 Ladies and gentlemen, welcome to the Center for Strategic and International Studies. My name is David Burto. I am the Senior Vice President and Director of the International Security Program here. I also have the privilege of heading up our Defense Industrial Initiatives Group, and I'll be your moderator this afternoon. I want to thank you all for coming out. It's a lot cooler here than it is outside. I was looking at an event we had actually three years ago this day, not this date, but the third Friday in July, and it was right after a hurricane had come through and wiped out the power, and this room was about 130 degrees. And it was by far the shortest webcast event we've ever had at CSIS. We rushed through the slides. There were zero questions from the audience, and we were done. Today, though, we're in no hurry to leave because it's not worse here than it is upstairs. I want to also, a couple of administrative details. Those of you in the room, please silence your cell phones or other devices. I'd like to welcome our viewers on the web. We have an increasing number of web viewers, and I suspect on Friday I should offer a particular welcome to our furloughed viewers. Thank you all for tuning in, and we're hopeful that you'll get something useful out of here that will in no way violate the terms and conditions of your furlough. So in all seriousness, I think we owe a great deal of respect and gratitude to all our civilian employees in the defense business who are sticking this out, and I want to express my gratitude to all of you, whether you're furloughed today or not. This is an event that's associated with the Ground Forces Dialogue, and it's really the first visible public collaboration that we've had between the Defense Industrial Initiatives Group and the International Security Program, and the Ground Forces Dialogue, which is operating under generous sponsorship and support from Northrop Grumman and BAE Systems. Martin Leed, who is a senior fellow in the Brown Chair here at CSIS, runs that Ground Forces Dialogue. This is a little bit of a tangent because we're obviously talking about a lot more than just Ground Forces today, but it's brought up some of the issues, if you will. I intend to provide a few introductory comments, and then we have an excellent panel with us here today who each have some presentations to make, some withslides, some just oral presentations. Then I'm going to ask a couple of questions exercising the moderator's prerogative to ask a question or two, and then our plan is to open it up to questions both here from the audience and from our viewers. If you're here in the room, we'll be doing our normal question process. If you raise your hand, identify yourself. We'll bring you a microphone. Actually, you wait until you get the microphone before you identify yourself. We don't require you to identify yourself before we give you the microphone. And then you'll have the opportunity to ask your question, and we'll let the panel comment. For those of you who are watching on the web, I'll give you my email address and you can send in questions by email when we get to the end. There are a host of reasons why it's in the US government's interests and the Defense Department's interests to promote and create a good opportunity to actualize foreign sales, military sales, either foreign military sales or foreign direct sales. It's a way of promoting our national interests and our national security interests all around the world. It's a way of fostering relationships with allies and partners. It's a way of enhancing technology and technology exchanges. It's a way of increasing interoperability and both tactical and operational capability as well as strategic value. And of course it also has the added benefit of providing an additional business base for defense companies on whom our nation depends for national security. So we're looking at more the industry side of this today, but clearly this conversation fits inside a much broader context. You see examples of that across the board in the Defense Department. CSIS released its report about a year ago on the force posture options with respect to the strategic rebalancing in Asia. A prominent element of those recommendations was a better job of organizing and rationalizing military sales so that it would be consistent with our long-term in developing interests in the region. At the other end of that spectrum, when Frank Kendall and Dr. Ash Carter were here in this room back at the end of May, laying out a status report on the better buying power initiatives 2.0, one of those initiatives, of course, is designing for exportability. And there's active work underway inside DOD today to implement that initiative and to move forward on a near-term timetable to come up with some solutions internally that would in fact help DOD support design for exportability. And I know industry has a lot of interest in there. So there's a much broader spectrum of concerns and issues that this fits inside. And we're committed to continuing that discussion and dialogue going forward. Today's focus, though, is a little more narrow, and that is really on not so much just industry perspectives, but the perspectives of a number of people in looking at the industry role here, if you will. And joining us, we have three outstanding panelists to both provide some insight and input to us and to provoke some discussion and some exchange amongst themselves and with all of you here in the room. First is John Barney. He is a partner at Avacent. He's going to provide an overview. And he does have some charts, and they're very good ones. I believe these charts are available to you if you're watching on the web. There should be a PDF file that you can download. For those of you in the room, we'll be posting both the video record and the audio record of this event, and we'll be posting the charts as well so that you can download them yourself as you need them. Following John will be David Scruggs. David is a co-founder and managing partner of Renaissance Strategic Advisors, and of course, a former deputy director of our own defense industrial initiatives group here at CSIS and a senior fellow here. And then finally, Lieutenant General Jim Lovelace, who is US Army, retired, now corporate vice president for international programs at L3 Communications. And as I said, I'll open up after they've covered theirs with a couple of questions of my own. And then you can be thinking about your own between now and then. With that, let me turn to you, John, and let you start. Thank you very much. Thank you. Thank you, David and CSIS and everyone for coming on this 110-degree day in Washington on a Friday. So it's a pretty good turnout, I think showing the timeliness of the topic. So first of all, as a consultant, I thought it was required to have a few slides just to entertain you. But there's actually a reason for them. I want to share first some of the findings. Like we've