Robert O’Brien: One of the things we’ve seen that’s happened faster than the experts thought — particularly over the last decade — is that the Chinese military and naval services have closed the gap on the US both in terms of quantity as well as quality. We still have an edge but the gap is smaller. They’re looking at military platforms the way Silicon Valley or industry would look at a product. There’s iterative manufacturing and design, beta testing, constantly upgrading.
When we’re looking at what the Pentagon does, where we have these pristine processes that take decades to get to a platform that’s perfect or near-perfect, it’s taking us forever to get the box designed and then deployed at very high expense. What does the Pentagon need to do to keep the edge and fix procurement — in some ways to make sure that the Chinese don’t catch up the way they appear to be doing relatively quickly.
Peter Theil: The procurement question is obviously a very broad question. But I think what was healthy about the Cold War military-industrial complex is that we had some balance of bigger companies and a lot of smaller companies in the ecosystem. I think big companies are generally good at doing things at scale. Small companies are generally better at innovating and coming up with new products. You want some ecosystem that has a blend of both kinds of companies.
I think what happened in 1989 when the Cold War ended was a shrinking of military budgets, but there was also an incredible consolidation of the defense industry. The consolidation meant that the money was spent less efficiently, especially with respect to R&D. We spent less money, and less efficiently. There a mass decline in the effectiveness of the system in the 1990s.
I think there have been various attempts in the last decade to reform the procurement process to find ways to find smaller companies to do R&D. We’ve improved some. But it has to be an integrated process. You can’t just get a $5 million DARPA grant where what you invent gets stuck in the broom closet in the Pentagon. You have to get to a pilot that scales. It has to be integrated with the whole procurement process. There is all these risk averse things. If you’re working in the Defense Department, it’s always safe to go with IBM or something like that. It never works.
That was from Theil Talks podcast, Peter Theil on US-China relations at the Nixon Foundation.
I disagree a bit with Peter Theil on his analysis of the defense industry (which he repeated three times in the conversation). It seems to me that he’s adopted a very Silicon Valley-centric narrative that doesn’t gel with my understanding of acquisition history.
(1) Consolidation. The “last supper” consolidation of the defense industry at the end of the Cold War simply accelerated existing trends. Since the WWII explosion, there’s been a steady decline in participating contractors. This accelerated after Vietnam, and then oddly enough again in the 1980s. Despite Reagan-era high budgets, Wall Street was rewarding companies with higher valuations for exiting the defense industry. It is not as if the GWOT defense budget boosts reversed that trend.
(2) Small vs. Big. While I agree with the general thrust that new/small firms can be more disruptive, it’s not like they did all the innovating during the Cold War. A lot of the innovation from the post-WWII era actually was from big firms like Lockheed, Boeing, Hughes, Sperry, and others. Perhaps they were younger and led by engineers. But this focus from Peter on small companies innovating is probably colored by his involvement with firms like Palantir and Anduril, and may be what leads him to this simple narrative of consolidation squeezing out the smalls.
(3) Cost-Effectiveness. Another major point is that the effectiveness of military programs was declining well before the end of the Cold War. It wasn’t like everything was great — the US crushed it in Desert Storm — but then budget troubles forced a consolidation that ruined everything by boxing out small companies. Companies had not been entering the defense market for decades, and universities largely split during Vietnam. Weapon system costs had been skyrocketing for decades, and performance in many cases were underdelivering to plans whereas systems were overdelivering back in the 1940-60s era. Desert Storm relied on precision and stealth — two things that only made it to DoD through irregular means.
I think a proper view of the history of defense acquisition — and the technologies it fields — would show that the end of the Cold War was not a major event. It simply accelerated existing trends in the defense industry. Industrial consolidation emanates from deep problems in the DoD itself. Industrial structures adapt to match the structures of DoD decision-making. Simply put, Lockheed Martin looks the way it does because DoD looks the way it does, not because of the “last supper.”
The much larger event that had major repercussions in national security is the management revolution of Robert McNamara and his Planning-Programming-Budgeting System (PPBS). Before the PPBS, Harvard researchers Merton Peck and Frederic Scherer observed the “multi-buyer” nature of defense. There were various centers of decision-making which had the authority to put money to projects quickly based on the judgment of their leaders. That was scrapped for the PPBS, which centralized decision-making and made money very difficult to come by unless it was agreed upon by 50 or more offices. This turn multiple buyers into a single buyer — a monopsony.
To deal with incredible lead times and compliance requirements, it’s no wonder industry had to consolidate into duopolies (which would be monopolies if perception and anti-trust would let them).
Though it took time for PPBS to put a strangle-hold on the previous culture of risk tolerance and innovation, an inventory of major elements of today’s force structure show that the most important technologies the US has today were mostly (1) developed before the PPBS took effect in the 1960s; or (2) developed outside the formal PPBS process.
I’ll just list a few things today developed before the PPBS: Jet aircraft, nuclear warheads, nuclear submarines and aircraft carriers, satellites, jammers, ICBMs and many other classes of guided missiles, helicopters, lasers and laser-guided bombs.
And a few more recent things developed outside the PPBS process: Stealth aircraft, UAVs, GPS, night vision, internet.
Leave a Reply