could be replaced with one glass fiber cable,which would weigh 15 pounds as opposed to 14,000pounds, and could be installed at a cost of $30,000instead of $1 M, the cost to install the copper cable.27

Despite all these advantages, it is still the case thatno ship in the U.S. Navy presently employs ashipwide fiber optic communications system.

In approaching the question of the extent ofdivergence between military and civilian applica-tions of fiberoptic technology, it is perhaps useful todistinguish between tactical and fixed-plant fiberoptic systems. The Army has provided informationthat directly addresses this problem. Tactical sys-tems require rapid mobility. Approximately 50percent of mobile communications would be operat-ing in place for only ten hours. Although fixed-plantsystems are installed directly in the ground or inconduits, most tactical systems must be placed onthe ground or strung above the ground. While thereare no significant limitations on cable length forfixed systems, tactical systems must be configuredso that they can be set up and retrieved quickly. Inaddition, cable used in tactical communicationsmust be more flexible and durable than in fixed-plant systems because it is handled frequently andunder conditions that may not be optimal. Cable andrepeaters for fixed facilities are usually protectedfrom extreme variations in climate; whereas tacticalsystems may have to face a temperature range ofbetween -55 and +160 Fahrenheit. While opticalsplicing may be used for many fixed applications,connectors are necessary due to requirements formobility in a tactical environment. And finally,batteries or other sources of local power are usually

required to drive sources and repeaters in tacticalsystems.28

There are also some important military applica-tions of fiber optic technologies that do not havecivilian analogs. One example is the use of fiberoptic guidance systems in tactical missiles. The fiberconfiguration must be light, strong, and able to payout quickly even after years of storage on a coil. TheFiber Optic Guided Missile (FOG-M), now in fullscale engineering development, pays out an opticalfiber from a bobbin, like a fishing reel, enabling thebattlefield operator to target the missile with areal-time video image emanating from a camera inthe nose of the missile. This makes it possible to hittargets that are not in the operator’s line of sight,while the operator is at a sheltered location.29 Itrequires many special parts that are not typicallyproduced for civilian purposes. In addition, there area number of fiber optic sensing devices now inresearch and development, such as the NavyAriadne system, for which there are no obviouscivilian applications.

But do such differences in application reallytranslate into differences in the technology itself orin the way that R&D for fiber optics must beconducted? Here, the answer is a qualified “No.” Forfixed-plant systems, the requirements would differonly marginally, if at all, from those used in privatesector businesses or for local area subscriber net-works. The need for secure lines might, in somecases, entail a requirement for special hardware tomonitor the system to ensure that security was notcompromised. But such measures might also benecessary to safeguard proprietary information ofbusinesses as well as the communications of banksand other financial institutions. For a large percent-age of military applications30—wiring the Pentagon,the DoD laboratories and R&D facilities, and themilitary bases-the technology is broadly availablefrom the civilian sector. This is also true for the longdistance trunk lines used to connect military facili-ties with one another and with commercial commu-nications systems. In addition, fiber optic systemsdeployed on ships would be similar to local area


networks now undergoing trials in the private sectorin Japan and the United States.

In both sectors of the economy, sensors haveenormous potential in a wide range of applications.Many of the major sensors used by the military areanalogous to those used in the civilian sector. Radarand sonar probably diverge the most from civilianproducts, but sonar is used to locate and harvest fishin the open sea as well as in logging and oilexploration operations. The oil industry employs acable that is inserted into wells, using optical gyros,which is subjected to more severe environments thanwould be encountered in a military context, andwhich is used over and over again. For this reason,it is not accurate to say that fiber optic sensortechnologies that are employed for military purposesdiverge significantly from those used in the civiliansector. Nevertheless, some sensors are absolutelyunique to combat environments.

One fiber optics group in the Navy has designated54 different types of sensors that could be applied toa wide variety of military systems. Most would bebenign and passive in all the environments for whichthey are designed. The group has tested a great manysensors developed for civilian purposes and foundthat most of them did not perform adequately in amilitary context. Their conclusion, however, was notthat the civilian sensors should be discarded andreplaced by sensors built to military specification.(After all, most such specifications do not yet exist,and the process of writing them and getting themapproved will take years.) Instead, the group took theapproach of addressing military requirements byattempting to modify commercial products so thatthey are suitable for the particular military needs.

The group’s objective is to use the technology thatis out there-technology which, they believe, is farmore capable than the Services are currently capableof employing. Industry already has endoscopicdevices used to look into machinery and into placeswhere electronics cannot be inserted. None of thesethings is new or radical; each represents basictechnology with different applications. In this view,the job at DoD is to figure out how to take thetechnology that is available-not a radical departurefrom it—and adapt it to a military setting. Thissynergistic approach is especially interesting, be-cause sensing technology is probably the only area

of fiber optics technology where the military leadsthe civilian sector.

Despite the decidedly military character of theFOG-M missile, its designers indicate that the Armyhas been able, for the most part, to use optical fiberthat can be produced on modified commercialmanufacturing equipment. The fiber companieshave entered into earnest discussion with the FOG-M program because they anticipate a run of fiber thatmight reach 2 million kilometers. There are differ-ences in the way that the fiber is wound on the spool.in the cladding that must surround it, and in thematerials that are used to attach the fiber to the spool.But these do not translate into large technicaldifferences, nor do they require large differences inthe way that R&D is carried out. What is needed isthe civilian industry and technology base to developthe modification.

BARRIERS TO MILITARYACCESS TO CIVILIAN FIBER

OPTICS TECHNOLOGYAND VICE VERSA

The issue of using civilian products for militarypurposes is not new. It is at least as old as therecognition that the costs for the military to developits own technologies are extensive and, in somecases, prohibitive. The Packard Commission recom-mendations addressed the question of commercialversus developmental items in strong language:“Rather than relying on excessively rigid militaryspecifications, DoD should make much greater useof components, systems, and services available‘off-the-shelf. ’ It should develop new or custom-made items only when it has been established thatthose readily available are clearly inadequate tomeet military requirements.”31

The Commission’s statement builds on a long lineof legislative provisions, presidential directives, andcabinet-level memoranda since 1972 that havesuggested a preference for commercially availableproducts in government procurement. Nevertheless,the substitution of civilian products for militarystandard items remains the exception rather that therule, and nothing less than a “specific and enforcea-ble statutory directive [from Congress] in favor ofthe acquisition of commercial products” is likely to

Appendix D—Case Study: The Fiber Optics Industry ● 69

make a difference.32 The wisdom or unwisdom ofsuch a mandate is a matter of heated debate; but thereis, nevertheless, considerable consensus that muchexcellent technology exists in the civilian sector, andthat the military must surmount enormous barriers toacquire it.

Perhaps the greatest structural impediment thatthe military faces in drawing on the civilian technol-ogy base is that the business practices of thegovernment diverge so radically from those of theprivate sector.33 Like other industries, fiber opticscompanies have found it necessary to create aseparate corporate division in order to do anysubstantial amount of business with the Departmentof Defense. In order to meet government regulationsand specifications, fiber optics businesses mustorganize many of their principal functions differ-ently-including accounting, personnel, auditing,R&D, production, advertising, marketing, and man-agement information systems.

They must also adjust their business psychologyand profit orientation. Successful fiber optics andoptoelectronics companies invest heavily in re-search, develop a superior product, realize largeprofits, and plow their earnings back into the R&Deffort. This business environment contrasts sharplywith government-subsidized research and regulatedprofit margins. While all firms that seek defensecontracts must face these facts, it is particularlydifficult for high technology companies whoseproducts and technologies were born in the civiliansector. In many cases, fiber optics and optoelectron-ics companies are unable or unwilling to make therequired investments and adjustments.

The Problem of Specifiations and Standards

The question of how to specify fiber optic systemsand devices for the military poses what amounts to

a paradox, both for the industry and for thegovernment. The problem is that optoelectronic andfiber optic technologies are changing so rapidly thatno one can agree on standards. Part of the reluctanceto adopt worldwide standards is based on thecompetitive postures of different national industries.If a company or group of companies could setstandards de facto, forcing the rest of the industry goalong, the originators would enjoy a strong compara-tive advantage. But equally important, there aresome fields in which settling on a particular set ofstandards is not possible because the technologynever stabilizes. Fiber optics has been such a field.and standards officials expect that it will remain influx for the foreseeable future. Faced with suchvolatility, DoD has been unable, thus far, to writespecifications for fiber optics fast enough to enableit to procure many of the items that it needs.

DoD is confronted with the problem that, bypicking a standard, it may lock itself into an obsoletetechnology or an application that no one in thecivilian sector is willing to build at a reasonable cost.This is because the military wants to nail downprescriptive standards34 in a field that is changingfrom month to month. The alternative is to adoptperformance standards specifying, in a general way.the characteristics that a part or component mustmeet, and then leave it to industry to figure out thespecifics. Performance standards may make moresense for fiber optics technology in the presentsituation, but they raise problems of enforcementand lack of uniformity among testing measurements.Nevertheless, the rate of technological change in theindustry makes prescriptive standards virtually im-possible to use.35

Industry executives suggest that, in general. themilitary does not recognize the capabilities of thecommercial sector. From the industrial perspectivethis is due to “the momentum factor” and “cultural

32"A Quest for Excellence: Final Report to the Presdent,” by the President’s Blue Ribbon Commission on Defense Management, June1986-Appendix H: “Expanding the Use of Commercial Products and ‘Commercial-Style’ Acquisition Techniques in Defense Procurement: A ProposedLegal Framework,” pp. 95, 103-105.

33This was a principal conclusion of the 1986 Defense Science Board Summer Study: “’Commercial practices used to procure commercial productsare sufficiently different from DoD practices (because of history, regulations, and statutes) that the expanded use of commercial products in DoD systemswill be inhibited until the differences are reduced”. Defense Science Board, Report of the Defense Science Board 1986 Summer Study on Use ofCommercial Components in Military Equipment. prepared for the Office of the Under Secretary for Research and Engineerutg, Januw 1987, p. wi.

specify the material to be used for the protective jacket of an optical fiber. In contrast. “performance standards” specify only the resulting capability orperformance level to be achieved. For example, a performance standard might specify the tensile stress that a jacketed fiber must withstand withoutdamage.

to adopting fiber optics for many applications. There is evidence to suggest that the Defense Department has moved to develop such standards whenno non-fiber alternative was available. Examples would include underwater fiber sensing systems, fiber optic gyros and fiber guided missiles.


conservatism” in the military, two substantial barri-ers to the large-scale introduction of fiber opticstechnology. The first idea holds that the Serviceshave committed themselves to older communica-tions and sensing technologies, many of which arenot compatible with fiber optic systems. In this view,the military is constrained to maintain an evolution-ary approach, working gradually away from systemsthat already exist in the field. Converting the oldersystems over to fiber optics would introduceenormous costs that simply cannot be justified inmost cases. While fiber optics technologists in theServices are anxious to retrofit ships and otherplatforms with fiber systems, they encounter apervasive willingness to get along with older andless capable technology. Indeed, fiber optics tech-nology seems to be advancing rapidly toward thefield only in those applications, such as sensors,where there is a significant new capability and noexisting alternative.

In addition, there are many new weapons systemsin advanced development that have not been de-signed to take advantage of fiber optics technology.While military planners and technicians at all levelsrecognize the overall superiority of fiber optics, theymust work against a strong and unabating culturalconservatism within the procurement system thattends to mitigate against the introduction of fiberoptics. There is little incentive for program manag-ers to seek out a new technology and put it into aweapon system, particularly if the technology ischanging rapidly and proposed parts or componentsare not fully specified. Here, the specification wouldact as a buffer between the program manager andpossible failure or delay associated with a new fiberoptic device. Faced with possible career damage andan administrative structure that does not reward thesuccessful introduction of a new technology, theofficer in charge is likely to avoid risk and to makedo with coaxial cable or a twisted copper pair andassociated electronic components.

The lack of industry standards exacerbates thisalready difficult internal problem. From the DoDperspective there is no way that acquisition manag-ers can make mass scale purchases from civilianindustry-and this is where the technology isfound-in the absence of performance, design, and

testing specifications. From their perspective, suchspecifications are essential to the acquisition proc-ess. So there is an impasse. DoD can acquireoptoelectronic technology and products only in thepresence of mature specifications (or at the veryleast, a ruggedized civilian standard). But thetechnology is developing so rapidly that temporaryor firm-generated standards are insufficient to meetDoD’s unstated requirements.

There are also circumstances-and these may bemore numerous-in which the existence of specifi-cations creates barriers to the introduction of a newtechnology into the military. This problem canoccur, for example, when a large civilian-sectorcompany attempts to install a standard fiber optictelecommunications system for a military base. DoDcould procure regular commercial fiber optic prod-ucts because there are no special requirements.These might be systems already developed to supplybusinesses or subscriber networks in the civiliansector. But it is very difficult to install such a systemon a base, because the company must comply withunnecessary and unreasonable specifications that arecostly and unrelated to performance.

In this kind of situation, there are commercialspecifications that would meet the needs of the base.In many cases, though, the military people do notpick up on the commercial standards, insistinginstead on a great many complex, and sometimescontradictory, specifications that may have little todo with the way in which the telecommunicationssystem is supposed to perform. The key obstaclehere is the military specifications that are alreadywritten for the procurement of communicationssystems. They tend to be design-based instead ofperformance-based, making it difficult to substitutea newer, more capable technology for an older one.36

One key missing element in getting civiliantechnologies into the military is the lack of acommercial standard for ruggedized fiber opticcables and components. If there were a standard, themilitary would buy substantially more fiber. With-out one, commercial technologies must be testedindividually. For its part, the industry would bewilling to produce to military specifications, butthey do not yet exist. Military procurement officials

361t is, of c-, suu po~iblc for DoD to acquire these systems; it is just difficult andcostiy. The Navy, for example, has installed a fiber op:ics-basedcommunication system at its weapons testing center at China Lake, California and also plans to use fiber optics in a local area network for the U.S. ~avaiAcademy in Annapolis, MaIYland. lle fiber in the backbone of this network “will be able to support tlnure loo-megabidsec” data transnmsion basedon the Specificadons being developed for fiber-disrnbuted data interface networks”. Governrnenr Comparer News, Oct. 24, 1988, p. 37.

Appendix D-Case Study: The Fiber Optics Industry . 71

reported that they are using as much civiliantechnology as they can, but that they need standardsto promote consistency in design, facilitate procure-ment, assure inter-operability, ease maintenance,and reduce cost. On the other hand they recognizethat the military specifications process for fiberoptics should be performance-based and will have tobe synchronized with the pace of technologicaldevelopment.37

Is Government an Undesirable Customer?

In general, DoD-mandated business proceduresbias the system toward large prime contractors.From the military’s perspective, these companiesminimize the risks associated with performance,cost and scheduling. Large companies generallyestablish separate divisions to handle the militaryside of the business, a costly option that would beprohibitive for most smaller companies. In compari-son to the civilian economy, the military industrialsector is extremely concentrated. A relative handfulof large firms account for a large portion of theannual defense business. These circumstances haveled some analysts to conjecture that the single mostimportant capacity of the large primes is the abilityto obtain and administer government contracts. Thestructure of these firms enables them to deal with thesometimes awesome requirements of DoD; it is astructure that simply cannot be emulated by mosthigh technology firms operating in the civiliansector of the economy.

Industry executives and analysts cite severalreasons for the difficulties some optoelectronics andfiber optics firms have experienced in selling toDoD, and why others are reluctant to do businesswith DoD at all.38 Among these reasons are: (1) DoDcannot guarantee firms that funding will be availablefor authorized projects; (2) DoD seeks to acquiredata rights that would compromise large R&Dinvestments; and (3) to do business with DoD, a firmmust fundamentally alter its corporate structure,policies, and overall intentions. Each of theseproblems is discussed below.

Somewhat ironically, a fiber optics company thatlicensed its technology from a DoD-funded univer-

sity program is now unwilling to do business withthe government. It is a small, highly profitablecompany that is limited as to the money andtechnology it can leverage for any given purpose.Executives must see a payoff down the road or theycannot commit in that area. They are very reluctantto take contracts with DoD because they cannotsupport the cost of research and gearing up forproduction unless there is a definite market for theproduct in question. Accordingly, they avoid mili-tary contracts because they are unwilling to assumethe risk or even the uncertainties that go withyear-to-year funding.

A related problem pertains to the turnover andreliability of government acquisition managers. Inthe civil sector, a company can develop long-termrelationships with buyers in other firms, with areasonable expectation that they will be around tohonor their commitments. With DoD, it is lesscertain that the people and the program will last, andthat they will end up with the final contractauthority. Large defense-oriented firms undertakeextensive lobbying and specialized political intelli-gence operations to address this problem. Fibersuppliers may also gear up for a large productionrun, only to have the government recompete thecontract and award it to a firm submitting a lowerbid-even if the firm cannot deliver the sameproduct within the specified time.

A second major problem cited by some industryanalysts is that government procurement officersand regulations do not recognize the extent to whichfiber optics and optoelectronics are technologiesdriven by R&D. Government agents tend to demandas many data rights as they can get in a givencontract, because they are under a fiduciary obliga-tion to protect the interests of the government andget as much for the taxpayers’ dollars as possible.Most fiber optics firms are unwilling to share theirdata because they believe that such data can be usedto reveal a core of proprietary product or processinformation. In some cases, fiber optics companiesinvest tens of millions of dollars to develop a productor process. The knowledge gained is vital to thecompany. They know that, sooner or later, govern-

37~em is, for ~xmp]e, an effo~ ~d~ way in tie Navy [o h~on~ tie mi~it~’s propo~ Sticne[ s~ndtids wirh the commercial FDD1 (FiberData Distribution Intcrfacc) .mndards, but progress has been slow, since the proposed standards deal with low data rate systems which mayor may notbe useful in the future.

3E@ ~e o~er h~d, may t~hnolo@~ ad proc~m~t offlccrs in tie servi~s Obme mat Civilim-WtOr companies arc tMIWlhlg tO UIVCSt Lhelr

own funds to satisfy he needs of Dod. They point out that many civilian ltems+ncluding fiber optic products-must be adapted, repackaged. and testedbefore they arc suitable for militaq applications.


ment may share the data, perhaps even setting acompetitor up in business. They are particularlyconcerned that military procurement is orientedtoward developing multiple sources for any givencommodity, product, or process. Standard require-ments in government R&D and production contractsmay obligate the initial contractor to share informa-tion with another firm or firms that DoD chooses toparticipate in the manufacturing process down theline.

For optoelectronics and fiber optics companies,the problem of protecting proprietary rights comes atthe very beginning of a decision to take a govern-ment contract or not. Fiber optics companies gener-ally rely on quite extensive patents. That is theirbread and butter in the civilian sector. If the militarysegment of the business is small, or if the companyusually does not do military business, executivesmay eschew government contracts because they areexpected to sign away the patent rights. Some haveargued for a more versatile mechanism that wouldenable government agents to write a contract thatdefines and splits the patent and proprietary rights ina more equitable reamer. This problem was under-scored for some fiber makers when DoD contractedwith a Japanese competitor, enabling the competitorto continue climbing up the learning curve, evenafter the courts had ruled that the Japanese firm hadinfringed patents held by an American company.

A third major impediment between DoD andcivilian sector fiber optics firms is the perception onthe part of industry executives that they are simplyill-equipped to do business with DoD. This is partlya consequence of the difference in business practicesin the military and civilian sectors of the economy,and partly a result of inflexibility on the govern-ment’s part.39 Many optoelectronics firms in theUnited States are quite small and extremely en-trepreneurial. They invest heavily in research andare in the business of making and selling products ata profit. To do substantial business with the govern-ment, these firms would have to adopt DoD’sstandard operating procedures. They would have tolearn to live with and respond to regulatory, report-ing, accounting, and auditing requirements that arelargely incompatible with their own systems andmake no sense in the context of civilian sectorbusiness. From their perspective, managers would

have to accept pervasive government oversight andregulation, including the imposition of regulatedprofits.

To some extent, the Small Business Innovationand Research (SBIR) program helps to alleviate thisproblem. It has helped some smaller “fiber opticscompanies enter into the initial stages of develop-ment when they might not otherwise have been ableto do so. But its critics complain that by the time theproduct gets to production, the SBIR supports areremoved and competition to ensure multiple sourcescomes back into play. Larger companies accustomedto doing business with DoD can easily eliminate thesmaller companies from the competition.

Easing the Barriers

There are some circumstances in which thevarious barriers, discussed above, are diminished orhave been circumvented altogether. The FOG-Mmissile is an important case of cooperation betweengovernment and the civilian sector in the develop-ment of military applications for fiber. Fiber opticssuppliers developed new techniques for coating fiberto strengthen it. The military provided precisionwinding that had been developed for the TOWmissile, in return receiving the fiber optic data linknecessary to target the missile. The key obstacle—both for the companies and for the Army-was therapidly changing nature of fiber optic technologies.Nevertheless, the missile, which the U.S. ArmyMissile Command and several fiber optics compa-nies jointly developed, will soon enter production.This path was highly unusual, because an Armylaboratory functioned as a kind of prime contractorfor the project.

A second area has to do with the highly classified,special access (or so-called “black”) military pro-grams. While it is not possible to provide a specificexample, DoD fiber optics officials indicated thatthe best thing that could happen to a programmanager would be for his or her program to receivea special access classification. As such, it would beexempted from many of the regulatory, legal, andadministrative requirements that usually apply whengovernment is doing business. In addition, theprogram would be largely exempt from Congres-sional oversight as well as from inquiries from thepress and public interest groups. Some analysts

39scver~ WUF wl~ tie Smlces have stat~ hat tie procurement process is the leading barrier when DoD attempts [O access technology in thecivil sector.

Appendix D—Case Study: The Fiber Optics Industry ● 73

believe that, from a security perspective, there is this view, the special access classification is a fastlittle that goes on in the special access programs that track. It indicates that a program has been given highdoes not go on in less highly classified programs. priority by top leadership and is being pushed alongBut because the number of black programs has outside the system for that reason. If this is true, it isexpanded by a factor of eight in the past decade,these programs now constitute a second develop-

a significant comment on the impediments that existin doing business with the government.

mental track that weapons systems can follow. In

Appendix E

Case Study:The Advanced Composites Industry

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .GLOBAL MARKETS AND THE HEALTH OF THE INDUSTRY . . . . . . . . . . . . . . . . . .Global Nature of Advanced PMC Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Industry Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Carbon Fiber Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Overcapacity of Carbon Fiber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .End Users of Advanced PMCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Foreign-Owned Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CONVERGENCE/DIVERGENCE OF CIVILIAN AND MILITARY

TECHNOLOGY ...........0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Cost vs. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Production Volumes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Specific Technical Performance Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Quality Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Government Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Diverging Business Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .BARRIERS TO ACCESSING PMC TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Government Business Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Military Contract Specifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Classification of Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Unwillingness To Share Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Teaming and Second Sourcing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7779798183848586

878788898990909091919192929292

FiguresFigure PageE-1. Composite Reinforcement Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78E-2. Specific Strength and Stiffness of Graphitelepoxy Composites

and Selected Metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78E-3. PMC Industry Structure .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

TablesTable PageE-l. Polymer Matrix Composites Part Forming Techniques . . . . . . . . . . . . . . . . . . . . . . . . . 79E-2. World Market Shares in Carbon Fiber for PNCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80E-3. Foreign vs. U.S. Production of U.S. Aircraft Components . . . . . . . . . . . . . . . . . . . . . . . . 81E-4. Participation of Key Fisms in the U.S. Advanced Composites Industry, 1986 . . . . . . 83E-5. World Market for Carbon Fiber, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84E-6. Status of Emerging Low-Cost Composite Material Technologies . . . . . . . . . . . . . . . . . 88

Appendix E

Case Study: The Advanced Composites Industry

NOTE: This study, along with those in Appendixes D and F, is presented in condensed form in chapter9 of the main report, Holding the Edge

INTRODUCTIONHistorians often classify historical eras accord-

ing to the materials that societies used to build theworld around them. The Bronze and Iron Ages gaveway to steel and the Industrial Revolution; in thefinal decades of the twentieth century the world hasseen a host of new and powerful engineered materi-als for which a new age could be named. One suchmaterial, polymer matrix composites (PMCs), con-structed from two or more separate materials,provides high strength and stiffness and lightweight, permitting such remarkable feats as the‘round-the-world flight of the Voyager and suchadvances in defense as Stealth aircraft.

The range of possible applications for PMCs isbroad, including: aircraft/aerospace, automotive,marine, and biomedical applications; and productssuch as sporting goods, bridges, reciprocating indus-trial machinery, and containers for storage andtransportation of corrosive materials.

Composites generally consist of strong, stiff, butbrittle reinforcements (fibers, whiskers, or particu-late) bound together by a surrounding material (aplastic, metal, or ceramic) called the matrix (seefigure E-l). Composites are named for their matixmaterial; thus, the composites referred to in thisappendix are polymer matrix composites. The poly-mer matrix is an organic material, usually a thermo-setting epoxy that, once formed, cannot be meltedand reshaped. It is this matrix material that binds andprovides toughness for the brittle fibers.

PMCs are classified according to their strengthand stiffness. They can be divided into two catego-ries: reinforced plastics and advanced composites.Reinforced plastics (or engineered plastics) havebeen used in large volume in corrugated sheet andpipe and in the auto and recreational boat industries.

Reinforced plastics are formed using inexpensive,lower-performance glass fibers. They were used tomake the composite body of the GM Fiero and theChevrolet Corvette. These fibers may be choppedinto short lengths and oriented randomly in theplastic matrix.

Fibers for advanced composites are made ofmaterials such as boron, aramid, and carbon.2

Advanced composites comprise only about 2 per-cent of the total markets for PMCs, selling primarilyin the aircraft/aerospace market. Although relativelyexpensive per pound. they are lightweight andpossess excellent strength and stiffness (see figureE-2); according to one industry spokesman, they are“pound for pound, the strongest material known.”Advanced composites are comprised of continuousfibers aligned very carefully within the polymermatrix. Sixty-five to seventy percent of advancedcomposite structures produced worldwide are rein-forced with high-strength carbon fiber.

Used in commercial aircraft, advanced PMCs cancurrently offer commercial airline companies asavings in fuel of $70 to $100 per pound over the lifeof an aircraft. Used in military fighter and attackaircraft, advanced PMCs are enabling technologiesfor high speed and maneuverability, and can bemodified for the reduction of radar signatures. Thisappendix will focus on advanced composites madeof carbon and epoxy used in the aircraft and defenseaerospace industries.

Advanced PMCs are highly specialized materials;they are not commodity materials, like metals. Incontrast to production of metal parts, where materialproperties are fixed, PMCs used for given applica-tions are tailored to them at the start of the designprocess. The material cost, and the cost of theprocess technology used to make an advanced

1~~ _dix ~aws on U.S. ConWss, Wfice of Technology Assessment. Advanced Materials by Design: New Snucmral Matertils Tech~logiesvOTA-E351 (Springfield, VA: NationaJ Technical Information Service, June 1988).

The major type of graphite fiber used comes from polyac@onitrile (PAN precursor). It is of high strength, but expensive. Many firms, particularlyin Japan. have attempted wnh little success to produce a cheaper high-strength graphite fiber tlom a pitch precursor. Several Japanese companies (andcertain U.S. companies) possess a noteworthy capacity for producing of pitch precursor; but the denvtive fibers are not very strong.

-77-


(

composite, depend entirely on the end use and themarket. For example, E-glass fiber used in certainautomotive applications costs $0.80 per pound andcan be formed by processes that produce pounds perminute. Graphite fibers used in aircraft cost $25 to$50 per pound, and are formed by processes thatproduce pounds per hour.

Processes for making military and commercial.

aircraft structures from advanced composites areextremely labor-intensive. New, more automatedprocesses are under development at a number ofairframe manufacturers. (Table E-1 describes thecurrent range of part-forming techniques in use andunder study.) Although PMCs can be competitivewith certain metal structures that require complexmachining or large numbers of fasteners, moreeconomical processing methods are a key to increas-ing market interest in advanced PMCs.

This case study is structured to explore threequestions: First are the PMC industry and itsassociated industries eroding in the United States?Second, do military applications of polymer matrixcomposite technology diverge significantly fromtheir counterparts in the civilian sector of theeconomy? And third, what are the principal techni-cal and institutional barriers that inhibit civilianaccess to military PMC technology and vice versa?Each of these questions is refined further andaddressed in a separate section below.

Appendix E—Case Study: The Advanced Composites Industry ● 79.

GLOBAL MARKETS AND THEHEALTH OF THE INDUSTRY

Global Nature of Advanced PMC Technology

Although the U.S. Department of Defense drivesthe development of composite materials technology(historically through its R&D funding and nowthrough its aircraft/aerospace purchases), advancedcomposites are a global business conducted bycompanies with broad international interests. Largechemical and petroleum companies are suppliers offibers and composite parts around the globe; thesesuppliers are multinationals of varied national ori-gin. BASF, a West German multinational and one ofthe largest chemical companies in the world, is asupplier of fibers, “prepregs” and fabricated parts.Shell (the Netherlands) and DuPont are also locatedthroughout the world. It has become difficult todetermine what is a “U.S. firm.”

The PMC industry has been worldwide from itsinception. In other technologies, the typical eco-nomic scenario has become the successful applica-tion and marketing by Japan (or other globaleconomic competitor) of a high technology productinvented in the United States. Advanced PMCtechnology is an exception, in that carbon fibertechnology was originally developed in Great Brit-ain and Japan, as well as in the United States byUnion Carbide. U.S. firms followed the develop-ment of this technology as it occurred, and devel-oped advanced PMC technology for aerospaceapplications. Since then, the United States has

provided the largest market, with U.S. firms havinga dominant role.

Joint Ventures and Licensing AgreementsPMC technology spread globally as the Japanese,

the Europeans, and the Americans participated inlicensing, joint ventures, and acquisitions-a proc-ess that continues today. Japan has two mainsuppliers of carbon fiber, Toray and Toho, each withbusiness and technology ties to European and U.S.companies. Historically, Japanese carbon fiber tech-nology was licensed to U.S. firms to build U.S.production capacity: Union Carbide (facilities nowowned by Amoco) and Celanese (facilities nowowned by Hoechst). These license agreements aredue to expire soon, and Japanese fiber suppliers canbe expected to enter U.S. markets. Hercules, anothermajor U.S. carbon fiber supplier, obtained carbonfiber technology from Courtaulds in England.

Roughly 68 percent of the U.S. carbon fibermarket is supplied by U.S.-based companies, asindicated in table E-2. The balance of the U.S.market is supplied by Japanese, European, or otherfirms. Japanese companies are building a strongposition worldwide in PMC technology.

U.S. advanced PMC carbon fiber suppliers indi-cate that their only success in penetrating Japanesemarkets has been in supplying fiber for fabricatingcomponents being built in Japan for Americanprograms. The following discussion of offsets willshow that these programs are a significant force bothin the development of foreign markets and thetransfer of technology to foreign firms. These


Table E-2—World Market Shares In Carbon Fiber for PNCs

Market Share, percent

Supplier Us. Japan Europe Taiwan Other

suppliers feel that it will be very difficult for theUnited States to participate in Japanese markets.

The Japanese also have a large share of Europeanmarkets, either by shipping in fiber from Japan orthrough Japanese joint ventures (there are two inEurope). In Taiwan, the Japanese currently have avery large market share. Although U.S. industryleaders expect Japanese imports to decline as theTaiwanese build their own facilities, Japanese influ-ence will remain high-since many of them will beJapanese-owned.

Offsets

Foreign production of U.S. aircraft components isgrowing. Manufacturing of composites for commer-cial aircraft has moved offshore in many cases. Astable E-3 shows, a significant number of foreigncompanies are fabricating parts for U.S. aircraftmanufacturers. This is largely the result of economicoffsets that are used to secure sales of aircraft byoffering portions of the aircraft fabrication to com-panies from the buying nation. Aircraft sales are ofclear economic benefit to the United States in termsof the balance of trade, but the offset agreementsassociated with the sales enhance technology devel-opment and potential future economic competitive-ness of foreign-owned advanced composites busi-nesses, possibly at the expense of U.S.-owned firms.

Industry representatives generally believe that thetransfer of technology to other firms is necessary andin the best interests of both aircraft manufacturersand materials supplier companies. Access to U.S.technology is provided to sell aircraft and therebymaintain the current competitiveness of the U.S.aircraft industry in international markets. On theother hand, some industry executives privately state

that they would rather not use offsets, since they maygenerate unwanted competition later.

Airbus Industrie (a consortium of European com-panies) is now offsetting parts to the United Statesin order to encourage sales to this country. SomePMC industry representatives speculate that Airbusmay be concerned that one day poilitical pressurewill be applied to U.S. airline companies to avoidbuying foreign-made aircraft. The more U. S.-manufactured components there are in the aircraft,the more Airbus will be able to resist that pressure.The dollar exchange rate may also make it moreeconomical to fabricate parts in, for example,Tennessee, than in Europe today.

Besides securing aircraft sales, airframec o m p a -nies use offsets to force their suppliers to bear someof the burden of inventory and work-in-progresscosts of non-military programs for which there areno progress payments.

Foreign Dependence

A clause contained in the DoD AppropriationsAct passed in December 1987, required carbon fiberproducers to secure at least 50 percent of their rawmaterials (PAN precursor) from U.S. sources by1992.3 The legislation (H.R. 395, Section 8088) isaimed at assuring the availability of U.S. sources ofdefense-related carbon fibers, which are used princi-pally to build advanced structural components formilitary fighters and attack aircraft. The requirementspecifically applies to carbon fiber manufacturedfrom polyacrylonitrile. Four major U.S.-based car-bon fiber producers are affected by the law: Hercules(by far the major supplier of fiber made from thisprecursor), Amoco, BASF (West Germany), andCourtaulds-Grafil (United Kingdom).

g~ 19s5, ~e Assismt ~~ for Wfcnse Acquisition and bgistics issued a statement expressing ameem that there be some d~=tlc someof production of PAN fiber ~ursor. This ultimately led to the legislation described in the text.

-——

Appendix E—Case Study: The Advanced Composites Industry .81

Table E-3—Foreign vs. U.S. Production of U.S. Aircraft Components

SOURCE: James N. Burns, "Relationship Between Military and Civilian PMC’s” presentation made at an OTA workshop, September 23,1988.

Until 1987 there were no U.S.-based PAN precur-sor suppliers to the military. Hercules, the majorsupplier of carbon fiber for military applications,buys precursor from Japanese suppliers. Industryexperts believe that DoD concern for domesticsupply on this issue is tied as strongly to breaking upa single-source situation for carbon fiber supply asit is to ensuring that the one production link takingplace entirely abroad be brought into the UnitedStates. Amoco produced PAN precursor in theUnited States but was not qualified for militaryprograms. Since 1985 three new plants have beenbuilt in the United States, and Amoco’s fiber hasbeen qualified for some military aircraft.

Foreign-owned firms may have some difficultyqualifying their products with the DoD, and greaterdifficulty establishing classified facilities. Someindustry analysts cite greater difficulty accessingprograms at foreign-owned facilities even afterqualification is achieved. However, many compa-nies with U.S. facilities are generally treated as U.S.companies regardless of ownership, once the initialhurdles of classification have been overcome.

Industry Structure

It is difficult to separate foreign and domesticinterests in any review of the U.S. advanced

composites industry. PMC suppliers are extremelyintertwined, whether one considers corporate verti-cal integration, or integration with major markets,airframe producers, and multinational markets.

In order to grasp the industry’s structure, one mustunderstand the process by which PMCs are made.Advanced composites are formed in a series ofstages, beginning with raw materials and endingwith finished parts sold to (or made by) such endusers as the airframe manufacture. Raw materialsinclude: carbon fiber precursor, the carbon fibermade from the precursor. and the epoxy resinsforming the matrix. These are used to form prepregs(impregnated woven fabric, impregnated tape, orindividual fiber strands coated with epoxy). Theseprepregs are then formed into shapes, and cured andtrimmed to become final parts (see figure E-3 for aschematic of PMC production). For purposes of thefollowing discussion on the industry structure, it isnecessary to define three distinct production phases:1) raw materials, 2) prepregs and shapes, 3) compo-nents for end use.

Companies supplying raw materials are generallythe large oil companies (Amoco, British Petroleum,Shell) and large chemical companies (BASF, Ciba-Geigy, DuPont, Hercules). There are some compa-

qNmw ~d efion carbon Fhcr, owned by BASF of W- G~ y; Hitu) and Standard Oil Advanced Materiak, OWlld by British petrokurn;Fibcnte, owned by ICI of the United Kingdom; and Heath Tecna Aerospace, owned by Ciba-Geigy of Swimrland.


Figure E-3--PMC Industry Structure

SOURCE: Office of Technology Assessment, 1990.

nies that are mainly fiber suppliers (Hercules,Courtaulds-Grafil, Toho Rayon, Toray), and onecompany that is mainly a prepreg and compositeshape supplier (Hexcel). Of the 26 companies in thePMC trade association, SACMA5, 12 are U. S.-owned, 9 are owned by Europeans, and 5 areJapanese-owned.

Corporate Integration

Most of the companies listed above are attemptingto integrate vertically (the present degree of industryintegration is shown in table E-4). Raw materialssuppliers are moving downstream into prepregs andshaping, into more value-added products. The valueadded in advanced PMC structures, as opposed tocommodity fibers, is large: carbon fiber is priced

(near cost) at $20 to $25 per pound, prepreg sells for$40 to $55 per pound, but the final structure cost is$250 to $600 per pound.

Airframers, which had relied on shapers andprepreggers for part forming have been moving themaking of parts in-house, buying only the rawmaterials. One company (Hercules) is integratinghorizontally, expanding its production to compos-ites other than aircraft that have military applica-tions. Companies throughout the industry buy andsell to each other and compete with each other forbusiness from military prime contractors.

The industry structure plays a very important rolein discussions of global movements of technology,civilian versus military needs, and policy objectives.

Appendix E—Case Study: The Advanced Composites Industry ● 83

Table E4-Participation of Key Firms in the U.S. AdvancedComposites Industry, 1986

Advanced material productsa

U.S. carbon fiber market is in aerospace (bothmilitary and commercial aircraft), and the market isforecast to remain over 65 percent aerospace duringthe 1990s. Over half of the U.S. aerospace market forfiber is military; 25-30 percent is commercial.Military applications are projected to grow by asmuch as 22 percent annually in the next few years.7

The U.S. aerospace market is a primary target forforeign companies producing carbon fiber compos-ites because it is the largest, most advanced, andmost attractive market (see table E-5) in terms ofsales and profitability. The second largest market isthe Far East, where carbon fiber products are used insporting goods (tennis rackets, golf clubs, and thelike). The world sporting goods market for carbonfiber is likely to grow at 5 to 10 percent per year.

Based on the assumption that the military marketwill exhibit the growth projected above, the U.S.market on the whole is likely to grow faster than theworld market. Although the number of U.S. militaryaircraft being built is declining, composites arereplacing much of the metal (aluminum) on air-

Where arc a large number of fibers developed to meet different needs, but fibcm in general arc a commodity product, and will become more so asthe technology matum.

7Fm tie ~=t~on of JtUIES B~ Hercules, Inc., at the OTA workshop on polymer composite% Sept. n. 1988* w@L* ~.


Table E-5—World Market for Carbon Fiber, 1888 (pounds, millions)

Application

Aerospace Industrial sports TotalUnited States . . . . . . . . . . . . . . . . 2.44 .90 .35 3.69Europe . . . . . . . . . . . . . . . . . . . . . . .94 .22 .38 1.54Far East . . . . . . . . . . . . . . . . . . . . .10 .10 2.43 2.63Other . . . . . . . . . . . . . . . . . . . . . . . .10 .15 .20 .45

3.58 1.37 3.36 8.31N. Burna, “ReMionahip Betwaan Military and Civilian PMC’S= praantation mada at an OTAworkahoP,

planes. An older plane, the F-16, has 260 pounds ofcomposite per aircraft; the V-22, which is in thefull-scale development stage, has 6,500 pounds(flyaway weight) per aircraft. This represents atremendous growth in the use of composites. TheU.S. market is projected to grow rapidly in the nearfuture, due partly to this continuing replacement ofaluminum with advanced PMCs. However, some-time in the mid-1990s this large growth due tosubstitution should level off, as advanced PMCsmove into a high percentage of primary and secon-dary structures.

Given the large budget deficits with which theCongress must contend, the reluctance of the Presi-dent to raise taxes, and the current perception of adiminished Soviet threat, the market projections forgrowth of PMCs in military aircraft may be unrealis-tic. Advanced composite suppliers are rightly look-ing toward other markets (commercial aircraft,industrial applications) to support the large produc-tion capacity developed in response to new militaryprograms.

Although the major use of advanced compositesis in the aircraft industry, carbon fiber materials alsoplay a major role in strategic missile hardware andare forecast to move into weapon systems for allbranches of the military. Large amounts of compos-ites would be used in the heavy-lift launch vehiclesrequired to put large payloads into space during the1990s. A potentially large volume industrial marketsegment (primarily autos) is forecast for the mid-to-late 1990s.

Overcapacity of Carbon Fiber

At 16 million pounds, worldwide nameplatecarbon fiber capacity is twice the current marketvolume.g Japan, with 6.9 million pounds, and theUnited States, with 5.8 million, have about equalcapacity. Japanese companies manufacture carbonfiber precursor which is then sold to U.S.-basedcarbon fiber suppliers, mainly Hercules and BASF/Celion. Hercules, in turn is the major supplier offiber for military programs. At present. very littleJapanese carbon fiber is supplied directly to U.S.military programs. Most of Japanese carbon fibergoes into U.S. commercial aircraft Japanese pro-grams, and the Far East sporting goods market.

U.S.-based industry is continuing to add carbonfiber capacity (about one million pounds in 1988).This fact indicates that, worldwide, there is and willcontinue to be a great deal of excess capacity.However, while the United States has a large fiberovercapacity compared to domestic market require-ments, industry opinion is that most of the world-wide excess capacity is in Japan rather than theUnited States. Although excessive, the U.S. carbonfiber capacity (5.8 million pounds) is still bettermatched to the U.S. market size (3.69 millionpounds).

Worldwide prices are low mainly due to excesscapacity in the Far East; Japanese-made fiber is soldto Taiwan at a loss. While the Far East sporting -goods market is as large as the U.S. aerospacemarket, its low profitability makes it far lessattractive to fiber suppliers than the U.S. aircraftmarket. It is not known why the Japanese fiber

8Nm@U ~fm t. ~ ~~ of cap~i~, rti~ than actual capacity. Carbon fiber is sold in bunch= called tows, of 3000, @OCl, w 12,000 fiksper tow, Mall carbon fibers were sold in tows of 12,000 fibers (the prcdominan t carbon fiber product sold), t&n nameplate capacity would be equivalentto actual capacity. Real qwity is approximately two-thirds of nameplate capacity.


suppliers are building up such excess capacity.These companies may be overoptimistic about thegrowth rates of their larger present markets; theymay expect to enter U.S. aircraft markets as licens-ing agreements expire, or to be suppliers to aJapanese aircraft industry as it evolves. The compa-nies may also be gaining production experience in aneffort to lower production costs to the point wherethey can supply these materials in quantity toautomobile manufacturers.

There are two possible reasons behind the presentU.S. overcapacity. First, the U.S. fiber suppliersmisread the military fiber market, adding excesscapacity to respond to a military demand that neverappeared. While profitable, the military market doesnot generate high volumes. In continuing to bringnew capacity on-line, carbon fiber suppliers exhibitoptimism about future use of carbon fiber in civilianand military aircraft. Since the United States isundergoing a budget squeeze, it may be that fibersuppliers are again misreading the market whenadding new plant capacity. However, market projec-tions for the carbon fiber market as a whole(including both civilian and military aircraft as wellas sporting goods) predict very healthy growth overthe next decade: 12 percent annually.9 Conse-quently, many companies are continuing to enter themarket place.

Second, overcapacity may be endemic: largemilitary projects (like the Titan 4) encourage overca-pacity by enticing too many materials suppliers togear up production. Since the main market ismilitary, and market forces are not allowed to workas they would in the private sector, it may be thatovercapacity (which keeps material costs to theprimes and the military low) is a direct result of theway that the government and military aircraft primecontractors have structured the market.10

Material suppliers feel that overcapacity hascreated such unprofitability that it is unhealthy forthe industry as a whole. Airframe companies, on theother hand, benefit from chronic fiber overcapacity.Assuming that Japanese overcapacity is not affectedby U.S. military needs, worldwide overcapacity is

not entirely due to the military market structure.Carbon fiber also goes into the sporting goodsmarket at very low prices-at a loss in most cases.Companies manufacturing tennis rackets are makinga profit, while companies supplying material to thetennis racket manufacturers are merely dumpingexcess capacity .11

Intermediate Suppliers

Some material suppliers also see an excess of U.S.part fabrication capacity, with as much as 50 percentunderutilization. Airframe manufacturers, though,see a shortage of qualified, economical parts fabrica-tors. Even in the teeth of this oversupply, someairframers see it as less expensive to tool up tofabricate parts in-house than to pay the overheadrequired to use some of the existing parts fabricationcapacity.

