Why EADS Needs KC-X Partners

When Northrop Grumman joined forces with EADS to bid on the airborne tanker, most people assumed the two companies were driven together largely by political reasons, helped by the prospect of $35 billion in revenue.

Northrop saw a chance to become an aircraft prime and to work closely with Europe’s largest defense company. EADS knew Boeing supporters would hammer them on being foreign and hooking up with one of the American primes gave them political cover. Once Northrop dropped out of the bidding, having concluded that the negatives — like the opposition of top defense appropriator Rep. Norm Dicks — outweighed the benefits and EADS decided to pursue the possibility of an independent bid, a basic question arose. Since EADS North America exists, would the parent company feel the need to partner with a Tier 1 or a large Tier 2 company.

The conventional wisdom quickly hardened: EADS would join with L-3, or perhaps BAE or Raytheon should it pursue a bid. Beyond the issue of political cover — which wouldn’t really carry much weight given how relentless Boeing supporters have been in painting EADS as a dark foreign force threatening American jobs and security — many of us believed that EADS North America lacked some of the necessary corporate security mechanisms and needed to piggyback on a larger American firm with black corporate infrastructure.

I checked around and EADS North America does operate under a Special Security Agreement and so can take on some classified work. However, it does not, as far as I can find out, have a proxy or voting trust agreement setup, which more rigorously separates a foreign parent from its American subsidiary. A proxy means that a company has been set up as a U.S. company that is legally and bureaucratically independent from its foreign parent. SSA companies can be granted access to highly classified information but it requires a judgment by the contracting authority, while a proxy company will include clearance as an assumption of its creation. They are harder to set up and create much greater operational barriers between the U.S. company and the foreign parent or foreign investors. So EADS North America can probably handle any classified work on the tanker, but if ELINT and SIGINT systems are included it may face some obstacles in getting cleared for that work. That may be one of the reasons for the talks with L-3, which does heaps of the most highly classified work.

UPDATE — Turns out EADS NA does have a proxy called EADS North America Defense Security and Systems Solutions. It handles information assurance work for the Air Force. I haven’t been able to find out yet if it could handle other types of work. UPDATE ENDS

Meanwhile, EADS North America is looking to add suppliers that augment its capabilities with best in class skills, such as engines, avionics, hose and drogue systems, etc. The word we are hearing is that the capabilities of suppliers is more important than security clearances but we’ll have to get more information about this before making any hard and fast judgments.

So far, EADS has nearly 200 companies that would get some kind of direct or indirect work share on a tanker program. As they delve deeper into the RFP, we can expect EADS will identify areas where adding a supplier will help them gain expertise relatively painlessly.