The Iron Quadrangle

As we’ve heard so, so many times, the defense industry is counting on international sales to pick up the slack caused by flat (or declining) budgets in Europe and North America.

Deputy Defense Secretary Ash Carter as much as endorsed that view on his trip to India this week, and he pledged that the Pentagon would try to do its part to help that process.

Picking up a point that has frustrated defense firms for decades, Carter told an audience in New Delhi on Monday that he gets it — the U.S. does not have the smoothest and easiest system for contractors to sell their weapons and equipment overseas. That must change, he said, appealing to India in particular but doubtless also aware it could also help the aerospace and defense industry get closer to its sales goals elsewhere.

Said Carter, per DoD’s official story:

The deputy secretary noted the United States has begun to prune back bureaucratic restrictions hindering defense trade and joint development between the two countries. The United States’ export control system is designed to prevent high-end technology from getting to states that shouldn’t have it, Carter noted.

“But our system can be confusing, rigid, and controls too many items for the wrong reasons,” he added. “We know we need to improve it,” and the president’s 2010 Export Control Reform initiative is guiding those improvements, he said.

The Defense Department’s internal procedures also can erect barriers, the deputy secretary acknowledged. He added that he and Panetta are committed to reforming those processes. For example, he said, the United States has moved India’s Defense Research and Development Organization and the Indian Space Research Organization off the Commerce Department’s entity list. The list sets restrictions on foreign end-user nations involved in proliferation activities.

“We trust India and know that India is not a re-exporter or exploiter of our technologies,” Carter said.

This is after India rebuffed Lockheed Martin and Boeing — and implicitly, the United States — by selecting France’s Dassault Rafale for its new fighter. But Carter, as the Building’s former top weapons-buyer and a longtime heavyweight in this game, sees the writing on the wall: Even if he and Secretary Panetta can save the industry from the threat of this winter’s automatic budget restrictions, more business is always good. And if they can’t, more business could mean the difference between survival and starvation.

To that end, Carter also said he wants to smooth out and speed up the foreign military sales process, again here in the context of India but likely also for other potential customers:

Defense Department leaders also are working to improve the Foreign Military Sales program, or FMS, he said.

“India was our second-largest FMS customer in 2011, with 4 and a half billion [dollars] in total FMS transactions,” he noted. “And we delivered six C-130J’s on time” …

“We think our defense technology is the best quality on the market. … Buying American, whether through direct commercial sales or Foreign Military Sales, will get India exceptionally high-quality technology, a high degree of transparency, and no corruption,” Carter said.

Defense leaders also are working to make their acquisition process clearer and more export-friendly, he added.

“I used to be undersecretary of defense for acquisition, technology and logistics,” he said. “There was a chart on my wall, outlining the 250 … steps it takes to move a program from development to delivery. It read like hieroglyphics.”

The department is working to make that system more export-friendly, and also has a new fund that allows the Pentagon to procure long-lead, high-demand items in anticipation of partner nations’ requests, he said. Officials also have developed a cadre of acquisition experts to help other countries define their requests and to streamline DOD’s response, he noted.

Translation: Hang in there, defense industry — if, due to events beyond our control, we can’t keep up the purchases we’ve said we’d make, we’ll do our best to clear your way toward other customers.

Carter’s official blessing for increased foreign defense sales could mean the old polygon metaphor about the defense game, the iron triangle, needs an additional point: In addition to Congress, the Pentagon and the defense industry, we could add a fourth player, the “foreign customer,” or the rest of the world.

But as everyone in this game knows, it’s a two-way street; you scratch my district and I’ll scratch your program. Not only is it not clear whether the foreign defense market can help the U.S. industry survive, there’s a more basic question: If official Washington is going to try to goose the game, can it get foreign powers to play its way?

Said Carter to his Indian audience:

“We want to cooperate with you on high-value technologies,” Carter said. “To get where we both want to be, India can make some changes too, to increase U.S. investment.”

If India raises its foreign direct investment ceiling to international standards, he said, commercial incentives to invest would be greater. India currently limits foreign investment in its defense sector to 25 percent. A Washington-based nonprofit research group, the Center for Strategic and International Studies, recommended in a report last week that India increase its defense FDI cap to above 50 percent.

“An arrangement where U.S. companies invest in [the] Indian defense industry could provide a win-win for both the United States and India by improving India’s defense industry while providing U.S. companies a potential source of lower-cost manufacturing for defense products,” the report’s authors wrote.

Carter said the Indian government also could adjust offset agreements to increase U.S investment opportunities. Offset agreements typically involve a foreign supplier agreeing to buy products from a government acting as buyer, to offset the buyer’s investment.

“Offsets can be tremendously helpful to growing industry capabilities – if you have the right companies, and the right absorptive capacity,” Carter said. “If offsets are calibrated correctly, they work. But if offset requirements are too onerous or too narrow, they deter a company’s interest, and you lose that alignment of economic interest and strategic intent. For companies to participate, our arrangements must make good economic sense as well as good strategic sense.”

Third, he said, projects integrating technology development, production and acquisition require administrative structures that can accomplish that integration, he said.

Foreign direct investment limits, offset agreement restrictions and integrative administration structures are “just three points where change could be a real help in Indian-American cooperation,” the deputy secretary said.

“The point is that on both sides we need to change, reform, and push ourselves to get to a place where U.S.-India defense relations are only limited by our thinking, not by our capacity to cooperate,” Carter said.

The incentive from the American perspective is crystal clear. The big question, however, is whether the Middle Eastern, Asian and South American powers of tomorrow will see things just as clearly, or whether they’ll prefer the view from their own capitals.