End Users of Advanced PMCs

While the U.S. PMC industry is healthy, it isconcentrated in the defense/aerospace sector. On thestrength of its military aircraft and aerospace pro-grams in advanced PMCs, the United States leadsthe world in developing and using advanced PMCtechnology. But according to industry representa-tives, foreign commercial end users outside theaerospace industry are more active in experimentingwith these new materials than are their U.S. counter-parts. For example, Western Europe is considered tolead the world in composite medical devices.12 TheEuropean Community (EC) also has several effortsunderway to commercialize advanced PMCs inautomobiles; outside of the EC in Europe, theEUREKA Carmat 2000 program proposes to spend$60 million through 1990 to develop advanced PMCautomobile structures.

Looking at the aircraft industry, Western Euro-pean commercial aircraft manufacturers use morecomposites per aircraft (specifically, the A320) thanU.S. commercial airframersdo. France is by far thedominant force in advanced PMCs in WesternEurope, with sales greater than all other Europeancountries combined. West Germany, the UnitedKingdom, and Italy make up most of the balance.

86 ● Ho/ding the Edge: Maintaining the Defense Technology Base, Volume 2.

Airbus is the single largest consumer of advancedPMCs in Western Europe.

In the past few years, the increase in participationof Western European-owned companies in the U.S.advanced PMC market has been dramatic. This hasoccurred mainly in the form of acquisitions ofU.S.-owned companies. Industry analysts indicatethat U.S. carbon fiber facilities have been sold dueto corporate “impatience” resulting from the need toreport favorable quarterly earnings. In general,foreign corporations tend to be more patient; despiteexcess worldwide capacity and profitability prob-lems, for example, the Japanese have not sold anycarbon fiber facilities. Foreign companies want toparticipate in the U.S. market for carbon fiber,prepregs, and parts. Materials suppliers feel that theforeign interest in U.S. firms reflects a desire to enterthe U.S. aerospace market and share the technologyleadership that participants enjoy.

Although Japan is the largest manufacturer ofcarbon fiber in the world, it has been only a minorparticipant to date in the advanced compositesbusiness. Japanese companies have been limited bylicensing agreements from participating directly inthe U.S. market. Japan also does not have a domesticaircraft industry to which companies can sell ad-vanced PMCs, although it is trying to establish oneas it did with automobiles.

Foreign-Owned Firms

The U.S. PMC industry is healthy because U.S.aircraft industries are healthy. The largest, mostprofitable, and fastest growing market for PMCs inthe world is U.S. aircraft (mostly military aircraft).U.S. overcapacity of carbon fibers exists in large partbecause of PMC market analyze (and generaloptimism) projecting strong growth in U.S. PMCproduction for aircraft-civilian as well as military.

Players in the PMC structure market must beU.S.-located for two reasons: 1) coordination ofproduction and technology development with co-suppliers and customers, and 2) DoD regulations andCongressional legislation on domestic sourcing.However, neither of these factors requires thatcompanies be U.S.-owned. New developments byforeign companies in PMC technology flow natu-

rally and swiftly toward the U.S. aircraft market, endusers want the latest technology regardless ofsource, and suppliers will go where the market is. Nodecapitalization is occurring; in fact, the oppositeholds since foreign firms are putting long-terminvestment into new and acquired U.S.-based facili-ties. Production of fibers and resins need not even beU.S.-located, since these are commodity products:standardized, relatively high volume, and low value--added.

Like U.S.-owned plants, foreign-owned plantsemploy U.S. skilled and unskilled labor, and muchof the research is conducted in the United States,with the attendant high-paying positions. Foreign-owned companies are as willing as U.S.-ownedcompanies are to comply with Congressional legis-lation, DoD and FAA regulations, DoD policy goals,and military program requirements. Very telling isthe fact that U.S.-owned PMC firms do not have thecomplaints against foreign-owned firms commonlyheard in other industries, and industry representa-tives are quite comfortable with the internationalorientation of their industry.

What would be the possible reactions of foreign-owned companies if the U.S. aircraft industry wereto become “unhealthy” in a relative sense? Althoughthe United States is still the dominant aircraftsupplier worldwide, Airbus is making significantinroads on U.S. market share. 13 Japan’s pursuit of acommercial aircraft industry through offsets andjoint venture arrangements with U.S. and Europeanairframers will lead to a formidable commercialaircraft industry in Japan at some point howeverdistant that might be. If Airbus Industrie, otherEuropean airframers, or Japanese aircraft manufac-turers capture enough of the world market share for.

it could profoundly affect the U.S. PMC

If these trends hurt the domestic aviation industry,U.S. airframers might feel it necessary to engage inless PMC development and use as profits fall.Alternatively, they may increase use of PMCs,seeing this as away to gain a competitive advantage,particularly if rising fuel costs are a factor. Airfra-mers might choose to move significant levels ofproduction abroad if planes could be assembled

13WM Saks still RpmSent a small fraction of the North American fleet, but tbc consortium is expanding its North Amcncan pmcnce rapidly: 70_ of ~1 Airbus sales to North America over tbe past ten years 0~ in 1987-88 and, if all options arc exercised, there will be more than 450Airbusaircraftin scrviceonthc Continent by 199S. W Airbussak in North Amcricafor 1988 w-$2(I biIlion for348 aircraft, according to’’CanadianOrders Strengthen Airbus’ Role in North America”, Aviufim Week and Space Technology, Aug. 8,1988, p.68.


more cheaply offshore, thus hurting U.S.-basedPMC suppliers.

PMC manufacturers might follow the airframersby moving fiber, resin, or prepregging facilities fromthe United States to the countries with the largestpool of end users. This sort of movement would beattractive to both U. S.- and foreign-owned firms oflarge size and with currently established interna-tional interests. PMC manufacturers maintainingg themajority of their facilities in the United States (mostlikely U.S.-owned firms of small size) would have tochoose one of several options: 1) bank on otherpotentially sizable markets (such as automotiveapplications); 2) become entirely military in orienta-tion, while integrating further up- or down-stream;or 3) restructure (shrink) to rely on niche markets inbiomedical, sporting goods, or industrial applica-tions.

If the United States were to depend entirely onforeign-owned firms at a point when U.S. aircraftmanufacturers were seriously losing market share,and if these foreign-owned firms moved offshore atthis point, the U.S. military could find itself in abind: Without the latest in PMC technology, themilitary would be forced to choose between buyingforeign-developed aircraft or propping up a domes-tic aircraft industry, spending money now spent bycommercial industry on PMC development, orbuying significant types and amounts of strategicraw materials from foreign-based suppliers. Forgood reason, no industry or DoD representative hasexpressed so pessimistic a view, since the UnitedStates currently has the world’s strongest aircraftindustry—whether one considers innovations inPMC technology, new product technologies, or theuse of PMCs in military aircraft. The point, though,is that Japanese and West European aircraft com-munities are not standing still; DoD will have tohave face this issue of dependence on foreignsuppliers, whether in 10 or 30 years.

CONVERGENCE/DIVERGENCEOF CIVILIAN AND MILITARY

TECHNOLOGYMilitary and civilian applications of advanced

PMC technology both converge and diverge. It isdifficult to know how much of the divergence is dueto the nature of the military environments in whichthe technology must function, and how much to theregulations, government standards, military specifi-

cations, and contracting procedures that have accu-mulated over time. Most of this section considerstechnical and economic issues of convergence anddivergence, with the remainder devoted to “artifi-cially induced” differences between the military andcommercial advanced PMC sectors.

Although military and civilian markets havedifferent technical and cost criteria for selectingmaterials and process technology, both kinds ofapplications aim to meet the necessary performancecriteria at the minimum cost. As will be seen, theparticular application, not its military or commercialpurchaser, is the strongest determinant of the mate-rial used. Convergence and divergence occur simul-taneously in different aspects of the PMC industryand its markets.

Cost vs. Performance

Various segments of civilian and military marketsplace different emphases on performance and cost.In commercial aerospace, military non-aerospace,automotive, and construction markets, for instance,acquisition costs and operating expenses are themajor purchase criteria, with a progressively lowerpremium placed on high material performance. Inmilitary aerospace, biomedical, and space markets,on the other hand, functional capabilities andperformance characteristics are the primary pur-chase criteria.

The sales potential of advanced composites isgreatest in the automobile and commercial aircraftmarkets. Construction materials are used in highvolume, but must have a low cost; biomedicalmaterials can have high allowable costs, but are usedin very low volume.

costIn the automotive and industrial markets, the

major factor determining the value of advancedcomposites is the reduction of production costs,although in some cases, a performance premiummay be passed on to those car buyers interested inhigh performance or fuel economy.

In commercial aircraft, composites have to earntheir way in economic terms. Commercial airframersbase the choice of advanced PMCs on the purchasecriteria of the customers, the commercial airlines.Airlines weigh the balance of initial cost with thecost over the lifetime of the aircraft, includingmaintenance and fuel cost.


At a time of rising fuel costs, a compositeempennage may have been necessary for U.S.aircraft manufacturers to compete in the commercialaircraft market. Today’s relatively “stable” energycosts have minimized the value of weight savings forthe present.. In 1978, one airframe manufacturerestimated that at a jet fuel cost of $2 per gallon asingle pound of aircraft weight saved was worthapproximately $300; today, fuel costs $.80 pergallon and weight savings is valued at roughly $70per pound. (This measure of the importance of fuelcosts is generally valid for new aircraft designs, butwould not be a determining factor in changingestablished production of aircraft.)

Competing vs. Enabling Materials

Despite the ability of advanced composites toprovide the same strength and integrity with fewerpounds as high-strength aluminum alloys, othereconomic benefits are needed to justify their muchhigher costs. Polymer composites in these marketsare just one of a number of competing materials.

Although military and commercial functionalrequirements (low weight, high strength for primarystructures, lower strength for secondary and non-structural parts) converge, it is their stringentmission requirements that drive the use of advancedcomposites in military aircraft. For space applica-tions and fighter aircraft, advanced PMCs are morethan just one of many competing materials; they canbe the enabling technology for mission requirementsbecause of their high stiffness and strength-to-weight ratio.

The use of lower-cost materials (such as glass-reinforced composites) in general means moreweight and lower performance (lower stiffness) inthe traditional aerospace sense. Industry experts feelthat to get the edge on the battlefield, weaponssystems must weigh less. That is why composites,particularly carbon-reinforced composites, were at-tractive at their inception. Lower costs are needed inthe military aerospace sector, but performanceremains the major driver.

Processing

Seventy to eighty percent of the cost of a finishedadvanced PMC part is due to fabrication. Asdiscussed previously, developing production tech-nology to reduce fabrication costs is critical tocommercial industrial, automotive, or marine appli-cations. Several composite part-forming technolo-gies are more advanced in the industrial/automotiveworld than in military applications. Table E-6indicates the status of various low-cost compositematerial technologies in terms of meeting militaryapplication requirements.

For military and commercial aircraft, the struc-tures made from composites (e.g., wings, fuselage,and empennage) are similarly complex to fabricate.The basic method of production of aircraft parts isalso similar: coating of continuous fibers with resin,careful placement of fibers, and application of heatand pressure to form the structure. Many develop-ments have wide applicability across both thecivilian and military arenas. There is synergismbetween military and commercial aircraft produc-

Table E-6—Status of Emerging Low-CostComposite Material Technologies

Development Status

Appendix E— Case Study: The Advanced Composites Industry .89

tion in resins and fibers, the way materials arestitched together, and the way they are used.

However, military applications have require-ments that may force a modification of the fabrica-tion process. For example, a process called pultru-sion is typically used in producing beams forindustrial applications. Military applications needsuperior load-carrying properties, so that for militaryapplications pultrusion must be modified to impartdifferent properties to the fabricated part.

Lower-cost processing technologies are beingevaluated in the Low Cost Composite WeaponProgram (located at Eglin AFB). This programlooked at three different low-cost commercial ap-proaches for building an interdiction missileairframe:

. Compression molding (from the automotiveindustry),

● Pultrusion processing, and. Resin transfer molding.

The goal of the Low Cost Composite WeaponProgram is an order-of-magnitude reduction in costlowering airframe costs to the $10,000 to $20,000range. It was developed to examine the civilianmarket and assess the application to defense systemsof materials and technology used in automotive andother commercial enterprises.

The initial objectives were to save weight, reducecosts, and make materials capable of traveling athigher speeds and operating at higher temperatures.In actuality, the fret-round demonstration of theapplication of commercial technology and materialssacrificed performance to achieve lower cost. Thefinal design did not include carbon fiber advancedcomposites; low-cost materials (viz., glass fiber)were required to meet the program cost goals.

Production Volumes

Put simply, the military community often de-mands custom-made hardware, while commercialindustries seek off-the-shelf products combininglow cost and high quality. Many military and spacehardware applications are very specialized andrequire low production volumes. The automotiveindustry, on the other hand, is driven by low costsand high production rates. Between the aerospaceand automotive advanced PMC markets, a variety ofother market applications (including the non-aerospace military market) have production rates

higher than military aerospace, cost objectivessimilar to automotive applications, and moderateperformance requirements.

Structural aircraft components may initially cost$1,000 per pound and fall to $230 per pound afterproduction of 500 units. The DoD fiscal year 1989budget forecast procurement of only four aircraft atthese volume levels for fiscal years 1989-93:

AverageAircraft 6-year total productionUH-60A helicopters . . . . . . . . . . . . . . . . 432 units 72 units/year

AH-64A helicopters . . . . . . . . . . . . . . . . 432 units 72 units/yearF/A-18A . . . . . . . . . . . . . . . . . . . . . . . . . 504 units 84 unit/yearF-16 fighters . . . . . . . . . . . . . . . . . . . . . . 930 units 155 unit/year

Typical commercial production rates range from 130per year (MD-80s) to 300-400 per year for Boeingcommercial aircraft (all models).

Material quantities required for small missiles aresignificantly greater. Thousands of missiles such asthe Stinger (6,750 units in fiscal year 1989) and thelaser Hellfire (5,000 units in fiscal year 1989) arebuilt annually. For these and similar weapon sys-tems, materials requirements for casings and finsapproach automotive composite part productionlevels. In the automotive industry, production of100,000 structurally identical vehicles is not unu-sual, although special units may be built at “low”production levels of 20,000 units. (Composites havea cost advantage over steel for these specialty lowvolume automotive applications, mainly becausecomposite tooling costs are lower.)

Specific Technical Performance Criteria

Military and commercial aircraft experience somesimilar environmental conditions, and because ofthis require similar lightning protection, corrosionresistance, fatigue resistance, and material tough-ness. While the technical requirements for PMCs incommercial aircraft are comparable to those forfighter aircraft, the major differences include:

Military fighter aircraft are designed to techni-cal criteria based on peak g-loading and maneu-verability, while commercial aircraft are de-signed to meet high duty cycle and fatiguestress.Repair strategies for military aircraft emphasizerapid turnaround, while repair strategies forcommercial aircraft emphasize lifetime dura-bility.


Military aircraft design and material selectionmust consider battlefield issues; stealth, repairof battle damage, and radiation hardening haveno relevance in the commercial sector.

Design temperatures for very high speed mili-tary aircraft are more severe than for commer-cial subsonic aircraft

Maintenance

Military and commercial aircraft have inherentlydifferent duty cycles. Military aircraft are on theground a significant amount of the time, whilecommercial airplanes spend much more time in theair. Commercial aircraft designers are concernedwith structural fatigue and takeoff-and-landing dutycycles. The dominant factors for maintenance ofmilitary aircraft are ground temperature, corrosion,and exposure.

Quality Assurance

Before a material can be used in a military orFAA-certified system, it must be “qualified” for use.Advanced composite materials are produced in thesame facilities for both the military and commercialaerospace markets. For example, the same compos-ite material is used in the production of componentsfor the military C-17 and the civilian MD-1 1 aircraftby McDonnell Douglas; in fact, both aircraft use thesame material specification. While the costs may bethe same for FAA and military qualification of amaterial, the military can pay more to qualify amaterial. The entire cost of qualifying a material fora civilian aircraft is borne by the airframer andpassed onto the customer; for a military aircraft thegovernment is the customer. For any man-rated (e.g.,piloted or passenger-carrying) application at least,materials will need to be qualified for use in eithersector.

In the aircraft industry, material property data-bases are continually being developed to qualifynew materials and combinations of materials. Eachairframer, military or civilian, must conduct exten-

sive tests on potentially useful materials to avoid anypossibility of structural failure; thus, a certainamount of overtesting between materials supplierand user will always be necessary because of thisissue of liability.

It can cost up to $10 million apiece to developdatabases on individual new materials, and doing socan involve up to 3,000 individual tests by the primecontractor and a similar number by the materialsupplier. Much of the materials qualification ex-pense for a military aircraft is borne by the FederalGovernment, either in the form of independentresearch and development (IR&D) overhead, orthrough specific program/contract charges paid tothe prime contractor. Each prime contractor main-tains expensive test facilities in order to develop itsmaterials databases. Airframers consider these data-bases proprietary information.

Various groups are hying to reduce testing costs,among them: the airframers'Composite MaterialsCharacterization, Inc.; the Suppliers of AdvancedComposite Materials Association; DoD’s Standardi-zation Program (Composite Technology ProgramArea); and the American Society for the Testing ofMaterials.

Partly because of these expensive, time-consuming, and overly duplicative qualificationprocedures, the same material supplied for militaryuse will cost a third more than for commercial use. *4

This may just be paying for a certain amount ofnecessary overqualification up front, rather thanbuying liability protection as commercial companiesmust do.

Government Regulations

Aircraft manufacturers, parts fabricators that sub-contract to the aircraft manufacturers, and materialscompanies that contract directly with the DoD oftenmust set up separate divisions to comply withgovernment regulations and procedures. Althoughpersonnel can be transferred from the commercial

l~~cmrmw ~ TCC~]O~ Man~~tA~i~, summarizing a workshop eatitlal’T’hc Relationship Between Mihtaxy and Civilian Ph’lCTechnology,” held at OTA, Sept. 23, 1988, Wash., DC.

Appendix E-Case Study: The Advanced Composites Industry ● 91

divisions or hired from other defense contractors,industry analysts state that everybody in the defensedivision eventually thinks “government contract-ing.” Due to accounting costs, the overhead chargedby that division is much higher than that charged bythe rest of the company.

It will be necessary for the military to relaxregulations to meet the goal of low-cost compositeweapons; however, some materials vendors haveencountered great resistance to a straight militaryadoption of a commercial material in a militaryprocurement

Diverging Business Approaches

Most of the points of convergence and divergencedescribed above centered on technical or economicfactors. There is also a certain divergence ofbusiness approaches in the PMC industry betweenthe military and civilian sectors.

Approach To R&D

Managers of civilian aircraft companies do notunderstand the extent to which company moneymust be spent to participate in government researchprograms. The general view among military airfra-mers seems to be that R&D contracting is a “lossleader.” That is, although companies invest inproduct and technology development leveraged withgovernment contract R&D money, these R&Dprojects do not turn a profit or break even. From thestandpoint of companies that do business primarilyin the commercial world (particularly small materi-als suppliers), R&D costs seem a substantial barrierto entering the military market.

Managements in the commercial sector are alsounfamiliar with the government’s way of doingbusiness. Note that while commercial airframersa r eused to “betting the company” during the develop-ment of a new aircraft, and materials suppliers areused to putting in a great deal of development moneyon a new material, they expect large payoffs fromthese investments within a given time.

Auditing Procedures

One civilian aircraft manufacturer indicated con-cern over contracts that require monthly tracking ofcosts and schedule status of every part. It isestimated that using military specification account-ing would have added $13 million to a $200 millioncontract. The accounting costs for fixed price

programs were considered by some industry repre-sentatives to be unnecessarily burdensome. Forexample, in a subcontract for a secondary structuralpart for a military aircraft, more money is involvedin accounting and reporting than in engineering.

BARRIERS TO ACCESSINGPMC TECHNOLOGY

The military sector was the first to apply advancedcomposite technology. Although the PMC industryenvisions a very large commercial market foradvanced composites in the future, it sees limitedcommercial opportunities today. PMC suppliers feelthat commercial development is the key to profita-bility in advanced composites, and that sustaining apresence in the military marketplace is a way topursue it. However, companies (even the large ones)that do not currently participate in the defense arenahave reservations about entering the military market.

Military contracting and accounting procedures,and the potential loss of proprietary rights andpatentability, are distinct drawbacks to participatingin the military composites market. This last factor isconsidered by some commercial sector companies asa threat to their survival in a competitive market-place. Forfeiting proprietary rights goes against the“corporate culture” in many non-defense companies,and fear of such loss inhibits the flow of technologybetween the defense and commercial sectors. Due toproprietary concerns, technology developed in thecommercial half of the company will not be sharedwith the military half.

These barriers inhibit, but do not prohibit, thetransfer of technology between the civilian andmilitary sectors. Participation by commercially ori-ented companies in recent defense programs such asthe Low Cost Composite Weapon Program and C-17subcontracts indicates that such companies arewilling to engage in military programs. One factorfrequently cited as significant in its effect ontechnology transfer is classification, which is dis-cussed below.

Government Business Practices

Government business rules and regulations haveinhibited the transfer of PMC technologies fromcommercial to military applications. For example, in1978 ACF Industries had successfully developed aninexpensive glass fiber composite railroad car basedon aerospace technology (filament winding of large


shapes). DoD repeatedly approached ACF to use thistechnology in an ongoing defense program. ACFmanagement declined to work with the governmentbecause putting up with the government auditprocedures was more trouble for the company thanit was worth.

Similarly, the teaming arrangement for the LowCost Composite Weapon program was designed toaugment a military aircraft manufacturer’s capabili-ties with the lower-cost commercial technology ofnonmilitary subcontractors. The lack of simplepurchase orders for commercial sector contractorsand complying with government accounting require-ments met with stiff resistance. Commercial sectorsubcontractors expressed reluctance to participatebecause of the forms, audits, and justification ofoverheads.

According to an industry spokesman, small com-mercial companies fear working with a militaryprime contractor in this environment. One subcon-tractor on the Low Cost Composite Weapon team isunder criminal investigation because of purportedirregularities; apparently technical errors were madeand the subcontractor did not comply with everydetail of the specifications.

Military Contract Specifications

According to one military aircraft manufacturer,the process that generates “red tape” starts whenCongress tries to solve a problem by creatinglegislation that implies action but does not specifyexactly what needs to be done, then interpretsCongressional action and creates a number ofregulations. In a mirroring of DoD action, the primecontractors then impose more requirements on thesubcontractors.

Classification of Programs

Personnel working on highly classified programssometimes cannot obtain clearance from their pro-gram monitors to share what PMC industry repre-sentatives believe to be nonsensitive information,such as generic materials and process technologydata. This generic information is often embedded inclassified reports. It is costly for the military or thecontractor to employ personnel to extract generictypes of information from classified reports, eventhough it would benefit them in the long run to avoidduplication of effort. There is no tangible reward for

either the military or the contractor to undertake theeffort Even in cases where a military contractor hasa commercial side that could benefit, and proprietaryconcerns are few, unsensitive information is notavailable outside the classified regime.

DoD has similar internal problems. There maybetechnology under development in the “black world”that the rest of DoD could build on but does notknow about. PMC industry representatives haveindicated that more attention should be placed on thetransfer of “black” technology into a “white” tech-nology base.

One military airframe manufacturer reports diffi-culty finding people to work on classified programs,citing the fact that they get “lost” in a professionalsense. Considering the cost of secure areas, monitor-ing, and clearances, industry representatives esti-mate that a classified program may cost two to threetimes as much as a similar unclassified program.

Unwillingness To Share Data

Some sharing of materials databases is necessaryto reduce current costs, which are expensive. U.S.companies also need to share advanced materialsdatabases if they are to compete effectively in globalmarkets.

As an indication of this concern, seven U.S.aircraft manufacturers have created a consortium,Composite Materials Corporation (CMC), for mate-rials database development.15 CMC does not specifyparticular designs (i.e., provide design allowable);instead, it screens new composite materials forsubsequent testing by the individual companies.CMC is funded only by the participating companies,and the data developed by CMC are proprietary tothem as a group.

According to one U.S. aircraft manufacturer,these companies really do not want to cooperate witheach other, but cannot afford to pay to evaluate allthe new materials being developed. Some compa-nies feel that information disclosed to the govern-ment would become public and might be used bytheir competitor in a different market.

Teaming and Second Sourcing Requirements

Forced teaming is a response to DoD’s industrialpreparedness concerns: without a significant com-mercial business base in advanced composites,

Appendix E—Case Study: The Advanced Composites Industry . 93

maintenance of the PMC industrial base has beentaken to be the responsibility of DoD. For example,under the current teaming philosophy, DoD selectedtwo teams from multiple competitor to developthe Advanced Tactical Fighter. Military aircraftmanufacturers and DOD personnel contend that theteam members, who normally are competitors, arewilling to share technology to improve the chancesthat their team will eventually win procurementcontracts large enough to benefit all the teammembers.

From the viewpoint of one military airframemanufacturer, military second source programs donot enhance the health of the industry; they drivedown the price of a particular weapon system at the

expense of industry. For example, in some instancescontractors are awarded 70 percent of productionone year and a competitor is awarded 30 percent.PMC industry representatives feel that a new DoDprocurement is offered only when the smallersupplier will bid anything just to keep from shuttingdown production. The second sourcing approachexacerbates the competitive nature of the businessand inhibits the willingness of competitors to sharedata and team naturally on other programs. Competi-tion is heightened further in programs for which thelead prime contractor (with 70 percent of theprocurement) is required to provide assistance,including materials technology, to the second sourcecontractor.

Appendix F

Case Study: The Software Industry

CONTENTSPage

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .GLOBAL SOFTWARE MARKETS AND THE HEALTH OF THE U.S.

SOFTWRE INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Software Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Software Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Foreign Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .International Software Protection and Trade Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Hardware’s Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .R&D Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CONVERGENCE/DIVERGENCE OF CIVILIAN AND MILITARY

SOFTWARE TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Convergence of Civilian and Military Software Technology . . . . . . . . . . . . . . . . . . . . . . . .Divergence of Civilian and Military Software Technology . . . . . . . . . . . . . . . . . . . . . . . . .Divergent Acquisition Procedures and Lifecycle Model . . . . . . . . . . . . . . . . . . . . . . . . . . . .Ada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .BARRIERS TO MILITARY ACCESS TO CIVILIAN SOFTWARE SECTOR

AND VICE VERSA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Acquisition Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Data Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ------- . . . . .Ada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Military Hardware Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

97

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105105106108109

110110111112113

Appendix F

Case Study: The Software Industry

NOTE: This case study, along with those in Appendixes D and E, is presented in condensedform in chapter 9 of the main report, Holding the Edge.

INTRODUCTIONThe word “software” means different things to

different people. It encompasses everything fromoperating systems to home video games, missileguidance systems to database managers, file serversto compilers and translators. A more rigorousdefinition of software is: the combination of dataand computer instructions written in any of a varietyof languages used to instruct or enable computerhardware to perform computational or controlfunctions. It includes computer programs, i.e., aseries of instructions or statements in a formacceptable to a computer, designed to cause thecomputer to execute an operation or operations.

The software industry has advanced rapidly sinceit emerged in the early 1950s. At that time, computerprograms were written in binary machine codespecific to a particular mainframe computer. By1955, assembly language, composed of abbreviatedsymbolic codes, replaced binary code as the com-puter instruction set. Soon after, the high-orderlanguages FORTRAN (FORmula Translation)and COBOL (COmmon Business Oriented Lan-guage) were introduced, providing programmerswith a more natural language interface to comput-ers.1 Since the late 1950s the computer industry hasadded a multiplicity of languages to the industry. By1975, the Department of Defense alone used morethan 450 computer languages and derivations oflanguages for its embedded systems.2

During this same period, advances in the hard-ware industry increased the performance of comput-ers by six orders of magnitude and reduced the costof computers by about the same amount.3 Improve-ments in hardware have resulted in computer config-urations ranging from personal computers (PCs) tomini-, micro-, and mainframe computers. Each typeof computer is designed for a particular market anda different scale of applications. The variety ofcomputers available at reasonable cost to the generalpublic has stimulated a market for all types o fsoftware—the demand for some of which thesoftware industry cannot currently meet.4

Increased demand, coupled with a global shortageof trained computer programmers and an exponen-tial rise in the cost of developing and maintainingsoftware, has created what some have called a“software crisis.”5 But the crisis presents ampleopportunity to U.S. software fins, which havedominated the world software market since itsinception, controlling 70 to 75 percent of the marketshare. The number of U.S.-based software firms hasincreased from 4,340 in 1982 to over 25,000 in 1987,with a corresponding increase in revenue fromapproximately $10 billion to $17.6 billion. Theincrease in the number of software firms can beexplained in part by the introduction of the PC byIBM in 1981 and the resultant increase in demand forSoftware. 6

Increases in both demand and revenues fromsoftware are expected to continue in the foreseeablefuture, but there are factors that may adversely affect

1(J. S. Department of commerce, “A Competitive Assessment of ‘I%c U.S. Software Industry,” December 1984.z~~~ ~omputm ~ pm of a lmrr (nonamputcr) ~~cm; a~omobile~ missdes, ~ microwave OVenS all rely on embedded computers for

their operation. Missile guidance systems are an example of embedded systems. Benjamin ElSon, “Software Update Aids Defense Program,” AwationWeek & Space Technology, Mar. 14, 1983, p. 209. See also: Jeremy Tennen baum, ‘The Military’s Computing Crisis: The Search For a Solution” (NewYork, NY: Saiomon Brothers, Inc., Sept. 22, 1987), p. 3,

JFredticlc Brooks, Jr,, “NO Silver Bullet: Essence and Accidents of Software Engineering,” Co??QtUer, April 1987, PP. l@~9.4jo~ Morocco, 1* Cofig L-p Shon in softw~,” Air Force Maguzuw, February 1987, p. 64; and U.S. mpartment of comme~e~ oP. cit., foomote

1, p. 7.sDiet= ~~, Th G~o~lRace in ,U1croelec~oM~: ~wv=tion and co~or~ s~~gies in a Perbd of Crtiti (Frankfurt: C~pUS Verlag, 1983).15u.s. ~~mt of Comme, op. cit., footnote 1; ad”~ gramming the Fumre,” Tk Economist, Jan. 30, 1988, pp. 3-18.

-97-

98 . Holding the Edge: Maintaining the Defense Technology Base, Volume 2.

the prosperity and health of the U.S. softwareindustry in the world market. These include increas-ing competition from foreign companies, R&D thatoften focuses on short-term, application-specificsoftware projects, foreign barriers to U.S. exports,inadequate intellectual property protection for U.S.developed software, and the failure of softwaretechnology to keep pace with advances in thehardware industry.

The health of this industry is vital to the nation’sdefense technology base because it profoundlyaffects DoD’s ability to acquire and operate com-puter systems. In a very practical sense, softwareruns DoD. It controls communications systemsamong the Services, monitors force logistics, mod-els scenarios of nuclear and conventional warfare,controls missile guidance systems, maintains ac-counting and payroll data provides office automa-tion systems, and coordinates Command, Control,Communications and Intelligence (C3I) operations.7

The Office of Technology Assessment (OTA) isexamining software as a dual use technology fromthe perspective of its contribution to the UnitedStates military. This case study examines the trans-fer of software technologies between the civilian-based and defense-related software industries, andthe ability of the DoD to acquire and use the bestavailable software technology.

This case study addresses three central questions.First, what is the current status and relative health ofthe United States software industry, both the de-fense-based and civilian-based industry? Second,what are the similarities and differences between thetwo sectors? Third, what procedural, institutional,technical or other barriers preclude the exchange ofsoftware technology between the defense and civil-ian sectors? Several policy options and problems

generated from these three questions conclude thisappendix.

GLOBAL SOFTWARE MARKETSAND THE HEALTH OF THE U.S.

SOFTWARE INDUSTRYSoftware is categorized in several ways-by its

end-use application, by the size or scale of applica-tion, and by the degree to which it is customized.Industry and economic analysts use a variety ofsoftware classification schemes, and in some casesfail to distinguish between software as a service andas a product. It is therefore difficult to makegeneralizations about the software industry’s nature,health, and future. Despite the lack of consistenteconomic data, the U.S. software industry clearlyappears to be strong and competitive, in both thedefense-based and civilian sectors.8

In 1981, U.S. software firms held 70 percent of the$10.3 billion international market for all types ofsoftware. In 1983, U.S. industry again controlled 70percent of the world market, but the market hadincreased to $18.5 billion, putting the U.S. share at$13 billion.9 These figures are based on the interna-tional market for packaged software, integratedsystems software, and custom-built software.10 In1983, approximately 60 percent of U.S. revenuescame from packaged software, 25 percent fromcustom software, and the remainder from integratedsystems software. In contrast, the other majorsoftware producing nations, Japan, France and theUnited Kingdom, receive most of their revenue fromcustom-built software, followed by integrated sys-tems-software designed primarily for their respec-tive domestic markets.11

7softw~’s significance to the defense technology base should not be undemsbad : mcettt estimates show that DoD spends approximately $12billion a year on its embdded software needs alone. l’bud software rests (including systems development and maintenance) are expected to ccmsume10 percent of the total DoD budget by 1990. See Jeremy Tennenbaum, op. cit., foomote 2; Jonathan Jacky, ‘The Star WaIX Defense Won’t Compute,”Atkmtichfonddy, June 1985, pp. 18-30; U.S. Congress, Office of Technology AssesamenL SD/: Technology, Survivabdisy, and Sofhvare, OTA-ISC-353(Washington, DC: U.S. Govcrnm ent Printing Office, June 1988), p. 225; and National Rexarch Council, The Narionai Challenge in Computer Scienceand Technology (Washington, DC: National Academy Press, 1988), p. 31.

Es= fw Cxmple, “N~o~ ~~my ~s w Computkg’s FULUR,” Science, vol. 241, Sept. 16, 1988, p. 1436; ~d U.S. ~~ent of co~er~~op. cit., foomote 1.

W.S. Department of Commerw, op. cit., foomote 1, pp. 32-34. In contrast to rhe Department of Commerce’s figures, INPUT/ADAPSO repottedthat in 1982, U.S. f- had revcmtcsof $26.5 billion for the aggregate of: software products, data processing sewices, professional (consulting) sewiccs,and turnkey systems; Sofrware: An Emerging industry (part 9 of the series, “Information Computer and Communication Policy”) (Paris: Organizationfor Economic Co-opmm“on and Development, 1985), pp. 63-64.

10~~@~n is comm=l~ydeve]~ ~dbro~y mm~ted+ Int~t~ SyS@UM ~W~ is acomplcte system that is sold @ integratedwith a specific hardware architecture. Custom software is developed to meet a user’s specific needs.

1 IU.S. qm~ of Commerce, op. cit., foonote 1, p. 32.

Appendix F—Case Study: The Software Industry ● 99

By 1986, the U.S. share of the worldwide marketfor packaged software alone, including applicationstools, generic solutions, and systems software, was$17.6 billion.12 The worldwide market for packagedsoftware is forecast to grow at a compound annualgrowth rate of 22 percent; and under this scenario,U.S. firms would reach revenues of $47.35 billion by1991. 13 Various software industry estimates high-light the fact that no “hard” dollar figures areavailable since 1986, but most experts believe thatregardless of the dollar amount, the United Statesstill dominates the entire software industry.14 Thediscrepancies in these estimates, forecasts, andreported revenues are partly attributable to aneconomic slump in the sales of hardware afterforecasts were made, to variations in exchange rates,and to the classifications and methods used to reportthese figures.15 They indicate the need for accuratemeasurement of the various types of software sold sothat better analysis of the industry can be made.l6

Although the U.S. software industry presentlydominates the world market-both technically andeconomically-its continued superiority will de-pend on a number of complex factors. First, theindustry faces a growing demand for all types ofsoftware-packaged, integrated systems, and cus-tom built. Second, international competition in theindustry is increasing as other nations-particularlyJapan, France, the United Kingdom, Korea, andIndia—increase their software production capacityand penetrate the global software market. Third,U.S. software firms are increasingly forced to deal inan unfavorable international market where tradetariffs and national policies directly and indirectlyrestrict U.S. software exports to many foreigncountries. And trade that does occur often fails toprovide adequate intellectual property protection.Fourth, the gap between advances made in the

hardware industry and those of the software industrycontinues to widen, making it difficult for thetechnologies of both industries to complement oneanother. Fifth, current software R&D activitiesrelating to state-of-the-art technologies are insuffi-cient. Finally, as the world market continues togrow, its composition will undoubtedly change, andthe demand for new types of software may outpacethat for current types, creating an advantage fornewly established foreign companies. Each of thesefactors is addressed in a separate section below.

Software Supply and Demand

The ability of the U.S. industry to meet the overalldemand for software depends on the various types ofsoftware that exist and current market trends associ-ated with those types. Software is often categorizedas either custom-built or packaged software. Cus-tom-built software is developed according to a user’sspecific or unique requirements. An example issoftware developed to meet the requirements speci-fied by a missile guidance system. Packaged soft-ware17 consists of standardized software designed tobe marketed widely. Examples of packaged softwareinclude operating systems, compilers, word process-ing systems, and database management systems.Prior to the existence of standardized operatingsystems and high-order languages, custom-builtsoftware dominated the U.S. software market. Sincethese developments, and as the cost of software hascontinued to increase relative to that of hardware,packaged software has increasingly dominated salesin the software market. Custom software accountedfor almost one third of U.S. revenues in 1981. By1983, the custom segment had fallen to about onefourth of total software sales with an annual growthrate of 16 percent. During that same period, pack-aged software sales grew at an annual rate of 40

12*4comW= ~~q R~ew & FOITX~, 1982.1991 ,“ Special ReporL International Data ~tion (IDC), WtobCr 1987. P. 109. ~is fi~eXChl@ custom-built SOftWSfC.

131bid.lq~fm~lm ~id~ a thc J~y 1988 Workshop on the Relationship Between Military & Civilian Software (hereinafter called OTA Software

Workshop) suggested that t.k U.S. controUed art estunated 80 to 90 pxcertt of the worldwide software mark~ for revenues of $30 billion, in 1988.15_ding on tie ~ ~ ~m of ~ftw=, ~mu~~= ~ ~P~ ~~ SCv~ Stantid Ixtdu.st.riaJ Classification (SIC) codes and other

indusuy “de facto” classillcadons. For example, custom-built software is often accounted for in professional ~ccs, and integramd systems may beincluded partially in hardware sales and semiccs For further information, see: Intcrmm‘onal Data Corporation, op. cit., foomote 12, pp. 108-109: andU.S. Dcpartrrmtt of Commerce, op. cit., footnote 1, pp. 3, 10-11.

16s0-: ~A ~ftw= w~shop. Merncs of ~ indm~ ad accur~c cl~~lc~on of wh~ constitut~ SOftWWC ~ needed not OIl]y tO studyindusny trends, but to clarify how software is treated with respect to intellectual property protections, tax law% accounting procedures and productliability laws. So@vare: An Emerging industry, op. cit., foomotc 9, p. 11.

17pa@~ SOftW= is alSO rcfcmed to as comrnercialaff-the-sheif (COTS) a Non-Dcvdopmcntal km (NDi) sofiw~.


percent. This trend is expected to continue,18 and issignificant for the military which predominatelyacquires custom-built software for its applications.19

Packaged software can be further classified assystems software, including operating systems andsystems support software; applications tools, in-cluding database managers, compilers, programdevelopment tools and environments; and applica-tions software, software designed for a specificend-user problem, including generic banking, ac-counting, and office automation programs. Each ofthese segments of the packaged market is expectedto grow in the future. Systems software, whichcurrently makes up the largest share of revenues forU.S. firms, is expected to increase at the slowest rateand to decrease its market share. This reflects thismarket’s symbiotic relation with the hardware in-dustry. Systems software is typically developed fora particular size computer or specific hardwarearchitecture, and recent fluctuations in the hardwaremarket-particularly for mainframe computers-have negatively affected sales of these types ofsoftware. 20

The ability to meet the growing demand forsoftware, and of the United States to maintain its

dominance of the softvare market, largely dependson the supply of computer programmers and thetechnology available to them. The United Statescannot meet the demand for ail types of softwarewith the present number of computer programmers.This shortage is not limited to the United States.21 In1985, the shortage of U.S. software professionals,including programmers, software engineers, andmanagers, was estimated at 50,000 to 100,000.There are many indications that this gap willcontinue to grow in the immediate future.22

The lack of qualified software developers maybepart of a larger shortfall in trained science andengineering professionals in the United States.Beyond any doubt, there is a serious shortage ofrigorous software engineering programs at U.S.colleges and universities. The poor performance ofAmerican students in the sciences shows no immedi-ate signs of reversal,23 and while the number ofstudents entering the computer science field seemsto be increasing, demand outpaces estimates offuture supply.24 Finally, while there are signs thatuniversities are adding more computer science andengineering courses to their curricula, an increasing

‘sU-S. ~t of C--= w. cit- foomom L PP.17-22. ”19-~~g~GAO, ~of 1983, betw~% and98 percent of all sofiwaredeveloped for U.S. Government agencies was custom built. So-: Uni:d

States General Accounting Office, “Federal Agencies Could Save Time and Money With Better Computer Software Alternatives,” GAO/AFMD-83-29,May 20, 1983, p. 4. It seems likely that the DoD has propordonately as least as much custom software as other Federal agencies, based on the DoD’snumerous embedded systems, uniqu systems and languages, and ~urity requirements. What has been acknowledged by many experta is that the DoDis incteasingly using COTS software in its applications.

m~ternaticmal Data Copratim, op. cit., footnote 12, pp. 112-113. In 1986 systems software made up approximately 43 percent of the revenuesreceived by U.S. firms in the packaged wftwam market, applications tools made up 25 percent and applications software, 32 percent of that samemarket. By 1991, these sham are estimated to be 39 perccn~ 28 perccnL and 33 Percznt XS~tiVd)f.

21_dy ~ ind- ~ons ~ a critical shorta~ of “softw~ ~ialists,” and most member nations of the Organization for Economic CO-operadon and Ikvelopmcnt (OECD) identify this situation as the most impmtant policy issue the software industry faces. So@are: An EmergingItubtry, op. cit., footnote 9, pp. 131-137. See also: U.S. Department of commerce, op. cit., foomote 1, p. 72.

%stimatesthatthis shortfall will reach 1 million by 1990 in the U.S. alone am often cited, as are projections that demand for software professionalswill exceed supply by 40 percent. See for example: John Morrocco, op. cit., foomote 4, p. 6% Paul J. Meilvaine, “Software bgistics: A Sleeping Gian~”Concepts, Autumn 198Z p. 157; Parker Hcxiges, ‘The New Maturity of Computer Science,” Datamatio n, ScpL 15, 1988, p. 40; Jeremy Tennenbaum,op. ci~, foomote 2, p. 3; and S@ware: An Emerging Industry, op. cit., footnote 9, p. 131.

23s= f~ ex~ple, “Science ~hi~ ement in Schools Called Distressingly h,” Science, Sept. 30, 1988, p. 1751, which indicates that the poorscientific understanding demonstrated by 9, 13, and 17 year4ts poses a serious threat to our national security. AIso: American Electronics Associatmn,“Engineering & Technical Education Program,” Septexnbcr 1987.

l~e supply of computer programmers is estimated to grow at a rate of 4 percent annually (Jeremy Tennenbaum, op. ci[., foomote 2, p. 3), whilethe demand for computer pmgrammexs will grow at 70 percent and demand for computer analysts will grow at 76 percent (Ed”torial Research Reports,Sept. 9,1988, p, 446). see also: Parker Hodges, ‘The New Maturity of Computer Science,’’Datumtzo‘ w Sept. 15, 1988, pp. 37, 40; CMfkeofthe UnderSemtary of Defense for kquisition, Report of the ll~eme Science Board Tark Force on Military Soyhare, Washington, DC, September 1987, p. 38;U.S. Congress, Office of Technology Assessment, Demographic Trends and the Scient@c and Engineering Work Forci+tl Technical Memorandum,(Springfield, VA: National Technical Information Service, December 1985); and American Electronics Association, op. cit., footnote 23.

Appendix F—Case Study: The Software industry ● 101

percentage of students enrolling in these courses areforeign nationals.25

Software Quality

While efforts are underway to increase the num-ber of individuals entering the software industrythrough improved education programs, these arelong-term investments with payoffs not expected inthe immediate future. Of more pressing concern isthe quality of individuals entering the softwareengineering profession, and of those already in it.The complexity of applications, and the variety ofhardware architectures that software is designed for,require scientific and engineering skills beyondthose defined as computer programming.

