Friday, May 25, 2012

Lockheed Martin pulls out the big guns

This report today just says so much about the whole F-35 program. Lockheed Martin is now publicly threatening that Canadian firms that have received F-35 industrial contracts to date may not get continued work in the future if our government goes with another jet. Heck of a way to run a business, don't you think? For what is essentially a petty, vengeful rationale, not a decision that has to do with choosing the best company to do the job, Canadian firms may lose out.

Canada, however, is a signatory to a Memorandum of Understanding ("MOU"), along with other "Partner" nations, that sets out our rights to bid on contracts. Those provisions are a little different from what you hear from the Lockheed Martin rep in this main excerpt from Postmedia:
F-35 manufacturer Lockheed Martin is warning that Canadian companies will lose out if the Conservative government decides not to purchase the stealth fighter. "Right now we will honour all existing contracts that we have," Lockheed Martin vice-president Steve O'Bryan told Postmedia News on Thursday. "After that, all F-35 work will be directed into countries that are buying the airplane."
But O'Bryan also said his company has not received any indication Canada won't buy the aircraft. "What we have is the official statement out of the government and we're working with the government," he said. "They're committed to the F-35, they've selected it, and we haven't had any change in that official position."
That will likely come as a surprise to many Canadians as the Conservative government has said since last month that it has not committed to purchasing the F-35 and that all options are still on the table when it comes to replacing Canada's aging fleet of CF-18 fighters.
That latter part is also news, in a sense. Some of us actually wouldn't be surprised at all that the government is telling we the Canadian public that they're going to consider other jet options but haven't yet clarified anything with Lockheed Martin. But back to the main point here. The Memorandum of Understanding includes these provisions on Industrial Benefits:
SECTION VII INDUSTRIAL PARTICIPATION 7.1 The Participants, through their Contracting Agencies, will require their Contractors to select subcontractors (which term includes subcontractors from all of the Participants’ nations) on a competitive, Best Value basis to the maximum practical extent consistent with the objectives and requirements of the Contracts and this MOU.
7.3 The Participants acknowledge that, subject to the submission of Best Value offers, industries that are in the nations of Participants procuring JSF Air Systems under this MOU and that were awarded SDD subcontracts will normally also be awarded subcontracts for low rate initial production and full rate production work, as well as for related sustainment and follow-on development work.
I think those are the main provisions that are relevant here. They essentially say that companies in Canada can bid and the contracts will be awarded on a competitive, best value basis. The wrinkle is that the nations that procure the jets, according to 7.3, will "normally" also get subcontracts and work for the jets. Emphasis on "normally." There is clearly room for participant nations who do not procure F-35s to still get work. What Mr. Lockheed Martin is saying in this media interview, however, is that unless Canada buys, Canada will not get any contracts. So in that way, what he is saying is absolute. But the provisions are not so absolute. We did pay money to participate in this MOU regime, as well. Further, combine the above industrial benefits provisions with section of the MOU:
"Actual procurement of JSF Air Vehicles by the Participants will be subject to the Participants’ national laws and regulations and the outcome of the Participants’ national procurement decision-making processes."
The two provisions seem to run contrary to one another and challenge the Lockheed Martin approach as articulated in this Postmedia report. Why would a document like this give nations the freedom to hold their own procurement processes, which might lead to the purchase of a separate jet? And yet at the same time allow those participant nations to still bid on contractual work? Maybe because it's good business sense? Nations who buy other jets, strangely enough, still might possess capable industrial expertise that could help build your F-35.

If you were Lockheed Martin, you might want to make decisions on who should help build the F-35 based on who those best companies are. And how expensive it might be to break ties with existing suppliers, like Canadian ones, and move on to new ones. But what do we know anyway? Lockheed Martin have run up the F-35 building and design costs to such an unprecedented extent that the very existence of the program has been called into question many times over. So I guess we can presume they know what they're doing in threatening job losses in Canada.

What this does, however, is ratchet up pressure in Canada and cause uncertainty about future contracts and jobs. It helps the Harper government who no doubt will continue to pursue the F-35, despite the establishment of that new fighter jet secretariat and all their damage control in the wake of the Auditor General establishing that they kept $10 billion in costs of this deal from the public during a general election.

Lockheed's warning should also be taken with the knowledge that if Canada does pursue another jet in a competitive process, there would be other industrial benefits in store for Canadian industry as a result of that competition. That's a big if given this government's continued commitment to the F-35 to date.

It would be nice to think that whatever is decided on jets for Canada, it will be done in Canada's interests though, not in response to threats by a foreign multinational.