A fairly common pattern in the past and the present has been the carrying out of development even of a fairly exploratory nature by the same companies that engage in production. This can have some very pernicious consequences. If the production side is to be kept “healthy” by restricting entry into the field then automatically, as already noted, development will be restricted to a fairly small group of companies…
On the other hand, of course, the advantages, also noted, of joining production and development cannot be completely overlooked. It is clear that when a development is of a very minor nature it is probably best tied to production, but as one goes further and further away from present models there is a stronger and stronger case for divorcing development and production.
That was from Kenneth Arrow’s RAND paper, “Economic Aspects of Military Research and Development,” 30 August 1955, D-3142.
Because defense companies make most of their profits in production and sustainment, it is no wonder that all of their incentives are to block the R&D of competing programs. Once production is expected to ramp down for the incumbent, it wants to be well-placed to win the logical follow-on next generation program.
Some of this seems to be due to the fact that the DOD doesn’t pay companies well for R&D, which is normally on a cost-reimbursable contract where profits are restricted. Moreover, companies are incentivized to underbid one another to win the development work, leading to cost overruns and in some cases penalties. They make it back on these “loss leaders” in production and sustainment which tends to be fixed price.
That is an odd policy. Companies should be paid for innovation. Production and sustainment are challenging, for sure, but many technical aspects are locked in by what is done in R&D. Production is more “routine,” particularly if you have a stable and tested design. If the government would be willing to pay contractors margins that entice them to enter R&D for its own sake, then they can break the link between R&D and production/sustainment. Not only does that put an emphasis on test & evaluation rather than concurrency, it might have beneficial knock-on effects to company cultures.
Apple, after all, designs the iPhone and sources the components, but it does none of the manufacturing or final assembly itself. Yet Apply makes nearly all the profits on the product, not Foxconn which does the assembly and receives very slim margins for its efforts.
For smaller programs, there might be a stronger case to keep R&D and production/sustainment under one company. Here, the imperative that government pick up all the R&D costs may not necessarily hold. Companies will have enough size to do R&D in-house and sell to government on the back end. Indeed, it appears that Boeing developed the T-7 mostly on it’s own dime, as did Textron/Howe&Howe with its unmanned “Ripsaw” mini-tank.
I’m not sure about this logic, however. For example, most defense primes do not actually “manufacture” a majority of large systems. They mostly do final assembly. And while Apple can outsource final assembly to China, companies producing large and complex systems like aircraft and especially ships may build synergies between final assembly and development. The Dassault company in France, for example, would outsource everything except for final assembly in order to maintain technical knowledge for prototyping. Development at a shipyard looks a lot like production.
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