Programming can be defined as the translation orwritten representation of a system design to a forminterpretable by a computer. The actual translationor coding of statements in a high-order languagerequires minimum training to master. The difficultyin developing software is in the formulation of thatdesign—the specification of data, data relationships,mathematical formulas and functions-in a rigorousand precise manner.26 This process requires thesoftware developer to conceptualize system com-plexity, interfaces to other systems, and futurechanges to the system. It is complicated by the factthere are no methods readily available that accu-rately represent the abstraction of all possible statesthat software can assume. The written computerprogram is a sequential translation that reflects onlyone such state. Graphical representations, such asflow charts or data flow diagrams, are similarlyunable to capture all possible states, so that in both

cases the design concept is retained only in thedeveloper’s mind.27

The difficulty in developing software is aggra-vated by what many consider to be the focus ofcomputer science courses on software as a softscience, synonymous with coding, rather than anengineering science.28 As a result many new pro-grammers are unskilled in large-scale systems devel-opment and in the maintenance of such systems.29

They may have limited experience working as partof a project team, but do not understand theengineering and design principles necessary to buildreal-world systems. Because the capabilities ofcomputer programmers and software engineers di-rectly affect the productivity and health of theindustry as a whole, rigorous educational andtraining programs are a critical factor in the health ofthe software industry.

The software development process can be im-proved through the use of formalized and automatedengineering techniques that support the iterativebuilding and testing of software prototype systems,allow for the reuse of software components, andaccommodate the complexity of software systems.Many software development methods and practicesused today are primitive when compared to sophisti-cated software engineering techniques. It is notuncommon to find programmers using practices 10years behind today’s most advanced technology, dueto inertia and the incompatibility of existing systemswith these techniques. The result is that manysoftware tools and concepts commonly used lag farbehind those of the hardware which that softwarecontrols. Software utilities and Computer Aided

102 . Holding the Edge: Maintaining the Defense Technology Base, Volume 2

Software Engineering (CASE) techniques that areavailable are employed erratically in the industry.These factors contribute to the impression thatsoftware state-of-the-art is still art, not science.30

Appropriate and leading-edge technology is criti-cal to the development of correct and maintainablesoftware. Current practices and conditions—thefailure to recognize software engineering as ascientific discipline and the lack of trained softwareengineers—am largely responsible for the growingcost of maintaining operational software systems.Maintenance, which encompasses the modificationof software both to correct errors and to incorporatechanges or enhancements, has become the majorcost in any software system. Maintenance costsconsume between 50 and 80 percent of all softwarebudgets. Present estimates indicate that in fiscal year1990, DoD will spend 80 percent of its softwarebudget ($16 billion) on maintenance. Industry-widemaintenance costs are estimated to exceed those fordevelopment by a factor of 50.31 While no softwarecan be expected to be error free, the use ofengineering techniques, system prototypes, modularsystem development, standard languages, andCASE tools can minimize computer “bugs” andimprove productivity. Additionally, these practicessupport the development of portable and upwardcompatible systems that accommodate future en-hancements and modifications.32

DoD has responded to the software crisis in twoways. First, the Department mandated the use of a

standard language, Ada, which supports the use ofmodem software engineering practices and which isdesigned to replace the multiplicity of computerlanguages used in the DoD for mission-criticalsystems. Second, DoD has stated a preference for theuse of commercial-off-the-shelf software whereverpossible. 33

Foreign Competition

Today, approximately 40 percent of the packagedsoftware revenues earned by U.S. firms come fromoutside the United States.34 This share is threatenedby the software industries of Japan, France, theUnited Kingdom, Korea, India, Taiwan, and Sin-gapore.35 Japan is the strongest competitor primarilybecause of its strong hardware industry and propen-sity to take advantage of standardized technologiesand develop marketable products from them.36 Thestrength of the Japanese, and to some degreeSingapore, India, and Taiwan, is in their ability toclose large portions of the world market to theUnited States and simultaneously penetrate the U.S.market with systems software created with U. S.-developed technology. The quality of these productsis equal to those of the U.S. firms, and can partly beattributed to the facts that many foreign engineersare trained in the United States and that a number ofU.S. firms have established development facilitiesoverseas. However, the quality of other types ofsoftware developed in these nations, especially

Appendix F-Case Study: The Software Industry . 103

applications software, suffers in comparison to thatdeveloped in the United States37

A comparison of the U.S. and Japanese industriesshows that, while the level of software technology inboth countries is similar, Japanese firms establishmore disciplined software engineering environ-ments conducive to the development and use ofsoftware tools. Japanese firms make greater invest-ments in the area of basic technology and distributethis capitalization within the entire firm, rather thanlocalizing it to a particular software project as istypically done in the United States. Additionally, theJapanese incorporate experiences and lessonslearned into their future projects.38 The Japanese are,in fact, turning programming into an applied scienceas demonstrated by “software factories” that reuseapproximately 30 percent of previously developedsoftware, have an error rate one-tenth that of theirU.S. counterparts, and have the potential to producelower cost and higher quality software.39 The resultof these efforts is programmer productivity figuresthat greatly exceed those in the United States.However, many experts note that at least part of thediscrepancy between Japanese and U.S. productivityand error rates can be attributed to the fact that muchJapanese software production focuses on program-ming from extant design. Further, these figures tendto be balanced by more efficient project manage-ment practices in the United States.40

The third major competitor in the worldwidesoftware market, France, receives a considerableportion of its revenues outside its own borders. Thiscontrasts with Japan’s larger, but almost exclusivelydomestic, market. As a result, France was secondonly to the United States in worldwide softwaresales in 1982. The strength of the French industry ispartly a result of national policy and partly the resultof its growing internal software needs.41

Competition from other foreign nations is partlythe result of industry standards. The development of

standards is seen as a mixed blessing in the softwareindustry. Although a lack of standards spawnsinnovation and creativity, it can also create exces-sive numbers of incompatible systems that inhibitrapid development of the technology. It is generallyagreed that standards are needed and appropriate forsystems interfaces, computer languages and proto-cols, and they are useful in codifying existingpractices. But this also makes it easier for foreignvendors to compete effectively in the softwaremarket by taking advantage of technology devel-oped by others.

International Software Protectionand Trade Policies

As U.S. software firms exploit the world market,they become increasingly subject to intellectualproperty violations and infringements by foreignvendors. U.S. intellectual property protections (cop-yrights, trademarks, trade secrets, and proprietarydata) are currently insufficient to protect U.S.interests in foreign nations where penalties forintellectual property infringement are less than thepotential profits to be made from such infringement.Foremost among the violators are lesser developedand newly industrialized countries-Taiwan, Korea,and Brazil-which have little to lose and much togain by not honoring U.S. regulations. Japan is alsocited frequently for violations. The InternationalTrade Commission surveyed over 400 U.S. firms in1986, and estimated that U.S. computer hardwareand software firms lost $4.1 billion due to inadequa-cies in intellectual property protection. This figureincludes loss of exports and domestic sales toforeign infringing goods and counterfeit products,unrecovered research costs, increased product liabil-ity costs, reduced profit margins, damage to corpora-


tion trademark or reputation, and lost employmentopportunities. 42

These losses translate into decreased incentive foraffected firms to invest in new technologies andinnovative research and development activities.43

Three conditions appear to encourage this situation.First, the technology and resources required toproduce counterfeits or imitations of legitimatesoftware products are readily available and rela-tively inexpensive. Second, consumers remain indif-ferent to or unable to detect differences betweenlegitimate and infringing products. And third, thecost of genuine innovation remains higher than thatof imitation. As long as these conditions prevail, theproblem of inadequate intellectual property protec-tion for software will remain.44

Additional economic loss is attributed to restric-tive trade policies that serve to foster native softwareindustries at the expense of U.S. firms. Importquotas, discriminatoryt a x e s , l o c a l o w n e r s h i p r e -quirements, embargoes, trade tariffs, and preferen-tial treatment for locally produced goods are amongthe common policies which discourage or precludeU.S. firms from seeking business in many foreignnations. These practices are most pronounced inBrazil, India, Mexico, and Korea.45

Hardware’s Impact

A major portion of the software industry isintimately related to the hardware industry. This isparticularly true for systems software and, morerecently, packaged software geared to the PCmarket. Since the preponderance of computer manu-facturers are U.S. based, this symbiotic relation hastraditionally benefited the U.S. software industry.

While efforts are underway to diminish this strongtie to the hardware industry-for example, 0S/2,UNIX, and MS-DOS-this relationship will remainas long as the demand for integrated systemssoftware and software development environmentsdesigned for particular hardware architectures con-tinues. 46

The increasing complexity of software systems,and the inability of software technologies to keeppace with innovations in the hardware industry, is ofgreat concern.47 The gap between the hardware andsoftware industries can be seen in the exponentialrise in software costs relative to hardware costs, thelow productivity growth rates of programmers,48 theincreasing incompatibility of software systems, andthe high costs associated with integrating or retrofit-ting existing software for new distributed architec-tures.

The United States seems unable to take fulladvantage of many of the advanced hardware andsoftware technologies it has developed, principallybecause of its large embedded and heterogeneoussoftware base. The problem of technology insertionis exacerbated by inadequate provisions in thesoftware for its maintenance or inevitable post-delivery modification. Many existing military andcivilian software systems are old by softwarestate-of-the-art standards, but young with respect totheir life expectancy of 5 to 20 or more years. Theirlongevity implies that the potential to use manyadvanced or new technologies is limited to software“maintenance” or modifications. Too often, suchchanges are not considered in the design process—functionality and data structures are not isolated andthere is no system modularity to accommodate

Appendix F-Case Study: The Software Industry . 105

change. As a result, maintenance becomes a costlyand time-consuming proposition. Finally, many newtechnologies and methodologies are incompatiblewith the computer language or dialect used in theoriginal software.” As a result of these factors andthe United States’ commitment to its software base,the United States is it at a relative disadvantage tothose nations just entering the computer industrythat have little or no historical computer base.50

R&D Investment

The present software crisis indicates the need forreinvestment and capitalization in the U.S. softwareindustry that fosters R&D and technological growthand provides the capacity to exploit advances madein the industry. It is estimated that Japan spendsapproximately two-thirds of its R&D budget onprocess innovation, while the United States spendsonly one-third of its R&D monies on the sameactivities .51

Currently, the U.S. Government funds severalsoftware-related research efforts. The Software En-gineering Institute (SEI) is a Federal ResearchCenter located at Carnegie-Mellon University. It isresponsible for numerous R&D projects relating tosoftware productivity, reuse, and education. Theobjectives of DoD’s Software Technology forAdaptable, Reliable Systems (STARS) include iden-tifying possible technical solutions, methodologies,and tools that can be used to build reliable andcost-effective defense-based software. Withoutcontinued commitment to these programs, andfurther funding to support research and developmentin the areas of software engineering, developmentenvironments, distributed systems, and softwaremetrics that record these efforts, it is likely that

improvements in software productivity, cost, andreliability will be realized and put into commonpractice more slowly than necessary.52

CONVERGENCE/DIVERGENCEOF CIVILIAN AND MILITARY

SOFTWARE TECHNOLOGYThe software industry is increasingly divided into

two groups, one dedicated to military interests andanother that supplies the commercial world.53 Thesetwo sectors have always been present, and exchangebetween the two was assumed to be the norm, not theexception. But these groups seem increasingly to bediverging, a trend that is contributing to a weakeningof the U.S. software technology base. As a majorconsumer of software and software services, theDoD has exerted, and will continue to exert, muchinfluence over developments in the industry. There-fore, a strong software industry, one where thetechnology and research base is not divided betweenmilitary and civilian environments, is in the interestof both communities.54

Convergence ofCivilian and Military Software Technology

As in many other industries, the underlyingsoftware technologies are highly similar in both themilitary and civilian sectors, and divergence onlybecomes noticeable in the detailed requirements forspecialized applications. Convergence between ci-vilian and military software industries is mostnoticeable in the small-scale applications and sys-tems software areas. Both sectors use packaged/COTS software for the majority of their small-scalesoftware applications. These include PC-based pro-

106 ● Holding the Edge: Maintaining the Defense Technology Base, Volume 2— .

grams and office automation products. Packagedsystems software, such as operating systems, com-pilers, and systems utilities, are used to the samedegree in both environments as well. The basicrequirements for these particular types of softwareare similar in both sectors, and there is little need forcustomization of these products. More importantly,the availability and cost of these types of packagedsoftware products make them readily accessible andattractive to both military and civilian users.55

Convergence in the industry’s two sectors is alsoevident in their acceptance of CASE tools andmodem software engineering methodologies. Un-fortunately, this convergence is not always at thestate of the art. Experts from both sectors of theindustry cite examples of the use of modern engi-neering technologies that increase productivity andperformance; but they are quick to acknowledge thatat least as many software projects use little or noadvanced technology.56 The unpredictable and var-ied use of modem software engineering techniquesand tools throughout the software lifecycle57 is notlocalized by organization. Discrepancies are foundwithin the DoD Services and agencies, withincivilian firms, and within software projects of bothsectors. A probable explanation for the industry-wide discrepancy is in the relative age of the systembeing analyzed. New starts and recently developedsystems are more likely to exploit new technologies;they will be implemented in high-order languages,and modem engineering techniques will be broughtto bear in their design and development.58

Divergence of Civilian and MilitarySoftware Technology

In general, the military and civilian softwareindustries have access to, and use, the same technol-ogy. But they diverge in the ways they acquiresoftware and, in particular, at the point where theysponsor large-scale applications that require cus-tom-built software.

Similar applications for software are not limitedto the PC-based or systems software previouslymentioned. Analogous applications of large-scalesoftware systems can be found in both sectors aswell and include software developed for avionics,telecommunications, and embedded systems. Butwhile the applications are similar, military andcivilian environments place different, sometimesopposing, requirements on the software that controlsthese systems.59 This is particularly true for large-scale, mission-critical military applications.60

Different requirements, as well as differences inscale, create two distinct software industries in thelarge-scale applications area. The industry diver-gence is illustrated in avionics systems software,where military requirements for high performanceavionics are exchanged for high survivability andsafety in civilian avionics.61 The significance eachsector attaches to software requirements, andwhether they become rigid specifications or eco-nomic trade-offs, partially explains why there is

Appendix F--Case Study: The Software Industry ● 107

little transfer of software between them at theembedded and large-scale application levels.62

In contrast to civilian industry, military require-ments for custom-built and embedded software tendto be very rigid. Once documented and approved inthe design stage, the specified requirements governthe subsequent development of the software, regard-less of their criticality to the system. Any suchchange typically requires a System DevelopmentNotification and contract modification that delaydevelopment. In addition to user-specified require-ments, military software systems must address themaintainability, survivability, security, availability,reliability and interoperability63 aspects of soft-ware.64 These requirements are usually specified inabsolute terms, not all of which maybe necessary fora particular military system. But they are more easilycopied from previous software contracts than tai-lored for the new system.65 The need for specificperformance and operational characteristics is evi-dent in many DoD mission critical-systems. It isnecessary to require near-loo” percent reliability fora missile guidance system and desirable to requiremulti-level security in a networked defense commu-nications system. But when these requirements areunnecessarily transferred to other military systems,the cost of development increases and the ability touse analogous civilian applications or commerciallydeveloped software decreases.66

Many of the requirements identified as unique tomilitary application—e. g., security, data encryp-tion, interoperability, survivability, and reliability—are appropriate in banking, insurance, commercialflight control, and other civilian applications. Indeedmany of the characteristics implemented for militarypurposes could be transferred to civilian applica-tions.67 But while these requirements are desirable

and appropriate in civilian applications, their im-plementation would be based on economic and riskanalysis. The bottom line in the civilian sector iseconomic. If the cost of implementing a requirementexceeds the expected return for that implementation,then the requirement is, in most cases, deleted ordeferred. This analysis and design-to-cost approachrarely occurs in military software acquisitions,although similar accommodations will be morelikely in the future if the cost of military softwarecontinues to escalate. In contrast to the civilianmethods, military software is designed to a set ofapproved requirements that seeks to minimize costand risk; often these requirements fail to distinguishbetween the user’s needs and wants.

The requirement for custom-built software existsequally in both sectors, but custom-built softwareappears to be used more often in DoD applications.The General Accounting Office (GAO) reported in1983 that 95 to 98 percent of applications softwareused by the government was custom-built.68 Thereare indications that the military is increasingly usingcommercially developed software in its systems;nevertheless, the majority of mission-critical andembedded systems software is still custom-built.One report estimates that “custom development willexceed packaged software sales in the Federalsegment, in contrast to the mass market, whereCOTS software products will exhibit more rapidgrowth." 69 The trend to use more COTS productsacknowledges that the disadvantages of using com-mercially available software- n o t r e c e i v i n g t h ecustomized software to meet unique requirements—are clearly outweighed by the direct and indirectbenefits of using such software. These include costsavings, improved documentation and operationalsupport, and increased availability. As the relative


cost of acquiring and developing custom softwarecontinues to increase, so does the trend to use COTSproducts. 70

An approach intermediate between COTS andcustom-built software is the customization of com-mercially developed software or reuse of existingsoftware. As the technologies to support reusemature, one would expect both sectors to adopt thispractice and incorporate previously developed soft-ware as components of larger, integrated systems .71The degree to which reuse is accomplished by eithersector is not known, but it is an area of potentialconvergence. Whether economic reality in the civil-ian sector is likely to encourage this practice morethan Directives and mandates issued by DoD maydepend on the current DoD requirements and proce-dures that discourage contractors from adopting thispractice. According to many experts, there arecurrently few economic incentives, particularly in“cost plus” contracts used by the DoD, for contrac-tors to reuse existing software; building software isperceived to be more profitable than reusing soft-ware. 72

Divergent Acquisition Procedures andLifecycle Model

Much divergence between civilian and militarysoftware is related to the acquisition process. It isevident in the way in which software requirementsare specified, in the design and development ofsoftware, and throughout the entire software life-cycle. This divergence is magnified in the areas ofspecial applications and large-scale systems soft-ware.

The analysis and writing of system requirementsbased on a user’s needs is the most critical and

difficult aspect of developing software.73 Onceestablished and approved, requirements directlyinfluence the entire design and development ofsoftware. It is therefore essential that softwarerequirements accurately reflect the needs of the user;that they do not place impossible performance,interoperability, or similar demands on the software;and are not so rigid that they preclude inevitablemodifications to the software. The optimal way toaccomplish this crucial task is to develop softwarerequirements iteratively .74 Success ultimately de-pends on having a flexible vehicle that allows foriterative development, not only of requirements, butof the entire software lifecycle.

The mechanism used by the military is DoDStandard 2167A, which establishes the “require-ments to be applied during the acquisition, develop-ment, or support of software systems.” DoD-STD2167A is designed to provide flexibility in thesoftware development process, and at the same timeprovide the DoD with a mechanism to monitor thatprocess. 75 Its objectives have not been fully realizedbecause many government procurement officers stillfollow the older “waterfall” lifecycle model ofsoftware development exemplified in DoD-STD2167. 76

The waterfall lifecycle identifies distinct stagesduring the life of software that are associated withrequirements analysis and definition, system design,system implementation or coding, systems testing,and deployment (including maintenance). Basedlargely on weapons acquisition, the military inter-prets this model to describe a sequential softwaredevelopment process, where each stage of develop-ment naturally leads to the next. Each phase isdocumented and is normally accompanied by agovernment review. Once the system requirements

.


are specified and system design is complete, it isassumed that the implementation can and willautomatically fall out from that design. In reality, thesoftware development process is evolutionary andrequires an iterative approach.77

While DoD-STD 2167A was designed in part tocorrect the waterfall lifecycle bias currently used, itcontinues to emphasize a document-driven, specify-then-build approach to software development.78 Theprocedures set forth by DoD-STD 2167A andcorresponding documents are designed to ensurethat DoD gets the highest-quality software at the bestprice. But the system has not improved the quality ortimeliness, or decreased the cost, of military soft-ware. Instead it remains a major part of the problem.The military’s approach is based largely on compet-itive procurements that necessitate establishing re-quirements as early as possible in the lifecycle. Theprocess backfires, however, once bids are awarded;many requirements turn out to be impractical,beyond the scope of current technology, or simplyunneeded. The inevitable result is software that isdelivered late, at higher cost, and with less function-ality than planned.

DoD-STD 2167A attempts to avoid the cascadeeffect of this approach by allowing for all lifecyclestages to occur iteratively. But the standard directlyor indirectly requires that developers comply withnumerous other DoD and Military Standards, Direc-tives, and Data Item Descriptions at each majordevelopment stage, milestone, or prior to a majorrevision in order to provide government oversight ofthe entire process.

79 These procedures perpetuate theinflexibility and bureaucracy that DoD-STD 2167

originated. The acquisition process used by DoDillustrates the government’s propensity to use proc-ess specifications and standards that dictate how-to-design and how-to-manage, rather than performancespecifications and standards that focus on desiredresults.80 This approach contrasts with the civiliansector’s tendency to negotiate for a final product anddesign-to-cost, and precludes the use of innovativeor unproven techniques and methodologies by DoDcontractors .81

Ada

A more recent divergence in the two industriesrelates to the military’s mandated use of a singlehigh-order language, Ada, in its mission-criticalsoftware systems. DoD’s sponsorship for Ada beganin 1974 when the “software crisis” was acknowl-edged to have potentially serious consequences forthe military’s ability to maintain and operate itsmany computer systems.82 In 1983, Ada was ap-proved as an American National Standards Institute(ANSI) and Military (MIL-STD 1815A) standard.By 1987, Ada was approved as an InternationalStandards Organization (1SO) standard.

The DoD Directive that Ada shall be the singlehigh-order language used in command and control,intelligence, and weapons systems has no counter-part in the commercial environment. With theexception of civilian avionics systems, Ada is notwidely used in U.S. commercial applications. In-stead, civilian-based software continues to be imple-mented in the language thought best for thatapplication—whether it be COBOL, Assembly, a

n~e -fits of ~ ;~~n -ach and prototyping of systems developmen~ are descnhcd in: Frekick Brooks, Jr.. OP. cit.. footnote 3; offi~of the under~ of Defense for Acquisition, op. cit., footnote 24, pp. 11, 33-35; U.S. Department of Commerce, National Bureau of Standards,‘*Application Software Prototyping and Fourth Generation Languages,” NBS Speeial PuMication 500-148, May 1987; John Morrocco, op. cit., footnote4; Mark Gerhardt, ‘The Language of Abstraction,” Aerospuce America, July 1988, pp. 32-34; and U.S. Congress, Offiu of Technology Assessment,op. cit., foomote 28, The ill-effects of the waterfall Iifccycle and DoD-STD 2167 are addressed fhrther in the following section on barriers hetween themilitary and civilian sectcm.

7~ff1u of ~ Unk ~~ of Defense for Acquisition, op. cit., foomote 24$ P. 33.T~D-STD 2167A, op. cit-, foomote 75, see pp. 1+ 35-36.

-aldF_rh, ‘“Should the DoD Mandate a Standard SoftwaTC Devclopmcm Process,” Procadings of Joint Ada Confercnwon Ada Technologyand Washington Ada Symposium, March 1987, pp. 159-167.

sl&)~: OTA &)fiW(ifC Workshq.mA 1983 memdm from the Under Secretary of Def- fof R~ h and Enginccringrecommm ended that Adabe the single high-order language

used in all DoD mission-critical computer wstems; but this rec ommendatkm was not implemented until 1987 in IhD Directive 3405.1, which statesthat Ada shall be the *’single, commom computer programtm“ng language” used in command and control, intelligence, and weapons systems. Policyregarding Ada is also provided in DoD Directive 3405.2, which mmdates the use of Ada in all weapons-related computef systems.


Fourth Generation Language,83 or any other com-puter language.

84 As new DoD computer systems aredeveloped, the convergence of new software tech-nologies and the ability to transfer software betweenthe two sectors will depend a great deal on severalfactors: first the civilian sector’s acceptance of, anddemonstrated use of, Ada; second, DoD’s willing-ness to grant waivers to its Ada mandate; and finally,the military’s acceptance or ability to incorporatecommercially developed, non-Ada software in itscomputer systems. The barriers potentially intro-duced by Ada will be examined further in thefollowing section.

BARRIERS TO MILITARY ACCESSTO CIVILIAN SOFTWARE

SECTOR AND VICE VERSADespite similarities in technologies available to

the civilian and military software sectors, it isapparent that there is a growing divergence betweenthem. Such differences, primarily in their respectiveacquisition strategies, obstruct the exchange ofsoftware technologies and applications. This contin-uing divergence not only damages the U.S. softwareindustry, but also erodes the defense technologybase. Previous studies, reports, and directives haveidentified the importance of technological exchangebetween the commercial-based and military-basedsoftware industries, and the need for DoD to adopta more commercial-like acquisition process. Butthese reports, prepared by the Defense ScienceBoard and others, have had little impact on thesystemic problems identified to date. The persistentbarriers to the transfer of technology, methodolo-gies, and products between military and civilianinterests are identified below.

Acquisition Regulations

In 1987, a Defense Science Board Task Forcereported that the “major problems with militarysoftware development are not technical problems,but management problems.”85 This finding wasrevised during a follow-up workshop to state thatwhile both technical and management problems areevident in military software development, the latterare more significant. These management problemsrelate to the manner in which the DoD procuressoftware, and they represent the major barriers to theexchange of software technology between civilianand military sectors.

According to industry representatives, the princi-pal barrier to exchange of software technologybetween the civilian and military sectors is thebureaucracy and administration o v e r h e a d a s s o c i a t e dwith DoD acquisition procedures. Requirementsregarding the procurement, design, and developmentof DoD software are enumerated in DoD-STD2167A, which provides “the basis for governmentinsight to a contractor’s software development,testing, and evaluation efforts.”86 DoD-STD 2167Adoes not profess to follow a particular softwarelifecycle model and does not require a particularsoftware development methodology. Yet, as a re-view mechanism, it unnecessarily burdens contrac-tors with the many Standards, Directives, Data ItemDescriptions, and Federal Acquisition Regulationsthat it directly or indirectly requires.87

DoD has defined eight major activities for soft-ware development, each of which requires a formalreview or audit to be conducted or supported by thecontractor. Additionally, the contractor must docu-ment his plan for completing all activities and DoDmust approve this plan before any development

gsFotuth-g eneration languages arc application-specific languages or program generator% not geaeral-purpose or high-order languages. l%cy includedatabase langwges, spreadsheets, natural query languages, and any language designed to be used in a limited problem domain. Office of the UnderSecretary of Defense fori+cquisition,op. cit., footnote 24, p. 18; see also: U.S. Depart.mentof Commerce, National Bumauof Smndards , op. cit., footnote77.

MSom: OTA SofNVUC WOrkShOp, ‘I%crc arc exampks of civilian applications being designed andb developed in Ad& but most commemid f~shave adopted a “wait and see” attitude regarding the language. By comparison, Europeanfms have elected to usc Ada in a variety of applications morefrequently than their Us. munurparts have.

WO- of * under !jec~ of Defense for Acquisiticm, op. cit., fOOtUOtc 24, p. 24.~Dof).sTD 2167A, Feb. 29, 1988, pp. iii/k.

8T~id., pp. iii, iv, 3,4, 35, @ 36.

Appendix F—Case Study: The Software Industry . 111

efforts can begin.88 The entire process is designed toguarantee that the government acquires the softwarethat best meets its needs, ensuring that governmentfunds are not misused or used for commercialbenefit. The results of DoD’s procurement strategyare contractual obligations that force commercialvendors to employ specialists fluent in the militaryregulations, government reviews, documentation,and accounting procedures required by the DoD.These regulations, audit requirements, and associ-ated legal issues have forced many DoD contractorsto establish autonomous divisions for conductingbusiness with the government. Finally, vendors needa sufficient economic base to survive fluctuations inthe DoD contracting and budget cycle.89

As a consequence, few civilian firms regularlycontract with the DoD.90 It has been argued that thelimited base of contractors established to do busi-ness with the government inhibits DoD’s ability toacquire quality software. While seeking the samequality software and the same assurance of a fairdeal, the civilian software sector has no suchregulatory mechanism. Performance, quality, andoperational requirements of civilian software appli-cations are weighed against cost. The commercialprocurement process is designed to acquire the bestsoftware at the best price. Commercial-based con-tracts make no attempt to regulate or control themanagement practices of the developer, focusinginstead on specification of the software functionalityrequired. The numerous reviews and proceduresrequired during the development of military soft-

ware conflict with such a commercial-based prac-tice.

The acquisition procedures and contracting prac-tices used by the DoD not only limit the number ofpotential vendors, but discourage those contractorsalready qualified by the military. Civilian firms whocontract with the DoD receive no guarantee of acontinued relation with the DoD, accept poor profitmargins, and often lose the rights in data to theirsoftware. 91 Gov ernment contractors therefore havelittle incentive to provide software that is innovativeor of superior quality. The mechanisms used by thedefense sector to select a software contractor in asellers’ market not only increase the chance that theDoD will get mediocre software, but frustrate manycontractors from doing business with the military .92

Data Rights

The actual acquisition of software illustrates afurther barrier to the transfer of software between thetwo sectors. Often, regardless of the software type,government contractors lose most, if not all, of theirintellectual property rights to the software theydevelop. 93 The government’s claim to unlimiteddata rights is based on the notion that these rightsprotect the government and will ensure publicdissemination of publicly sponsored research ef-forts. In negotiating for unlimited rights in data forits software, the government gains the ability tomaintain and modify its software systems in thefuture. Perhaps more importantly, this practice isintended to ensure the competitiveness of future

sa~id., p. 9. The eight major activities SE SYsteII’I J@ uirernents Analysis, Sohvare Req uirements Analysis, Preliminary Design, Detailed Design.Coding and Couqmter Softvvare Unit Testing, Computer Software Component Integratirm and Testing, Computer Software Configuration Item Testing,and System Integration and Testing. These activities may overlap and may be applied iteratively. It should be noted that 2167A was developed tosupercede DoD-STD 2167 and the waterfall lifecycle model it represented for software development. Yet the categorization of the development processin 2167A does not differ significantly from that in DoD-STD 2167; what it does allow is for the iterative application of the design and review processesin an attempt to accommodate a pmtotyping approach to systems developrmm

SYWICC of tie IJnd~ Secretary of Defcnx for Acquisitiuh op. cit.., foomote 24, p. 30. As an example, the time that elqses from q~~mmtsspecification to letting a contracting to full deployment typically runs from 8- 14 years. By the time large defense systems software 1s deployed andoperational, the computer hardware is 5 to 12 years behind that avaiiabk on the market.

% Defense Science Board Task Force on Military Software reported in 1987 that tke were approximately 24 contractors regularly involved withmission-criticaJ software development for the DoD. Mae recently, Intcrnati mud Resoume Development, Inc., identified over 50 fms able to contractfor large DoD software projects. In either case, these firms represent a minority of sofiware fms in the United States. See: Office of h Under secretaryof Defense for Acquisition, op. cit., foomote 24, pp. 29-32; and Adu Duru, International Resource Development, Inc., Fall 1988.

9! Off1U of tie uw SeCre~ of ~fcnse for Acquisition, op. ci~, footnote M PP. 29.

WTA Sofiware Workshop; also Office of the Under Secretary of Defense for Acquisition, op. cit., footnote 24, pp. 29-32.93 The gov ernmem’s claim to sotiware rights in data are usually unlimited or restricted. The former allows the government to “use, duplicate,

disclose . . . software in whole or parL in any manner and for any purpose w hatsocver, and to have or permit others to do so.” For sofhvare developedwholly with private funx the contractor can negotiate restricted data rights that give the government the right to modifi software and make backupcopies, but allow the developer to incorporate a typical licensing agreement with the government to protect his efforrs. See: Michael Gmnbergcx,“Rights-In-DataPolicies Affecting Department of Dcfemse Acquisition of fbmput.ex Software and Related Products,” presentation for the Computer LawAssociatkm, Washington, DC, April 1988, pp. 4-6.


software maintenance and follow-on contracts. Butaccording to many experts, in its efforts to foster faircompetition, the government appears unable tocompete effectively for its software. Further, manygovernment employees and government contractorsview the practice as onerous, burdensome, unneces-sary, expensive and unfair.

Despite these acknowledgments and the flexibil-ity allowed government contracting officers tonegotiate less than exclusive rights to data insoftware acquisitions, the government usually in-sists on full transfer of data rights. In the commercialworld, no company would demand exclusive rightsto proprietary information, and many are dismayedby the government’s expectation of these rights.94

This practice clearly inhibits DoD’s access tosoftware developed by many civilian firms. TheInstitute for Defense Analyses Rights In DataTechnical Working Group reported that because ofthe government’s unlimited data rights demands,

. . . the government is failing to obtain the mostinnovative and creative computer software technol-ogy from its software suppliers. Thus the govern-ment has been unable to take full advantage of thesignificant American lead in software technology forthe upgrading of its mission critical computerresources.95

The commercial sector typically protects proprie-tary information through laws relating to tradesecrets. Contractual or licensing agreements governthe disclosure or dissemination of the intellectualcontent, or trade secrets, of software. Such licensesprovide developers with continued revenue as theycontrol the marketing of their product. In contrast,DoD’s exercise of exclusive data rights does notguarantee the developer continued income or afurther relationship with the government.. While themost recent DoD directives and regulations cite the

ability and desire of the government to “negotiate”the rights to intellectual property, several factorshave limited the practice or success of such negotia-tions. First, many DoD contracting officers andprogram managers intimate with the software con-tract do not have the guidance, knowledge, orexperience necessary to request anything short ofexclusive data rights. Second, the government gen-erally receives exclusive rights to software that hasbeen developed, either in part or wholly, with fundsfrom the government. Third, developers who negoti-ate for restricted rights must meet governmentregulations and contractual obligations in order toFully realize their rights.96

Ada

Some civilian software firms cite Ada as a barrierto working for DoD. The directive stating that Adashall be the “single, common, computer program-ming language"97 used in command and control,intelligence, and weapons systems may dramaticallyalleviate the military’s software crisis. But becauseof Ada’s relative immaturity, the number of com-mercial-oriented fires proficient in its use is limited.The mandate to use Ada appears to further decreasethe already limited number of firms willing and ableto contract with DoD.

Some experts cite Ada as an example of thegovernment’s tendency to standardize too manythings too early. While the mandate to use Ada formission-critical applications was arguably prema-ture in 1983, developments associated with Adaweaken that argument.98 But many commercialvendors, with the exception of those in the avionicsindustry, still have a wait-and-see attitude aboutAda. While this is the prevalent strategy regardingAda, there are successful examples of commercialAda ventures, for example, in the development of

~fiid.; MM. G~~, T. Shu@ J. Edxtm@ ~d R. S~sfeld, “-g the B* BCtWCCJI GOvmmt d kktIY ~~fs ~ SofiW~Acquisitions” (SEI-87-MR-9), Sofhmrc Engineering Institute, May 1987.

gs~t~e fm Wf= AIMIYSCS Rights III Data Technical Working Group, Draft FhMI RcporL NOV. 22.1983. s. 1-1.

%)TA Software Worksimp; also Mic&l Grccnbcrgcr, op. cit., foomotc 93; and M. Grunberger et al., op. cit-, footnote 94.m~D Di~tivc ~. 1.98~ fi~~ Ada mm- w= ~~ ~ a m~o~um ~m men Unk s~~ of mf~~, Mc* MLmcr. But at the the of DCLaUCr’S

muxtorandum, them was a scarcity of vaiida@ and more recently, pcrformancequality Ada compiks and development cnviromnents available in theindustry, This situation has recently chan@4 A& lnfonnution Clearinghome reports that the numba of Ada development projects increased from35 in Auguat 1986 to 315 in September 1988. During the same period the number of validated Adacompiiers roae from 74 to 153, with an additional65 compilers derived from fhcsc base cumpilem for similar hardware architectures. ‘W market for Ada compilers, tools, environments, and training is-g ~ a ~PO~ ~u~ IPOti me of 35 m @ -t ~ ~o~d exe $750 million by 1990: see Jeremy Tcnncnbaum, op. cit., foomote 2.

.


compilers, tools, and in banking and communica-tions applications.w

The merits of a single, standardized language willalways be debated. In the case of Ada, the benefitsinclude its embodiment of engineering techniquesessential to the development of maintainable soft-ware; its support for modular (and reusable) compo-nents necessary in the development of large-scale,integrated systems; and increased portability amongcomputer architectures. Additionally, because Adawas standardized early and trademarked, there arenone of the incompatible dialects that have longbeen a problem in the software industry.l00 Thesecharacteristics may bridge some of the technologicaldifferences between the civilian and military sectors.

Whether Ada becomes an area of convergence,rather than a barrier, remains to be seen. Because theDoD remains the single largest consumer of soft-ware, and remains committed to the use of Ada, thelanguage is potentially a major factor in futuresoftware technologies. Its potential, though, con-trasts with the current situation where many militarymission-critical applications are required to be

implemented in Ada, while similar civilian applica-tions will continue to be developed in the languagethought best for that application.

Military Hardware Requirements

Requirements for hardened computers often resultin the DoD buying specialized computers for someembedded and mission-critical systems. Given theclose relation between hardware and software inthese systems, this situation limits the potentialnumber of vendors who can develop software forthese applications. It is particularly evident in theNavy, which typically contracts for special-purpose,non-commercial, hardware.101 These specializedhardware requirements exacerbate the incompatibil-ity that exists among many software systems withsimilar applications. Barriers of incompatible inter-faces, languages, operating systems, and protocolscreated between militarized hardware and commer-cial hardware architectures make it less likely thatany transfer can or will occur between the defenseand civilian software sectors.

~so~e: OTA sofiw~ workshop: also: John Burgess, “ ‘Universal’ Computer Language Finally Takes Hold at Pentagon,” Washington Posr, July17, 1988, pp. HI, H5.

l~Ada w= O@MIly u~mkd to prevent the creation of “supcrsets” (extensions) and “subsets” of the language-al] in’IpkInentaUOnS of f-klanguage must meet MIL-STD 1815A fully to be considered Ada. l%is, combined witb the req uirernent that all Ada compilers pass a validation(conformance) procxss, helps ensure thal Ada is portable across computer architectures.

10I B- on &e Nay’s Next Generation Computer Resources Mgrm briefing to OTA.

Appendix G

European Organizations andPolicies for Research

and Technology

CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Overall Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1992 and the Single European Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .U.K. POLICY FOR RESEARCH AND TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . .Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .U.K. R&D Program Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Collaborative R&D in the United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .FRENCH POLICY FOR RESEARCH AND TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . .Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .R&D Budget Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Policies for Collaborative R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .WEST GERMAN POLICY FOR RESEARCH AND TECHNOLOGY . . . . . . . . . . . . . . .Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .West German R&D Program Overview.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ITALIAN POLICY FOR RESEARCH AND TECHNOLOGY . . . . . . . . . . . . . . . . . . . . . .Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Italian R&D Program Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .SWEDISH POLICY FOR RESEARCH AND TECHNOLOGY . . . . . . . . . . . . . . . . . . . . .Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . .Swedish Research and Technology Program Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .SUMMARY OF EUROPEAN COLLABORATIVE RESEARCH AND

TECHNOLOGY . . . . . . . . . . . . . . .Background . . . . . . . . . . . . . . . . . . . . . .Collaborative Military programs. . .European Space Program . . . . . . . . .European Advanced Civil Research

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .programs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Table.

117117117123123126133135135136140141141141149149150154154155

161161163166166

TableG-1. Major Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164

Appendix G

European Organizations and Policiesfor Research and Technology

INTRODUCTIONThis appendix focuses on the approaches Euro-

pean government and multilateral groups employ insponsoring research and technology. Among thecountries reviewed are the United Kingdom, France,West Germany, Italy, Sweden, the IndependentEuropean Program Group (IEPG) and the EuropeanCommunity (EC) have been studied. The followingcountry summaries and concluding review of collab-oration contain some “themes” that may apply to theU.S. Department of Defense’s Science and Technol-ogy operating concepts.

1.

2.

3.

4.

Overall Findings

There appears to be a trend for governments toreduce funding for defense research and tech-nology (R&T) and to place more emphasis onbroadly based (civil) research. Industry, in turn,is expected to introduce new technology intodefense products and systems at the “applica-tions” stages.

Civil research programs are increasingly es-tablished as “national (or strategic) goals.” Al-though specific projects retain some latitude, thetrend is toward more central direction andcontrol. Financial control from the top is becom-ing the norm.

Although there is a widespread demand thatgovernments receive “value-for-money” in re-search, “peer review” remains the standardmethod of assessing results. Several nations areexamining more elaborate schemes,

Research costs are prompting nations towardboth rationalization and collaboration. In the caseof rationalization, separate research activities arebeing merged, with “centers of excellence”becoming a common means to assemble suffi-cient scarce resources to make headway in

5.

6.

7.

selected (strategic) technology areas. Collabora-tion has also become a way of life for govern-ments, companies, and academia. The SingleEuropean Act, creating a single economic entityin 1992, is giving this trend an added push.

Universities appear to play a major role in bothformulating and executing national research poli-cies. A significant percentage of national R&Tbudgets goes into academia, with strong linksencouraged between universities and industry toeffect “technology transfer.”

There has been some backlash, especially amongthose European industrialists who question thewisdom of emphasizing technology-based indus-trial growth. Their dominant concern is thatEurope take care to invest in technologies that arenew and unique, rather that continue to “chase”the United States and Japan for a share of today’smarkets.

Most countries view space research as a majorarea for R&T funding. It appears that this area hasreplaced defense as a “locomotive” for research,providing potentially lucrative spin-offs for com-mercial market exploitation. In the view ofindustry, however, these expectations have notmaterialized.

1992 and the Single European Act

Overview

Europe’s potential can be summed up by the date1992, when Europe is to become a true commonmarket. A campaign that began with the originalcommitment establishing the European EconomicCommunity aims to propel its 12 nationsl toward acommon market in which goods, people, services,and capital could move unrestricted among membernations.

1 Ireiand, Britti, Portugal, Spain, France, West Germany, Bel@um, Luxembourg, Hoil~d. ~~~ I@Y> ~d G=e.

-117–


Background-In the early 1980s Europe, withdecreasing revenues and high employment, founditself lagging in comparison with America’s andJapan’s strong economic positions. In 1985 the newEC President, Jacques Delors, a former Frenchfinance minister, toured the member states andfound growing support for a renewed campaign fora true European market. Lord Cockfield, a BritishConservative ex-businessman, was the EC Commis-sioner charged with drafting a White Paper on thesubject. He drafted a list of 300 initiatives that wouldbe needed to produce a wholly unified Europeanmarket. 2 Cockfield laid out an accompanying time-table to accomplish these initiatives over the nexttwo EC Commissions’ 4-year terms (1985-88;1989-92). The target completion date was the end ofthe second term—December 31, 1992.

Although 20 or more of the original 300 initiativeshave since been dropped or replaced, the magicround number represented all that European govern-ments wanted. They accepted the challenge andpassed the Single European Act, which becameeffective on July 1, 1987. This Act states:

The Community shall adopt measures with theaim of progressively establishing the internal marketover a period expiring on 31 December 1992 . . .The internal market shall comprise an area withoutinternal frontiers in which the free movement ofgoods, persons and capital is ensured in accordancewith the provision of the Treaty.

Member Nations Support-Of the 12 membernations, France embraces 1992 with the mostpassion, with polls showing that more than 70percent of French companies regard “quatre-vingt-douze” as a golden opportunity. This attitude waspromoted by a new French Government that de-spises old French habits of “dirigisme.” WestGermany’s industrial giants are also eagerly await-ing 1992. The large chemical companies-Bayer,Hoechst, and BASF—are confident that no one canbeat them in a free market. Italy’s industries, such asOlivetti, are leading their government in supporting1992 concepts. Some say this is a timely accompani-ment to an Italian industrial trend to create Europe-wide business empires. Some of the medium-sized

companies are less optimistic, and smaller nationsare resigned to accept what they cannot control.

The biggest surprise is the United Kingdom,which could benefit the most from a free market(especially in the areas of finance and insurance). A1988 survey by the accounting firm of Ernst &Whinney found that fewer than 40 percent of Britishcompany directors were aware of 1992 plans in theEC. In financial services, an area where Britainshould dominate, fewer than 30 percent of compa-nies had planned for the 1992 goals. However,British businessmen have launched a Club 1992 todiscuss the implications of a single market, and thegovernment is promoting a publicity campaign insupport of 1992. Prime Minister Thatcher nowinsists, “It is not a dream. . . it is for real, and it isonly five years away.”3

Other European Nations-Outside the EC, thesix countries of the European-Free Trade Associa-tion (ElTA),4 fear that they are going to lose their“good deal.’* Each has a free-trade agreement withthe EC, permitting duty-flee access to EC marketsand vice versa, without having to share in the cost ofsupporting the EC’s farm policy. They fear that once1992 arrives, they will become outsiders; to preparethemselves, they are now modifying their relationswith the Community. Although the neutrality issuekeeps Sweden and Switzerland from joining the EC,Austria may apply for Community membershipsometime in the 1990s. Unencumbered by neutral-ity, Norway may ask to join after its 1990 elections.But the EFTA ministers have already called for aproper system of consultation between the twogroups, and are ready to cooperate with the commu-nity in new fields of industrial research, the environ-ment, and education. They hope to create a “singleEuropean economic space” (without agriculture, ofcourse) that would encompass a Western Europe of18, not 12, members.

Japanese Actions-Scores of Japanese corporateplanners are visiting Europe to analyze the 1992phenomenon. It appears that Japan, viewing the ECas “safer” than the protection-prone American mar-ket, is turning its export focus towards Europe.Japanese firms such as Nissan, NEC, Fujitsu, and

zcoml~~on of ~e E~~n Communities, “Coxnpicting the krnd h4arkcL” A White Paper PP* for h ELUWWI Comcll. COM (85) 310Final, Brussels, June 14, 1985.

3M. ~~~ m Briti~ b~en, reported in Ctirkm Science Monitor, June 27, 1988, p. 111.qswitim~ A*4 s-, Norway, Fid~d, ~ 1~1~.

—. ..—.— —— —

Appendix G-European Organization and Policies for Research and Technology ● 119

Toshiba are targeting direct investments to two orthree EC countries, building factories from whichthey aim to serve the whole Community. They arewatching the European market closely, ready to grabany opportunities as frontiers come down.

Fearing the economic strength of a Washington-Tokyo connection, many EC members believe directJapanese investment in the EC could enliven theEuropean economy-as American multinationalsdid when they set up European plants in the 1950sand 1960s. To do this, however, Japanese firms inthe Community would have to become part of thelocal economy; they would have to transfer technol-ogy from Japan to Europe and buy more componentsfrom European suppliers. They would have toabandon their current practice of setting up “screw-driver plants,“ in which the final product is largelymade up of parts imported from Japan.

EC and the COMECON-The EC and the Soviet-led economic bloc COMECON (Council for MutualEconomic Assistance) signed a joint declaration ofmutual recognition on June 25, 1988. This will boosttrade and economic ties with COMECON andenable the EC to open diplomatic relations withindividual COMECON members.

With a potential market of more than 400 millionconsumers, COMECON traded a total of just under$50 billion with the EC in 1987. EC officials viewthe East Bloc as a highly underdeveloped market forexports. They are watching closely to see if glasnostwill succeed, and whether that will open the way forincreased trade opportunities with the East Bloc.

Analysis

Economic 1rnplications-Dissolving the frontiersof the European Community means that all 12countries will be using just one passport, stampedEC, with the EC symbol (a circle of 12 gold stars ona blue background) on the front. Individual countrycitizens will now be EC citizens-able to liveanywhere in the EC they want, able to practice theirprofession in any of the 12 countries, able to retireto any EC area they desire.

However, the true impact of the Single EuropeanAct will be economic. A recent study, "The Cost ofNon-Europe,” 5 estimated that the customs costsattributed to border delays and trade barriers mightrun as high as 8 billion ECUS

6 to firms and 1 billionECUs to governments. This study supports thelong-held belief of many European industrialists thatthe governments’ nationalistic policies have re-tarded the growth of strong, world-class companiesin Europe.

Given such savings, calculation indicate that 1992lifting of frontiers could result in an increase of upto 7 percent in gross domestic product (GDP) and 5million new jobs.7

The Market

Selling to a Single Market—For business, thesingle market is welcome. The EC estimates thereare more than 100,000 technical regulations andstandards (most often in high-tech sectors) wheremarket fragmentation places Europe at a major competitive disadvantage vis-a-vis American andJapanese competitors. In electronics and engineer-ing, the different requirements will be reduced oreliminated. For the Netherlands-based electronicsgiant Philips, it means making one kind of televisionset instead of 12. For the transportation companies,who face appalling obstacles of frontier documenta-tion and corruption, it means cutting delivery timeand costs in half.

What it does not mean is marketing a product inthe same way. If the companies are to be competi-tive, they will have to shift their emphasis to anexpanded market outside their national boundaries.In this respect, the larger EC companies already havean edge. Accustomed to different marketing strate-gies for different areas, the larger conglomeratesshow no fear in the face of 1992; they havesubsidiaries in many countries. It is the smaller andmiddle-sized companies of the EC member nationsthat are going to have to play “catch-up” inmarketing strategies in general (with a “pan-European” flavor specifically)-an area where theymay lack experience.

5C()-sion of the European Communities, ‘“Rte Cost of Non-Europe: Basic Studies” (vol. I), 1988.

-E~Currency Unit (ECU) is the unit of accounting used by the EC. Its value is set by a basket of European currencies. 1 ECU= US $1.23.(November 1987 ratio).

‘Commission of the European Commumty, “’he Economics of 1992,” No. 35, March 1988.


European Industrial Mergers—The problemsthat small and medium-sized European firms antici-pate have generated several hundred industrialmergers since 1985. These mergers are especiallysignificant in the software industries. The CAPgroup, a British software and services company, hasannounced a merger with France’s Sema-Metra toform Semacap. There was a similar deal betweentwo British companies, Systems Designers andScicon, the latter of which also has interests inFrance, West Germany, and America. These merg-ers create companies that can sell in the Americanmarket and compete with American companies inthe emerging pan-European software business. Thetwo new companies, Semacap and SD-Scicon, arenow rated second and third, behind Europe’s premiersoftware firm, Cap Gemini Sogeti of France. Thethinking is that pan-European software companiesstand the best chance of winning contracts fromEuropean giants in retailing, communications, andfinancial services.

With estimates that the European software andservices market will grow from under $50 billiontoday to about $250 billion by 1996, competitionbetween American and European companies is nowlikely. In the past, Europe’s software market hasbeen fragmented by language and culture; now,more companies are becoming international. And asinformation technology becomes more complex,customers are turning to “one-stop shopping,” ratherthan assembling a different package themselves.Although vendors are now adopting internationalstandards that make it easier for computers to talk toeach other, the large American computer firmsshould continue to hold the edge in Europe for awhile-unless they fail to adapt.

A hostile takeover bid for the Belgian conglomer-ate Société Générale de Belgique in early 1988represented, for some, the downside of 1992 eco-nomics. The Italian financier Carlo de Benedetti,who finally settled for a minority interest in Génér-ale (plus a stake in the French financial group Suezand a $1 billion profit), works as if 1992 alreadyexists. One of his aides explained it: “He says if heis really a European there is no reason, for instance,[not] to meddle in French politics. We are all part ofthe same country.”8 The recent GEC/Siemens bid totake over Plessey and Plessey’s countermove with

Thomson-CSF and possibly AT&T are other exam-ples of how the “takeover game” is heating up. Theeffect on Europe’s defense technology base will beprofound, but is yet uncertain.

Public Procurement-The buying of goods andservices by national and local governments andpublic and private utilities amounts to about one-sixth of the EC’s GDP. Strong nationalist interestshave resulted in an abundance of duplicative produc-tion: 11 EC telephone exchange manufacture, 10turbogenerator manufacturers, etc. Although the EChas been compelled to put large construction con-tracts (anything over 1 million ECUs) out toEurope-wide tender since 1971, and to do the samewith other large purchasing orders (above 200,000ECUs) since 1977, just 2 percent of orders in eachcategory go to other European countries.

There are four main aims of the procurement partof 1992:

1.

2.

3.

4.

to broaden the scope of,in, existing obligations;to give the EC greaterregulations;

and block loopholes

police powers over

to improve redress procedures for disap-pointed offerors; andto extend open procurement to businesses thathave remained exempt until now (energy,transport, water, and telecommunications).

Impact on NATO and European Defense—Members of the EC include all European NATOmembers except Iceland, Norway, and Turkey. Onlyone EC country, Ireland, is not a member of NATO.Although the EC charter maintains that the Commu-nity is an economic body uninvolved in defensematters, anticipated changes are so broad that almostall aspects of European defense operations will feeltheir impact.

Like most EC officials, European defense minis-ters resist the 1992 changes out of a reluctance tosurrender the political power they now hold. How-ever, European economic unity may require theestablishment of central procurement agencies, suchas those the Independent European Program Groupis now studying for defense purposes. More central-ized research and development will be necessary toavoid duplication and cut costs. A European R&Dagency like the U.S. Department of Defense’s

8MB usimssmcn: Tky Grow Than Bigger Now in Europe,” The Christian Science Monitor, June 28, 1988, p. 118.

Appendix G—European Organization and Policies for Research and Technology Ž 121

Defense Advanced Research Projects Agency (al-ready recommended by the 1986 IEPG report,“Towards a Stronger Europe"9) could assist inexpanding a European technology base. MultilateralEuropean projects like the European Fighter Air-craft, will have to change their form to accommodatethe economic realities of a single European market.International consortia will compete for Europeandefense contracts without the added burdens ofdifferent national policies (e.g., financial, industrial,etc.)—and the implications for U.S. defense/aerospace firms will be significant.

Impact of Advanced Technology-Accompany-ing Europe’s concern about its economic position inworld trade is a heightened sense of concern aboutits technological future. Many papers have focusedon this issue, with some suggesting that Europe’sproblems lie in the failure to organize properly forexploiting innovations with commercial potential.10

Many European companies still rely on homemarkets or operations dedicated to each nationalmarket. Breaking down the barriers that haveisolated European companies from each other, aswell as from other European national markets, is anexplicit objective of the collaborative high-technology initiatives now being pursued. Breakingdown these same barriers is also a goal of the SingleEuropean Act.

In pursuit of technological achievements, the EChas agreed to spend 5.2 billion ECU on R&Dcollaborative programs over the next 5 years. Withinthat framework are several individual spendinglines, including information technology, advancedtelecommunications, biotechnology, alternate en-ergy sources, environmental research, and nuclearsafety. These subjects have their own specificresearch programs such as ESPRIT, RACE, andBRITE. In principle, the EC supports, but does notfund, EUREKA, a separate program approaching $5billion in value. All of these advanced researchprograms support Europe’s 1992 goals.11 Europeanadvanced-technology collaborative efforts arebound to help Europe succeed in meeting the

challenge of the single market-and to compete inworld markets.

Problem Issues

Trade Barriers and National Subsidies-Article115 of the White Paper12 allows governments to barimports of non-EC goods “entering” in indirectlythrough another member country. If Article 115were abolished, France and Italy, for example,would want higher trade barriers against importsfrom outside. Otherwise, they argue, non-Europeanswill be the main beneficiaries of a single market. TheWest Germans and the British point out that, formaximum benefits, external trade policy shouldproduce a lower rather than higher level of overallprotection.

The EC has to come to terms, not only with tradebarriers, but with the issue of national subsidies,which are quite high in some countries. Stiff rulesagainst subsidies must accompany the removal oftrade barriers, if the full benefits of a single marketare to be realized.

A Central Bank—The financial community willgain from the completion of the internal market in1992. Peter Sutherland, the Commissioner responsi-ble for competition policy in the European Commu-nity, believes that the financial sector will benefitmore than others, with gains exceeding $30 billionannually .13 Presently, there is a wide variety ofservice charges levied by banks and insurancecompanies. These charges will probably be reducedand brought into line with one another, so thatconsumers can make payments anywhere, thanks totruly European credit cards.

Changes in the European Monetary System arebeing made, and there are already discussions onestablishing a new central bank for Europe. Yetplans for this “Bank of Europe” must go hand inhand with a common currency; more and morebusinessmen are now using the “ECU” as a unit ofaccounting in their European operations. A centralbank with a common currency would bring aboutmonetary stability in Europe, as it merges EC

9111&puI&IN EWqXXUI ROgrMI GKRIf), ‘7iiwa(is a Stronger Europe,” VdS. I and II (Bruwls, Bcl@un: NATO Hcadquiuters, ~987).low for ~xmple, ms~on of the European cOmmUI’Ilties, Op. cit., f-~ 5.

11* co~wlon of t.hc European Communities, op. cit., foomote 7.l~tision of ~ European Commumties, op. cit., foomote 2.13*fw~~w ~ be _ comm~~,” ~ ‘*A ~~ F~m -: A Mo~y (J- on ~ EI,KO~ Comm@ly From 1(s fk]egtiOn in

Washin~” No. 51, June 14, 1988, p. 4.


members into one economic unit. The microeco-nomic benefits that would result from a singlemarket-no border delays, greater efficiency thanksto larger markets, and more effective competition-would be multiplied by a single currency. Amacroeconomic gain could also be achieved. Withmonetary policy no longer under national politicalinfluence, reckless spending would give way tofinancial stability and lower inflation.

The EC summit meeting in Madrid in June 1989will review the report and recommendations of ECcommittees studying monetary policy. Since thecommittee is headed by France’s former FinanceMinister Jacques Delors, who has just been reap-pointed to the EC Presidency for another 2 years andis the prime driver in the movement toward 1992goals, it is anticipated that the meeting will recom-mend a central bank and a common currency.

Value-Added Tax-One of the biggest problemsthe EC will have to overcome is the wide variance inmember nations’ value-added tax (VAT) (similar toa sales tax). Current variations range from O to 33percent. In a frontier-free economy, this variationwould allow citizens to go shopping across theborder where prices were cheaper. The EC hasproposed two bands of VAT: a standard rate of 14 to19 percent and a rate of 4 to 9 percent for“necessities.”

Conclusion

“Fortress Europe’’—Many Americans fear that1992 will mean a “Fortress Europe’’-impenetrableto outside competitors. Europeans officials loudlyproclaim “No!” “If Europe is strengthened inter-nally,” says Lord Cockfield, “there will be less fear,less need for trade protection, not more.”14 “We areeach other’s biggest and best customers,” says ECCommissioner de Clercq. However, accompanyingthose reassuring words is an underlying messagethat Americans should heed—because the Commis-sioner goes on to say: “The Community . . . willactively share (benefits) with those who are willingto cooperate with us."15 The downside of 1992 isthat Europe intends to be stronger, more competi-

tive— a potent rival in world trade and a hardnegotiator in trade talks. Reciprocity will be a key todealing with the Europe of 1992.

The United States is currently the EC’s largesttrading partner-about $133 billion in 1986, $53billion of which consisted of American exports tothe EC (double the value of American goods sold toJapan). However, Americans are still wary ofpotential European protectionism. Alfred Kingon,U.S. Ambassador to the Community cautions:“When I speak to EC leaders, I receive reassurancesthat the Community will not become ‘FortressEurope’. But when I hear talk of ‘nurturing’ indus-tries, I become concerned.”16

U.S. lndustry-Segments of U.S. industry aregearing up for 1992. Giants like IBM, Ford, andAT&T have set up planninggroups to developstrategy. As things stand, both their subsidiaries inEC countries and teaming efforts with Europeancompanies place them in a strong position-IBMhas subsidiaries in every EC country; Ford operatesassembly plants in six European nations; and AT&Tis in partnership with Olivetti of Italy, Philips in theNetherlands, and Telefonica in Spain. Inside-Europesales by U.S. subsidiaries dwarf U.S. exports toEurope: $500 billion in 1987 compared to $75billion in U.S. exports to Europe. They are ready toseize the opportunity to sell to this unified market of320 million people. On the other hand, the “smaller”American companies will feel the competition, asthe European companies grow larger and strongerthrough mergers and acquisitions and expand their“target” areas, venturing into countries previouslyclosed to their sales.

U.S. companies’ ability to compete with a unifiedEurope-and Japan-in global markets will requirenew attitudes and strategies. In an intense interna-tional economic competition, technological isola-tionism is not an option. Markets are becomingincreasingly international and information flowsworldwide despite restrictions imposed by govern-ment or industrial organizations. A recent study bythe National Academy of Engineering (NAE)17

suggested that better focused efforts are needed for

l@~tfig si~~ BMIy on Unity,” Christian Science Monitor, June 27, 1988, p. 10.

IS’’U,S. Begins Asscssing Impact of 1992 Deadline,” Europe, May 1988, p. 15.le~w~ R@ C~UI@,” Timc, Apr. 18, 1988, p. 55.

ITN~@ ~~~y of En@cr@ ~ Offke of IrItcmational Affkirs, “Stm@cning U.S. fi-g ~ @ ~~rn~on~ COOPCfi~: s-eRccornrncn dationa for Action. ” (Washington, DC: National Research Council, 1987).

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Appendix G-European Organization and Policies for Research and Technology . 123

the United States to remain a leader in worldmarkets. There needs to be a new level of interna-tional collaboration on technological issues and anincreasingly international outlook of major corpora-tions. Once again, it is the small and medium-sizedcompanies that are at a disadvantage. Most of themlack the resources of large companies for accessinginternational markets and technical developments.“Banding together” must become commonplace-and government policies must be set to encouragethis process.

U.S. Government-Industry alone cannot be re-sponsible for U.S. international competitiveness. Ina 1988 report, an NAE committee on technologyissues that affect international competitiveness18

outlined several areas in which U.S. Governmentpolicies must respond to the global challenge. Theremust be, the committee said, a reassessment of theFederal Government’s role to support and enhanceU.S. competitiveness. There must be governmentpolicies that stimulate industry to create new prod-ucts and improve productivity. A climate must becreated for the early development of innovativetechnologies, as well as for promoting industryconsortia and joint government/industry/academiacooperation. In a 1992 environment, U.S. protec-tionist policies will only hamper U.S. efforts in anincreasingly competitive global market.

U.K. POLICY FOR RESEARCHAND TECHNOLOGY

Background

Civil v. Defense R&D Trends

Throughout 1986 and 1987, the U.K. *S policiesfor R&D were subjected to intense scrutiny by theBritish Govemment, Parliament, industry, and thescientific community. In mid-1987 the governmentpublished its plans for sweeping changes in themanagement and funding of R&D in the UnitedKingdom, including a restructuring of universityscience programs.

19 The proposal, which p1aced a

strong emphasis on exploiting the economic poten-

tial of research, were drawn up after sharp criticismearlier that year from a House of Lords SelectCommittee of the Government’s $9 billion annualR&D effort.20 (Note: Funding levels are given inUS$ with an exchange rate of US$l.89/l poundsterling.) The Lords said that the R&D strategylacked coordination, particularly in the way researchwas applied to industry. If the advance of scienceand technology were to restore and sustain economicgrowth and prosperity, they said, its promotionshould be a central objective of government policy,with the impetus coming from the Prime Minister.

As reported in the 1987 Annual Review ofGovernment Funded R&D issued by the CabinetOffice,21 the Ministry of Defence spent 52 percent oftotal government R&D in the year 1985/86. Thishigh proportion of total R&D dedicated to defensehas generated widespread concern among econo-mists and industrialists of all parties that defensemay be crowding out valuable investment in the civilsector. In its 1987 Defence White Paper** thegovernment noted this concern and announced thatit would, over the next few years, take a closer lookat defense programs with a large R&D element toensure that government funding was essential.Significant reductions in funding could, therefore,be expected in 2 to 3 years as defense R&D becamemore efficient and competitive-and as Britainreduced its duplication of Allies’ research effortsthrough greater collaboration. The aim would be torelease more government money to support the civilsector, in both industry and academia.

Beside the need to transfer R&D funds fromdefense to the civil sector, there was also a cleardesire both in government and industry for greatercivil spin-off from R&D carried out by the govern-ment’s Defence Establishments. Several initiativeshave been introduced, both to exploit technologieswithin the Establishments for the benefit of the civilsector, and to offer selected facilities for use byindustry.

In implementing its new R&D policy, the BritishGovernment sees two challenges: 1) to target

18N~on~ kadutty of @imring, “The Technologhd Dimensions of Irtternadcmal Compuilhwmcss” (Washington, DC: 1987).I%’Civil Research and DcvelopmcnL” Cmnd 185 (Imndon: Her Majesty’s Staticmery Offhx, July 1987).~’ci~] R=~h ~d ~e]vat: Rem of the sel~t Commjw on &jc~ ad TLX~logy,” WY]. I (n 20-1), British parliament, HOUSC Of

brds, November 1986.21’’1987 AIMNMI Review of GOVCI-IUDCIM Funded R&D,” Government Statistical Semice, united Kingdom, 1987.22”s1atemcnt of the Defcnec Estimates 1987,” CM 101-1 and 11 (London: Her Majesty’s Stationery Office, 1987).

.


scientific and technological resources without con-straining individual creativity; and 2) to coordinateparallel R&D programs without divorcing themfrom the individual objectives they are meant toserve. The new policy has been given an impetus bythe government’s acceptance of two principles: 1)the collective ministerial consideration, under thePrime Minister’s leadership, of science and technol-ogy priorities; and 2) the creation of an independentadvisory body to comment, not only on Britishscientific and technological endeavor, but on inter-national efforts as well. The government’s aim is toharness Britain’s total R&D resources, both civil andmilitary, in a science and technology program thatwill enhance both the U.K. economic growth and itsdefense capability. To assure value for money, agovernment committee will coordinate and overseethe more-or-less independent civil and militaryprograms.

The 1987 Annual Review of Government FundedR&D reflects the status of departmental plans as ofJuly 1987. It does not take into account the changesagreed during the Public Expenditure Survey held infall 1987; these changes will be reflected in theforthcoming Public Expenditure White Paper.

Total spending in 1985/86 was $8.5 billion, ofwhich 52 percent was spent by the Ministry ofDefence (MoD). Civil spending was $4.1 billion,over half of which was in the Research Councils anduniversities. Civil Departments, such as the Ministryof Agriculture, Fisheries and Food, the Departmentof Energy (including the U.K. Atomic EnergyAuthority), and the Department of Trade and Indus-try (DTI) accounted for less than 22 percent ofspending on R&D. Government R&D expenditurewas 2.9 percent of total Government expenditures in1985/86. Compared with 1984/85, the final figurefor 1985/86 was 6 percent higher in current prices;spending on defense R&D was 7.5 percent greater,compared with a rise of 4.4 percent in civil R&D.

The $8.5 billion government expenditure on R&Din 1985/86 is expected to increase to $9.2 billion incash terms by 1989/90. Total civil spending isexpected to increase by 12.8 percent to $4.65 billion,and defense by 2.9 percent to $4.55 billion. How-ever, these are net reductions in real terms, withdefense R&D spending programmed to fail by 10

percent and civil by 5 percent in constant value. Inthe 1988 Defence White Paper23 the total defenseR&D expenditure for 1987/88 was given as $4.43billion, with the following breakdown:

Research Development

In-house . . . . . . . . . . . . . . . . . . . $0.48B SO.89BContracted out. . . . . . . . . . . . $0.28B $2.79B

Total . . . . . . . . . . . . . . . . . . . . SO.76B $3.68B

The “push” in government for a more evendistribution of government R&D funds betweenmilitary and civil sectors has come from Mr. JohnFairclough, Chief Scientific Adviser to the Cabinet,with support from DTI. But in recent years awidespread view among economists, industrialists,and politicians has been that, compared with manyother countries, Britain directs too large a share ofthe R&D funds to a relatively small sector, defense.Their main arguments are that those countriesspending least on defense R&D have prosperedmost—Japan, West Germany and, to some extent,Italy. Although France and the United States directa high share of government R&D into defense, theyare seen as richer countries anyway, also spendingmore on civil R&D. The second concern, as the 1987Defence White Paper puts it, is that Britain’s pool ofscientists and engineers is “ . . . not inexhausti-ble. . . ,“ and”. . . it would be regrettable if defencework became such a magnet for the manpoweravailable that industry’s ability to compete in theinternational market for civil high-technology prod-ucts became seriously impaired. ” Some believe thathas already happened.

The Levitt Report in 198524 found a perversecorrelation between defense procurement and pro-ductivity: in the electronics components sector,which in the United Kingdom depends very little onmilitary sales, productivity was rising quickly, whilein the radio, radar, and electronics capital goodssector, which does depend on military sales, produc-tivity growth was negative. It also found that theinflation rate for defense procurement was signifi-cantly higher than the national rate of inflation—even for dual-purpose products like oil and non-military vehicles. Other analyses of the benefits (orlack thereof) to the British economy from expendi-tures on defense R&D reached broadly similar

236cStmmt of h wf~ atimties 1988” (bndon: Her Majesty’s Stationery Offke, 1988).Z4M. S. ~vltt, 4%C ~mmics of Defcnce Spending,” National Institute for Economic and Social Research, London, 1985.

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Appendix G-European Organization and Policiesfor Research and Technology . 125

conclusions. The essential point is that, of the $4.55billion spent on defense R&D, only $0.75 billionwas spent on research as opposed to development—and much of defense R&D was thought inherentlyunsuitable for civilian use. Most defense R&D led toproduct innovation, while much of the innovation onwhich civilian industry depended was in improve-ments to manufacturing processes; it was mainlythrough process improvements that companies com-peted to achieve price and/or quality advantages.

House of Lords Select Committee Report

The comprehensive report by the Select Commit-tee on Science and Technology of the House ofLords focused on civil R&D. Specifically, a sub-committee was set up to consider “the policy andpractice of public support for civil science andtechnology in the United Kingdom,” with four mainareas of inquiry:

1. the organization of civil R&D;2. sources of funds for basic, strategic and

applied R&D;3. the working of the customer/contractor princi-

ple; and4. the civil implications of defense research.

Although it had no charge to analyze the manage-ment of defense R&D except for spin-off, the SelectCommittee Report embraced the “annual” or“whole” national R&D effort, which must includethe defense element.

The report described the central weakness o fBritain’s annual R&D effort as its fragmentationand lack of coordination, with flagging moraleamong scientists and a low level of public interest inR&D-particularly in the City (London’s “WailStreet”). The committee called for companies todisclose their R&D investments to encourage “fi-nancial interests to take R&D strength more intoaccount when weighing a company’s future pros-pects.” The report recommended that a CabinetMinister should take responsibility for the nationalR&D, with a central body to coordinate the wholeeffort and that a new source for public funding ofR&D should be introduced to supplement presentmechanisms. The new source would finance “strate-gic” research, which was defined as that undertakenwith eventual applications in mind-even whenthese could not be clearly specified. Only in the1980s had such research been identified as a distinctcategory, funded as if it were basic research, with no

specific application in mind, through a dual-supportsystem involving the science budget of the Depart-ment of Education and Science and the UniversityGrants Committee. -

The Lords urged a third route “for funding thatstrategic research which is of most significance tothe United Kingdom’s economic future.” But theyalso saw the Research Councils and GovernmentDepartments, as proxy customers in non-com-mercial fields, retaining responsibility for somestrategic research. They also criticized the researchcommunity’s own efforts to evaluate the perform-ance of research, finding its approach “less scientificthan the science and technology it is designed toassess.” The Committee suggested that about 1percent of all government R&D funds should bespent on evaluation, which must be approached as adiscipline, and not as a threat.

Among the 39 conclusions and recommendationsof the Lords’ report were the following:

The advance of science and technology, whichis essential to the economic recovery of thecountry, must be a central objective of govern-ment policy.Anew impetus is needed to raise the morale andfocus the effort of the scientific community andindustry. This requires action at the highestlevels of government.Neither government nor industry is spendingenough on R&D to restore Britain’s industrialposition in world markets.Departmental policies and spending on R&Dmust be looked at horizontally across the wholeof government, in addition to the traditionalvertical look by individual Departments.A Cabinet Minister should be designated to beresponsible, under the Prime Minister, for thescience and technology dimension of govern-mental policy and the promotion of nationaleffort in R&D.A Council on Science and Technology (chairedby the Prime Minister) should be established,with the designated Minister as deputy. ItsSecretariat should be located in the CabinetOffice under the Chief Scientific Adviser. Itwould oversee the whole of scientific andtechnological endeavor.The five Research Councils should as far aspracticable harmonize their administrative pro-cedures, criteria, and approaches and work


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more closely on corporate planning, marketingof results, and external relations.Strong management and clear decisions aboutpriorities between Research Councils are es-sential in present circumstances.The customer/contractor principle for R&Dfunded by government departments is en-dorsed.Beside the dual-support system and the cus-tomer/contractor principle, a third method ofpublic funding of R&D is required. To this end,a process should set in motion to fund thatstrategic research of most significance to theUnited Kingdom’s economic future.The government should assist in funding theprocess for generating strategic research inexploitable areas of science, and should makenew pump-priming funds available for researchgenerated by the process.Any other initiative to ensure that the govern-ment’s R&D funding makes a greater contribu-tion to the economic well-being of the countryis to be welcomed, but it must be adequatelyfunded and its relationship with exploitableareas of science must be clarified.The Science and Technology Assessment Of-fice (STAO) is welcome to carry out itsassessment function, as well as to evaluate theoperation of the exploitable areas of science.Approximately 1 percent of all governmentR&D expenditure should be devoted to evalua-tion.Closer links between government ResearchEstablishments and Research Council Insti-tutes, adjacent universities, and polytechnicsare desirable.Civil and defense R&D budgets should nor-mally be recorded separately. The size of eachshould be determined by the civil and defenseprograms which it supports. A thorough exami-nation of defense R&D expenditure should bean early task of STAO and the proposedCouncil for Science and Technology.The Committee welcomed recent initiatives toimprove the effectiveness of defense procure-ment, reduce R&D costs, and increase spinoff,and recommended that further efforts be made

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to pursue the industrial opportunities for ob-taining more civil benefit from defense R&D.The security classification of the results ofdefense R&D should again be examined with aview to introducing a more liberal policy.Further, a more detailed annual report on theresults of defense R&D should be published.The committee recommended a high profile forscience and technology, dynamic leadership atthe center, and a new approach to fundingR&D.

The Lords’ report has been covered at lengthbecause the British Government has incorporatedmuch of it in its new science and technology policy.Some actions were taken before the committee hadfinished its inquiry, causing the committee to reportthat it had “sometimes felt they have been operatingon a moving staircase.”

U.K. R&D Program Overview

The Politics of Research and Development

The Government’s Response—The governmentpublished its interim response to the report of theHouse of Lords Select Committee in July 1987.25

The 1987 Conservative election manifesto had givenan early indication of the government’s intendedpolicy with the following:

Government support for R&D amounts to morethan 4500 million pounds sterling [$8.5 billion] peryear. It is larger as a share of our national incomethan that of the United States, Japan, or WestGermany. A country of our size cannot afford to doeverything. These resources need to be better tar-geted. The task of Government is to support basicresearch and to contribute where business cannotrealistically be expected to can-y all the risks. Wewill ensure that Government spending is firmlydirected towards areas of high national priority byextending the role of the Advisory Council onApplied Research and Development, drawing on thefull range of advice from the academic communityand business.

All that was missing in the manifesto statement,from what was eventually to become the new policy,was the commitment to fund it and the establishmentof new centers of excellence independent of theuniversities.

“’Civil Reseamh and Ikvelopment, Oovernmcnt Response to the Fmt Report of the House of brds SeIcet Committee on !kienee and Technology,1986-87 ksion” (ImmIon: Her Majesty’s Stationery OffIce).


These components were still missing when thegovernment published its initial response to theLords’ report. However, it did accept the twoprinciples mentioned earlier: collective ministerialconsideration, under the Prime Minister, of scienceand technology Priorities; and advice by an inde-pendent body, which will comment not only on thewhole of British scientific and technological en-deavor, but on international efforts as well. The firstof these two principles was decoded by the press andothers 26 to signify the establishment of a Cabinet-level Committee on science and technology, chairedby the Prime Minister. Although the existence of thiscommittee and its work are probably shrouded in theOfficial Secrets Act, it appears from leaks andgovernment briefings that the committee will havefour

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main tasks:

considering important ad hoc issues, e.g., U.K.involvement in space and nuclear research;considering major policy developments in sci-ence, e.g., the government’s response to theLords’ report;overseeing reviews of particular parts ofgovernment-funded R&D in relation to generalpolicy considerations; andundertaking an annual review of science fund-ing priorities as a major input to the PublicExpenditure Survey process, beginning in1988.

This last task is thought to be particularlyimportant as, for the first time, it appears thatgovernment will scrutinize the level and distributionof its R&D expenditure across all departments. Thenew advisory body will be known as the AdvisoryCouncil on Science and Technology (ACOST), withan independent chairman reporting directly to thePrime Minister.

Soon after his appointment as Chief ScientificAdviser in 1986, John Fairclough established theScience and Technology Assessment Office withinthe secretariat of the Cabinet Office. Its terms ofreference were, broadly:

. to establish a central body that will analyze thecontribution made by each component of gov-

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ernment-funded R&D to the efficiency andcompetitiveness of the economy,

to advise ministers and officials on the shape,content and conduct of the national pro-gram, and

to advise on priorities in spending.

The STAO will complement the activities ofACOST by analyzing data gathered by it. The Lords’Report welcomed the STAO in its own right-andhoped that it would “help evaluate the operation ofthe exploitable areas of science process.” As notedearlier, the Lords had recommended that approxi-mately 1 percent of all government R&D expendi-ture should be devoted to evaluation, having foundthat the research community’s own efforts to evalu-ate the performance of research are inadequate.Throughout all documents consulted in this study,no measure of research quality has been mentionedother than a count of patents or published scientificpapers; in all cases, evaluation of research has beenby subjective peer review.

The ABRC’s Strategy for the Science Base—Published together with the Government’s responseto the Lords’ report was a discussion documentprepared for the Secretary of State for Education andScience by the Advisory Board for the ResearchCouncils (ABRC), and called “A Strategy for theScience Base.”27 The ABRC includes the Govern-ment’s main scientific advisers, as well as represen-tatives from industry and the universities. Althoughthe document did not have unanimous ABRCsupport, there was consensus that British sciencewas underfunded and underdirected, and that re-search was too widely spread. It was also agreed thatuniversities and other institutions in all fields ofexperimental science lacked staff and resources withwhich to compete in the international arena, and thatsome rationalization was needed. Earth sciencesresearch, for example, was distributed over 54departments in 41 university institutions.

The ABRC suggested that the provision forscience in the universities would have to be funda-mentally reordered, and proposed the followingre-categorization:

Z6S1r David phil~lw, *’A str~~ for Scim in h U.K.,” The International Science Policy Foundadon’s 1987 (23rd) A.Mild ktm, Scien@ ~d

Public Policy, February 1988.m~vl~w -d for tk R~h Councils, “A Strategy for the science Base” (London: Her Majesty’s Stationery Office, May 1987).


● Type R: Institutions offering undergraduateand postgraduate teaching and substantial re-search activity across a range of fields.

. Type T: Institutions highly competent in under-graduate and MSc teaching, with staff engagedin the scholarship and research necessary tosupport and develop that teaching, but withoutprovision of advanced research facilities.

● Type X: Institutions providing teaching acrossabroad range of fields and engaged in substan-tial, world-class research in particular fieldswhere they are already preeminent or couldachieve eminence in collaboration with otherinstitutions.

The ABRC did not recommend that such differen-tiation be imposed from above but that, as Sir DavidPhillips, the ABRC Chairman, emphasized:

Significant responsibility will rest on the institu-tions themselves in identifyng their main strengthsand future roles, in developing collaborativearrangements, and in pursuit of the necessary re-structuring. We recommend that the Research Coun-cils should collaborate with and, where appropriate,prompt institutions to bring about appropriate con-centration of research activity.”28

The ABRC also called for interdisciplinary re-search centers associated with Type R institutions,and with the Type X institutions which can make agood case collaboratively. It wanted much of theresearch councils’ support for universities channeledthrough such multidisciplinary centers, which“would each have a positively managed coherentprogramme of work undertaken by a small numberof core staff and visiting teams of researchers.” Itwanted to see Type R and X institutions bidding tohost such centers, and for all additional equipment,materials, technical and support costs to be trans-ferred from the universities to the research councilconcerned. 29

These proposals challenge the universities as nowrun; since the Robbins Report of the 1960s they havebeen seen as equals. Acceptance of the proposalswould mean that Britain could not remain at theforefront of all the sciences. There might be someareas from which the country would have towithdraw altogether at the advanced level—and

someone would have to decide which these were.Until now, priorities for research have been made ona somewhat ad hoc basis; while budgets have beenreasonably constant under the Conservative govern-ment, salaries and the cost of equipment have risen.At the same time, because industry expected agrowing science base to help it compete internation-ally, it had to set some priorities. The ABRCproposed that they and the research councils shouldadopt new common criteria for gauging priorities inscience, taking account of timeliness, pervasiveness,excellence, exploitability, applicability, and signifi-cance for education and training. It also urged theresearch councils to give higher priority to programsof research and research training undertaken collab-oratively with users, to increase the chance ofexploitation and reduce the information gap betweenbusiness and science.

The ABRC document went further. Not only didit call for a wholesale reorganization of Britishscience, it wanted it immediately. “Additional fundswill be necessary to facilitate the necessary transi-tion from a widely distributed university researchbase to a system in which fewer centers are equippedto world class standards, including funds for theestablishment of university research centers and forfurther re-structuring of Research Council institutes.The Government should adopt a business-like ap-proach to this essential investment in re-structuring . . . .If our centers of excellence are to beequipped to compete internationally and to provideU.K. with the support it needs, the centers must beadequately resourced now. They cannot wait for thegradual release of funds from elsewhere in thesystem, as and when commitments can be run downwithin the constrained recurrent budgets.”

In its turn, the government consulted universities,industry, and the various parties involved beforetaking any decisions on the somewhat controversialchanges advocated. The government had alwaysside-stepped policies based on “picking winners” asbeing too risky politically; in this case, the interna-tional scientific community at least appeared toagree on the three broadly-based “winners” ofenabling technology: microelectronics, materials,and information technology.

~lbid.z% utiti Kingdom has five Rcscarch councils: science and En gincuing (SERC), Materials (MRC), Agriculture and Fisheries (AFRC), Natural

Environment (NERC), and Economic and Social (IXRC).


Organizational Aspects of GovernmentR&D Policy

Beside the Cabinet Committee on Science andTechnology described earlier, the government hasmade other changes in the course of implementingits plan for national R&D.

Advisory Council on Science and Technology-As mentioned earlier, in mid-1987 the BritishGovernment established, as the closest advisers tothe Cabinet Committee on Science and Technology,the Advisory Council on Science and Technology tohelp it shape the national research and developmentprogram. ACOST, which absorbed and replaced theAdvisory Council for Applied Research and Devel-opment (ACARD), has an expanded charter to coverthe whole of national science and technology,particularly those areas previously regarded asacademic science, including the life sciences. Itsprincipal roles are to identify areas of science andtechnology that British industry can exploit, and toidentify areas where the government might realizesubstantial savings. It will also advise the govern-ment on the nature and extent of U.K. participationin international science and technology collabora-tions. ACOST inherited ACARD projects alreadybegun, including a 2-year study of the efficiency ofdefense research under the chairmanship of Dr.Charles Reece, and a study, headed by Prof. StanMetcalf, of factors that hinder the growth of smallBritish companies. ACOST’s terms of reference arebroad and should allow advice to be offered to thegovernment in a much more comprehensive andcoherent reamer than has been possible before.

Following the various debates and studies men-tioned earlier, the government made two furtherannouncements in late 1987 as part of its plans forreshaping British science: the creation of a Centrefor the Exploitation of Science and Technology(CEST) and the choice of Cambridge University tohost the first of the government’s University Re-search Centres (URC). Although just a beginning,each illustrated British Government thinking aboutR&D-and each was undergirded by a novel collab-oration among academics.

CEST-First came the establishment of CEST,based at Manchester University. Envisaged as athink-tank, along the lines of the Brookings or

Hudson Institutes in the United States, and with aSteering Committee headed by Sir Robin Ni-cholson, 30 CEST’s role is to help improve Britain’sability to exploit R&D, imported as well as home-grown. Above all, it will back-up the ACOST, whichin turn reports to the CSA, John Fairclough. CESTwas conceived two years ago to bridge the gapbetween industry and the scientific community; over80 percent of its finding will come from majorscience-based companies (18 contributed from 40invited) and the rest from the government. Its taskwill be to encourage research in promising aspects oftechnology where there are commercial opportuni-ties to be exploited for the national benefit. CESTwill not be an agency of either the government or itsuniversity hosts, but will interact directly withindustry and the research community.

The idea has always been that CEST would behosted by a university, but would operate as anindependent center under a strong executive-preferably someone with both academic and indus-trial experience. The successful bidders were aconsortium of seven universities and polytechnicsbased in northwest England, which pooled talents tomake their case; their proposal showed the clearestunderstanding of the purpose of CEST and itsobjectives, and it had strong industrial backing in thenorthwest, CEST’s first Chief Executive is Dr.Robert Whelan, former Marketing Director of PATechnology (and ex-Lucas and Monsanto).

University Research Centres—As “agents ofchange,” the new URCs have a vital role in thegovernment’s plan. Similar in concept to the Engi-neering Research Centers set up in some U.S.universities, they will be laboratories devoted to aspecific scientific opportunity believed to be ex-ploitable within a decade. The idea is to establishand manage a directed research program in a centerof excellence, concentrating resources and expertisein order to create a “world research force. ” It isthought that the Chief Scientific Adviser considersthat Britain must speedily establish 30 to 40 URCsto bring about the changes he seeks in Britishscience. Those changes can be summed up simply asa science base more responsive to society’s needsand wishes.

The disciplines from which the first URCs will bechosen include:

30.4s jo~ Fairdough ‘S pti~ as government CSA, NichoIson laid the foundations fw the government’s new pkns for R&D.


high temperature superconductivity (includingpower engineering);

surface science;synthesis and characteristics of semiconductorsand novel materials;molecular sciences;lasers in manufacturing;engineering design; andprocess simulation, integration, and control.

The National Committee for Superconductivity (ajoint DTI/SERC committee headed by Sir SamEdwards) chose Cambridge University to host thefirst URC because it could demonstrate that no fewerthan five different departments (physics, chemistry,materials science and metallurgy, engineering, andearth sciences) were already collaborating infor-mally on the newly discovered possibilities ofhigh-temperature ceramic superconductors. Al-though CEST played no part in the Cambridgedecision, it is expected to have a vital role in thegrand plan and to help identify the most suitabletopics for other URCs. Fairclough himself wasreported to have believed that the first URC shouldfocus on high-temperature superconductors, seeingit as a good test of academic readiness to break downtraditional barriers and embark on truly multidisci-plinary research programs. According to SERC,Cambridge also won because of its program ofindustrial liaison in the technology, including find-ing, equipment sharing, and staff exchanges withGEC, Oxford Instruments, PA Technology, and theCentral Electricity Generating Board’s researchfacility.

Based in the University’s Cavendish Laboratory,the Cambridge URC will receive $10 million inSERC funding over 6 years and be the leadlaboratory in a three-tier program of governmentsupport, The second tier will include such schemesas the Harwell-based club of companies and OxfordUniversity departments, together with the runner-upfor the first URC. (In early 1988 the governmentfollowed up by announcing a $30 million nationalprogram of research into high-temperature super-conductivity, and sought proposals involving thecollaboration of British industry in “clubs” (orconsortia) to pursue a common objective, withwhich it would match investments.) The third tierwill be smaller university and polytechnic effortsalso funded by SERC.

Coordination of Research Into Information Tech-nology-In May 1988 another part of the govern-ment’s plan was launched, aimed at improvingcoordination of government-funded research proj-ects into information technology (IT). All researchonto IT, whether sponsored by the DTI or SERC, willnow be done under an “umbrella” advisory organiza-tion with an overview of the entire sector, therebystrengthening links between industrial and academicresearchers. This restructuring is seen as placingfurther emphasis on industry’s responsibility forinvesting in product development, while the govern-ment itself is adopting a stronger role in disseminat-ing the results of basic research, and encouragingcompanies to adopt a more adventurous approach tohigh technology.

In addition, the DTI has redirected its support forhigh-technology research towards collaborative Eu-ropean projects, particularly the ESPRIT programfor information technology run by the EuropeanCommunity. As a result, it decided late in 1987 notto repeat the ambitious Alvey research project (seelater Section, “The Alvey Program”), which pio-neered joint research by industry and the universitiesand which still has some on-going projects. Partly asa result of the experience with Alvey, the DTIbelieved there was an even greater need for coordi-nating the government’s approach to high-technology research. Several committees in DTI andSERC, under which electronics research had hith-erto been organized, will now be made redundantunder the new structure. Resource allocation will bedirected by a top-level advisory committee drawnequally from industry and the universities.

Ministry of Defence—A section on the organiza-tional aspects of government-funded R&D would beincomplete without reference to the largest con-sumer, the Ministry of Defence. As the 1987 AnnualReview of Government Funded R&D puts it:

The R&D work of the MoD has the overallobjective of meeting the needs of the ArmedServices for equipment and weapons in a timely andcost-effective reamer. There is a major distinctionbetween the objectives of research and developmenthowever. The research programme is aimed atsustaining an underlying basis of scientific andtechnological expertise on the basis of which supportcan be given to the selection, development, produc-tion and operation of weapon systems and equipment, and assessments can be made of the likelyfuture evolution of the threat and options for


countering it. It contains no element of basic,curiosity-driven research. In contrast, developmentis directly related, item by item, to the procurementof specific military equipment and is the essentialforerunner to the production of such equipment.31

With regard to defense research, the Reviewcontinues:

The research program is undertaken both in MoDestablishments and as funded research in industry,research institutes, the universities and other institu-tions of higher education. The contributions of theseseparate sources are brought together into a coherentprogramme through an integrated managementwithin which responsibility for specific major fieldsis delegated to the relevant Research Establishments.Overall the research programme may be character-ized as follows:

1,

2.

Strategic Research. [A]imed at strengthening andextending the scientific and technological basefor future exploitation, which is broadly aimed atknown military needs. This is maintained at alevel equal to at least 5 percent of the Defencescientific effort available to them.Applied Research. This is work which is directedprimarily towards equipment projects in 5 to 10years’ time and absorbs the largest part of theResearch Establishment effort . . . .

The Review goes on:

The research programme covers a wide range ofscientific disciplines and technologies. Prioritieswithin it are reviewed annually having regard for thelargest assessment of Service needs, the timescalesof application opportunities, and the varying pros-pects of making significant technological progress indifferent fields. . . It is the Ministry’s longer termobjective, however, to reduce its involvement inwell-established technologies where there is a sub-stantial capability in the private sector.

The major fields of research referred to above arelisted in the Review as follows:

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Air Vehicles, Aerodynamics, Structures andMaterials;Gas Turbines;Navigation and Avionics;Space;Ships and Submarines, Signature Reduction,Human Factors;Ships Systems;

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Undersea Warfare and Countermeasure Sys-tems;Rocket Propulsion, Explosives and WeaponsMaterials;Conventional Weapons, Armaments and Com-mand and Control;Military Vehicles and Army EngineeringEquipment;Chemical and Biological Defence;Guided and Air-launched Weapons;Tri-Service Electronic Systems;Electronic Components; andElectronic Technology.

The reduction in defense R&D for which thegovernment and others are pressing is likely to arisefrom:

increased collaboration, in R&D as well asproduction, with European allies and theunited states;increased competition in British procure-ment—new MoD contracts are now beingawarded on the basis of either competitivefixed-price bids or a maximum-price arrange-ment; andmore R&D being contracted out to the privatesector, and possibly carried out at privateindustry’s expense, i.e., getting industry toincrease its contribution to the cost of R&D.

The MoD Research Establishments have beenreduced in number from 22 to 7, with a workforce ofabout 22,000 compared with more than 30,000 tenyears ago. One third of their total research in nowextramural (contracted out to industry), and thattrend will accelerate. In return, British industry islooking for tax incentives.

Military/Civil Trade-Off

Several of the documents referred to in thissection have stressed the need to redress the balanceof government funding between civil and militaryR&D, and secure greater benefits for the civil sectorfrom technology developed under defense R&Dprograms. Several initiatives have been taken by theBritish Government in pursuit of that objective,including a study into the role and status of theResearch Establishments.

31BritiS&I p~h~cn~ House of hinds, op. Cit., fOOtnOte 20.


Technological advances initiated for defense pur-poses have been exploited successfully by civilindustry in fields ranging from new materials andelectronic devices to advanced aerodynamics withapplication to civil aircraft and jet engines. The MoDResearch Establishments interact with industry andthe civil sector in four main ways, as described bythe 1987 Annual Review of Government FundedR&D: 32

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Some $285 million of research work is carriedout under contract to industry and the academicsector, with the MoD joining with the ResearchCouncils to make grants to institutions ofhigher education for work of high scientificmerit that is relevant to defense.The Defence Research Establishments carryout some $83 million of work a year funded byother government departments for civil pur-poses. Much of this is complementary todefense work and uses the same staff andfacilities. A further $43 million of work is donefor other paying customers, including the use offacilities by industrial firms for both defenseand civil work.Much of the work carried out in the DefenceResearch Establishments is relevant to civil aswell as defense technology. The Alvey pro-gramme and the British National Space Centre,in both of which the MoD is a major participant,spearhead work across the civil/military dividein their respective areas. The MoD consultswith industry and with other government de-partments on the scope for collaborative re-search programmed (e.g., the research initia-tives in electronics at RSRE Malvern). TheMoD will be a major participant in the LINKprogram announced by the Prime Minister inDecember 1986 to “pull through” innovativework into industry.Defense-related work may have commercialapplications. To further such work, the MoDhas assisted in establishing Defence Technol-ogy Enterprises (DTE) Ltd; a privately owned,profit-motivated company, established specifi-cally to assist industry in identifying, develop-ing and exploiting work carried out at the major

Research Establishments, to which the com-pany has access under suitable safeguards.Where ideas are not immediately transferableto civil applications, DTE may arrange furtherdevelopment. It operates at four Establish-ments-RAE, RSRE, ARE, and RARDE.33

There are now some 500 items on the DTEdatabase judged to have potential for exploita-tion, and DTE has recruited some 180 compa-nies as associate members. Fifteen licenses forexploitating innovative technology have beennegotiated, or are in the final stages of negotia-tion. As a further initiative directed to enhanc-ing spinoff, work has been done on the idea ofestablishing a “science park” adjacent to one ofthe Research Establishments. This idea iscurrently at the feasibility stage.

A different kind of collaboration is the jointventure between an Establishment and a privatecompany, as epitomized by the July 1986 agreementbetween CumminsInternational and RARDE. Cum-mins manufactures diesel engines, and wanted toenter the international tank market; RARDE hasfirst-class facilities for testing tanks. Under theagreement, Cummins will provide engines valued atabout $470,000 in return for a RARDE test programof similar worth.

Another initiative recently publicized is the CivilIndustry Access Scheme, whereby MoD will allowcompanies to use its research equipment and for a feeconsult experts at four of its major centers. Thecenters are RAE, RSRE, ARE, and RARDE. Thenew scheme, to be operated jointly by both MoD andDTI, is aimed at British companies, but applicationsfrom foreign firms will also be considered.

Perhaps the most controversial option in thegovernment’s review of the future of the DefenceResearch Establishments is to privatize them. Sixnon-nuclear Establishments are being studied forpossible change to commercial status: ARE,RARDE, RAE, RSRE, A&AEE,34 the ChemicalDefence Establishment, and (possibly) the Meteoro-logical Office. The options appear to range fromsimply putting an “agency” label on the Establish-ments to full privatization. The MoD team conduct-

32Ibid.

33RAE_~0y~ MA Es~lis~ent; RSRE-ROyd Signsls and Rsdiu Establishment; ARE-Admiralty Research Establishment:RARDE-Roysl Armament Rcgcarch and Development Establishment.

34/&f@&/&mpl~e and Armament Experimental Establishment.


ing the study on behalf of the Controller Establish-ments, Research and Nuclear (CERN) is due toreport to the government in June 1989. Privatizingany of the Establishments should immediatelyreduce the cost of defense R&D, at least until theproper “commercial” rate is applied. Full privatiza-tion that entailed outright purchase would immedi-ately raise questions about the Establishment’sability to act as a neutral technical adviser inassessing competitive proposals, as well as itswillingness to sponsor fundamental and intermedi-ate research where the returns are too distant to becommercially attractive.

Collaborative R&Din the United Kingdom

DTI’s Role

A White Paper (Cm 278) described the role of DTIin encouraging enterprise, one of the major eco-nomic goals of the government.35 It set out the mainpolicies of the DTI and announced changes both inthose policies and in the organization of DTI. Oncollaborative research the DTI “will encourage theparticipation of U.K. companies in technologicalcollaboration with other European firms and re-search communities, including programs such asESPRIT and RACE.” (The DTI uses “collaboration”in a national context to include intercompany andindustry-university ventures. )

The White Paper continued: “There are four mainways in which DTI, with other government depart-ments in some cases, will encourage and financecollaborative research:

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LINK encourages companies to undertake jointresearch with Higher Education Institutions(HEI) and Research Councils. The research willbe precompetitive but industrially relevant.Programs currently under preparation includenew technologies such as nanotechnology andindustrial measurement systems.National collaborative research programs pro-mote longer-term, industrially led collaborativeprojects between U.K. companies in advancedtechnologies. DTI’s role is to help establish thecollaborative links both between firms andbetween firms and the research community atthe precompetitive research stage. Once thoselinks are established, decisions on further

collaboration and commercial exploitationshould be taken by industry itself. DTI, withadvice from its Technology RequirementsBoard, is currently running collaborative pro-grams in such advanced technologies as robot-ics and gallium arsenide. A new program onsuperconductivity is now being launched,linked with initiatives by the Science andEngineering Research Council,General industrial collaborative projects en-courage collaboration through a variety ofprojects. Some foster R&D serving the interestsof fragmented industries where small firmstypically do not have the resources for ad-vanced technological projects; Research Asso-ciations that pool resources can meet thoseneeds. Some encourage the adoption of tech-nology originating in the science base, particu-larly in the government’s research establish-ments. Some are collaborative projects involv-ing only industrial participants in joint researchfor companies with similar interests, especiallysmall and medium-sized companies.

According to the White Paper: “In the future DTIwill only contribute funds to research which wouldnot and could not go ahead without some supportfrom the taxpayer. It will normally be DTI’s policyto fund any particular project or area of work onlyover a specific time period and where appropriate toreduce the rate of funding over time. Companiesthemselves are expected to become aware of thebenefits which collaborative arrangements can bringand to undertake collaborative research withoutGovernment tiding.”

On Information Technology, the White Paperstated that: “Within the context of the policiesoutlined above, the Government have consideredwhether the proposals in the report of the IT86Committee should be included amongst the nationalcollaborative programs. The Government have al-ready agreed to support ESPRIT H, for which therewill be a U.K. contribution through the Communitybudget of the order of [$380M]. The Governmentalso recognize that the Alvey Programme hasprovided a good focus for the IT research commu-nity, which has helped to bring together differentparts of industry as well as industry and the HEIs.

35_mt of Trade and Industry, “DTI—The Department for Enterprises,” White Paper Cm 278 (London: k Majesty’s Stationery office,Janumy 1988).


The involvement of secondees from industry, acade-mia and the Government departments involved hasalso proved successful and has assisted U.K. organi-zations to participate fully in ESPRIT. The Govern-ment nevertheless accept that some resources shouldbe devoted to a national initiative complementary toESPRIT, within the framework of the nationalcollaborative research programme. . . "

From 1988 the Directorate will be known as theInformation Technology Directorate, not Alvey, andits program reoriented towards precompetitive re-search. The DTI has earmarked $55 million over thenext 3 years (1988-90) for IT programs, and SERChas plans to devote $104 million over 5 years torelated academic research, mainly in partnershipwith companies. As mentioned earlier, all IT re-search will now be done under a joint DTI/SERCumbrella advisory organization with an overview ofthe entire sector.

The Alvey Program

The Alvey program was Britain’s response to thenational program that Japan launched in 1981, aimedat developing a so-called fifth generation of comput-ing systems. The Alvey Report of 1982, whichpersuaded the U.K. Government to launch theprogram, assumed it would take at least a decade tomeet the program’s objectives. Launched in 1983,the Alvey Program focused on four “enablingtechnologies” thought to be crucial: very large scaleintegration (VLSI); software; man-machine inter-face; and intelligent knowledge-based systems.Three government departments-MoD, DTI, andSERC (for the Department of Education andScience)-jointly sponsored a common $375 mil-lion, 5-year program under its own directorate, withindustry contributing another $285 million.

The 5-year program in Information Technology isnow coming to a close. All the funds have beencommitted to over 200 industry-led projects, typi-cally with two or three firms and one or twoacademic teams working together on each project.Over 110 firms have been involved in the actualresearch projects, and another 200 on the “aware-ness” side. The academic world was broadly repre-sented with 56 universities and 12 polytechnics,

together with 24 U.K. Research Associations orGovernment Research Laboratories.

Alvey-generated VLSI technology is being ap-plied to fabricating integrated circuits, as well asmemory chips offering switching speeds compara-ble to U.S. and Japanese products. A major achieve-ment of the Alvey Software Engineering Program isthe success with which “Formal Methods” from theacademic world are being applied to industrialproducts. Widespread use of these Formal Methodsmay revolutionize software writing, with considera-ble economic benefit. Projects for artificial inteilli-gence/knowledge-based systems, systems architec-tures, and man/machine interfaces have led tosignificant advances, owing to collaboration be-tween industry and academia. Plans for commercialexploitation exist for about half the projects; for theothers, it is still too early to judge. Beside the fourenabling technological areas already mentioned, theAlvey Program supported four large scale demon-strators, with the aims of stimulating enablingtechnologies for practical applications, and visiblydemonstrating the exploitable results of the pro-gram.

Having generated a research strategy based onmulti-departmental funding, the government willcontinue to fund IT research based on the sameprinciples for which Alvey was the model. As wasmentioned above, the Directorate has been renamedand the name Alvey has been dropped.

Lessons from the Alvey Program and its relation-ship with ESPRIT have been documented in detailin an Interim Report of the Evaluation of the AlveyProgramme b Y a joint team from Sussex andManchester Universities.36

U.K. Collaboration on Advanced Research

The U.K. ’S policy to support fully Europeancollaboration, both in civil R&D and major militaryprojects is well documented. The U.K. Government,and industry in general, are firm supporters ofcollaboration among European high-technologycompanies, academia and research institutes. Theheightened sense of concern in Europe about itstechnological future is attributable to three factors:the sheer breadth and scale of the impact ofinformation technology; the growing perception of

MK4 Guy, M. Ho~y, R. DUWO&, H. Cammm, T Ray, and L. Gcoghiou “btcrim RcpoR Of the Evaulation of he ~veY M-C” (~~~:Defense Tcdmical Inatiturc$ October 19s7).

Appendix G—European Organization and Policies for Research and Technology . 135

advanced technology in strategic terms and the needfor self-sufficiency; and the severe “structural”handicaps to Europe’s international competitive-ness. Collaboration has become an accepted way oflife among the high-technology community withinthe United Kingdom and the other European indus-trial countries. Put simply, no country can nowafford to go it alone on all scientific fronts; it mustcollaborate or retreat from some or all of the worldtechnological state. That point is well accepted in theUnited Kingdom.

FRENCH POLICY FORRESEARCH AND TECHNOLOGY

Background

The administration of government funding forFrench R&D is highly centralized, though civil anddefense R&D are budgeted and administered sepa-rately. Innovation and exploitation are encouragedby an elaborate system of aids and incentives;economic growth is sought through market-driventechnology; and officials affirm that defense R&Dshould enrich the overall economy with scientificand technical progress for non-defense. Policies fornationalized firms and the government-supportedresearch system are incorporated in long-term plansfor R&D and innovation, with relatively specificpriorities and goals. Science and technology policies(especially technology) are also integrated wher-ever possible with the government’s industrial andbroader economic policies.

The Law of 15 July 1982 established guidelinesand a system of planning for French research andtechnological development; it also legislated theintroduction of the High-Level Research and Tech-nology Council (CSRT) to advise the Minister ofResearch and Higher Education (responsible to theMinister for Education) about the government’smajor scientific and technological policy options.37

The Law on R&D38 stipulated that the Ministershould present to Parliament each year “a report onresearch activities and technological developmentwhich outlines the strategic choices for nationalpolicy and illustrates the progress made towards

achieving the objectives fixed by the Law . . . “(Article 16). The Law also stipulated that “[t]heHigh-Level Research and Technology Council shalldeliver an opinion each on the evaluation of researchand technological development policy. The opinionshall be published. It shall be attached to the reporton research and technological development speci-fied by Article 16 of this Law” (Article 18).

The basic aim for French Government R&Dpolicy is to stimulate rapid science-based economicgrowth, with key, technologies assigned priority ineither national or collaborative programs. In thePreface to the first Annual Report (pursuant to theabove Article 18), the Minister saw the draft 1987R&D Budget Plan as an essential element inrelaunching and reviving the French economy. “Thefield of research and technological development is afundamental component of that policy, becauseresearch and technological development are seen byeveryone as being a powerful factor for the long-term development of our economics and providinga decisive advantage in present-day economic com-petition worldwide. The policy I am pursuing in theresearch sector is based on one absolute principleand requirement-evaluation. In my view, it isimpossible to define and implement a researchpolicy with relying on means of evaluation. It wouldbean illusory and irrational misuse of public moneyif a number of ambitious, not to say over-ambitiousquantitative objectives were fixed in advance with-out providing for a critical analysis of the substanceand repercussions of the measures envisaged.”39

The Minister also promised to review the centraladministrative structure of the Ministry for Researchand Higher Education, and to review the activities ofthe government research organizations. He reportedthat, despite budget stringency in 1987, majorscientific investment projects had been maintainedand their funding assured, allowing basic research todevelop within “a modernized technical frame-work.” At the same time, the Minister noted “theneed to develop industrial research in France” and“to make a very serious evaluation and re-evaluationof the relevance and cost of projects conducted by


the many different intermediaries, whether researchagencies or particular research organizations."40

R&D Budget Structure

Funding Levels and Priorities

The French Government issues 5-year nationalplans. Its policies become laws when the particularplans are approved by Parliament. The annualbudget law is programmed for Parliamentary ap-proval in January when “credits” or outlays are votedfor the spending departments.

When the 1985 5-year plan was being prepared,the CSRT stressed the importance of regular evalua-tion of research activities; it also specified theprinciples and criteria of evacuation, particularly theindependence and transparency of evaluation re-sults. The law gives the CSRT the power, to considerhow well the evaluation process has been conductedand to draw appropriate conclusions. Because thereis no precise, operational evaluation system, CSRTconfined the scope of its first annual report toselected areas outlined by the Research Committeefor the 9th Plan, namely: industry research; scientificposts; research and the universities; the role of theregions; evaluation and forecasting.

Although a budget analysis41 shows civil R&D tobe decreasing as a percentage of government-fundedR&D [Effort Budgetaire de Recherche et Develop-pement (EBRD)], actual expenditures have beenfairly constant since 1985. There is, however, anapparent budgetary shift from civil to defense R&Dexpenditures in the 1988 R&D Budget. Comparedwith other sectors of government expenditure, R&Dfunding has actually fared well in the 1988 budget,with an increase of 8.3 percent (+10 percent fordefense and +7.2 percent for civil), compared to anaverage of +3 percent for all ministries. Govern-ment-funded defense and civil R&D was split 39/61percent in 1988, compared with 33/67 percent in1985. Defense R&D, at about 26 percent of thedefense equipment budget, has risen to support theprogrammed increase in defense equipment expen-diture for 1987 to 1991. About 50 percent of defenseR&D funding is spent with industry, accounting forabout 70 percent of total state R&D funding forindustry.

The civil component of the EBRD, the BudgetCivil de Recherche et Developement (BCRD), (i.e.,the civil element of the EBRD less telecommu-nications and university staff costs generally attrib-utable to research) shows an increase of 7.2 percentfor 1988, owing to the inclusion of expenditure onEuropean collaboration and the loss of income dueto the research tax credit system. As part of totalgovernment spending on R&D, European collabora-tion naturally belongs in the EBRD, but the programcosts are not attributable to specific ministries’budgets. The civil R&D budget, for 1988 wasFF39.3 billion, an increase of 2.3 percent over 1987.Of this, approximately 70 percent was to be spent onthe following organizations and programs:

Centre National de la Recherche Scientifique—FF8.96 billion on general research. Manylaboratories are located on university cam-puses.Centre de la Energy Atomique (CEA)-FF6.65billion on atomic energy research.Centre Nationale pour l’Exploration de laSpace (CNES)-FF5.43 billion on space-related research, including finding the Euro-pean Space Agency.Aeronautics Program-F F 2 . 4 9 b i l l i o n .Filière Electronique (electronic components)—FF1.99 billionINSERM (medical, health, biology)--FFl.92billion.

This heavy commitment to Government ResearchEstablishments makes it difficult for the FrenchGovernment to effect changes of policy or to redirect research rapidly. The influence of the civil servantsappears to militate against a cohesive strategy for theResearch Establishments, but the Research Ministryis moving them towards a concept of strategicplanning. However, the 1988 R&D budget has beenheralded as one to “encourage industrial R&D,” toget industry to do more R&D, and to make up for thedecline in such finding prior to the 1986 changes.

In June 1988 the French Government approved anFF830 million increase for research that will aug-ment, by 2 percent, the FF39.3 billion currentlyspent. The first priority will be to spend approxi-mately FF90 million recruiting more young re-searchers to redress existing shortages. There are


currently mom than 300 frozen vacancies for techni-cians in public research agencies. The remainder ofthe money will fund 150 new research posts inpublic research agencies. Of these, 100 jobs will bein biotechnology research at INSERM, the nationalagency for medical research, and at the nationalinstitutes for agronomy, cancer, epidemiology, andimmunology. Fifty more jobs will appear at theFrench national space agency, CNES. Not all thenew researchers will be French; some of the moneywill pay for 200 foreign scientists to work in Frenchlaboratories.

In addition to this new money for personnelincreases, FF700 million will go to French industryto encourage greater involvement in basic research.Priority will be given to joint projects betweenindustry and research agencies and to the “nationalpriorities,” notably research on new materials, set bythe government last year. To remedy deficiencies inresearch in French universities, FF50 million hasbeen earmarked to help universities develop theirown research policies, particularly in conjunctionwith industry. ANVAR,42 the agency that supportsthe development of promising new technologies,will receive another FF1OO million, and is slated forfurther funding later from the new industry minister.

This increase in funding results from a long battleby the new French research minister Curien, whoheld that post until 1986 and resumed it in early 1988after Mitterrand’s triumph in the presidential elec-tion. During his 1981-86 tenure, Curien planned toincrease the science budget by 4.4 percent per year.But the Chirac Government cut the science budgetby 6.6 percent during its 2 years in power (1986-88).

Despite the FF830 million additional allocation,Curien says that he will be unable to realize hisoriginal plans, set in 1985, to spend 3 percent ofFrance’s total revenues on research by 1990. How-ever, the infusion of new money will allow someresearch institutions to survive the year.

Beside allocating more money, the new prore-search government will reaffirm its original goals ofstreamlining the national research councils andagencies, to promote liaison among these agencies,industry, and the universities. In support of this goal,the principal data networks used by researchers in

France are being unified to permit intercommunica-tions and file transfers. The new national researchdata communications network is seen as a “federa-tion” of data networks already used by the majorFrench research establishments. The new networkwill encompass those of the CEA, the electric poweragency, the institute of computer science andautomation research, and the research center fortelecommunications. The network will interface tothe “Reunir” network developed by the associationof universities that links centers of higher education.INSERM, the center for agricultural research, theresearch center for cooperation with Third Worldcountries, and the research center for agronomic indeveloping counties.

Government-Funded Civil R&D

Civil R&D funding is managed by the twoDepartments of Industry and Education (through theMinistry of Research and Higher Education). Theseveral government Research Establishments (orOrganizations) receive the majority of the funding,with about 70 percent of the EBRD going to the sixorganizations and programs listed earlier. The re-search budget for Higher Education was FF1.65billion in 1988, (staff costs of FF7.44 billion areincluded in the EBRD but excluded from theBCRD).

The Industry Department disburses funds toindustry for innovation, or the exploitation ofresearch, through ANVAR. The Ministry of Re-search and Technology disburses funds for down-stream R&D through the Fends de la Recherche etde la Technologie43(FRT). As noted, the CSRT is aHigh-Level Research and Technology Council,whose role is to advise the Minister of Research andHigher Education on scientific and technologicalpolicy options. Scientific committees act as steeringand advisory bodies on programs and objectives foreach spending department and are answerable to theMinister for Research an Higher Education.

The FRT is the Research Ministry’s principalmechanism to support R&D of downstream projects,usually involving at least one industrial partner. The1988 R&D budget (BCRD) of FF39.3 billionincluded programs for electronics and informationtechnology (formerly in the Postes and Télécommu-


nications budget), of which the FRT budget wasFF930 million (+8.8 percent) for 1988, plus aboutFF63 million unspent from 1987. Over 40 percent ofplanned FPT expenditure was allocated to the“National Programs” with 11 priority sectors: bio-technology, foodstuffs, medical research, life andsocial sciences; technology and production; elec-tronics and information technology; transport; natu-ral resources; new materials; new chemistry; andresearch for developing countries. On average, theFRT funds about 33 percent of these programs, withpriority areas (besides AIDS) in superconductorsand mechanical engineering (including optics).

In recent years, the FRT has acted as a transfermechanism between the government Research Es-tablishments and industry; however, little real tech-nology transfer has occurred. In addition, the spend-ing departments concerned received little “impar-tial” guidance on which programs to support. TheResearch Minister has now changed the system and(reintroduced scientific committees to act as steer-ing and advisory bodies to each of the departments.

The FRT also funds about 50 percent of theFrench Government’s involvement in EUREKA(21.5 percent of the FRT budget), and training (17.2percent of the budget). The rest of EUREKA findingcomes from the Industry Ministry’s InformationTechnology and Electronics budget. Increasing thenumber of researchers in industry remains a highpriority, and training initiatives include:

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technology transfer schemes (Centres de Re-cherche, d’Innovation, et de Transfert de Tech-nologies and technology counselors, aimed atgiving low-technology companies an entry intothe Research Establishments;Poles Firtech44 - centers of expertise that groupindustries, research facilities and educationalestablishments by geography and discipline;Conventions Cifre - placing doctoral studentswith companies to encourage industry research.

Manned by career civil servants, the ResearchEstablishments are involved in these initiatives;together with short-term secondments to industry,trial loans, and incentives to public sector workers totransfer to industry, do contract work, or set up theirown companies, they improve the transfer of tech-nology into industry.

As noted, the Industry Ministry funding for theexploitation of research is effected throughANVAR. This funding has been increased to FF784million (+8 percent) for 1988. (With repayment ofloans the budget rises to about FF1 billion). ANVARoffers grants for pre-project studies and interest-hloans to convert the results of such studies into amarketable products. For 1988, about FF200 millionwill be spent on information services to help smallcompanies to collaborate with public sector re-searchers and professional technology centers. It isalso proposed that ANVAR fund the costs ofinsuring risk capital. (It appears that the IndustryMinister has also proposed risk insurance as afunding mechanism for EUREKA projects.)

Most of the Industry Ministry funding for indus-trial R&D (about FF2 billion) is for the favored areasof IT, electronics, manufacturing technologies, andthe space sector, and is administered throughSERICS. SERICS also funds about 50 percent of theGovernment’s contribution to the EUREKA pro-gram, worth FF200 million for 1988 (the other 50percent comes from the FRT). Funding for electroniccomponents of FF1.99 billion is thought to comejointly from both the ANVAR and FRT budgets.

As already noted, most of the BCRD funding isspent with the Research Establishments. CNRS, thelargest, accounts for about 10 percent of totalgovernment-funded R&D expenditures and 42 per-cent of the Research Establishments’ budget. TheEstablishments employ over 25,000 persons, ofwhom nearly 11,000 are researchers; staff costsabsorb 63 percent of their total budget of FF9.1billion.

Government-Funded Defense R&D

The 1988 defense budget for both research anddevelopment was FF3.2 billion, an increase of 10percent over 1987. Fundamental to French procure-ment strategy is the need to maintain an industrialbase that ensures independence in armaments andpreserves France’s freedom of action. The “strategyof means” involves comprehensive planning, pro-gramming, and budgeting, with the results embodiedin legislation. There must also be a parallel industrialpolicy to guarantee the development and procure-ment of the equipment the Armed Forces require;and this industrial policy must be integrated into the


government’s other industrial, economic, and socialpolicies.

The organization for defense R&D should be seenagainst this clearly stated policy background.

Délégation Générale pour l’Armement-The cen-tral institution in the French procurement organi-zation is the Délégation Générale pour l’Armement(DGA). It has a dual responsibility:

. to organize the implementation of all of theMinistry’s armament programs; and

. to ensure that the country has an up-to-date andeffective armaments manufacturing capability.

In short, the DGA is the agency to whichimplementation of the “strategy of means” has beenentrusted. It has both government and industrialtasks.

Its government tasks include:

. determining the Services’ armaments require-ments in consultation with them;

. supervising the State establishments and the(wholly or partly) publicly owned companiesengaged in armaments research, development,and production; and

. developing a long-term program to ensure thatFrance can be assured of the “means” to fulfillits armaments requirements.

The DGA’s industrial tasks include:

● acquiring weaponss systems and materiel for theServices; i.e., acting as the government’s buyerin the market;

● actually producing these equipments in thearsenals and other establishments it runs; and

● responsibility for bringing the State’s intereststo the attention of industry, and vice-versa.

The DGA is the institutional expression of the“strategy of means” in that it is the link between thehigh command and the defense industrial base.

The Delegué General pour l’Armement.-At thehead of the DGA is the De1egue General Armement,who is directly responsible to the Defense Ministerand normally acts as the vice-chairman of research,development, and equipment programs, He is as-sisted by a “cabinet” of scientific, technical, andmilitary advisers, including a head of research. Hisentire area of responsibility includes over 75,000personnel thoughtout France, many of whom arestaff military engineers who are graduates of l’Ecole

Polytechnique. These civil servants have a fullcareer structure with ranks analogous to militaryones, and often use their ranks as a mode of address.

DGA Functional Directorates—The task of theDGA’s functional Directorates and one technicalservice is to provide coordination among the fourTechnical Directorates and Departments. The Direc-tion des Programmes et Affaires Industrielles is thefunctional directorate that translates the require-ments of the Services into research, development,and production programs (in line with program lawsand the annual budget), while the Direction desRecherche, Etudes, et Technique D’Armement coor-dinates the basic defense research effort, dissemi-nates results, and sets priorities for exploratorydevelopment; several study centers and servicescome under its aegis.

Each of the four Technical Directorates is respon-sible for both government and industrial tasks. Eachis both a “puissance publique’’—(public authority)undertaking research for, and exercising directionover, the armaments programs within its area ofinterest-and a “fournisseur” (provider), itself con-ceiving, developing, producing, and repairingweapon systems. In other words the four technicaldirectorates within the DGA are responsible forresearch, development, production, test, and evalu-ation of the equipment for which they are alsoresponsible as customers. Although procurementprocedures are similar to those of other majorWestern nations, the French process is probablymore flexible and pragmatic. It has also beenobserved-specifically in relation to procurement ofaircraft for l’Armee de l’Air-that a stress on initialprototype production, and an aversion to the use ofprojects to “prove” several new technologies at thesame time, are distinctive and successful character-istics of the French way of doing things. The fourTechnical Directorates are:

. Direction Technique des Armements Terrestresfor ground defense equipment, technical assis-tance, and after-sales service of equipments;

. Direction Technique des Constructions Na-vales for naval ships, equipment, and weapons;

● Direction Technique des Constructions Aero-nautiques (DTCA) for the whole range ofmilitary aviation engineering, including air-craft design, development, and production; itsresponsibility also extends to all aspects of civilaviation. The DTCA is organized to deal

-140 ● Holding the Edge: Maintaining the Defense Technology Base, Volume 2

separately with the supervision and control ofdevelopment and manufacturing programs, andtest and trials; and

. Direction Techniques des Engins for all aspectsof ballistic and tactical missiles.

Policies for Collaborative R&D

Collaboration in Civil R&D

The French Government which initiated EU-REKA, is firmly committed to the collaborativeprograms established under the aegis of the Euro-pean Commission. The concluding section of thisappendix describes some of these programs. To-gether with West Germany, France is a major partnerand contributor to the European Space Agency(ESA) program, with each providing a quarter of itsannual budget of about $1.7 billion. The FrenchSNES has a budget of about FF5.43 billion ($1.1billion), of which 40 percent is spent through ESA.Two of its major projects are the French designedand led Ariane-5 launch vehicle and Hermes, amanned orbiter now in development.

Collaboration in Defense R&D

What the French Government sees as the benefitsof collaborative arrangements in defense R&D andprocurement is rarely stated explicitly and authorita-tively. Formally, France supports the IndependentEuropean Programme Group initiatives for coordi-nating and integrating armament procurements, andis an active partner with Alliance members in severalprojects such as sonars, army weapons, missiles,aircraft, and ships. It is also involved in the earlystages or development of other collaborative proj-ects across the whole range of defense equipment.But it is significant that the country’s Loi deProgrammation for 1984-88 mandates that Frenchdefense industries give France almost completeindependence in armament production. The infer-ence is that, for France, collaboration is seriouslyconsidered only when there is no alternative. AMarch 1987 agreement to cooperate with the UnitedKingdom on arms purchases (and nuclear issues),discussions in 1988 with the United States andUnited Kingdom on mutual requirements for astand-off missile, and an accord with West Germanyon operational issues, appear to have consolidatedthat position for the French. With an indigenouscapability in most areas of defense technology, themain motivation for collaboration can only beeconomic. It is difficult to see France collaborating

with other nations if the costs of such ventures wouldexceed those of a nationally produced product.Pragmatism prevails.

Research and Technology Evaluation

There is a Center for Evaluation and ProspectiveDevelopment (CPE) which has created an intelli-gence nework that collects scientific, technological,industrial, economic, and social data worldwide—especially from the United States, Japan, the Scandi-navian countries, and Germany—and makes themavailable through publications. CPE also acts for theEC as the French coordinator of data collections inthe EUROT’ECH program, which aims at providinginformation on technological innovation in the EC.CPE was instrumental in providing French data tothe Organization for Economic Cooperation andDevelopment (OECD) for its 1986 report and is nowworking on models dealing with the influence oftechnical advances on production, on new ways ofinternational technological cooperation, and onproblems in creating a potential for intellectualinvestment. By virtue of its quasi-independentstatus, CPE hopes to establish itself as a center forevaluation of the major scientific organizations andto apply its studies of evaluation procedures to thetechnologies of artificial intelligence. It will act alsoas consultant in evaluations required by the EC andOECD.

The concept of “valorization,” that is, assessingresearch in terms of transfer to definite applications,was one that the previous government hoped toaddress by creating the CPE and new advisorycouncils such as the CSRT. Recommendations hadalready been implemented concerning this area.especially by giving the Ministry for Research andHigher Education a central role in overseeingscience and technology. However, the new advisorycouncil CSRT, has recently called for anothergeneral review and recommendations for increasedeffectiveness in this area. It has been suggested thatestablishing technology transfer techniques alonedoes not automatically generate acceptable policies,and that advisory councils adequate for administra-tive purposes are insufficient to devise policy.Parallel experience in the United Kingdom showsthat advisory bodies do not arrive at acceptablerecommendations unless they have available thefindings of policy research groups on which to basedecisions. The data assembled by the CPE in scienceand technology will be at the disposal of a new


assessment unit (observatoire) intended to lay theground for wide-ranging research on which policydecisions in science and technology can be based.

France now seems to possess adequate machineryfor the design of science policy. While value formoney is a criterion for evaluation, the decisionprocess in France is easier because there is a moregeneral consensus on encouraging promising newprojects-particularly international ones. On thenational scene, while France is hoping to persuadeindustry to make a larger contribution to R&D, it isnevertheless encouraging industrial R&D withgrants and tax concessions. The Government is notcoercing industry with threats to withdraw support,for fear of undermining the very position in hightechnology that the French Government is support-ing.

WEST GERMAN POLICY FORRESEARCH AND TECHNOLOGY

Background

Although no country in Europe matches the totalspending on research and technology of the WestGerman Government and industry, the proportiondevoted to defense R&D is small. The country is alsoone of the world’s leading exporters, but its industryhas been less dynamic than that of the United Statesor Japan in shifting emphasis to growth sectors suchas electronics. This is true for R&D as well asproduction. Overall, the country’s competitive posi-tion in advanced technologies has not sufferednoticeably in the 1980’s, but neither has it improveddespite a period of weakness for the deutsche mark.West German officials realize they cannot alonematch the spending of the United States and Japan,and that the scale of today’s research and technologyrequires cooperation between countries and compa-nies in areas such as aviation, space, and nuclearpower. Even then the investment pays off only if asufficiently large market is available. West Germanyis therefore committed to collaboration.

Despite its support for international cooperation,West Germany joined with the United Kingdom in1987 to oppose an increase in funding for EuropeanCommunity-wide research programs for 1987-91.German officials first wanted to see other govern-ments, particularly those in southern Europe, striveto boost national R&D spending. Germany and theUnited Kingdom shared the view that the EC is not

a replacement for a minimal national R&D policy;EC money should be seen as a stimulus forcooperation, to bring partners together-but not tofinance projects, None the less, Germany stronglysupports programs such as ESPRIT which have ledto the formation of several hundred Europeanresearch groupings, and believes that, during thenext 5-year period, there should be more of them.

Because the EC’s existence helps account for thesuccess of Germany’s export-oriented economy,very few Germans would want to cast doubt on theirsupport for the EC. Membership has involved a pricein that West Germany is, and will continue to be, theEC’s biggest contributor; but the political andeconomic benefits of belonging to a united Europehave always been thought adequate compensation.Now, however, there is less certainty. The viewappears to be growing that the country stands to losemore than it gains from the southward shift in theCommunity’s center of gravity, the Commission’sbid to reform its agricultural policy, and its plan toharmonize competition rules throughout the EC.Relations are also improving with East Germany—visibly so since the East German President visitedthe country in September 1987 and pledged scien-tific cooperation on projects ranging from physics toproduction technology.

With 1992 and the single European marketapproaching, a powerful coalition of West Germanindustrial and trade-union interests is opposed toopening borders to genuine EC competition in suchareas as insurance and telecommunications services,electricity supplies, and road haulage. The WestGerman Government, like the Italian, sees the needfor a closer coordination of European monetarypolicies and increased cross-border cooperation, tounderpin the planned single market.

West German R&D Program Overview

Budgetary Aspects and Statistics

Total spending on R&D in 1987 was expected tobe about DM48 billion (2.9 percent of GDP), ofwhich approximately 75 percent was to be privatelyfunded by industry and other sources, and the restprovided by the government (federal and state). Thegovernment’s share was divided between the Minis-try for R&T (60 percent) and the Defense, Educa-tion, and Environment Ministries (40 percent). TheGovernment’s share of total R&D has steadilydecreased from 41 percent in 1983; to some extent,


this reflects the administration’s efforts to improvethe investment climate by using indirect mecha-nisms rather than direct funding of R&D.

A 1988 report,45 indicates a 5-percent increaseover the initial estimate of DM 48 billion spent onresearch and development. When adjusted for infla-tion, this represents a real 2.5 percent growth over1986. Privately funded research in 1987 was alsoslightly higher than expected, with 83.6 percent ofall research being privately funded, as comparedwith the approximately 75 percent anticipated. Thismeans that government funding of private researchwas actually only about 15 percent of the total.

Of government funds appropriated for researchand development, most of the federal funds comefrom four ministries: the Ministry for Research andTechnology (more than 50 percent), the Ministry ofDefense (approximately 20 percent), the Ministry ofEconomics (about 10 percent), and the Ministry ofEducation and Science (which together with theother federal ministries, makes another 8 percent).

A high proportion of West German spending onR&D is for basic research, approximately 70 percentof which is performed in the higher education sector,with about 25 percent in the public sector, andindustry spending nearly 20 percent of total basicresearch funds. Applied research is embedded in“development” figures and is difficult to identifyseparately; but together these categories constitutealmost four-fifths of total R&D expenditure.

The Ministry of Defense accounts for about 15percent of federal R&D finding, compared to about50 percent for the United Kingdom. Put another way,in 1986, government-funded R&D for defense as apercentage of GDP was only 0.11 percent in WestGermany, compared with 0.68 percent in the UnitedKingdom and 0.81 percent in the United States.

West German Government R&D expendituresconsist of both federal and state funds. In 1983 thefederal government was responsible for 60 percentof the total government funds. By law, the statesfund almost all of the research and half of the capitalexpenditures of the universities. For the most partfunds awarded to universities for general researchare not allocated to specific categories-variousindependent specialist organizations set priorities.Nevertheless, the volume of funds is large enough to

distort any breakdown of government R&D objec-tives by fund category. Funding for the Max-PlanckSociety, the German Research Society, and theFraunhofer Society, as well as funding for basicresearch in the natural sciences, constituted morethan 14 percent of the federal R&D budget in 1983(compared to 20 percent for energy and 15 percentfor defense).

Policy Aspects

Basic Pillars of Research Policy-"Art and sci-ence, research and teaching shall be free. Freedom ofteaching shall not absolve from loyalty to theconstitution.” These words from the Basic Law ofthe Federal Republic of Germany echo similar wordsfound in the constitutional legislation of the 11federal states. While the federal and state govern-ments are authorized to create a climate conduciveto research, the researchers themselves are free in thechoice of their subjects. Furthermore, the scientistsare free to accept third-source funding if money fromtheir own institution is insufficient.

An R&T Ministry director once described theconstitutionally guaranteed freedom of scientificresearch policy in the Federal Republic. The secondof these four pillars can be seen as West Germany’sfederal structure, where the 11 federal states assumeindependent responsibility in education and science.(The states are thus solely responsible for theircolleges and universities, and it is only the area ofexpansion of the university system that federal andstate governments share tasks.) The third pillar is thedeclared intention of the federal and state govern-ments to interfere as little as possible with theresearch systems. The fourth pillar is symbolized bythe intention that German research be integratedclosely and effect ively in internat ional—specifically, in European-research cooperation,with a corresponding effort to design generallyaccepted regulations and standards for innovationand market expansion within Europe.

The significance of this freedom of research istwo-fold. One point is that this freedom is neverquestioned. One institution, the German ResearchSociety (Association), DFG, is an autonomousorganization that wields great influence within thescientific community. The DFG’s influence mani-fests itself in key research programs, whether in

4~tR csearch Policy for the %kral Republic of Germany,” ‘l%e German Research service, Special science R- Special Issue, January 1988.

Appendix G—European Organization and Policies for Research and Technology ● 143

helping set the direction of research or in generatingideas for research policy itself. Although the federaland state governments currently allocate DM1billion to the DFG, it is not subject to directgovernment influence.

It merely shares the government’s goal to buildupon a high standard of achievement in basicresearch in West Germany. The DFG’s independentexperts evaluate research grant proposals submittedby researchers of all disciplines. If their decision isaffirmative, approval of payment of the grant moneyis almost a matter of course. The Max Planck Societyand the Fraunhofer Society, both currently fundedlargely by federal and state governments, are alsoindependent establishments that exert great influ-ence in formulating research policies. The MaxPlanck Society is able to determine what researchprojects are needed at any given time, while theFraunhofer Society series as a catalyst for technol-ogy transfer between the scientific and businesscommunities.

The second point that bears upon freedom ofresearch is that it is accomplished in an atmosphereof trust and cooperation. These research establish-ments discussed above build a network that is bothmultifaceted and an integral part of the federalstructure of the Federal Republic of Germany. Theircooperative attitude is almost always harmoniouswith respect to the federal and state administrations,and conversely, the federated structure appearsalways to support the scientific community’s work.This cooperation between the government and thescientific community extends to the private sector aswell. Decisions by the Ministry of R&T consider thelikely impact of a project on the national economy,and whether the nation as a whole will profit.Government funds are available, should the com-pany responsible for a project incur technical oreconomic risks. This freedom of research is funda-mental to Germany’s success in research and devel-opment

Trends-h June 1983, the Ministry of R&Tpublished a long-term financial plan that detailedFederal R&D spending plans through 1987. Theplan showed government promotion of R&D to beslowing, with growth rates dropping to 2.4 percentby 1987. While the government remains concernedabout the competitiveness of its industries, it hasmoved away from concentrated direct funding ofproduct development, as illustrated by develop-

ments in the Information Technology sector. In-stead, the government announced a more compre-hensive plan to promote the development of microe-lectronics and information and communicationstechnology, one that required overlapping ministe-rial responsibilities in a variety of areas. Thisinitiative began at about the same time as the U.K.Alvey program, with which it has much in common.As with Alvey, this program was a point of departurefor German participation in ESPRIT and otherEuropean collaborative programs.

The 1983 reorientation of government policy onresearch and technology called for increased reli-ance on private initiative and entrepreneurial respon-sibility, and restraint by the government in support-ing R&D in industry, particularly in advanceddevelopment projects. Public funds were to betargeted at those areas where the government had itsown responsibilities, or where overriding social ormacro-economic concerns warranted governmentsupport of R&D. This was not unlike similarphilosophies underlying the U.K. science and tech-nology policies.

In 1987 the Ministry of R&T presented a “Com-prehensive Program” explaining in detail the basicconcept underlying its research promotion policies.This program suggests that there a reorientation inseveral is underway areas. The program emphasizedfive central tasks involved in research promotion:

1.

2.

3.

4.

5.

to promote basic research (Max Planck Soci-ety), support large-scale projects, and furtherresearch in the arts and humanities and socialsciences;to promote government-run long-term pro-grams (space, polar, nuclear fusion research);to promote research in the area of prophylacticcare (health, humanization of job life, environ-mental protection, climate);to support market-oriented technologies (genetechnology, molecular biology, materials re-search, information research and processing,and energy technologies); andto improve the existing framework conditionsand prerequisites for economic innovation.

There are specific programs for each of the first fourtasks. The final task is more general, but itsimportance should not be discounted.

It is the Ministry of R&T’s policy to emphasizenew technology innovation by small and medium-


size businesses. The allocation of funds to benefitlarge businesses is being reduced, with smallercompanies being strongly encouraged to involvethemselves in new developments. Tax reforms willalso provide a better environment for innovativedevelopments.

The continued goal for research policies inGermany is to intensify cooperation between re-search, academia and business. Collaborative proj-ects will be emphasized and personnel exchangesbetween government and privately run researchinstitutions will be encouraged. Accompanying thisgoal is the expansion of the Fraunhofer Society in itsrole as “mediator for technology transfer betweenthe science and business communities.”

The pattern of industrial R&D which results froma policy of encouraging industry to shoulder more ofthe national R&D effort will inevitably be dedicatedby the strategic needs of companies as they strive tobe competitive in world markets. The balancebetween civil and military R&D must, however, beinfluenced by the budgetary policies of govern-ments. The most prosperous countries appear to bethe ones which spend least on defense R&D,attracting scarce scientific manpower into industriescapable of competing in the international civilmarket for high-technology products, and depletingresources available for defense R&D. As one suchprosperous country, with only a small allocation ofgovernment funds for defense R&D, it is notsurprising that in West Germany both the govern-ment and the defense industry strongly favor collab-oration.

Referring to civil R&D, the Director of Interna-tional Cooperation in the Ministry for R&T said that" . . . the scale of today’s research and technologyrequires cooperation between companies and coun-tries for areas such as aviation, space and nuclearpower.” Even then, the resulting end-product"

. . . only pays off if you have a large market. So thepush for cooperation is stronger for Europeans thanfor America or Japan.” This “push for cooperation”is evident in several major European projects, civiland military, in which West Germany is involved,such as the Eurofighter, Airbus, the France-Germanhelicopter and, of course, the European SpaceAgency—to which it and France are the majorcontributors.

European Space Program-In 1987 the federalgovernment made a strategic decision to bolster its

aerospace industry. This included a plan to increasegovernment spending on space by 10 percent in1988, to DM1.2 billion, one-sixth of the total budgetfor the Ministry of R&T. In addition to the extramoney, the space program would also require extrascientists and researchers, perhaps limiting researchin other fields. The Research Minister has alsosuggested that 20 to 25 percent of his ministry’sbudget could eventually go for space researchprograms. That idea does not appeal to WestGermany’s industrialists, who question the wisdomof committing so much money to one sector. TheConfederation of Industrial Research Associations(AIF) has warned against this emphasis on space ifit means limiting research funds for small- andmedium-sized companies, arguing that such a policyis too roundabout away to benefit German industry.The government’s reasoning that space-based re-search findings have other applications does notconvince everyone. However, the Columbus, Her-mes, and Ariane 5 projects are ambitious and will intime inevitably produce spin-offs for all partners.Also under study, in collaboration with the U.K.(through British Aerospace and HOTOL) is theSaenger rocket-plane concept as the next, andpossibly more economical, step into space.

EEC Budget for R&D-Realizing the limits tonational funding for R&D, West Germany ada-mantly opposed a major increase in EC funding for1987-91 Community-wide research programs. Offi-cials first wanted to see more effort from suchcountries as Greece, Portugal Spain, and Ireland—each of which spend much less than 1 percent ofGDP on private and public research-before the ECprovides more of its own funds. None the less, WestGerman is firmly committed to collaboration in bothcivil and military fields, with an estimated 70 to 80percent of its researchers involved in internationalcooperation of one form or another, according to theMinistry for R&T

The Role of Science and Technology-The WestGerman Government also uses science and technol-ogy to shape international politics, as in greatercooperation with East Germany, the Soviet Union,and other Eastern Bloc counties.

The goal of West German industry-stayingcompetitive through high-quality products producedby high-productivity factories-has led the countryto create R&D teams in several areas. Governmentpolicy now is to use these groups to strengthen

. . — -.. —


European R&D efforts to produce a stronger Euro-pean Community while, at the same time, lookingeastwards to new markets-and using science andtechnology agreements to exploit them.

Not all senior researchers agree with the govern-ment’s research and aid-to-industry programs. Thehead of Bochum University’s Institute for AppliedInnovation Research, Professor Erich Staudt, wasreported as saying that” . . . state subsidies for hightechnology lead to peaks, but then there is noconnection. The Ministry talks only of more hightechnology, but that doesn’t pay off. There’s noeconomic context any more if you’re far ahead.”46

He felt it was better to ignore high-technology trendsand concentrate instead on new untapped areas.Staudt criticized the Ministry for R&T for “pushing”research into technologies where the United Statesand Japan already had an advantage. The result, hechimed, was the march of national research insti-tutes into saturated market areas, producing newover-capacity already evident for such products assteel and personal computers. West Germanyneeded to innovate, not copy the world’s latest hightechnology.

Whether by government or not, there is now avirtual hiring freeze at the 13 National ResearchCenters, 52 Max-Planck Society Institutes, and 34Fraunhofer Society Institutes, together accountingfor 25,000 staff jobs. Having filled these governmentand big-industry sponsored research centers, there isnow thought to be a latent technological potentialdeveloping, with job pressure forcing young re-searchers into small to medium-sized firms whereinnovation and market-oriented effort should pay offin increased sales.

Evaluation of R&D-In a recent survey of theworld’s influential S&T journals, German scientistsand engineers were found to have authored 6.5percent of the articles, twice Germany’s share of theworld’s researchers. In some subfields, Germanarticles represented up to 15 percent of the articles.Patent applications, another research quality indica-tor, increased 9 percent in Germany in the period1981-83, compared with a 1 percent decline in theUnited States. The number of U.S. patents granted toWest German investors rose more than 40 percentbetween 1970 and 1984, with over 60 percent inmachinery, and chemical and allied product technol-

ogies. The main evaluation method for R&D is theexpert peer review.

Organizational Aspects

Overall Structure-The West German Govern-ment achieves a degree of coordination of basicresearch without direct government control, largelydue to the efforts of autonomous associations in itsscience system, e.g., the DFG, which providesacademic project support and scientific advice, andthe Max-Planck Society (MPG), which conductsin-house research and operates over 50 researchinstitutes. The Federal science and mission agenciestake a more aggressive stance for applied researchand work in the national laboratories, but theAssociation of National Research Centers (for the 13“large-scale” centers) participates in setting researchdirections. A Science Council advises the govern-ment, DFG, and MPG.

Although no formal government-to-industry co-ordinating body exists, the Ministry for Researchand Technology is the major source of federal fundsand plays a coordinating role. Federal, state andindustrial funds support the Fraunhofer Society,whose work reflects both government and industryneeds. There is industry-government collaborationin the work of the national laboratories.

The system for funding and coordinating scienceand technology activities in West Germany thusrelies on certain special organizations in executingthe government’s research and technology policy.Although many of these are considered to benonprofit institutions, OECD guidelines state thatthe sector which largely controls a nonprofit organi-zation, or is served by a non-profit organization, isthe one to which the organizations performance andfunding should be assigned. If the organizationmainly serves or is financed by government, theguidelines consider the work as having been per-formed in the public sector. If the organizationrenders services primarily to industry, it is consid-ered private sector work. As a matter of budgeting,however, government funds allocated to the organi-zation are credited to public sector accounts.

The Science Council-The main coordinatingbody among the federal government, state govern-ments, and the scientific community is the ScienceCouncil (WR), founded in 1957 by an administrative


agreement between federal and state governments. Itprovides advice and recommendations on sciencepolicy matters, especially those concerning thehigher education sector. Without executive powers,its recommendations carry weight because theyconstitute the consensus of the Council, whosemembers represent a variety of sectors and disci-plines. An example of its recommendations was theestablishment of the special collaborative programsthat the German Research Society now sponsors (seebelow).

The WR is not a funding or granting organization.Nonetheless, it is mandated to review annuallyplanned expenditures of the federal and state govern-ments for higher education, including universityproposals for new laboratories, scientific equipment,etc. The Council is thereby able to reduce duplica-tion of major scientific equipment and facilities.

The Council recently reviewed the health of WestGerman universities, especially as they pertained tothe age structure of university staff. Most of theuniversity positions were filled by tenured profes-sors hired during the expansion period of the 1960sand 1970s. Since most would not be eligible to retirefor another 20 years, there was little room for brightyoung researchers to enter academia. Moreover,many of the faculty positions had to be filled rapidlyduring the earlier expansion, and some of the staffwere now less qualified than the younger research-ers. To create and justify new positions, universitiesintroduced new specializations. This led to theproblem of overloading of the university curricula.The academic requirements in individual disciplinesbecame so cumbersome that it was virtually impos-sible for students to complete their studies in 4 years.

The Science Council considered restructuring thehigher educational training system to shorten thelength of the first degree programs, and to strengthengraduate education, including the role of R&D.

Other issues with which the Science Council isconcerned include the importance of outside fundingfor universities and research institutions, mobility ofresearchers, increased competition among states forR&D facilities, employment problems, and evaluat-ing the quality of education and R&D.

Mux-Planck Society— The Max-Planck Society isan important performer of basic research. It isfinanced largely (94 percent) by public funds fromboth federal and state governments. Although its

budget represents only about 2 percent of totalnational R&D expenditure, its influence on thenational R&D effort is considerable. The MPGconsists of 52 institutes, three clerical units, and twoindependent research groups. Independent researchgroups are a means through which new researchefforts are promoted for a limited time and workingrelations between MPG and universities are in-creased. The institutes are not expected to performbasic research in all fields. The Society supplementsresearch in universities and is charged by theScience Council to carry out research that requireslarge or specialized facilities; to supply adequatehuman and financial resources to areas of particularscientific importance and promise; and to conductresearch in emerging and interdisciplinary fields.Over 60 percent of the MPG’s research funds are innatural sciences, and most of the rest are inbiomedical fields.

The importance of increased cooperation betweenthe Institutes and universities is being emphasized,with most Institute Directors and senior scientiststeaching at universities. The Institutes also offerresearch facilities to doctoral students. Despite anincrease in research projects conducted jointly bythe Institutes and universities, competition remains,with scientists preferring the research environmentat the Institutes.

Fraunhofer Society - The Fraunhofer Society isto applied research what the MPG is to basic. It is anonprofit society that sponsors and performs appliedR&D through contract research, defense research,and services. The Society’s main clients are industryand the federal and state governments. More thanhalf of its 3,700 staff (in 1985) were in naturalsciences (40 percent of funding) and one-third inengineering (50 percent of funding).

The Society performs a mix of its own researchprojects and contract research. Twenty-two Insti-tutes are engaged in contractor project research withgovernment and industry. Six institutes are dedi-cated to defense research and are supported by theMinistry of Defense. The Society also provides -

technical information; technical evaluations; eco-nomic studies; and assistance in obtaining, main-taining, and exploiting patents. There are fourInstitutes responsible for such services. The Insti-tutes conduct applied R&D in specific areas:

. microelectronics and sensor technology,


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information technology and production auto-mation,material and building component behavior,production technologies,process engineering,energy and construction technology,environmental research, andtechnical economic studies and technical infor-mation.

The federal and state governments provide subsi-dies through the Society to assist small and medium-sized companies for R&D projects leading to new orsubstantially improved products or processes, aswell as for technical assistance. The Society hasexcellent links with industry; in addition to contractwork and technical assistance, many of the heads ofInstitutes are on the boards of directors, or are R&Ddirectors at some of the larger companies. TheSociety also has close links with the universities,with Institutes usually located near research univer-sities, and more than half of the heads of Institutesuniversity professors.

In 1985, less than half of the Society’s fundingcame from federal and state government’s in theform of institutional funding, and about 60 percentfrom contract research. The importance of contractresearch is expected to increase still further, therebyreducing reliance on government funding.

The Society performs research for the Ministry forResearch and Technology in such areas as electron-ics, automation, and production technology (CAD/CAM and robotics); materials development (ceram-ics); and biotechnology and gene technology.

“Large-Scale” National Laboratories-In addi-tion to the MPG and Fraunhofer Society, there are 13“large-scale” national laboratories. funded by bothfederal and state governments but primarily sup-ported by the Ministry for Research and Technol-ogy. They were established to supplement the effortsof the universities by conducting research requiringlarge-scale instrumentation and large-scale invest-ment. The first centers began in the 1960s in nuclearresearch, while others now include space research,mathematics and data-processing, cancer research,biomedics, environmental protection, marine, andpolar research. The full list is as follows:

● Alfred Wegener Institute for Polar Research,● German Electron-Synchroton,

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German Aerospace Research & Testing Insti-tute,German Cancer Research Center,Society for Biotechnological Research,Research Center Geestact Ltd.,Society for Mathematics & Data Processing,Society for Radiation & Environmental Re-search,Society for Heavy Ion Research Ltd.,Hahn-Meitner Institute for Nuclear Research,Max-Planck Institute for Plasma Physics Ltd.,Nuclear Research Plant Juelich Ltd., andNuclear Research Center Karlsruhe Ltd.

Although supported almost completely by publicfunds through the Ministry of R&T, these laborato-ries are legally independent. Each has a supervisoryboard that establishes research priorities, and all arelinked by an Association of National ResearchCenters that coordinates their activities and repre-sents their interests with the federal government.The Ministry for R&T provides about 90 percent ofthe financial support for the centers, by “influenc-ing” their research priorities. The laboratories con-duct research in areas of technology of interest to thegovernment; when investment in a particular area isreduced, there is a “domino” effect in the laborato-ries which leads to diversification into other priorityareas.

Federal and State Research Establishments-haddition to the research laboratories already men-tioned, the federal government maintains 40 re-search establishments that perform mission-relatedresearch for their respective ministries. The variousstates also own and support 50 of their ownlaboratories, which conduct applied R&D importantto their particular region and economy. There arealso 48 research institutions that are funded aboutequally by federal and state governments, and whichare usually referred to as the “Blue List” institutes.They perform research that is usually more basicthan that performed by the other federal and stateresearch enterprises; a general requirement is thatthey conduct research of multiregional or nationalimportance.

The German Research Society-The GermanResearch Society (DFG), an autonomous organiza-tion somewhat similar to the U.S. National ScienceFoundation, finances R&D on a proposal reviewbasis, relying on expert peer review. Besides fundingresearch proposals, the DFG supports the training of


young scientists, fosters cooperation between re-searchers, including international cooperation, andprovides advice on scientific matters to poli-cymakers. The Society does not have its ownresearch institutes or perform research; it distributesR&D funds, mainly to the higher-education sector.

The DFG receives most of its funding fromgovernment sources; in 1984, 58 percent of itsbudget was provided by the federal government and41 percent from the state gov ernments. Aboutone-third of its funds were allocated to life sciences,an area for which funding appears to be increasing.Other fields include physical sciences and mathe-matics (25 percent), engineering (23 percent) andsocial sciences and humanities (15 percent). Thelargest proportion (45 percent in 1984) of the Societybudget goes to support its normal or core program,in which individual researchers initiate their ownproposals and select their own topics. The Society

also spends about 13 percent of its funds onproposals under a priority program; for a limitedtime the priority program supports research in thosefields determined by the Senate of the Society to bepriority areas, and for which it seeks to improveWest German capabilities in order to match interna-tional standards.

A special collaborative program, that not onlyfosters cooperation but also promotes interdiscipli-nary research, was established in 1968 on theScience Council’s recommendation. Under thisprogram the Society provides long-term, but notpermanent, funding that was about 30 percent of itsbudget in 1984. An institution or university, ratherthan a group of individuals, develops a proposal todemonstrate its commitment to long-term support ofthe research. Such a proposal must be examined andagreed by peer review. Unlike the other programs,this one is financed primarily (75 percent) by thefederal government. A university must identify anarea in which it excels, with the university or stategovernment committing itself to continue fundingthe area after the Society support ends. The sites atwhich special collaborative programs are developedcould be looked on as “centers of excellence,”although they may not be the only centers ofexcellence in that particular field. One of the firstspecial programs was so successful that it has nowbecome a Max-Planck Institute for Mathematics.These programs are able to attract internationalscientists and engineers and even pay their expenses.In fact, one of the criteria by which a program is

reinstated every 3 years is its international standing,calculated in part by the identities of the scientists,engineers, and publishers who have agreed toassociate themselves with the program.

The Society is also responsible for administeringspecial fellowship programs to enable young scien-tists with insecure positions to remain active inresearch.

Confederation of Industrial Research Associa-tions-The Confederation of Industrial ResearchAssociations is an autonomous organization thatfinances and coordinates cooperative industrial re-search-generally applied research and develop-ment. This organization is particularly important tothe small and medium-sized industrial firms whofind it difficult to support their own R&D. It wasfounded in 1954 and is now an umbrella organiza-tion encompassing 92 member associations, many ofwhich have their own research institutes; the AIFeven has 63 of its own. Industry supports most of theAIF’s activities, but funds are also received from thefederal government, particularly the Ministry forR&T and the Ministry of Economics.

If a problem common to member associationsexists, a research proposal can be made to the AIF,which relies on a group of 120 experts from variousfields to evaluate them. About half of the experts arefrom industry and half from the research institutesand universities. Reviewers must decide if theproposed project is technically sound and of scien-tific interest; whether the project is of economicinterest to small or medium-sized fires; and whethersufficient resources are devoted to the projects. If theproject application is approved, it will be supportedwith funds from the Ministry of Economics oncondition that individual associations demonstratethat they are spending their own R&D funds incooperative work.

The AIF also administers a federal governmentR&D support project for small and medium-sizedfirms that began several years ago. The exact termshave changed over the years; but essentially, theypermit the Ministry of Economics to subsidize 40percent of the labor costs for scientists, engineersand technicians engaged in R&D for those firmswith annual sales of DM50 million and not morethan 500 employees (1984 figures). It will also pay55 percent of the labor costs for new R&D personnelif the firm can show that it has increased its R&Deffort. In 1985, the program was expanded to include


payment for 45 percent of labor costs associated withnew R&D personnel in those firms with annual salesof DM200 million and 1,000 employees. Also in1985, the EC decided that the plan was allowableunder Community rules, and it is now scheduled tocontinue until 1989.

The AIF also administers the Ministry of R&Tprogram that encourages small and medium-sizedcompanies to contract for R&D work. The programsubsidizes the costs of an R&D project contractedout with external research bodies (including univer-sities and even foreign institutes). The Ministrysubsidizes up to 40 percent of the costs of extramuralR&D projects for those companies that have up toDM50 million in annual sales, and up to 30 percentof the costs for those that have annual sales of up toDM500 million.

Defense R&D—The Bundeswehr Plan, harmo-nized between all three Services, forms the basis forthe Defence Ministry’s annual contribution to theFederal Government’s budget estimate. The militarystaff implement the equipment aspects of the planthrough annual programs of research, developmentand procurement.

Within the Ministry of Defense there are twoagencies concerned with procurement but not part ofthe military departments. The Armaments Depart-ment is specifically concerned with procurementplans, focusing on technological problem areas“project-free.” Within the Armaments Department,and reporting to its head, is the Commissioner forDefense Research, who collates the research require-ments from all three Services, including interna-tional aspects. The Federal Office for MilitaryTechnology and Procurement (BWB) is the princi-pal body responsible for carrying our procurementplans. These two agencies administer research,development and procurement for virtually all WestGerman military equipment acquisitions.

As mentioned earlier, West Germany commitsonly 0.11 percent of its GDP to defense-relatedR&D, or about 15 percent of government-fundedR&D. This is spent within the defense-relatedindustries, with the national laboratories, and withthe Fraunhofer Society, which has six of its Institutesdevoted to defense research funded by the Ministryof Defense. The defense R&D program is coordi-nated by the Commissioner for Defense Research inthe Armaments Department, but procured throughthe BWB.

ITALIAN POLICY FORRESEARCH AND TECHNOLOGY

Background

In recent years, Italy has enjoyed one of the fastestGDP growth rates in Western Europe. The huge stateindustrial concerns brought their losses under con-trol and last year even turned in small profits, whileprivate-sector industrial concerns have been reapingthe profits of major restructurings and cost reduc-tions. During the 42 months of the Craxi govern-ment, Italy experienced political stability; however,in the last 7 months, proposals for major changes inItalian Government policies indicate a period ofsignificant turbulence ahead for industry as thegovernment tries to control the country’s economy.

In October 1987, the Senate budget committeesuspended work on the 1988 budget and told theItalian Government to rewrite it. In the Senate’sview, the assumptions on which it was based werejust not credible. Since then the fragile, five-partycoalition government has proposed the following:

1. A plan to reconsider the use of large sums ofpublic money to bail out struggling private-sectorcompanies.

. While not proposing to withdraw all state aidfor companies in crisis, the Senate thought itwas time to put an end to a policy of rescue tiedto exceptional events, and to create instead asystem of intervention in crisis situations withwell-defined aims, instruments, and a period ofimplementation. The politics of modernizationnow have to prevail because European Com-munity rules on industrial aid are becomingmore restrictive as the 1992 deadline for a freeinternal market approaches. A consensus hasgrown on the need to reduce governmentintervention in industry in all forms. Previous“rescues” too often saddled the governmentwith an expensive “flock of lame ducks,” awelfare activity that protected jobs withoutspecifying a time limit to government aid.Since EEC law will prohibit this, a n e wapproach is essential to ensure competitive-ness.

2. A rnultiyear procurement plan to boost spend-ing on defense equipment by 60 percent over 10years.


. This would be the first attempt in 13 years totake a comprehensive view of defense pro-curement related to Italy’s changing strategicrequirements. The Defense Minister’s politicalaim is to secure parliamentary endorsement forhis planning approach, serving both to establisha consensus and to strengthen the ministry’sbargaining position with the Treasury overbudgetary entitlements. The plan represents anagreed approach among the three Services, andshould reduce the crude lobbying that tradition-ally has prevailed at the expense of coherentlybalanced demands.

3. In May, the government sought to end a decadeof rising budget deficits and public debt by adoptinga 5-year strategy for boosting taxes and cuttingspending.

. This is the first time an Italian Government hascommitted itself to medium-term budgetaryreform; but there are still a great many detailsto be worked out if the policy is to succeed. Themotivation has come from EC’s push to free allcapital movements beginning about 1990;without a credible budget control program, adebt financing crisis would risk a return tocapital controls. An essential complement tothe government’s approach is closer coordina-tion of monetary policies at a European level_.

With the approach of 1992 and the single Euro-pean market, the Italian Government will be ex-pected to conduct its policies—whether on scienceand technology, industrial assistance, or whatever—according to the rules of the European Commission.In that respect, therefore, Italian policies will besimilar to the policies of other EEC members.

Compared to the complexity of the country’sdomestic politics, Italy’s approach to the EuropeanCommunity and collaboration has been straightfor-ward. It is: an active participant in the variousEuropean collaborative framework programs forresearch, a strong supporter of the European SpaceAgency, a member of a European five-nation R&Dand design program in nuclear reactors, and a partnerin the quadri-national Eurofighter program. In aero-space, as in other sectors of advanced technology(e.g., telecommunications or semiconductor manu-facturing), Italy has had to look abroad for (mainlyEuropean) collaboration to deliver the “spearhead”technological know-how, markets, and “niche” ac-tivities. Nonetheless, its research activities and

development efforts still lag behind the Europeanaverage, which is in turn, behind that of the UnitedStates. This relative under-commitment to R&D iscausing concern within Italian industry, whichbelieves that current levels of technology, thoughsignificant, provide no guarantee of being able tomaintain present achievements in the future withoutan increase in government funding of R&D.

Italian R&D Program Overview

Structural Problems With Industry

Any review of the Italian defense industry (andother sectors) must note the excessive number ofrelatively small companies. This causes many re-source problems-including those related to R&D,where the long “gestation” periods of projectsabsorbs resources. The disadvantages of this struc-tural arrangement were identified in a Parliamentarycommittee report (unpublished), finally adopted inmid-1987; the report observed that there is a limit tothe amount of public money available to financeprojects (referring to aerospace, but applicablegenerally), and deplored dividing it among competi-tive enterprises. Keeping public companies whichoffered similar products under separate banners alsomilitates against the economies of scale in manufac-turing that can only be achieved by creating compa-nies closed in size to the European average. Indus-trial “rationalization” seemed necessary; the crite-rion governing which state holding company anoperating enterprise should belong to should be thedegree of support and synergy that other companieswithin the state group can provide.

Proposed alternatives to rationalization includedthe formation of consortia, and cross-border mergerssuch as that between SGS-Ates (Italy’s main micro-chip manufacturer), owned by Stet and the non-military semiconductor interests of Thomson inFrance, spawned by the ESPRIT program. In thetelecommunications sector, however, the collapse inlate 1987 of Italy’s attempt to bring together its twomain indigenous equipment manufacturers-Italtel(owned by IRI Stet) and Telettra (owned by Fiat)-epitomized the pitfalls of pursuing a national ration-alization policy in Italy. The more aggressivecompanies have taken the initiative without waitingfor the government to act. Olivetti, for example, hasembarked on a particularly ambitious program ofmarketing and licensing deals to increase its access

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to world markets, while also embarking on anequally ambitious program of acquisitions.

Whatever the pitfalls, there is consensus insupport of further rationalization within the defenseindustries, provided a coherent plan for developingindustrial capacity exists. However, there is no signyet that this is about to happen or, with the vestedinterests of politicians, is even possible. The situa-tion is further complicated by the complex networkof shareholdings, linking companies in which share-holders from other parent groups are still repre-sented.

Financing of Research

With over 1500 amendments to be discussed, thefinance bill for the 1988 budget was hotly debated.The comments in this appendix refer, therefore, onlyto proposed policies and priorities; these are subjectto change until passed by Parliament.

Total research funding in 1987 was estimated at1.45 percent of GDP, an increase of 22.3 percentover the previous year. Although funding is lowerthan for other industrialized countries, the gap hasclosed significantly in the last decade in spite ofdevaluations of the lire. The figure is also lower thanthe 3 percent recommended by the Dadda Report onthe future of science and technology in Italy; but atleast the government has recognized that increasingthe research effort is the key to improving economicconditions.

Overall public sector spending on R&D accountsfor 46.4 percent of total R&D. University researchexpenditure continued to increase in real terms(+24.3 percent), and in 1987 represented 16.4percent of public sector spending on R&D—higherthan for the research organizations.

In 1987, industrial R&D accounted for the other53.6 percent of total R&D spending, with privatesector companies registering a 25.3 percent increase.Public sector companies registered an increase of22.2 percent further underlining the growth of R&Doutlays since the early 1980s. Figures vary withcompanies, but one public company, Italtel, spent12.4 percent of group revenues on research in 1987.This increase in R&D expenditure since 1980compared with growth in GDP in the same periodunderlines the effort Italy has made to develop abroadly based R&D system.

In 1985, public agencies performed 43.1 percentof the country’s R&D, but financed 51.8 percent;whereas companies performed 56.9 percent andfinanced 44.7 percent. The government shows itscommitment to research by supporting the universi-ties and large research organizations, but spendsonly modest amounts in its own laboratories. Com-pany effort in research and innovation is sustainedby public funding (17 percent of total public sectorfunding in 1985) and from foreign sources (3.6percent of the total in 1985). The external fundingthat companies receive represents about 25 percentof their total R&D expenditure.

Trends-In October 1987, amid political andfinancial uncertainty, the National Research Council(Consiglio Nazionale delle Richerche, or (CNR)submitted its report on the state of Italian science andtechnology to the Plenary Assembly of the NationalConsultative Committees prior to submission to theInter-ministerial Committee for Economic Planning(CIPE). Although presented publicly, the report hadstill not been passed for publication by the Cameradei Deputati several months later. This review refersto statistics presented in the CNR report.

Italy has a Minister of Scientific and Technologi-cal Research (MRST) who coordinates nationalpolicy on civil R&D. Defense R&D is the responsi-bility of the Minister of Defense. The major scien-tific institutions that advise the MRST on his S&Toptions for basic or long-term research are the CNR,the National Committee for Research & Develop-ment of Nuclear Energy and Alternative Energy(ENEA), the National Institute of Nuclear Physics(INFN), and the Higher Institute of Health (ISS).The National Space Plan (PSN) is managed by CNR.

The CNR reported that technological develop-ments were making it difficult to demarcate betweenbasic and applied research. The change in govern-ment priorities, combined with increases in the costsof basic research (growing complexity of instrumen-tation, use of databases and need for more efficientsecurity systems, etc.) created problems for insti-tutes in general and universities in particular. Whileuniversity research expenditure had decreased sig-nificantly in most other Western countries between1971-83, in Italy it had been maintained at around 15percent of total public R&D expenditure.

The public research sector favors disciplines withpotential economic or social impact; thus, one findssignificant support for engineering and technology


(18 percent of 1988 public sector R&D budget),space research (11.4 percent), physical sciences(11.9 percent), and biological and medical sciences(14.4 percent). Net funding has decreased for nuclearresearch and, strangely, for interdisciplinary re-search.

A major principle of the Italian Government’sS&T policy for supporting companies is that pub-licly funded R&D tends to contribute to increasedindustrial competitiveness; as a result, CNR aggres-sively funds high-technology areas such as aero-space vehicles and materials (28.4 percent of publicfinding), other vehicle and transport materials (11.2percent), telecommunications (15.7 percent), andinformation technology (8.7 percent). The IMI Fundfavored telecommunications (21.6 percent of theyear’s disbursements) and Information Technology(19.6 percent). The CNR presumably sees theseindustries as Italy’s most competitive-but therecould also be a circular argument.

Major S&T program funding is identified by lawswhen the annual Finance Bill has been passed. Forexample, the following earlier laws were listed in thebill for the 1988 annual and multi-year nationalbudget:

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Law 651/1983: Triennial funding for specialintervention in Southern Italy.Law 456/1984: R&D programs, AM-X, EH-101, CATRIN for aeronautical constructionand telecommunications (Defense).Law 284/1985: National Antarctic ResearchProgram.Law 331/1985: Urgent provision of universitybuildings.Law 710/1985: Contributions to encourageindustrial production.Law 808/1985: Assistance for developmentand growth of aeronautical sector industries(Industry).Legge Finanziaria ’87: Special rotating fund fortechnical innovation. Special fund for appliedresearch, university buildings, etc.

The CNR report refereed to earlier47 also lists anInstitution of Ministry of Universities and Scientific& Technological Research, which has its operatingcosts paid by a “special fund.” This fund also

provides for capital expenditure on programs suchas:

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CNR for Fellowships for Southern Italiangraduates (as part of the Government’s regionalaid policy).Reform of Law 46/1982 and participation ininternational programs of research and innova-tion.Renewal of the Government’s support for theInternational Center for Theoretical Physics.Research and growth of geothermal resources.Refinancing Law 30/1982 for renewable en-ergy sources and for energy saving.Financing of ENEA.

On-going, multiyear activities requiring budgetsto be authorized by law, and renewable annually inthe Finance Law include (with anticipated changesfor 1988-90):

. European COST program (+11 percent).

. Funding to CNR (+12 percent).

. National space program (-16 percent).

. Central Institute of Statistics (ISTAT) (+8percent).

. Ratification and execution of agreement withESA (+28 percent).

● Approval and execution of international agree-ment on energy (+5 percent).

National Research Council—The CNR currentlyreceives about 20 percent of the total public sectorfunding. Its budget was increased by 19.2 percent for1988, and its funds for the National Space Plan weredoubled. It was due to receive additional funds for“10 new finalized projects,” as well as specialprograms (Law 46/1986) for Southern Italy.

The initiation of the 10 “new third-generationfinalized projects” will involve 1,200 new full-timestaff, including 690 in CNR and 500 in companiesand other participants. The 10 projects are:

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telecommunications,robotics,electronic technology,new materials,superconductivity and cryogenics,international collaboration,information technology,biotechnology,

471bid.


. applied chemistry, and

. construction.

These, presumably, are program initiatives coor-dinated by CNR.

Under triennial Law 46/1986, the growth oflaboratories and personnel in Southern Italy shouldaccount for 40 percent of CNR’s total expenditure inthe early 1990s. The first planned agreements forinvestments in area, made between IRI (public),Olivetti & Fiat (private), and CNR (institutions), arein innovation technology and applied and develop-mental research.

Excluding university research, to which it contrib-utes, CNR’s research gives funding priority to thepromotion of industrial activity (13.5 percent),human health (10.4 percent), and basic research(10.6 percent). By comparison, the state administra-tion and public companies’ figures for 1986 were:promotion of industrial activity (20.9 percent),defense (12.1 percent), and energy (12 percent).

National Space Plan—The National Space Plan(PSN) was formulated in 1979 to give greatersupport to this sector and to strengthen Italianparticipation in ESA, to whose budget it is the thirdlargest contributor after France and Germany. Spaceactivity is managed by CNR, based on a 5-year planwhich it updates periodically. The third plan (1987-91) is in progress, with such programs as thetelecommunications satellite (ITALSAT) the pro-pulsion system of IRIS, the geodetic satellite(LAGEOS II), the tethered satellite, and the sciencesatellite for SAX astronomy.

Over the 1987-91 period the proposed spendingbreakdown for both national and international pro-grams is as follows:

. 30.5 percent-telecommunications satellites

. 21.4 percent—space structures & researchsatellites

. 9.2 percent-earth & environment observa-tions

. 9.1 percent-space station

. 7.8 percent-propulsion

. 6.3 percent—space science

. 3.8 percent-feasibility studies for future pro-jects

● 3.6 percent-Technological research. 8.3 percent-Other activities

In 1987, space activity increased in importance,receiving 9.9 percent of public sector R&D funding,both through the NSP and the growing financialinvolvement of publicly owned companies.

National Committee for R&D of Nuclear &Alternative Energy—The activities of ENEA in1988 fall within the fifth Five Year Plan, and mostof its budget is spent in the energy sector. ENEA’sbudget has been cut by 18 percent, reflectinggovernment indecision on energy policy. Whileawaiting the government’s decisions, ENEA reor-ganized those parts of the plan concerned withfission. Other areas of activity include collaborationwith CNR for the management and funding of theFinalized Project on Energy, the national researchproject in the Antarctic, and agrobiotechnoiogies.

Defense R&D

The defense budget in 1988 accounts for 2.3percent of GDP, while defense R&D accounts for12.1 percent of publicly funded R&D. The positionof the Italian defense industry among the Westernworld’s arms manufacturers is now well established,but the effort that brought it such prominence in thelate 1970s and early 1980s has ended. Exports havepeaked, though in 1986 they still accounted foraround 60 percent of the industry’s output, com-pared with roughly 40 percent for both France andBritain. Hopes in the defense industry are nowpinned on the recently proposed and coordinatedre-equipment program (mentioned earlier) in whichdefense spending is to increase by 60 percent over 10years-provided Parliament endorses the plan.

The Defense Technical Scientific Council(DTSC) coordinates and directs research and experi-mental activities carried out on behalf of or by thethree Armed Services. In particular, the DTSC:

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centralizes the direction of research of commoninterest to more than one Service;coordinates research of special interest to eachService;identifies research of common interest andprovides guidelines for its execution; andpromotes higher education courses for the threeServices.

The Chairman of the DTSC reports to the DefenseChief of Staff. The DTSC has a Standing Commit-tee, consisting of one general from each Service andits own secretariat, to define, plan, and supervise theresearch programs. A Standing Technical Secretariat


is the working body that implements the Council’sand the Committee’s tasks. The DTSC also cooper-ates with other national research agencies, therebyensuring cross-fertilization with the appropriatecivil science and technology programs. The DTSCmaintains three specialized facilities: the Center forMilitary Applications of Nuclear Energy, The Ex-perimental Missiles Range managed jointly by theNavy and Air Force, and a Center for Technical andScientific Documentation.

The DTSC is primarily concerned with inter-Service research requirements, and does not dealwith development or production. The post of Na-tional Armaments Director, responsible to the Min-ister of Defense, was created to provide “one voice”within NATO and elsewhere, to speak with authorityon the coordination and control of all activitieswithin Italy’s military procurement programs, in-cluding collaboration on research.

Research for military purposes is carried outwithin each Service by dedicated agencies, orthrough the auspices of the DTSC when there is amulti-service interest. Civil research agencies areused for the benefits of cross-fertilization and toinfluence the direction of civil programs which havea military application, as well as to use theirresources and research skills.

International Collaboratiot—In the past decade,Italy has been involved in major collaborativemilitary programs for all three Services, both withinEurope on projects such as Tornado and Eurofighter,and elsewhere on projects such as AM-X withBrazil. Generally, Italy does not become the majorpartner unless the project was originally a nationalone, as with AM-X. Italy has also launched severalnational projects, such as the A-129 helicopter, andonly later looked for partners. Now, however, it isunlikely that major new projects would be launchedin isolation from the needs of NATO and membersof the Alliance, or without first having been consid-ered by the Independent European ProgrammeGroup.

SWEDISH POLICY FORRESEARCH AND TECHNOLOGY

Background

Sweden accounts for 1 to 2 percent of the world’stotal resources for R&D, to which it commits about2.7 percent of GDP. With its limited number ofresearchers, it is impossible for Sweden to conductresearch in all fields of importance to industry andthe community at large; flexibility, both in the useand direction of resources, and in the definition ofpriorities, is therefore crucial. Through regularResearch Policy Bills the government gives theRiksdag 48 an overview of research and researchtraining at post-secondary education level, of sec-toral research, and of industrial research activities.The bills also guide the planning and developmentof research activities and general priorities.

The Swedes have a concept of sectoral researchin which every government department, regionalagency, and administration is responsible for itsown future, and must therefore invest in the R&Dneeded for its future operations. This R&D isnormally carried out by external partners; approxi-mately 25 percent of all R&D is performed withinthe higher education system; the rest is performed byindustry, national authorities, public, private, andcooperative research institutes, and independentconsultants. The higher education system plays amuch more prominent role in the performance ofbasic and applied research than in experimentaldevelopment, but in industry the ratio of basic toapplied research is put at 12/88. About half of theR&D undertaken by public authorities, institutes,and the like is research and half is experimentaldevelopment.

The main objectives designated by the Riksdag inscience and technology are to support the efforts ofSwedish industry in strategic areas, and industry’stechnical renewal. The government and the Riksdagdefine broad areas of support and decide the balancebetween different research fields in a nationalperspective, leaving researchers to decide on themore detailed definition of priorities and the projectsto be funded.

The political system (with only 7 prime ministersin the last 50 years) is noted for its stability and a


strong social consensus that, together, promote theacceptance of structural change and positive adjust-ment of national policies. This flexibility is furtherenhanced by the organization of government intosmall, efficient departments oriented toward draft-ing legislation and toward political activities, withadministrative work entrusted to autonomous agen-cies.

Emphasis is put on the search for new knowledgeand its application to the benefit of society. Apro-science and technology consensus appears toexist among all political parties and trade unions.The Swedish view of the status of science isexemplified by the fact that the Prime Ministerchairs the Special Research Advisory Board thatserves as a conduit to politicians, eminent scientists,and the community; there is a consensus regardingthe importance of science and technology as astrategic factor, rather than simply an enablingone—as an investment rather than a current expense.

Swedish Research and Technology ProgramOverview

Government Organizations and Coordination

There is no Ministry for Research in Sweden: Asa result of the widely adopted “sectoral research”model, each sector of society takes responsibility forthe research required for both short- and long-termcreation of knowledge. The Swedish R&D organiza-tion is therefore sectorized, and each ministry has itsown R&D organization. Most government depart-ments have allocations for R&D; however, 74percent of public grants are channeled through the“big three,” the Ministry of Education and CulturalAffairs (30 percent), the Ministry of Defense (24percent), and the Ministry of Industry, includingstate enterprises (20 percent). An analysis of totalpublic R&D funding by socio-economic objective in1986/87 showed “general advancement of knowl-edge” as the largest single objective at 43 percent,with defense the second largest at 26 percent (mainlydevelopment), energy and water at 6.2 percent, andthe industrial activities at 5.7 percent. In the “generaladvancement of knowledge” by field of science, thetop three were medical sciences, natural sciences,and engineering.

Since 1982 the coordination of R&D policy issueshas been the responsibility of the Deputy PrimeMinister, assisted by an Undersecretary of State inthe Cabinet Office. When the Deputy became PrimeMinister in 1986 he retained this role, therebypromoting a useful interchange in basic researchbetween the universities and industry. The govern-ment has a Research Advisory Board, chaired by thePrime Minister, which interacts among politicians,researchers, and the community and keeps thegovernment informed on research issues. It includeseminent researched in various fields and conveneslarger groups to discuss R&D issues-often at thePrime Minister’s summer residence.

The definition of priorities is crucial for smallercountries with limited resources, if they are to staycompetitive in a rapidly changing world technologi-cal environment. In Sweden the Riksdag defined anumber of priority fields in the Research Policy Actsof 1982 and 1984. By voting additional funds forR&D in the social sciences and humanities, theRiksdag noted the importance of R&D in thosesectors that, although less immediately useful, arevital to a country’s intellectual life.

It is accepted by the government and others thatonly by innovation can Sweden’s economic prosper-ity be maintained. Other organizations involved inthe planning and financing of research include theResearch Councils, the Council for Planning andCoordination in Research (FRN), the NationalBoard of Universities and Colleges (UHA), and theNational Board for Technical Development (STU).

Research Councils—The Research Councils(RCs) administer flexible grants for basic research,90 percent of which is conducted within the highereducation system.49 Three of the RCs, together withthe FRN, come under the Ministry of Education andCultural Affairs:

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Medical Research Council (MFR)Natural Science Research Council (NFR)

Council for Research in the Humanities andSocial Sciences (HSFR).

The Council for Forestry and Agricultural Re-search (SJFR) comes under the Ministry of Agricul-ture.

49~ @rinfJ, “Swedish R esearch, Policy, Issues, Organization,” transition by R. Tanner, Swedish Institute, Stockhold, 1985.


The task of the RCs is to encourage research bothin new and established fields. Besides promotingrest arch of scientific importance, the RCs alsoencourage the dissemination of research that maybeimportant to the larger society. They allocate fundsaccording to criteria that the researchers themselvesdefine. The 3 RCs under the Ministry of Educationand Cultural Affairs each have 11 members; theChairman and 3 members are appointed by thegovernment, while the other 7 are elected every threeyears by active researchers in the faculties. Memberscan serve up to 6 years; thus, except for the FRN, themajority are research representatives.

The RCs occupy a central position; their prioritiescarry weight, because they ultimately select among,and fund, new research projects. Professional chairscan be affiliated to the RCs, and RCs are alsoresponsible for research appointments, postdoctoralfellowships, and post graduate appointments insubjects with heavy recruitment needs. The RCs alsoevaluate research.

Much international research cooperation is car-ried out under the auspices of the RCs. The Board forSpace Activities (DFR), for example, funded both bythe Ministry for Industry and the Ministry forEducation and Cultural Affairs, is independentlyresponsible for various national and internationalspace programs, including Sweden’s contribution toESA. Other RC tasks include special investigatoryassignments for the Government.

Council for Planning and Coordination of Re-search-The FRN’s main task is to initiate andsupport research of great social importance, togetherwith the RCs and sectoral bodies. While the basicRCs are dominated by researchers, the FRN isdominated by community representatives from thefour main political parties, trade unions, the SwedishEmployers Confederation, municipal authorities,and county councils; the government appoints theFRN chairman. The FRN’s structure reflects its roleof monitoring community research needs and start-ing new, probably multidisciplinary, research pro-grams. The FRN’s tasks also include distributingstate grants for expensive scientific equipment,carrying out studies, and sponsoring the NationalUnderstanding of Science program.

National Board for Technical Development—The STU is the state agency that encouragesindustrial research and development. It is the onlycentral body that both supports initiatives, and plans

and advises on technical research and industrialdevelopment. Its contributions vary from long-range, broad-based research to technical develop-ment, the allocation of venture capital, advisoryservices, information distribution, and technologyprocurement. The predominant forms of support fortechnical R&D are both general and selective.Support is channeled through the STU (or theIndustrial Development Fund for longer-term, high-risk projects) in response to proposals from compa-nies and institutions. The support is general, in thatanybody can apply for it, but selective, in the sensethat awards are made after an evaluation by thefunding agency. The STU cooperates closely withhigher education establishments and provides muchof their funding. Loan to large companies arerestricted to projects where an exchange of knowl-edge with universities and research institutes is partof the program. The STU also has a program for the“Development of Knowledge” as well as its ownTechnical Research Council.

National Board for Universities and Colleges—The UHA, a Government agency subordinate to theMinistry of Education and Cultural Affairs, isconcerned with coordinating and planning nationalhigher education, research, and research training. Itcompiles documentation on which the governmentand the Riksdag base their decisions for developingresources for higher education and research. Itsubmits annual budgetary requests to the govern-ment, based on the requests it receives from individ-ual educational units and other authorities within itsjurisdiction. Central planning of higher education,research, and research training in various fields isconducted by five sectoral UHA planning commit-tees. In budgets since 1982, most education expendi-ture items have been cut, but not research andresearch training. Research and research trainingfunds are distributed by the local higher educationestablishments, not the UHA.

Sectoral Research—Beside the above organiza-tions, the sectorization of Swedish R&D hasspawned special agencies for planning, financing,and sometimes performing R&D in various sectors.In some cases special bodies exist to coordinateresearch in a particular sector, while in others theseactivities are coordinated through the ministryconcerned. There are some 100 sectoral bodiesfinancing R&D, most of them small. Those withextensive R&D activities include the Council forBuilding Research (BFR), the National Board of


Education (SO), the National Defence ResearchInstitute (FOA), the National Environment Protec-tion Board (SNV), the Swedish Transport ResearchBoard (TFB), and the Work Environmenrt Fund(ASF). The STU described earlier is an agency ofparticular importance for technological develop-ment, and is also a sectoral agency for industry. In itsreview the OECD,50 while recognizing that a reason-able balance had been struck between long-termbasic research and short-term sectoral research,advised the government not to establish any morespecialized in-house R&D facilities for fear that theywill isolate themselves from the university systemand from strategic research, and be unable to showa correlation between success and funding.

The National Defense Research Institute is a jointsectoral agency responsible for planning and coordi-nating defense research and for conducting the bulkof its R&D. Its funding allocation is part of theannual defense budget, although long-term develop-ment guidelines are laid down in the defense policydecisions enacted at roughly 5-year intervals. FOAalso receives an allocation through the Ministry forForeign Affairs to finance documentation for armslimitation and control.

The National Board for Space Activities isresponsible for state-funded space research. Itsduties include initiating space R&D long-rangeanalysis, distributing state grants for space researchand space technology development, and supportingindustrial development in the space sector, includingSweden’s contribution to ESA and other interna-tional projects.

Sweden has few governmental R&D laboratoriesoutside the system of higher education.

Industrial and Technical Council—An Industrialand Technical Council (ITC), attached to the Minis-try of Industry, was set up in 1981 to representeducational, research, and industrial interests, and isdesigned to promote contacts between government,industry, and technical research. Other miniserieshave similar units attached to them.

R&D Policy Formulation

The Role of Education—Higher education inSweden is a public research resource, and university

researchers are civil servants. Most basic researchtakes place within the higher education system andconsists of general scientific development, problem-solving, and goal-oriented research. Most develop-ment work is done by industry. In the main, the statefinances R&D through:

. permanent resources to the higher educationsystem;

. project funding for the research councils; and● project funding for the special sectoral agen-

cies.

Decisions by the government and the Riksdagconcerning higher education research essentially arebased on the annual budget requests submitted byeducational establishments and research councils.Although the state exercises no detailed control overbasic research, except through the establishment andscope of professorial chairs, it issues directives formajor sectoral measures whenever it deems thenational coordination of R&D necessary. Loosecontrol is maintained through the size of facultygrants and various funding items within them, andby the balance of funds between faculties.

For applied R&D fincanced by the sectoralagencies, the state sets the basic guidelines, based onsocial considerations of policy, priorities, and struc-tural matters-after consultation with industry, re-searchers and the unions. Within the government,ministries prepare R&D proposals based on requestsfrom authorities, committees, and their own R&Dagencies. The government presents its R&D policiesto the Riksdag in periodic research bills.

Research Bills—Generally, there is political una-nimity concerning the direction of research policy.Various research policy reform measures werecarried out in the 1970s to foster technical renewalin industry, encourage industry to increase its ownbasic research spending, finance institutional re-search through 5-year framework programs, and thelike. To achieve a coherent research policy, thegovernment’s practice since 1982 has been tointroduce a comprehensive research bill every 3years. The first such Bill was introduced by thegovernment in 1982, followed by another in 1984which represented a broader approach across 10departments. The third was presented in 1987.


The 1982 bill introduced measures concernedwith the dissemination of research information,improving contacts between university and industry,evaluating research by research councils and sec-toral agencies and, most importantly, improvingresearch planning and coordination. The 1984 billpresented long-term plans from sectoral bodies, sothat university research planning c o u l d i n c l u d e t h esectoral agencies. The bill provided for strengthen-ing research evaluation and, for the first time,defined priority areas across research fields. Indus-trial strategic priority areas in technical research hadbeen adopted in an earlier act on industrial policy.

The 1984 Act put less emphasis on planning, butdefined a number of main issues such as quality ofresearch, working conditions of researchers, and thebalance between resources for the sectoral agenciesand resources for basic research. The need tostrengthen basic research was given particular atten-tion. Measures to improve recruitment of students toresearch training were established and a system ofstudent grants introduced. In sectoral research,long-term development of knowledge and compe-tence was given a higher priority. The long-termpriorities of the 1982 Act remained unchanged, butspecial emphasis was put on environmental re-search, information technology, materials science,and biotechnology.

Civil R&D Activities

Universities and Colleges—Sweden is dividedinto six higher education planning regions, with theuniversity being the main institution of highereducation and research in each region. There are 34state institutions for higher education in 21 cities andtowns. Higher education units with permanentresearch organizations exist in seven cities: Stock-holm, Uppsala, Linkoping, Lund, Goteborg, Umea,and Lulea. Faculty and sub-faculty boards plan theresearch training within their fields and supply theuniversity senate with documentation on which tobase its applications for funds, and decide thedistribution and use of university or college re-sources. Some faculties have only one department,while others may have up to 40. Specialized groupsthat are more or less permanent conduct the research.There are also multidisciplinary projects.

Within the higher education system there has alsobeen a growth of problem-oriented research involv-ing researchers in several disciplines; the Riksdagspecifies these “thematic programs.” Several profes-

sorial chairs have been established for each theme,and a number of research centers have been formedat the universities and colleges involved, such as theResearch Policy Program at Lund and the Interdisci-plinary Centre at Goteborg.

As a result of the increase in research and researchtraining resources in the 1980s, the higher educationsystem has taken on a growing number of researchassignments from industry and the sectoral agencies.

Institutes—By international standards Swedendoes not have many state research institutes. It hasbeen, and remains, a deliberate policy of thegovernment and the Riksdag to gather R&D re-sources within the higher education systems. Re-search institutes remain an exception. The govern-ment has established a number of independent R&Dagencies and institutes in specific fields. Usuallythese are interdisciplinary to benefit the principalcustomer, exploit the installation of special equip-ment, do specialized tasks, or meet the needs of aparticular region. One such independent R&D insti-tute is the aforementioned National Defense Re-search Institute, which conducts defense-relatedresearch in the natural sciences, engineering, behav-ioral sciences, and medicine.

Partly to assure development in certain areas, thegovernment has sponsored special institutes andcompanies to conduct applied R&D. To avoidscattering R&D resources, the government and theRiksdag have recently been more reluctant to startresearch institutes outside the universities.

A number of “cooperative” research institutesfunded equally by government and industry exist;they form a common platform for industry and thestate to develop the competence of various sectors.(Other cooperative research, similarly funded, iscarried out in universities without the formation ofan institute.)

R&D in Industry—As mentioned earlier, only 12percent of industrial R&D is estimated to be basicresearch. With companies funding virtually all oftheir own R&D, it is understandable that the bulk ofit should be “experimental development,” The strictdistinction between the R&D roles of industry andthe public sector (including academia), necessitatesclose cooperation and transfer of R&D results. Thedevelopment of good relations between universityand industry is therefore very important to Sweden’stechnological and economic progress. For many


years, both imports and exports of high-technologyproducts have grown more rapidly than those ofother sectors; the success of industry must, therefore,depend on its ability to manage technology-relatedfactors.

While industry does little basic research, theOECD Review51 gives some significant figures fortotal R&D:

●

●

●

●

●

●

it represents 10 percent of value added inindustry;it is nearing 70 percent of all R&D in Sweden;about 95 percent of R&D is in firms with morethan 500 employees-the five largest accountfor 37 percent, and the 10 largest for 55 percent.Some of the large companies have their ownresearch councils;while R&D is mostly allocated to developingexisting products, innovation is growing;in some industries, R&D is hampered by lack ofmanpower,R&D-based high technology firms are on theincrease, but do not yet play a major role.

University/Industry Cooperation—Attitudes to-ward operation in both industry and the universitieshave changed since the early 1970s. There has beenstrong industry interest in specific programslaunched by public agencies, promoted in part by thepredominance of well-trained researchers in theuniversities, and in part by the need of companies forthe continuous generation of knowledge. R&D-intensive industries, such as pharmaceuticals andelectronics, are now establishing closer links with theuniversities.

In 1985, the UHA canvassed major companies toidentify their graduate needs by qualification, andtheir preferences for content, kind, and location ofeducation and research. Industry’s suggestions in-cluded expanding engineering degree studies, pro-ducing more computer specialists and other gradu-ates with computer science qualifications, increas-ing in-service training, offering better languageteaching, increasing the interchange of qualifiedpersonnel between academia and industry, provid-ing for better dissemination of R&D results, andencouraging wider sharing of specialized laborato-ries and expensive equipment.

Adapting the system of higher education to thecommunity’s rapidly changing educational needshas high priority in Sweden. The OECD Reviews*quoted the Undersecretary of State in the Ministryfor Education and Cultural Affairs as saying, “Dueto the size of the country and due to specifictraditions in higher education, there are three differ-ent oriented-research systems which have to co-existgeographically on seven main campuses: first of allacademic research; secondly, politically initiatedsectoral or mission-oriented research in areas such asdefence, health, environment, housing, etc; andthirdly, commercially initiated contract researchtowards sophisticated products in, for example, thepharmaceutical industry, metals and pulp, comput-ers, telecommunications, etc. All these kinds ofresearch have to be undertaken in the same physicalenvironment and partly by the same people.”

Since the mid- 1970s the trend has been for highereducation to be job-oriented and framed in themanner of the technical universities or the businessschools. By international standards, Swedish indus-try employs fewer postgraduates or PhDs thancomparable countries, preferring instead to hiregraduates and train inhouse. This has no doubtcontributed to the paucity of basic research done inindustry compared to the universities.

University-to-industry cooperation mainly occursthrough government agencies responsible for R&Dsupport of interest to Swedish industry; the mostinfluential are the STU and the BFR. STU, forexample, funds about 30 institutes in cooperativeprograms. Most institutes are-located at or close toa university and collaborate very closely with it. Thefinancing of the institutes is regulated throughlong-term contracts between STU and an industrialconsortium, on a 50/50 basis.

SUT also funds up to 500 researchers and up to1,000 research students in information technologyand other priority areas, thereby complementing thebasic resources of the university system.

Other examples of university-industry coopera-tion include science parks, innovation centers. andfoundations, all of which grew rapidly in the 1980s.Special arrangements have been adopted, one ofwhich is an R&D center established within a

5 1I b i d .

52 I b i d .


university to promote contract research as well asindustrial applications of new ideas. There areseveral such centers, often acting on behalf of thewhole faculty, some of whom take the application tothe pre-production stage. Another model is that of atransfer center established jointly by industry andthe university, perhaps by way of a foundation. Themost common arrangement is a foundation jointlycreated by a municipality or a county council, thecounty administrative board, a university or college,a chamber of commerce, some companies, and oneof the industrial development boards. In the govern-ment’s 1985-86 Budget Bill, special emphasis waslaid on promoting the regional economic role ofuniversities, with funds provided for support anddissemination of the technology and knowledgedeveloped. A particularly novel arrangement is theventure in biotechnology carried out in the laborato-ries of the University of Uppsala, financed by STU,the university, and Pharmacia (a major pharmaceu-tical company) whereby Pharmacia employs theresearchers but a special steering committee ensuresthat the results are open to all. Acknowledging thatsome cooperative arrangements may be more effec-tive than others, the government has assigned toFRN the responsibility for evaluating each model.

Other initiatives to promote university/industrycooperation include:

●

●

●

Adjunct or part-time professorships filled byscientists working outside the university sys-tem.A program under the government’s Commis-sion on University Cooperation with ExternalPartners to make so-called “liaison research-ers” from universities available to small andmedium-sized companies. The Ministry ofEducation funds only the initial phase of aproject, with regional organizations and thecompanies funding it thereafter.Contact offices at the technical universities tofacilitate liaison with local industry. The Feder-ation of Swedish Industries and some regionalchambers of commerce have established theirown contact offices at the universities ofStockholm, Uppsala, Lund, Linkoping, Umea,and Lulea.

Evaluation of R&D—Research is evaluatedthrough peer review committees comprised of indi-

viduals with international experience and reputation.While such audits can help in assessing the qualityof R&D, it may be that unless they knew the qualityto be high, these international experts would bereluctant to accept the auditing task, as they wouldbe unlikely to learn anything new. Sweden has somescientists of international repute, working in estab-lished centers of excellence; this preferential treat-ment of places and people of excellence may beconsidered elitist, but according to the OECD itappears to have served Sweden well. Sweden hasbeen eminent for decades in such fields as ultra-centrifuging in biochemistry, electrophoresis, exclu-sion chromatography, and the separation of largebiomolecules, together with the enabling equip-ments in each field. Such success reflects both thepersistence and perception of individuals and gov-ernment support.

Defense R&D

Long-term direction for the defense program isprovided by the Riksdag in 5-year defense resolu-tions, the last of which passed in June 1987. Annualbudgets define priorities and identify changes. In1986/87, defense programs accounted for 26 percentof government funded R&D of which, as in otherindustrial countries, the major portion was forproduct and project development rather than forbasic research. Allocations Under ’’defense R&D” onindustrial development, since research contracts areplaced with individual companies. Moreover, “com-mon defense research” as it is called, is closelyconnected with several other objectives such asspace, energy, transport and communications, na-ture conservation, and public health and hospitals.In a statement published by the Ministry of Finance,the civil functions for which the Ministry of Defenseis responsible even included ecclesiastical prepared-ness.53

The FOA is the joint sectoral agency responsiblefor planning and coordinating defense research andconducting most of related R&D activities. Inaccordance with its policy of neutrality, Swedenretains a comprehensive defense industry capability,and can claim to be among the world leaders inseveral technologies. When capabilities are notdomestically available, the freedom to manufactureimported systems and equipment under license or injoint ventures is inevitably sought.

534= S- rj@@ 1988/89,” A summary published by the Ministry of Fum.nce, 1988.

Appendix G–European Organization and Policies for Research and Technology ● 161

International Collaboration—Swedish industryand its exports are highly specialized. Sweden haslimited resources and cannot afford to develop acomprehensive range of complex technologies;therefore, it collaborates at all levels from individualresearchers to government. International R&D coop-eration includes exchanges of information, coopera-tion on individual projects and major researchprograms, coordination of research inputs, coopera-tion on research training, joint financing of research,and joint research institutions.

It is difficult for a small country to strike a balancein allocating its resources among national andinternational programs; tradeoffs have to be madeamong existing R&D programs, or at the expense ofother sectors of society. For many years, the Swedishscientific community has been mainly responsiblefor achieving a sound and balanced internationalorientation for Swedish R&D; this has been aguiding principle of Swedish research policy. Deci-sions on participation in international programshinge mainly on potential scientific returns, withspecial financial arrangements being made to allowparticipation in long-term European projects such asCERN, ESA, and cooperative fusion research.Though international research projects are alsopromoted by other motives such as industrial needsand policies in energy, trade, or developmentassistance, the importance of scientific value as adetermining factor is likely to remain. Initiatives toincrease international cooperation in research willlargely continue to emanate from the scientiststhemselves; but the Prime Minister is activelyinvolved in ensuring that costs and benefits arecompatible with the government’s integrated re-search policy.

Sweden also participates in international R&Dunder the aegis of such organizations as the UnitedNations UNESCO. It is involved in EUREKA and,though not a member of the EEC, is cooperating onESPRIT, BRITE, and RACE, etc. through an agree-ment with the European Commission signed inJanuary 1986. Sweden is an active participant inCOST (European Cooperation in Scientific andTechnical Research).

There is comprehensive R&D cooperation amongNordic countries funded through the budget of theNordic Council of Ministers, and focusing onindustrial technology. Substantial grants are chan-nelled into technical and scientific cooperation by

the Scandinavian Council for Applied Research(Nordforsk), the Nordic Industrial Fund, and undersuch project as Tele-X. Nordic R&D cooperationwas strengthened by the establishment, in 1982, ofthe Nordic Research Council.

Bilateral research associations promoted by STUhave been established with several countries, mostnotably France, Germany, and Japan, with extensivecontact between individual researchers in the U.S.and elsewhere. The 1984 Research Act proposedthat significant funds be allocated to enable re-searchers and students to work abroad, as well as tofacilitate visits by foreign researchers to Swedishuniversities.

SUMMARY OF EUROPEANCOLLABORATIVE RESEARCH

AND TECHNOLOGY

Background

Military Trends in Collaboration

Two diverse arguments support the current trendtoward increased intra-European collaboration: first,the pressing need to improve NATO’s militarycapability through a more efficient use of resources,and second, the political and commercial need topromote a stronger “European defense identity”within the Alliance and to maintain a viable “Euro-pean armaments base.”

Supporters of transatlantic cooperation empha-size the need for more efficient use of resources,while others emphasize the need to maintain a viableEuropean defense industry. The need for Europe toexport armaments and high-technology productsfigures strongly in arguments for European andagainst transatlantic cooperation, due in part torestrictive U.S. policies on technology transfer andthird country sales.

In fact, both arguments are valid. The issue thatbrings both sides together is money. Real costgrowth for military hardware can be more than 5percent each year and the trend is expected tocontinue. Unfortunately, defense budgets are notgrowing to meet these increased costs. This hasbecome a critical problem for the Alliance, whichsees inevitable and unacceptable shortfalls in con-ventional capability, unless steps are taken to reducearmament costs.


While some rationalization is taking place,today’s European defense industry is still frag-mented and nationalistic, with manufacturers lim-ited to smaller volume production that results inhigher costs. In seeking a more cost-effectiveindustrial policy through collaboration, Europe istrying to “put its house in order” and obtain morecapability from its defense investments. A strongEuropean defense industry will be better able tocollaborate with the United States on more advancedprograms, better placed to introduce Europeandefense products to the U.S. market, and able tosatisfy requirements for which European govern-ments have in the part turned to the United States.

All European NATO governments today broadlysupport armaments collaboration, as the collectiveMinisterial Declaration and Decision Document,issued after the meeting of the Independent Euro-pean Programme Group (IEPG) in November 1984,revealed. 54 To increase the benefits from armamentcollaboration these texts emphasized: 1) the impor-tance of R&D collaboration to provide a basis forfuture collaboration on development; and 2) theneed for staffs to work together from an early stageto see if needs could be harmonized.

The IEPG, whose task is to encourage Europeancollaboration in defense research and procurementin a NATO framework, also called on nations not tolaunch projects that would duplicate others’ efforts,and suggested that European governments be morewilling to adopt equipment already in production inother Alliance countries, preferably European. Thecommitment to collaboration is now registeredstrongly in national Defense White Papers, and theintent of the IEPG Ministerial statements is reflectedin national procedural documents that instruct MoDpersonnel to harmonize requirements, avoid dupli-cation, and enhance coordination with the Allies’research and procurement programs.55 Despite thiscommitment to collaborate wherever possible, thereremains no directive in the U.K. MoD, for example,that European products be given priority in procure-ment; the principle of “the best equipment for theprice” is still paramount.

The IEPG procurement concept models the U.S.style of competitive, consortium contracting, but on

an international scale, not unlike the approach nowbeing taken for “Nunn” programs. Whether diverseindustrial structures in individual European coun-tries will allow such competition remains to be see,but the political will essential to success has beenestablished.

European Collaboration onAdvanced Civil R&D

The growing concern in Europe over its techno-logical future can be attributed to three factors: 1) theenormous impact of information technology; 2) thegrowing perception of advanced technology instrategic terms and the need for self-sufficiency; and3) the severe “structural” handicaps to Europe’sinternational competitiveness.

Europe’s problem does not seem to lie in anycritical shortage of basic technological resources,skills, or funds to support them, but in its failure toorganize properly to exploit innovations to maxi -mum commercial advantage. Some analysts suggestthat Europe lacks high-technology companies bigenough to challenge the largest U.S. or Japanesecompetitors internationally, but this argument doesnot stand close scrutiny. More plausible is theargument that the structure of Europe’s industrieshas remained too rigid, with older companies slowto recognize that profitable growth requires world-wide marketing resources and a readiness to inno-vate. Many larger European companies still relyheavily on home markets that no longer provideeconomies of scale, or else they have traditionallyset up operations dedicated to each national market.This contrasts sharply with the ways in which U.S.companies such as IBM, Hewlett-Packard, andTexas Instruments have organized on an EEC-widebasis to take advantage of the Common Market.

Breaking down the long-standing barriers thathave isolated European companies from each other,as well as from other European national markets, isan explicit objective of the significant collaborativehigh-technology initiatives now being pursued. In-dustry, however, sees additional reasons for collabo-rating in research. One is that, as technologiesconverge, companies that once specialized in asingle activity need to draw on a spectrum of

j4~_daEWm ~PGmp, “~~~~ DCClu~m ~d ~ision Document,” rcportingon fmt IEPG Ministerial Meeting, Nw. 22-23,1984 (published in NATO Review, kxrnbcr 1984, Pp. 27-29).

S5Symposium on “A J5uqcm Armaments Policy,” Brussels, October 1979.

Appendix G-European Organization and Policiesfor Research and Technology . 163

sciences to progress; innovation increasingly de-mands a multidisciplinary approach. The other isthat as product life cycles shrink, the need for morefrequent introduction of new ideas increases thecosts and risks of research; companies can no longerafford to risk a generation gap in their productsbecause of research failures.

As an inevitable step in the above process, theSingle European Act passed by the EuropeanParliament provides the impetus and means tocreate an open market among EEC members by1992. The pace of European industrial integration isaccelerating, driven by high-profile governmentpublicity campaigns that “Europe is open for busi-ness” in 1992. Astute companies are preparing for1992; if the internal barriers fall as planned, Europewill need to have in place an industrial structure thatcan exploit the increased opportunities.

The Impact of Collaborative Researchon Future Defense Equipment

The political trend is for governments to reducespending on defense R&D in real terms, encouragedefense contractors to invest more, and put moreemphasis on civil research and commercial applica-tions.

The growing European collaborative civil re-search programs are explicitly directed towards civilcommercial application, with little public recogni-tion of their possible application to defense equip-ment. The dividing line between defense and civilR&D in the technologies appears to be fading, andonly becomes marked when technologies are appliedto products; at that stage, the trend is for funding totransition form government support to industryinvestment. The European collaborative researchcivil programs clearly do have defense applications,but it appears to have been left to the industriesinvolved to identify and exploit them; the programsmay not yet be sufficiently mature for such technolo-gies to have been matched with defense equipmentrequirements.

Collaborative Military Programs

Overall Trends

From all that has been said and published, it is notthe intention of the IEPG countries to encourage aform of European protectionism at the expense ofU.S. defense companies; rather, a stronger and morecoherent European industry is viewed both as

insurance against waning U.S. attention to Europe,and as a step towards a stronger, more coherentindustrial base throughout all of NATO, includingthe United States.

In fact, a significant impetus was given totransatlantic NATO collaboration by the Nunn-Roth-Warner Amendment to the fiscal 1986 DefenseAuthorization Bill. European governments and com-panies are now responding positively to Nunnprogram opportunities, and transatlantic consortiaare forming at record pace; most major Europeandefense contractors are involved in one or moreprojects listed as “Nunn Projects.”

However, there are major European defenseequipment programs provided for by Memoranda ofUnderstanding (MoUs) between participatingNATO nations, to which the U.S. Government is nota party-and in which U.S. companies can only hopefor a minor or subcontracting role. Funding for suchprojects will come from the “D” element of govern-ment-funded defense R&D budgets, with little or noresearch directly applicable once the collaborativeproject stage has been reached. These joint programsare invariably run by companies formed specificallyto manage them. Table G-1 presents a listing of themost important ones.

To this list of military projects can be added thecivil aerospace Airbus program, managed by AirbusIndustries on behalf of the U. K., French, German,and Spanish Governments.

Perhaps the most visible example of collaborationamong European companies is the European FighterAircraft. This program is experiencing all of thetraditional problems surrounding joint R&D andproduction programs, such as equitable workshar-ing, cost control, project leadership and control—and overcoming national biases. How the Europeansaddress (and overcome) these issues may be a goodindicator of how well economic “integration” willwork in 1992 and beyond.

European Fighter Aircraft

Program Structure and Goal—The EFA pro-gram is a four-nation collaborative venture involv-ing the United Kingdom, Germany, Italy, and Spain.An October 1986 MoU authorized a four-government management organization, the NATOEuropean Fighter Management Agency (NEFMA),to be set up in Munich under the auspices of NATO.The organization is similar to the NATO Multi-Role


Table G-l--Major European Management Companies

Company Project Nations

1. Panavia Tornado United Kingdom, West Germany, Italy2. Eurofighter & Eurojet European Fighter Aircraft United Kingdom, West Germany, Italy, Spain3. E H Industries E H-101 Helicopter United Kingdom, Italy4. Eurocopter Light Attack Helo United Kingdom, Italy5. Joint European Helicopter A-129 Light Attack Helicopter Italy, United Kingdom, Netherlands, Spain6. Euromissile HOT, Milan, Roland France, West Germany7. Euromissile Dynamics Grp TRIGAT France, United Kingdom, West Germany8. BBG ASRAAM United Kingdom, West Germany

combat Aircraft Development Agency (NAMMA),the Munich-based tri-government agency that over-sees the Panavia Tornado program. Also Munich-based are the EFA manufacturers’ consortium,Eurofighter Jagdflugzeug GmbH, consisting of Brit-ish Aerospace, MBB, Aeritalia, and CASA; and theEJ-200 engine consortium, Eurojet Turbo, consist-ing of Rolls Royce, Motoren-und-Turbinen Union,Fiat, and Sener. Many leading electronics andequipment companies in the four countries have alsoeither formed, or are forming, international consortiato bid for systems contracts for the project. Themaster contracts for the program, placed throughNEFMA, go to Eurofighter and Eurojet, both ofwhich started work ahead of the recent MoU andfinanced it themselves to save time.

The Chiefs of Air Staffs of the four countries metin Madrid in September 1987 and reaffirmed their airforces’ requirements for a fighter to meet the airthreat projected from the mid-1990s. They signedthe European Staff Requirement for Development(ESR-D) and forwarded it to their respective govern-ments, with the hope that an early decision would bemade to proceed with full development. That com-mitment has now been made by the U. K., Germany,Italy under an MoU signed in May 1988, with Spainexpected to sign later in the year.

The original, tentative national requirements forthe EFA were United Kingdom and West Germany,250 aircraft each, Italy, 165, and Spain, 100; butbudget stringency has reduced the West Germanfigure to 200 for planning purposes, and there issome doubt as to the firmness of the U.K. *S 250. TheUnited Kingdom and West Germany each have a 33percent share in the development program, whileItaly and Spain have 21 percent and 13 percent,respectively. The initial commitment is to spend$3.5 billion on the development stage, which shouldbe followed by a further $10 billion. Each produc-tion aircraft is expected to cost $52 million attoday’s prices, but the final fixed-price figure will

not be agreed until nine prototypes have been builtfor flight testing; each country will build at least oneof the prototypes, with the first scheduled to fly inmid-1991. Production contracts are expected to beawarded in 1992 and 1993 after development hasproceeded far enough to confirm that the aircraftmeets its performance requirements, with introduc-tion to service in 1996.

The program is ambitious in technological, eco-nomic, and political terms. In the new climate offixed-price, competitive contracts-and with thespecter of the Nimrod cost and schedule overruns tospur them on-the industrial partners are well awareof the challenges they face to keep costs in line andavoid the ever-present “alternative” to buy a U.S..aircraft (e.g., the Hornet 2000). In Britain, more thanin the partner nations, the advantages of “goingEuropean” tend to be presented in terms of jobcreation, but the most compelling case for keepingthe project “European” was to retain a cutting-edgetechnological capability. Cost, it seems, was not theover-riding factor in the commitment to EFA oversuch alternatives as the McDonnell Douglas Hornet2000, even though the program is disrupting defensebudgets in all the participating countries (the U.K.MoD has admitted that its share is only “affordablewith difficulty”); and Germany has reportedly can-celed nearly 200 defense projects to “make room forEFA” in its budget.

BAe Experimental Aircraft Programme (EAP)-BAe first flew its experimental demonstrator air-cm the EAP, in 1986. Originally conceived as atechnology demonstrator when U.K. industry’s pa-tience ran out after several years of MoD procras-tination over the RAF’s fighter requirements, it wasalso something of an “EFA trailblazer.” Funded byBAe, Aeritalia, partner companies in the U. K.,Germany, and Italy, and eventually by MoD, theEAP was designed and built remarkably quickly; itwas developed to demonstrate “fly-by-wire” andother advanced technologies for eventual applica-


tion on “the U.K. ’S next fighter aircraft.” Only oneaircraft was built. In June 1987 it was announced,ahead of the recent EFA MoU, that the EAP was tobe further funded for use as a flying test-rig for thefour-nation EFA development program. Additionalfunding was also expected to cover flight setting ofthe EJ 200 engine being developed by the Eurojetconsortium.

Commercial Aspect—The original EAP had beenfunded to a much greater extent by industry than bythe U.K. MoD (German and Italian MODS haddeclined to contribute), with the participating com-panies hoping to secure favorable—or even monop-olistic-positions once EFA was launched. How-ever, after the U.K. government imposed its consid-erable political influence on the EFA project, allEFA bidding became competitive, with all biddershaving an equal chance regardless of whether theyhad contributed significantly on EAP. This causedthose companies that had contributed to doubt thewisdom of such up-front investments on majorprojects when governments denied them any com-petitive advantage for so doing. The companies nowhave to bid a firm fixed price for development,drawing on hard-won background knowledge, withthe prospect of further competition for subsequentproduction-and no guaranteed share for the devel-oper. There is little doubt that if the companies hadnot made such investments, but had left it togovernments to act, the EFA project would not be asmature as it is.

Other EFA procurement rules include the need forall bids to be collaborative; bids from singlecompanies which, on their own, have all of thenecessary skills will be adjudged non-compliant—even if lower priced. This ruling has led to ad hoc or“pseudo” teamings, proliferation of so-called “ex-pert’ companies, and lengthy bid lists and evalua-tions. The EFA program is collaborative by govern-ment edict, and no country has been prepared toforego involvement in important high-technologyareas; this has led to mixed teams, committee or“political” choice of program leadership, as the riskof longer schedules, increased costs, and technologi-cal compromise.

The Radar Battle—The EFA program, if seen asthe last major European military aerospace programof this century, may also decide the future of somebidders in specific technical fields. The first equip-

ment to be decided will be the radar, and only in theUnited Kingdom are two companies (Ferranti Inter-national and GEC-Marconi) fighting for their coun-try’s share of the EFA radar contract. Each of theother three countries has only allowed one of itscompanies to bid for the contract, under a “chosen instrument” policy. The radar, which is the biggestsingle item after the engines and airframe,should beworth $2 billion shared among the four nations; thisis about the same as for the canceled GEC-MarconiNimrod AEW aircraft.

Largely as a result of its experiences on Nimrodand the troubled Tornado Exohunder radar pro-grams, GEC has opted for a low-risk solution forEFA, based on the technology of Hughes’ APG 65;Ferranti has offered an all-European. EuropeanCollaborative Radar (ECR 90) solution based on itsown technology. GEC, which believes that the nextcompetition will be between Europe and the UnitedStates, apparently sees the competition’s outcome ascrucial to the structure of European airborne elec-tronics companies. Ferranti, on the other hand, ismore concerned with Europe’s retention of hightechnology, and the ability to update it, free frompossible U.S. embargoes.

Under its bidding rules, Eurof`ighter has insistedon freedom to export all components of the aircraft.Bidders for contracts have been warned that theymust guarantee freedom to export the equipmentthey supply, or list in advance the countries to whichit cannot be exported. European companies arebound only by their governments’ adherence to thegeneral Western ban on sensitive sales to thecommunist world. Although not formally directed atthe United States, this rule reflects Europe’s sensi-tivity to U.S. technology controls and will affectU.S. companies most. DoD’s response to the situa-tion was a draft MoU that called for a phased releaseof APG-65 technology conforming to EFA develop-ment milestones, and assurances of an equitableworkshare for U.S. industry. The DoD also indicatedits willingness to be flexible in working out itsground rules for export of the radar technology tonon-EFA nations. It emphasized that EFA nationsshould meet their own inventory requirementsbefore trying to export the aircraft-thereby defer-ring export license requests until around the year2003.


European Space Program

The European Space Agency is currently consid-ering its long-term objectives for a series of majorprojects, including: an upgraded version of Europe’slauncher, Ariane-5; Columbus, intended to be Eu-rope’s contribution to the U.S. space station pro-gram; and the French-sponsored Hermes spa-ceplane. In the face of significant cost growth onexisting programs, ESA is under pressure to redefineits long-term program which the U.K. Governmenthas described as “over ambitious and beyondEurope’s financial capacity-and has failed to showhow private sector funding would be factored in toreduce dependence on government funding. ” Theseconcerns are beginning to be shared by others of the13 ESA member states, and even the most optimisticare concerned that ESA may have proposed morethan Europe can achieve. The concerns are two-fold:first, the cost of building the new infrastructure inspace may prove to be beyond Europe’s means; andsecond, inevitable cost increases in coming yearswill limit ESA’s capacity to operate and maintainspace hardware.

France and Germany are the largest contributorsto ESA, with each providing roughly a quarter of theAgency’s annual budget of about $1.7 billion. TheFrench national space agency, CNES, has a budgetof about $900 million, of which 40 percent is spentthrough ESA. With cost estimates for Ariane-5 andColumbus having risen by about 50 percent toaround $4 billion for each project, and Hermesnearly doubling to about $5 billion since conceptlaunch 3 years ago, agreement on all three projectswould require ESA’s annual budget to rise to $3billion by the mid- 1900s, approximately one-quarterof the U.S. budget for civilian space science andtechnology.

In contrast to France’s unwavering political andfinancial support for the three projects, includingHermes, Germany initially joined with the U.K. incalls for ESA to delay building the manned orbiterand to give more priority to the Columbus orbitingmodule project, led by Germany. The French posi-tion partly reflected anxieties about competition tothe Hermes concept from the West German andBritish designs for spaceplanes known as Saengerand Hotol, especially as these twO projects are nowmerged under an agreement between BAe and MBB.While France was prepared to increase its alreadysignificant financial support to ESA, the U.K.

initially refused to increase its 10 percent contribu-tion, insisting that the private sector should contrib-ute. This argument was rebutted by the Director-General of ESA, who believed that the funding ofpure science and research disciplines, such astelecommunications and Earth observation, was amatter for “society as a whole” and not privateindustry. Commercial spin offs from space are stillrelatively rare, the most obvious being launchfacilities and telecommunications satellites; returnsfrom investment in space projects over 20 years willnot be attractive to industry, even though technolo-gies from space programs are now being applied insuch other industries as electronics and materials.

In April 1988 the United Kingdom reversed itsearlier decision and agreed to participate in Colum-bus, although with a much smaller share than eitherFrance, Germany, or Italy. ESA assumed that Britainwould make a major contribution to a specialsatellite called the Polar Platform until the U.K.Government switched the direction of its spacepolicy in mid-1987 and then switched back again in1988. The Polar Platform will carry radar sensorsand other instruments for Earth monitoring, with theprospect that such remote sensing vehicles couldspawn a new industry, providing oil companies andagricultural organizations with ground images formonitoring mineral deposits and crop growth. Whilethe U.K.’s contribution and commitment to theEuropean space program is smaller than the spacecommunity and its partners would have wished, theU.K. Government at least appears convinced that theprogram’s objectives have been defined morerealistically, thereby justifying its intransigenceduring the 1987 budget discussions.

European Advanced Civil Research Programs

Overview

After months of wrangling over the EC’s budgetfor its framework of R&D collaborative programs,the EEC members finally agreed in September 1987to spend 5.2 billion ECU ($6.8 billion) on technol-ogy collaboration over the next 5-years. Within thatframework are several individual spending lines thatinclude information technology, advanced telecom-munications, biotechnology, alternative energysources, environmental research, and nuclear safety.These subjects have their own specific researchprograms -ESPRIT, RACE, and BRITE-whichwill be defined and described later in this section.


The Commission does not fund EUREKA, whichcould itself approach $5 billion.

The September accord contained important condi-tions designed to meet the objections of the UnitedKingdom, the only member to refuse a scaled-downversion of the Commission’s original ambitiousresearch budget first proposed 18 months earlier.Even now, there remain doubts as to how strictly oneof the U.K. conditions wiIl be enforced, whereby417 million ECU ($500 million) was held backpending clear evidence of progress on setting uppractical spending controls for the entire EECbudget. The U.K. Government remains adamant that“expenditure on research cannot be separated fromthe overall question of total resources available andthe disciplined identification of priorities for theirallocation.” Collaboration in advanced research isnot without its problems, but the Europeans appearto be making good progress.

The Joint Research Centers

The EC funds four laboratories of its own, knownas Joint Research Centers (JRCs), at Ispra in Italy,Karlsruhe in West Germany, Petten in the Nether-lands and Geel in Belgium. Whereas the JRCs wereonce the flagships of the EC’s research effort, theirdirection, objectivity, and usefulness have recentlybeen criticized to the extent that the EC is planningto tighten their management. Under proposalsadopted by the Commission in October 1987, theJRCs will have to reduce their dependence on theEEC budget by 40 percent by 1991. The proposalsenvisage that 15 percent of the JRCs’ resourcesshould come from contract research for governmentsand companies by 1991, with a larger proportioncoming from other Commission departments. Theplan does not, however, envisage any cut in theJRCs’ 690 million ECU allocation for the next 5years under the EC’s framework of research pro-grams. The Commission has proposed a sweepingreform of the JRCs’ objectives, mode of operation,and method of management Ispra, in particular, isreputed to need “a clean break with the practices ofthe past.”

The 12 research ministers, however, were unableto accept the Commission’s proposals; West Ger-many called for more details on how the JRC’sperformance would be monitored; the United King-dom called for better control on areas where JRCwork duplicates other EEC research; and WestGermany, the United Kingdom, and The Nether-

lands thought the 40 percent reduction in depend-ence on the EEC R&D budget by 1991 did not go faror fast enough. Ministers did agree, however, thatthe JRCs should have more autonomy and lessinterference from Brussels.

Eureka

Originally conceived by France as a riposte toPresident Reagan’s Strategic Defense Initiative, theEuropean Research C(K)oordinating Agency pro-gram was launched in mid-1985 as a joint Europeanprogram to strengthen non-military technologies, byjointly funded collaboration between Europeancompanies on civil projects with clear marketapplications. As stated by the Declaration of Ha-nover, the criteria for EUREKA projects are thatthey “will serve civilian purposes and be directedboth at private and public sector markets.” Thesponsors are the 12 EEC governments, the BrusselsCommis sion, plus Austria, Finland, Norway, Swe-den, Switzerland, Turkey, and Iceland. The aim ofthe program is to improve Europe’s competitivenessin world markets in civil applications of newtechnologies by encouraging technical and indus-trial collaboration.

Projects are underway in information technology,telecommunications, robotics, materials, advancedmanufacturing, biotechnology, marine technology,and lasers, as well as in environmental protectionand transport technologies. Companies identifytopics and market opportunities on which they wishto collaborate, then seek collaborative partners, withgovernments acting as “barrier-busters” whereverobstacles to collaboration and trade occur. EU-REKA status is granted to a project by agreementbetween governments of all companies involved,and the EUREKA Ministers’ Conference is notified.EUREKA has no central fund instead, governmentshave promised national support for approved pro-jects.

With a further 58 newly-agreed EUREKA proj-ects announced at the September 1987 Ministers’Conference, the number of agreed projects is 165,with a total value of at least $4.8 billion. A recentsurvey of the management needs of EUREKAparticipants showed that some companies wereexperiencing difficulties, with the underlying factorsbeing company size and collaborative experience.The U.K. Government believes that EUREKA hasconfirmed both the need for, and the feasibility of,cooperation between business and scientific com-


munities across national frontiers in Europe. EU-REKA has given companies the opportunity torequest support from governments and the BrusselsCommis sion. These measures should influence theframework for collaboration and thereby accelerateefforts to: establish joint industrial standards at anearly stage, eliminate existing technical obstacles totrade (e.g., mutual recognition of inspection proce-dures and certificates), and open up the system ofpublic procurement.

Esprit

The European Strategic Program for Research inInformation Technology (ESPRIT) was launched bythe EEC in February 1984 to encourage collabora-tion among companies, universities, and researchinstitutes in different EEC countries on a widevariety of Information Technology (IT) topics. Theprogram was conceived out of concern over Eu-rope’s poor IT competitiveness on the part of theBrussels Commission and the Round Table of 12leading European IT companies (GEC, ICL, Plessey,Bull, CGE, Thomson, AEG, Nixdorf, Siemens,Olivetti, Stet, and Philips).

ESPRIT involves joint precompetitive researchthat, while not intended to generate commercialproducts directly, may lead to further collaboration.The program was initially set to run for 5 years witha budget of 1.5 billion ECU, half of which isprovided by the EEC and half by the participatingorganizations, in support of 227 projects (from over1,000 proposals). Five areas of IT are covered:microelectronics, software, advanced informationprocessing, office systems and computer integratedmanufacture. ESPRIT is a program of directedresearch based on published work programs, organ-ized on an annual cycle that includes strategy andproject reviews. Management involves the Commis-sion, the Round Table, an ESPRIT Advisory Board,and the ESPRIT Management Committee.

The program is open to companies, academia, andresearch bodies, public or private. Each project mustinclude companies from at least two member states,but there is no formal prohibition of subsidiaries ofmultinationals, provided the research is carried outwithin the Community. Intellectual Property Rights(IPR) arrangements provide that “foreground infor-mation” is owned by the contractor generating theinformation; however, IPR must be made availableon a royalty-free basis to others in the consortiumand to those doing complementary work. The same

rules apply to background information provided thecontractor is free to disclose. There is a generalinjunction on the owner to exploit results, subject toconditions of disclosure and the owner’s commercialinterests.

Since most of the first-phase projects last for 5years, until the end of 1989, it is too early to judgewhether the program has met its three objectives: toboost cross-border cooperation, to develop industri-ally important new technologies, and to createEC-wide standards for IT products. Even so, theCommission feels it is time to start looking forresults, and an independent technology audit will beconducted later in 1988. According to ESPRIT’sannual report, by the end of 1987 and 227 projectshad produced 143 results of “industrial signifi-cance,” 27 had contributed to products on themarket, 44 were in products under development, 44had been transferred outside ESPRIT, and 28 hadcontributed to an international standard. About 5percent of the projects had been scrapped or merged.Specific achievements noted were:

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The high-speed chip or transputer, developedby INMOS of the U.K. Thorn EMI (INMOS’)parent company) worked with the Frenchelectronics group, Telmat, to produce twolow-cost supercomputers (the Parsys 1000 andT-Node) incorporating transputers. They pro-vide around half the performance of the fastestcomputers in the world—made by Cray Re-search-at a tenth of the price. Although thetransputer required only 4 billion ECU fromESPRIT for the precompetitive research, ThornEMI needed to invest substantially more tobring it to the market.As a catalyst for forming standards, ESPRIThas created a type of software, Communica-tions Network for Manufacturing Applications(CNMA), that allows different kinds of robotsto work together in an automated factory. It iscompatible with, but wider-ranging than, asimilar standard developed in the United Statesby General Motors, and is already used by BAeto build Airbus wings, and by BMW at itsRevensberg plant.The same kind of strategic value, this time inoffice systems, lies in a development calledoffice Document Architecture (ODA), a wayof formatting documents so that they can passeasily from one kind of desktop computer toanother, thereby making it more difficult for a


dominant supplier to comer the Europeanmarket. Another ODA allows the same flexibil-ity for mixed text, image, and voice data. ODAwas accepted by the International StandardsOrganization in late 1987.

In monetary terms, the package the Commissionrecommended for ESPRIT II was roughly double thesize of ESPRITI. The program, which the Commis-sion adopted in July 1987 and the European Com-munity Research Ministers approved the followingApril, benefits from a 1.5 billion ECU cash injectionthat industry will match. This second phase ofESPRIT (1987-1991), the largest single project inthe EEC’s R&D framework program, will concen-trate on the use and integration of IT, computer-integrated manufacturing, and application-specificintegrated circuits. Over 1,000 proposals were againreceived and final decisions on successful bids wereto be made in mid-1988. However, the joint bid byEurope’s three leading computer groups, Siemens,Bull, and ICL, for an 85 million ECU programfocusing on basic designs for the next generation ofcomputers is one of the most ambitious schemesplanned under ESPRIT 11 and “will need a lot ofdiscussion,” according to the Head of the Commis-sion’s IT Directorate; but the timeliness of the bid’sobjectives is not in doubt if Europe is to becompetitive in IT in the next century.

One source of the success of ESPRIT has been thestrength of basic IT research knowledge and skillspresent in European universities and research insti-tutions. There is a clear need to maintain andincrease these resources in Europe and, to this end,ESPRIT II will include a new element—the BasicResearch Action-to promote collaborative basicresearch in selected IT areas most likely to createfuture breakthroughs. Research should be clearlyupstream of ESPRIT precompetitive R&D in micro-electronics, IT processing systems, and IT applica-tions, and should be potentially relevant to long-term industrial objectives. Some 70 million ECUhave been set aside for the basic research actions,which should be aimed at:

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optical computing, electronic properties oforganic materials, quantum electronics, low-temperature electronics in superconductivity;formal methods in software engineering, com-putational logic and algebra, functional logicand object-oriented programming languages,distributed algorithms and protocols, dependa-

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bility, complexity, parallel systems, databases;andlearning, knowledge representation, non-standard approaches to logic, reasoning, speechand natural language, higher-level vision,multisensory fusion, perceptual-motor coordi-nation, autonomous systems, symbolic andsub-symbolic computation, and human-computer interaction.

The above list is not exhaustive; proposals forresearch across disciplines, areas, and topics areencouraged. ESPRIT rules require that consortiamust consist of at least two organizations fromdifferent member countries but, unlike the mainprogram, industry participation in the Basic Re-search Actions is welcome but not a requirement.

RACE

Research and Development in Advanced Com-munications for Europe (RACE) is a strategic,market-responsive R&D program intended to lay thegroundwork for a new generation of optical-fiberbroadband communications systems to come intoservice throughout Europe during the 1990s. Theaim is to achieve common standards and helpEuropean manufacturers gain a lead in advancedtelecommunications products. An initial 1-year defi-nition phase began in January 1986, with 31 projectscosting 50 million ECU split between the Commis-sion, manufacturers, and national telecommunica-tions authorities. The Commission was seeking 800million ECU in support of a second or main 5-yearphase to develop technologies and specificationsand test prototype systems. The Community’s con-tribution to this main phase is 550 million ECU,matched by an equal contribution from the industrialparticipants in the program.

BRITE

Launched in 1985 as a 4-year program to increasethe use of advanced technologies in the traditionalsectors of industry, the Basic Research into IndustryTechnology for Europe (BRITE) program has al-ready achieved a climate of cooperation in industrialtechnology, leading potentially to a new competi-tiveness for European industries. R&D carried outunder BRITE must have a clear industrial potentialand be precompetitive. The scope of the programincludes:

. reliability, wear and deterioration;

170 ● Holding the Edge: Maintaining? the Defense Technology Base, Volume 2

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laser technology and its application, and othernew methods of metal shaping and forming;joining techniques;new testing methods including Ion-destructivetesting (NDT), on-line and computer-aidedtesting;CAD/CAM and mathematical models;new materials, in particular polymers, compos-ites and others with special properties;membrane science and technology, and prob-lems in electrochemistry; andcatalysis and particle technology.

Precompetitive technical R&D, including pilotand demonstration projects in new production tech-nologies suitable for products made from flexiblematerials, is sought in three main areas:

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automated handling of flexible materials andarticles made from them;automated joining of flexible materials andtheir assembly into finished products; andintegration of the above technologies togetherwith others leading to flexible sequential auto-mated manufacture, with particular emphasison the need to accommodate multi-productmanufacture and model changes.

The rules for funding and participation in BRITEare similar to those for ESPRIT

In September 1987, the EEC approved 112 newprojects for BRITE, selected out of 471 researchproposals submitted from more than 2,200 differentorganizations. The 112 projects will involve 573participants from the 12 member states, 60 percentof them industrial companies, 25 percent researchinstitutes, and the rest universities. Out of these, 46projects were to receive Community finding up to atotal of 45 million ECU once contracts were signed.The remaining 66 projects were to receive up to 60million ECU as soon as the member states agreed onthe revised BRITE program to be submitted by theCommission.

Among typical cross-border projects is a Dutchchemical manufacturer teamed with laser specialistsin the United Kingdom to develop optical recordingmaterials based on polymers. Unlike existing photo-graphic films, these new materials would need nochemical processing and would be erasable. Otherprojects include the use of CAD/CAM in shipbuild-ing, and the use of lasers to treat alloys in steam and

gas turbines to reduce wear and increase resistanceto corrosion.

Some Reactions to the “Technology Push”

Though the United Kingdom was widely criti-cized in 1987 for single-handedly obstructing theEC’s proposed research package, enthusiasm inother governments was reported as “appearing to beslackening” as they reevaluated technology andindustry policies. While programs such as ESPRIT,RACE, BRITE, and EUREKA symbolized an al-most obsessive drive to strengthen technologicalperformance, complaints were heard that the Com-mission was interested only in more research spend-ing. The mood today is increasingly typified by thatof the U.K. Government, which accords higherpriority to promoting the use of the new technologiesthan to aiding the companies that supply them. InWest Germany, the change is thought even morepronounced, with Bonn appearing relaxed to thepoint of indifference—even with an “informationtechnology” trade deficit. A senior EconomicsMinistry official reportedly believed that WestGermany should concentrate on traditional indus-tries where it has proven strengths, rather than pourmoney into glamorous new technologies where therisks were high and commercial rewards uncertain.Siemens, too, apparently insisted that it was right tobe cautious, when “new technologies like roboticswere supposed to become big business but nevertook off.” In France, the government appears moreconcerned to acquire international market share forits high-technology companies, than to promotetechnological advances for their own sake.

These trends simply reflect the gradual recogni-tion in Europe that achieving a commanding techno-logical position, on its own, does not guarantee highprofits; innovation quickly becomes subject to in-tense competition in which even the most successfulcompanies can sustain heavy losses. Europeanparticipation in the U.S. Strategic Defense Initiativetypifies the mood, being described as “at best ofdubious commercial value, and at worst as awasteful diversion of scarce resources. ” Even therecent weakness of the U.S. economy was seen as acounter to the theory that a sound economy andcommanding technological skills went hand-in-hand. In Europe there has been a general shifttowards deregulation, privatization, and other poli-cies geared to enhancing the role of market forces. Inthe EEC the completion of the Single Market by


1992 now commands a high priority, and industry is In reality, today’s trend can be seen as a healthybeing encouraged to put its own house in order, correction to reduce reliance on costly, often ineffec-assume more independence from government sup- tive, technology-push policies and given greaterport, and respond to the influence of market forces. scope to the stimulus of market pull.

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Appendix H

Strategic TechnologyManagement in Japan:

Commercial-Military Comparisons

CONTENTSPage

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175R&D IN THE PRIVATE SECTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176R&D IN THE PUBLIC SECTOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177RESEARCH COLLABORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178DEFENSE DECISIONMAKING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179THE TECHNICAL RESEARCH AND DEVELOPMENT INSTITUTE . . . . . . . . . . . . . . 179PRIVATE SECTOR INTERACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182SELF-IMAGE, EXTERNAL EVALUATIONS AND IMPLICATIONS . . . . . . . . . . . . . . 184

TablesTable Page

H-1. Japanese Government, Science and Technology Budget Allocations,Fiscal Year 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178

H-2. TRDI Research Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180H-3. Technical Research and Development Institute Expenditures as a Percentage

of Total Defense Spending, Fiscal Years 1986-88 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181

Appendix H

Strategic Technology Management in Japan:Commercial-Military Comparisons

SUMMARYThe salient points of Japan’s overall research and

development (R&D) efforts that have particularimportance to the defense sector include:

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Emphasis on private sector activity. The pri-vate sector seines as the main player in R&Dexpenditures. Its time horizon is fixed on thelong term and management strategies, whichemphasize broad analyses of the effects oftechnological applications on corporate goals.Limited government role. The government roleas an initiator is most prominent when risks arehighest and the potential payoffs are notimmediately evident. Nevertheless, once abudding technology appears more attractivethan present endeavors, R&D is assigned to theprivate sector. Government strategies assessthe role of technology in terms of its impact onthe national economy.Strong institutional and informal integration ofgovernment and business R&D. Governmentand business interact at several formal andinformal levels and, in doing so, reach aconsensus on R&D directions. While the pri-vate and public sectors do not necessarily seeeye to eye on all major issues, there isnevertheless a greater degree of cooperationand coordination than is evident in othercountries. Moreover, by detailing their ownemployees to various agencies, governmentministries themselves encourage the integra-tion of perspectives and a comprehensiveoutlook on technology.Emphasis on dual use technologies with multi-ple applications. Advanced technologies witha single or limited application are not asattractive as those offering multiple applica-tions. The R&D management process tends toweed out technologies with limited applica-tions or defer their development. Whilespinoffs are desirable, an equally importantconsideration is “spin-on”: applying technol-ogy to producing new products or even indus-tries. The close integration of business andgovernment, along with an emphasis on focus-

ing R&D efforts on the ‘private sector, helpassure the development and utilization ofdual-use technologies. It is not a case ofdeveloping, say, a process or product in agovernment military laboratory and then at-tempting to find applications in commercialfields. To a large extent, military and commer-cial interests are merged by the institutionalstructures and management attitudes evident inbusiness and government.An emphasis on research collaboration. In bothmilitary and civilian fields, R&D that is partic-ularly far-reaching tends to organize aroundprivate-sector consortia that combine cross-fertilization in the early stages with the benefitsof free competition at the point of development.Collaboration is not the sole means of bringingtechnology into commercial or military market-places, but it does play a crucial role.

INTRODUCTIONAlthough defense R&D expenditures still account

for only a small part of Japan’s annual budgets, thegovernment is strongly emphasizing the develop-ment of indigenous weapons systems and theutilization of domestic technologies for defense .applications. The defense policymaking establish-ment recognizes that Japan’s capability to defenditself against potential threats, particularly in theface of a weakening U.S. presence in Asia and adecline of American economic power, rests on itsability to field superior technology in the form ofadvanced weapons systems. The 1988 issue of“Defense of Japan,” the annual statement of defensepolicies, issued with cabinet approval, declares that:

It is particularly important to continue efforts tomaintain and improve the technological standardsrelated to military equipment required for nationaldefense in years to come. Japan is the second largesteconomic power in the Free World and has a highlevel of industrial technology capable of independ-ently carrying out research and development projectsin the field of high technology. The Defense Agencyis conducting research and development by takingadvantage of technological expertise accumulated inthe private sector. It has been increasingly necessary

- -


for the country to direct more positive efforts toresearch and development on equipment. 1

Japanese defense technology strategies are inter-twined with a broader process of technology man-agement within government and industry that em-phasizes the nurturing of dual-use technologies toassure Japan’s security in the broadest sense duringthe coming century. To understand the thrust ofJapanese defense technology management, it isessential to look beyond narrow definitions ofdefense and security. One must examine the rolesand perceptions of a range of business and govern-ment interests in formulating and implementingtechnology management policies as part of a largereconomic strategy. The importance given to devel-oping dual-use technologies with multiple applica-tions demonstrates that Japanese technology poli-cies are developed and implemented in a way thatmerges economic, security, and industrial considera-tions. As a result, the line between purely defenseand civilian technologies is consciously blurred.

This paper examines the mechanisms and policiesthat result in this policy mix by reviewing: 1) themost important player in Japanese research, theprivate sector; 2) the nature of industry-governmentinteraction in R&D; 3) the players and processes indefense decisionmaking; and 4) the research patternsevident in commercial research that are manifestedin defense-related efforts, as well as the specializedrole of defense research offices.

R&D IN THE PRIVATE SECTORJapanese management of defense-related technol-

ogy must be seen in the context of overall R&D inJapan and particularly in terms of the role of industryand government-industry collaboration in achievingtargeted goals. In Japan the private sector dominatesR&D. Only recently have economic, political andinstitutional constraints on defense spending moder-ated sufficiently to identify a more specific defensecomponent in those efforts.

The United States still spends more in theaggregate on R&D than Japan does. Nevertheless,Japan now spends a higher portion of its GNP than

the United States does-2.8 percent for Japan,compared to 2.7 percent for the United States in1985. The Japanese Government estimates that thiswill increase to 3.4 percent of Japan’s GNP by 1990and 5.3 percent by 2000, compared with 2.9 percentand 3.4 percent for the United States over the sameperiod?

Approximately 50 percent of all U.S. R&Dspending is related directly to the military (estimatesgo as high as 70 percent). The percentage for Japanis far smaller (although increasing) with 80 to 90percent of all funds-government and private sectorcombined—directed toward commercial applica-tions. Private sector R&D dominates the Japanesetechnology process. Whereas half of all U.S. re-search is funded by the government, approximately75 to 80 percent of total Japanese R&D allocationsreside in the private sector.3

These factors have been cited to account forJapan’s efficiency in applying new or improvedtechnologies to products. But it is not a matter offunding alone. Business and government give prior-ity to projects that will provide a net technologicalgain to the domestic economy and/or serve as asource of innovation for other industries and sectors.If the collective evaluation of industry, government,or an individual company is that the potentialpayoffs are likely to be very significant, investorsand researchers will accept an even longer period forthe technology to mature. Innovation is viewed notsimply as a means of achieving economic break-throughs, but as a process to be incorporated intoevery phase of development and production. Japa-nese firms will invest in a series of incrementalimprovements in products despite the costs, whileU.S. firms often pursue more sweeping—perhapselusive-breakthroughs.

A basic difference between the United States andJapan is that in Japan engineers, researchers, andother technical specialists are involved both inchoosing among potential research projects and inparticipating in the design and development of newproducts from the outset. Production and manufac-turing considerations are accounted for in the

ltt~fm of J- 1988” (~yo: Japan Times, 1988), pp. 135s 136.

2Jon K-T ~oy, “TW~ologlc~ ~ov~on in J~ ~ ~ Uniti St-,” T~ WOrfd and/, November 1988, pp. 171-172, The budget for the

Technical Rcscarch and Development Institute (llUX), the research and development arm of the Japan Defense Agency, accounts for just 5 percent oftotal government R&D expenditures. Research in private fms accounts for the remainder of total defense-related R&D.

%id., p. 172.

Appendix H-Strategic Technology Management in Japan: Commercia/-Military Comparisons . 177

development and design stages virtually from theinitial consideration of a promising technology allthe way through the production phase. Their incor-poration into product design necessitates fewercostly and time-consuming modifications later on. Itis still difficult to determine if the same can be saidwithout qualification in defense production, but itwould not be surprising if similar attitudes andpractices prevailed.

Another fundamental but often overlooked pointis that Japanese firms that do not necessarily lead inunderlying technologies may still excel in processtechnology, the mundane but essential capability toproduce goods more efficiently than other competi-tors. Again, this is attributable in part to closecooperation and collaboration among designers andproduction personnel at the earliest phase of productdevelopment.

A final characteristic is top management’s com-mitment to promote technological advances withintheir companies. While participation of senior man-agers and corporate officials varies from one firm toanother, there is widespread awareness of the needfor continuing research. Failing projects can bequickly dropped, and those who first supported themsuffer no adverse consequences. Further, researchresults circulate throughout corporations, extendingeven to sales and marketing divisions.4

R&D IN THE PUBLIC SECTORIn terms of government funding, the Science and

Technology Agency (STA), Ministry of Interna-tional Trade and Industry (MITI) and Ministry ofEducation constitute the three largest players inJapan’s government-directed research and develop-ment. (This paper will focus on the first two. The sizeof the Education Ministry’s budget is partly attribut-able to its responsibility for managing educationalresearch facilities.) Total government R&D fundingwill reach 41.71 trillion yen ($8.92 billion) duringthe current fiscal year, with STA and MITI account-ing for 4,431 billion and 4,221 billion yen respec-tively (see table H-l).

A broad consensus on the value of R&D exists inJapan, one that provides a stable environment forpursuing long-term goals. Bureaucratic organization

and more politically oriented activities help assurethe preservation and continual assessment of thatconsensus. STA, for example, is organized under theoffice of the prime minister, while MITI’s researchprograms report directly to the head of the ministry.At the broadest level, scientific research trends aremonitored and influenced by advisory councilsassociated with the office of the prime minister.These councils fulfill multiple roles, includingfacilitating cabinet-wide consensus on appropriategovernment policies and allocation of resources, andlegitimizing initiatives developed in the private orpublic sector by publicly endorsing them. Councilreports can often stimulate progress in specificfields. Space exploration, for example, has becomea national priority in part because of the role playedby these advisory councils in articulating govern-ment visions and stirring the national imagination.

Government laboratories and research institutesfulfill a variety of roles in the Japanese R&Dprocess. While government facilities may serve ascreators of new technologies or initiators of largerresearch projects, that is not their main purpose.Rather, such facilities serve to verify, throughtesting, results achieved in private labs and to carryresearch to a point where it becomes more economi-cal to turn it over to private-sector facilities. Giventhese roles, which industry and government clearlyunderstand, it is understandable that considerablebusiness-government interaction takes place at thelevel of individual researchers, their supervisors, andthe directors of respective facilities.

Despite the efficacy of Japanese R&D efforts, theprocess is not faultless. Inter-ministerial integrationand cooperation are not always as thorough as theycould be. There have been instances in whichministries have competed against one another forprominent roles in research initiatives, forcingpolitical compromises that wastefully duplicatedefforts-c ompetition over budgets for space activi-ties comes to mind. Important initiatives can fail,even when there is a clear consensus of views ingovernment and industry. An aerospace effort in the1950s, for example, produced the YS-11, a smallpassenger aircraft intended for commercial use thatfell far short of expectations.

~ShWo S-a of the IWa ~cle~ of Sciem policy and Research Management details these ~d * chact~stics of JWUICSC r~achmanagement in “A Fact Finding Sumy of Researc h Management in Private Research Institutes,” MIT- Japan Science and Technology program PaperNo. 88-12, Masaachusctts Institute of Technology, 1988.


Table H-l–Japanese Government, Science andTechnology Budget Allocations

Fiscal Year 1988 (mlllions of yen)

PercentageTotal change from

Ministry/agency allocations previous year

Education . . . . . . . . . . . . . . . . . 812,954Science and technology

agency . . . . . . . . . . . . . . . . 430,955International trade and

Industry . . . . . . . . . . . . . . . . 221226Japan defense agency . . . . . . 82,700Agriculture, forestry,

fisheries . . . . . . . . . . . . . . . . 66,642Health and welfare . . . . . . . . . 44,059Posts and

telecommunicatlons . . . . . . 30,729Transportation . . . . . . . . . . . . . 14,627Environmental protection

agency. . . . . . . . . . . . . . . . . 7,752Foreign affairs . . . . . . . . . . . . . 6,417Others . . . . . . . . . . . . . . . . . . . 14,894Total . . . . . . . . . . . . . . . . . . . . . 1,706,504

4.2

1.3

-0.111.6

-0.210.8

4.30.8

-2.01.90.63.1

SOURCE: Ministry of International Trade end Industry, Agency of IndustrialScience and Technology,

By the same token, a nationwide or govemment-wide consensus on the value of defense productionand research for the economy does not necessarilyexist While it has been argue-d here that the countryhas embarked on a policy emphasizing domesticresearch and development of ‘advanced weaponssystems, that policy is not accepted. The Ministry ofFinance retains as-an article of faith the philosophythat virtually any spending on defense comes at theexpense of the economy (thus necessitating activelobbying by industry to convince the ministry of thedomestic economic value of, say, an indigenousfighter-support aircraft). A number of major re-search efforts within the civilian ministries andagencies have clear potential for military applica-tions. Among them ‘are artificial intelligence re-search, high performance plastics, fine ceramics,advanced alloys, jet engine research, and deepseamining systems, to mention only a few. Althoughboth the public and private sectors are examiningpossible military applications, the projects neverthe-less are justified ‘primarily on the ‘basis of theirexpected beneficed- impact ‘on the civilian economy.

RESEARCH COLLABORATIONSelective collaborative research, particularly in

the precompetitive phase, plays an important role in

realizing technological gains ‘n the public andprivate sectors. Although widespread, collaborativeresearch is not necessarily the rule in Japan. Thenature, timing and participants of collaborativeefforts vary from one field to the next. Nevertheless,collaboration features prominently in Japanese ef-forts to bring technology to the marketplace. Infor-mal and formal structures and processes tend toidentify promising research fields or trends. Oncegovernment and industry agree on more specificavenues of research, the establishment of a government-industry venture or a government-sanctionedresearch consortium often follows. As researchproceeds, greater competition is introduced to hastenthe introduction of a product to the marketplaces

Interviews with corporate figures suggest thatmany companies are less committed to the consor-tium approach than they might have been in earlierdecades. Officials argue that important resources arebeing diverted from corporations to government-sanctioned efforts, with insufficient evidence thatprograms will produce short- or long-term gains.Some firms suggest that their own resources aresufficient to stimulate technical advances; while notresenting the government’s role, they believe itshould be reduced or that government shouldintervene in other ways. But, out of deference togovernment and a fear that they will miss out ontechnical developments, these same companies con-tinue to participate in these consortia.

This situation is not likely to change soon. Indefense technology, for example, there are a largenumber of industry consortia including those incomposite materials, advanced turboprop researchand fighter aircraft. (In some cases, companies willpursue their own R&D projects, with implicitrecognition by the Japanese defense bureaucracythat ultimately the project will be funded by thegovernment when it has reached a certain level ofmaturity or that costs will be recovered by industrythrough procurement contracts.) Japanese managersfeel that the market is too competitive to risk a totallyindependent course of action. Certain projects, such

5For UI iNlidySiS Of COiltitiVC reseach in Japan, see Richad J. Samucls, “Research Collaboration in JaparL” MlT-Japan Science and TechnologyProgram Paper No. 87-02, Massachusetts Institute of Technology, 1987.

Appendix H–Strategic Technology Management in Japan: Commercial-Military Comparisons ● 179

as the FSX,6 are seen literally as once-in-a-lifetimeopportunities that, if neglected, could lead to thecomplete loss of important capabilities. Cost isanother factor favoring cooperation, especially inlarge-scale projects originating in, but not necessar-ily limited to, the defense field.

DEFENSE DECISIONMAKINGIt is in this environment that Japan establishes its

defense policies. As was noted earlier, defenseissues have assumed greater prominence in poli-cymaking circles in recent decades. Nevertheless,Japanese defense policymaking remains constrainedand is subject to negotiation among competinginterests. Historical and institutional factors helpexplain this situation. For example, broad defensepolicies-hence, decisions about allocating nationalresources to major defense R&D programs- a r e n o tthe sole domain of the Japan Defense Agency (JDA).JDA is not as autonomous or influential within theJapanese government bureaucracy as the Depart-ment of Defense is in the United States. Budgetconstraints have remained severe throughout thepostwar era. Until recently, popular and politicalsupport within Japan for defense was muted, curtail-ing the agency’s relative influence within govern-ment. The agency has been unable until recently toattract Japan’s most promising college graduates,most of whom preferred joining more prestigiousgovernment ministries, including Ministry of Fi-nance (MoF) and MITT.

Institutional factors also influence JDA’s role asone among many in determining defense policies.Multiple players with differing agendas and perspec-tives interact to generate policies that can beaccepted by the government as a whole. Whiledifferent agencies’ interests often compete with oneanother, this process nevertheless contributes to theformation of policies with widespread governmentsupport Interagency negotiation of defense policiestends to integrate economic, security, and industrialpolicy perspectives.

The most direct form of influence over defensepolicies is the budgetary power of the Ministry ofFinance. On the assumption that the growth ofdefense budgets represents a drag on the economy,the MoF has used its considerable influence torestrict such growth. In recent years, however,

defense proponents have been successful in securingspending increases far higher, on a percentage basis,than those for specific agencies and for the budget asa whole.

Despite this new influence, major defense policydecisions are only recommended by JDA, subject tothe approval of the Security Council of Japan, aformal body chaired by the prime minister thatincludes the ministers of finance, international tradeand industry, and foreign affairs, along with suchofficials as the director general of the EconomicPlanning Agency (EPA). The Security Council,which replaced the weaker National Defense Coun-cil in July 1986, is the final arbiter of such policiesas the agency’s 5-year procurement plans. TheSecurity Council’s influence means that much ofJapan’s defense policymaking process is intertwinedwith non-defense interests. Put differently, diverseand wide-ranging interests influence defense poli-cymaking through organs such as the SecurityCouncil. These interests include domestic industrialconcerns (as represented by MITI), fiscal andmonetary interests (represented by MoF), and mac-roeconomic policy outlooks (in the form of EPAinterests). MITT’s aircraft and ordnance division isparticularly influential in Japanese procurementdecisions.

This influence by other ministries and interests indefense policymaking is exhibited within JDA itself.Many key positions there are occupied by officialsdetailed from other ministries. The director generalof the procurement bureau usually is a MITIrepresentative with experience in the ministry’saircraft and ordnance division. The internal financebureau is staffed by an MoF employee. While thismight have drawbacks from JDA’s perspective, italso means that by virtue of their service within JDA,a growing cadre of government officials have beenintegrated into the defense policymaking process.

THE TECHNICAL RESEARCHAND DEVELOPMENT INSTITUTE

It is within this context that the TechnicalResearch and Development Institute (TRDI) oper-ates. Organized as a division within JDA, TRDI isthe agency’s primary research organization. It isheaded by a civilian who oversees three administra-


Table H-2-TRDI Research Facilities

FIrst Research Center● First division: Explosives; ammunition; small arms; artillery. Second division: Armor; anti/ballistic structures. Third division: Camouflage; parachutes.. Fourth division: Hydrodynamics; battleship technology

(structures, noise reduction).Second Research Center

● First division: Communications; computer applications;information systems integration

. Second division: Radar; electronic warfare; microwaveantennas/components

. Third division: Electro-optical systems; infrared systemsThird Research Center

● First division: FSX aerodynamics, stability/control, structureand system integration; helicopters; missiles, remotetypiloted vehicles.

. Second division: air breathing/rocket propulsion systems

. Third division: Missile guidance; fire control systems;sensors; navigation systems

Fourth Research Center. First division: Mine warfare; protective structures. Second division: Transmissions, suspension systems,

engines, and other vehicle subsystems. Test division: Vehicle testing (tanks)

Fifth Research Center● First division: Sonar; underwater acoustics. Second division: Torpedoes; mines. Field test/evaluation division: Torpedo, mine testing. Kawasaki branch: Shipboard degassing; magnetic sensors

SOURCE: SOURCE: "Defense of Japan, 1988."

tive departments, along with four uniformed direc-tors who supervise R&D in ground, naval and airsystems, as well as precision guided munitions.Research centers sponsor technological researchprojects, including survey research and test andevaluation to enable further development on specificsystems. Authorized manpower is 1,179, including256 uniformed personnel rotated from the threebranches of the Self-Defense Forces. TRDI main-tains five research facilities in Japan to test andevaluate a broad range of weapons systems andtechnologies (see table H-2 for a complete list of thefacilities and their areas of research). The Institutehas no prototype manufacturing capabilities, relyinginstead on private sector capacities.7

The R&D component of the Japanese defensebudget has grown at over 10 percent annually for thelast five fiscal years. TRDI’s total budget in fiscalyear 1988 (April 1, 1988- March 31, 1989) came to481.8 billion, ($682 million at current exchange

rates), or approximately 2.21 percent of Japan’s totaldefense budget. JDA’s fiscal year 1989 preliminarybudget request, submitted to the Ministry of Financein July 1988, included a 12.9 percent increase forTRDI over the previous year’s request.8 Table H-3shows the growth in TRDI spending, in recent years,as a percent of the total defense budget.

As a matter of policy, JDA seeks to continue itsupward R&D spending trend and boost total R&Dexpenditures to 2.5 percent of the defense budget bythe end of fiscal year 1991. Much of this is reflectedin decisions to proceed with “big ticket” items forthe three services. Major projects include the SSM-1surface-to-surface missile (from which antiship andother derivatives are anticipated); a new main battletank to succeed older, domestically developed mod-els; the XSH-60J antisubmarine helicopter, a code-velopment project with the United States designed toreplace outdated aircraft; and last, but certainly notleast, the FSX next-generation fighter-support air-craft, another codevelopment effort, led by Mitsub-ishi Heavy Industries from Japan and GeneralDynamics from the United States. JDA and TRDIalso have proposed four specific technology areasfor codevelopment projects with the United States.In October 1988, the two countries initialed anagreement to co-develop new missile guidancetechnology. 9

Throughout much of its early postwar experience,the bulk of the TRDI research effort was directedtoward reinventing the military technology wheel.With limited resources, bureaucratic constraints, alack of popular support, and other factors hinderingR&D efforts, the organization was not capable oflaunching high-risk projects of its own accord. Thatsituation has begun to change in recent years. Withgreater public acceptance of defense policies inJapan, TRDI has been able to recruit promisingtechnical graduates from leading educational institu-tions.

TRDI was established to develop independentweapons development capabilities and enhance thegrowth of the domestic arms industry. It began witha philosophy of moderating direct participation in

7,,~fem of Jqm ]988,” Op. Cit., foomow 1S p“ 137”

s~id., pp. 137, 312; Ko&ubo (National Defense), vol. ST, No. 10, @mber 1988, p. 102.W~f= of Jqa 1988,’* op. Cit., f~ote 1, pp. 138.145; Ky@ &onomic NewsWire, at. 6, 1988. The p~w “c~evc]oped” often is used in

Japan in reference to modification programs involving, for example, changes to a U.S. airframe or other structure to accommodate introduction ofJapanese electronics. The missile homing project, however, does appear to involve more fundamental efforts.

Appendix H–Strategic Technology Management in Japan: Commercial-Military Comparisons ● 181

Table Technlcal Research and DevelopmentInstitute Expenditures aS a Percent of Total Defense

Spending, Fiscal Years 1968-88

Fiscal Year Percent

1968 . . . . . . . . . . . . . . . . . . . . . . . . 2.011976 , . . . . . . . . . . . . . . . . . . . . . . 1.211984 . . . . . . . . . . . . . . . . . . . . ., . 1.491985 . . . . . . . . . . . . . . . . . . . . . . . . 1.841986 . . . . . . . . . . . . . . . . . . . . . . . . 1.951987 . . . . . . . . . . . . . . . . . . . . . . . . 2.081988 . . . . . . . . . . . . . . . . . . . . . . . 2.211991 (goal) . . . . . . . . . . . . . . . . . . 2.50

defense-related R&D, partly to minimize budgetoutlays and partly on the assumption that defensespending constituted a burden on the civilian sectorand should be limited.10 For these reasons, TRDIuntil now has viewed its defense technology spend-ing in light of its impact on the domestic economicand technology base. The Institute does not neces-sarily target the development of technologies to fieldspecific weapons systems.11 A consistent criterionfor selecting and nurturing technologies has been theimpact of any given technology on the commercialsector. The chances that such a technology will betargeted for development are greater if it contributesto the overall industrial base and provides opportuni-ties for other spinoffs. For example, the emphasisplaced on radar development reflects industry andgovernment interests as wide-ranging as phasedarray systems for fighter aircraft, 360° radar forcommercial airports, and collision avoidance sys-tems for automobiles. Composite materials is an-other field offering similarly diverse applications.

Thus, an important element of the Japanesestrategy is much like one used in drafting profes-sional football players. Rather than find the bestplayer for a specific position, TRDI often “drafts”the best technology available at the time regardlessof the position it plays. What matters is that it iscapable of benefiting the “team” over the long run.

The U.S. security guarantee, of course, contributesto a situation in which Japan has more flexibility tomake such decisions. In assessing this approach forthe United States, it is important to keep thesecomparisons in context. Allowing for contextualdifferences, however, does not make the underlyingprinciple any less valid for foreign observers.

The combination of a government attitude thatdefense spending is a drain on the civilian economyand the emphasis on broad technologies has led togovernment-business cooperation in defense areas.TRDI works with industry formally and informally.In many cases, the organization simply monitorsresearch already under way in private companies. Inothers, it carries out preliminary research that itultimately hands over to the private sector, once ithas reached a stage where risks have been reducedand the technology has proven itself. The develop-ment of the F-1 fighter support aircraft, SSM-1cruise missile, and T-2 trainer all illustrate thatpattern.

These patterns were reinforced by a July 1987reorganization that totally eliminated minor researchprograms that could be pursued more effectively byprivate research facilities. In addition, TRDI’s rolewas defined to include research that lacks animmediately identifiable demand in commercialsectors. This could be an important development forTRDI’s institutional role, perhaps representing ajudgment by JDA that fielding advanced weaponssystems will require selective development of spe-cialized technologies with primarily military appli-cations.

At the same time, a flexible approach wasemphasized to incorporate commercial technologyin military systems-all with the ultimate aim ofmaking Japan equal or superior to other countries interms of its defense technology base.12 This outlookis summarized in the current white paper:

IOFor a &uMlm of me origins and early ptUJCXtS of TRDI, we Boei Kenkyuhi, Boeicho, 3ieirai (Tokyo: 1988), pp. 269 ff. (Transli: ~fet’tseResearch Committee, Japan Defense Agency, Self-Defeme Forces).

11~~, JDA h= & a~u~of foregoing the acquisition of systems readily available from foreign suppliers untd TRDI couJd develop the domemctechnology necessaty to produce a comparable system, thus erthanctng domestic industry capabilities as well as spinoff/spin-on opportunities. Despitethe high priority given by the Ground Self-Defense Forces to fielding advanced tanks, for exarnplc, dcployrncnt was delayed until a purely domesucmodel was developed to TRDI’s satisfaction. Journalistic accounts of the Japanese procurement sysmrn also accused the government of delayingconsidetiion of short rattge surface-to-air missile systems for air base defenses until the Tan- SAM was fully developed. More recently, utdustry backersof a domestic fighter- support aircraft to replace aging F-is called in 1987 for fimher feasibility studies and/or the development of a dornesuc prototypeaircraft with the tacit suppon of the Air Self-Defense Forces, when It appeared that then-JDA director general Kunhara would deade m favor of ancodevelopment proJea with the Unifed States or the acquisition of an American aircdt.

lzl*Dt=f~ of Japm, 1987” (Tokyo: Japan Times, 1987), p. la.


The Defense Agency will positively utilize theprivate sector’s technology on the basis of itsexcellent technology in the field of microelectronicsand new materials including ceramics and compositematerials. F reticularly in the area of basic researchthe Defense Agency will rely heavily on the technol-ogy pooled in the private sector. Furthermore, theDefense Agency, carrying out a technological re-search project to integrate private technology intofuture high-technology equipment, will build it up asa system that will meet the unique operationalrequirements of this country. Accordingly, the De-fense Agency will achieve effective improvement ofsuperior equipment capable of competing withtechnological standards of foreign countries.13

Institutional and informal mechanisms compara-ble to those outlined reinforce the use of commercialcapabilities for defense in both research and manu-facturing. Close links plus the overriding philosophyemphasizing commercial benefits/inputs help as-sure, first, that military-related research benefits thecommercial sector (spinoffs) and, second, that com-mercial, off-the-shelf technologies are employed asmuch as possible in military systems (i.e., spin-ens).Even in the case of purely military technologies,TRDI can be expected to continue relying onprivate-sector development. Business and govern-ment will look to these technologies for maximumutilization in defense and commercial applicationsas well.

PRIVATE SECTOR INTERACTIONThe private sector helps to develop a consensus on

overall R&D trends, as well as sponsoring specificprojects through individual company contacts andvarious industry associations. The most influentialof these groups is probably the Defense ProductionCommittee (DPC) of Keidanren-the Federation ofEconomic Organizations.14 The DPC consists ofabout 10 percent of Keidanren’s total membership of800 industrial companies and over 100 financialinstitutions.

The DPC’s officiate serves functions include:

. compiling basic data on defense production,

●

●

●

collecting and exchanging information relatingto defense production developments and trendsamong its members,

promoting cooperation among defense contrac-tors, and

coordinating defense and non-defense indus-tries and interests.

A fifth, unofficial purpose of DPC is to promoteits members’ interests among government agenciesand policymakers. Given these objectives, it is notsurprising that the DPC plays a significant role as aforum for discussion and dissent among contractorson defense issues. The committee will refuse to takestands where industry-wide concurrence is impossi-ble or temporarily beyond reach, but it will promotepositions on which there is clearcut consensus. Thegroup issues an annual report on defense-relatedissues and has consistently favored higher domesticproduction rates and indigenous weapons develop-ment. Most recently, the group called on thegovernment to allocate greater budgetary resourcesto defense-related R&D, supporting JDA’s targetlevel of 2.5 percent of the total defense budget.15

Since its establishment in 1952, virtually everyDPC chairman has come from Mitsubishi HeavyIndustries. While it is beyond the scope of this reportto examine the implications of that dominance, it isworth noting that such consistency has given Mit-subishi a means of assuring its preeminent status asJapan’s number one defense contractor by projectingits views of defense issues on the domestic industryas a whole.

Other groups playing comparable roles includethe Japan Ordnance Association, the Society ofJapanese Aerospace Companies (SJAC) and theJapan Shipbuilding Industry Association. In addi-tion, the Japan Technology Association was createdin 1980 with the support of commercial firms suchas Sony and Honda Motors. These associations,along with other industry interests such as tradingcompanies, can play significant role at the formativestage of major policies, in part because of the lack of

ls’’llcfcnsc of Japam 1988,” op. cit., footnote 1, p. 136.14A ~~, but ~] ~WIy ~w, ~ay~ of tie wfm~ Production Committee in action is David Hopper, “Dcfutsc poky ~d k Busin=

~3~4&ty: Tbc Kcidanrext Defense Production Committee,” in James Buck (cd.), The Modern Jupancse Military System (Beverly Hills: 197S), pp.-015Fm o~a Keih D~ ~=tiv=, ~ ~t~~ c~i~~, AM~o s~~e “Sobi Neti~, ]988,” Tokyo, 1988, p. 479. k Jw~

(Mnancc Association expresses its policy positions on pp. 480-482.

Appendix H-Strategic Technology Management in Japan: Commercial-Military Comparisons . 183

outside, independent consultants available to U.S.government agencies to address pending issues.

Senior executives of leading defense contractorswho are also officials of these associations routinelyserve on key advisory panels for MITI, the defenseagency, and other government agencies. Thesepanels, like the Defense Science Board in the UnitedStates, are an important conduit of information andinfluence between business and government. More-over, it is not uncommon for major companies toprovide JDA with technical analyses of competingweapons systems for use in determining a finalselection for procurement. Governments in othercountries also frequently turn to private interests forsuch analyses, although Japan lacks the Booz-Allensor RAND Corporations that normally would providethese analyses in the United States. However, sincethese Japanese firms also act ultimately as thedevelopers, manufacturers, or agents for procuringthese systems, their involvement in such fundamen-tal activities gives them significant opportunities toshape the course of future policies in a manner thatserves private sector interests. In R&D projects, italso allows them insights into government perspec-tives that might otherwise be limited or unavailablealtogether.

Influence and interaction of industry is furtherstrengthened by the increasingly common practiceamong major defense contractors, industry associa-tions, and trading companies of hiring retired seniorJDA and SDF personnel as advisers in defensematters. This does not differ markedly from prac-tices in the United States, except to the extent thatsuch relationships are usually the result of a 1onger-term interaction than might be evident in the U.S.experience. Furthermore, potential access to higherlevels of government is greater if the new adviserretired from a senior position after serving in severalministries throughout his career.

Companies frequently attempt to anticipate majorpolicy developments by forming informal studygroups on specific issues. For example, the aero-space department of a major trading company mightcollect data and examine satellite utilization andtechnology to identify potential business opportuni-ties. Participants would include representatives fromcomparable divisions of other companies; by infor-mal agreement, a lower mid-level executive from theorganizing company would supervise the group.Government officials might participate informally.

If lower-ranking staff identified significant opportu-nities, the head of the trading company’s aerospacedepartment might also become involved. At thatpoint, the focus would shift to one or more of theindustry associations, and the participants of thestudy group would disband.

Such early interfirm cooperation can consolidateindustry perceptions toward emerging business op-portunities, and help identify specific roles forindividual companies once projects move into re-search, development, and production phases. Firmscontinue to participate in these arrangements be-cause they want to secure some portion of thebusiness resulting from a major procurement deci-sion. The Japanese defense market is an oligopoly,and government procurement decisions reinforce apattern in which only a few firms can developspecific manufacturing and production capabilities.Given that situation, no one firm will secure thelion’s share of a major procurement order. Theirparticipation in the ways outlined above can helpthem at least a part of the business.

A point to note is that firms at this stage are notnecessarily approaching these areas in terms of theirpotential for military business per se. Instead, theyidentify and analyze business opportunities in termsof their overall relationship to a company’s strategicplans. It has been noted that in the United States theDefense Department fields weapons, not technol-ogy. In Japan, on the other hand, where commercialand civil ministry interests are very important, it issafe to say that JDA fields neither technology norweapons, but products. This is partly because, unlikein the United States, Japan has few out-and-outdefense contractors. Mitsubishi Heavy Industries,for example, secures on average about 25 percent ofJDA’s total annual procurement budgets, whichamounts to only 15 percent of its total sales.Distribution of JDA contracts diversifies dramati-cally once MHI’s share is accounted for. Of majorcontractors, only one, Japan Aviation Company,depends virtually entirely on defense contracts forsurvival.

Firms are diversifying to emphasize defense-related sales. Thus MHI’s 15 percent of sales in thedefense field has grown from just over 7 percent adecade ago. Nissan Motors now officially describesitself as a defense contractor in its corporate charter.As was mentioned previously, firms as diverse asSony and Honda are keenly interested in defense

I84 ● Holding the Edge: Maintaining the Defense Technology Base, Volume 2

sales and applications for existing and new technolo-gies. But rather than looking at defense as a new fieldrequiring different marketing strategies, Japanesecompanies are incorporating their defense strategiesas new components of broader commercial plans,emphasizing maximum gains regardless of technol-ogy or product.

SELF-IMAGE, EXTERNALEVALUATIONS AND)

IMPLICATIONSJapanese policymakers and observers alike in-

creasingly view the country’s technological capabil-ities as second only to those of the United States, andeven then just barely second in terms of manyspecific technologies. The 1987 STA white paperconcludes that within the past two decades, Japan’sinherent technological strength and its potential forfuture technological development relative to theUnited States surpassed those of West Germany,France, and the United Kingdom.16 A recent assess-ment of Japan’s future role in the world, “Nihon noSentaku” (Japan’s Choices), completed by a MITI-sanctioned commission, determined that Japan leadsthe United States in many critical fields and isclosing ground on virtually every other technologythat will prove important in the coming century:space communications, launch vehicles, robotics,large-scale integrated circuits, civil aerospace, bio-technology, and artificial intelligence, to name onlya few.17 In its 1984 report on industry-to-industryarms cooperation, the U.S. Defense Science Boardconcurred that Japanese dual-use technologies offergreat potential for advanced U.S. systems. A subse-quent DoD task force identified a more specificrange of technologies.18

These assessments represent an increasing appre-ciation of Japan’s capabilities abroad. They are evenmore significant in demonstrating Japanese confid-ence—hitherto restrained-that it has the ability tolead the world in technologies with both commercialand military applications. Of itself, this developmentshould not necessarily cause concern to the United

States and other allies of Japan. It could even beviewed as a ringing endorsement of the economicand political systems that assisted such stridesthrough generous technology transfers, a securityguarantee that freed resources for commercial gain,and assurances of political stability through ademocratic form of government. There have beensigns that the effort will have payoffs in the form ofU.S.-Japan cooperation. The two countries con-cluded agreements in November 1983 to allowmilitary technology exchanges, and in 1987 Japanagreed to participate in the Strategic Defense Initia-tive (SDI). (The first SDI contract involving aJapanese firm was signed recently.) Furthermore,the two countries have embarked on a less heraldedproject, the development of a new missile homingsystem, that could be an even more promising augurof things to come.

Nevertheless, it is important to view the JapaneseR&D effort in perspective. Japan equates technolog-ical advancement with its chances for future sur-vival. The 1987 STA white paper concluded thatvirtually half of all Japanese economic growth in the15 years since the oil shocks was attributable toadvances in the domestic technological base, com-pared with 20 percent at most for the United States.19

(It is safe to say that, in terms of defense outlays,much of the growth on the Japanese side would beattributed to the dual-use, multiple applicationstrategy that has discouraged a focus on strictlymilitary technologies. For the United States, onemight conclude excessive attention to strictly mili-tary R&D has been a drag on the economy.) Thesegains have resulted in productivity improvementsand the creation of new demand for products thatsimply did not exist a decade ago. Small wonder thegovernment places a heavy emphasis on maintainingthis pace to assure the future vitality of the Japaneseeconomy.

The United States has concluded that its chancesfor continued global influence rest in large part onthe health of its technological base. A criticalelement in this strategy, however, is the assumptionthat allied cooperation and technology exchanges

lb~i~ ~d Tcch@y Agency, “Kagaku Gijutsu Hakusho 1987” (Science d TdlDoiogY WhkC PSPX), pp. 40-42.

17w~ of titi~ T- ~us&y, “Nihon no ~Ulhl,” ~yO, 1988, pp. 184-193.ls~f~ SciaW ~, “Rcpor& of the Defense science Board Task Force on industry-to-Industry Annamcnts -ion, - 11: JsPm.”

P_for~e Of@ of ~ un~r~t~ for Re=h ~d~@~g, 1984, PP. 15-17. U.S. mcntof Defense. Office of tic Undcz !kcmtiuYof Defense (Acquisition), Rcscarch and Advanced Technology, “Elcctro-Gptics and Millimeter- Wave Technology in Japan,” 1987, pp. 3-1,4-4.

~gsc~me ad Tec~~~ in J~~ VOI. 7, No. 26, J~ 1988.

Appendix H-Strategic Technology Management in Japan: Commercial-Military Comparisons ● 185

are essential to assure mutual survival. One must ask The answer to that question could have profoundif Japan, with its emphasis on retaining technology implications for this country’s relations with Japanto assure its own survival, shares that assumption. in the coming decades.

holding the edge: maintaining the defense technology

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