had just our observations talking, kind of senior aerospace and defense executives around kind of international markets over the last several years. Second is we recently did a survey with aerospace and defense leaders on their perceptions of international markets and offsets. Then third is we've done, with our average analytics capability, we've looked at the size of the global offset markets and a lot of the budget trends in certain markets. So we wanted to share some of those findings with you besides talking more broadly. So please enjoy a couple of slides. And I promise it won't be too painful at all. So first of all, just to get a sense, among the audience here, how many are in industry? OK. So I think this will probably resonate with a lot of you who are in industry. You know, over the last several years, certainly as US budgets are going down, Europe is going down. There's been a lot more focus on international markets. One data point that we just recently had from a survey we did among executives was that 93% of executives think, in the A&D sector, think that international is going to be more important in the next several years. You can see this from the statements that CEOs are making. Every major company, these are public statements. So certainly can be shared that are being set to analysts. But it's true just about every major A&D company, that international market expansion growth is really going to be a focus. Now, I'm always a little cautious when you hear somebody saying they're going to grow their percentage of international business. Because one way you can do that is, of course, have the domestic go down enough that international will, by definition, grow at a percentage basis. But you see that a lot. You can see this in terms of statements. You can see this in real time. If anyone has been to AUSA versus IDEX a couple months ago, the contrast, how forlorn everyone was at AUSA. And then when you go to IDEX in Abu Dhabi, deals are getting done. People are excited. So you just see that contrast in the energy and international expansion. And the reason I'm not going to go into a budget discussion here, but despite, while there is a lot of hype around it, the numbers are actually pretty significant. On the left, of course, is the US budget forecast, just our version of it, which I think is certainly known and understood. On the right, you see just a forecast we did around international markets and where we think the growth is. And the numbers, based on that, we see at least it could be $100 billion in growth potential over the next several years. And a number of international markets. So while there is a lot of hype, while the growth internationally won't be enough to necessarily offset the US decline or European decline, there is a real opportunity there. And this may look a little frightening with a lot of dots, but there's a couple of key points I just want to make on it, is that there's uneven opportunities around the world. So if you kind of take that point from there. So you've got, in the left, you've got markets that are established. You've got Europe and Canada and markets that are large, but they're going to be stagnant. They're not going to be growing over the next several years. Some are going to be in decline. Again, probably not a surprise, Germany, France, Japan. Then you've got, we're calling the major markets where every major aerospace and defense company is spending time, money, resources. These are India, Korea, Saudi Arabia, Brazil. And there is investment. There's people flying there. There's attempts to meet local partners in all these markets. So this is where pretty much every major aerospace and defense company will have one of the markets in the major category as a priority. I'm not saying exclusively, but many of them will. And then finally, the third category, which breaks out are minor markets. And I'm not using the word minor to be negative. Some of these are obviously strategically important markets, but in terms of overall spend, I think relative to the major markets, they're going to be a little bit smaller over the next couple of years. And what you find with companies is in these smaller markets, there tends to be few companies that are pursuing them all aggressively. But what you're likely to see is companies having a plan where they'll address all the major markets, then a couple of the minor markets based on their products, based on the right reps they have in country, based on other strategic reasons. But if you think about the world, you've got an overall story of growth, like I showed you previously, and then you've got kind of a mix with the European markets, not surprisingly stagnant. Everyone investing in these markets that are poised to grow and also have scale. Then you've got this pretty mixed environment below that where there's a lot that could be growing but from a pretty small base. So just I would take from there, it's going to be fairly uneven. Then who's familiar with the term bricks here? So it's a little tricky in the AAD sector to use bricks because you have Russia and China. So it's a little more complicated. So when we did our survey, an interesting finding came out of it. We're calling it the busy markets, BUSI. We asked the question in our survey to aerospace and defense leaders, what markets are most important to you? And four of them came out quite a lot higher than any other one. So it's Brazil, the UAE, Saudi Arabia, and India. And you can see the flags here. Those four represent considerably more interest than any other than you have Korea, Canada, and Turkey all coming in as markets of other importance. But we put that up there to show that everyone, if you're sitting in a strategic planning meeting, an international meeting, a global strategy meeting, those markets come up and repeatedly it's busy markets. Now we can have a bricks discussion another time because that adds a little level of complexity, but think of it as the busy markets. Now getting to a topic called offsets, which ends up being tightly related to global expansion and is an area of challenge for pretty much every major aerospace and defense company these days. And there's a couple of reasons. I won't get into a long dissertation on offsets, but simply, if you're not familiar with them, essentially when a sale of a defense product is done in a certain market, a company will incur an offset, which is essentially a form of economic development ideally into that country. It could be tech transfer, it could be training, it can be manufacturing capability, export potential, any kind of capability to help that country develop economically. However, over the years, companies have kind of ignored this, regulations haven't been enforced. It's changing for a couple of reasons. First of all, the numbers on sales are getting bigger. Then second, countries are becoming more sophisticated. So this is becoming an issue for every single major company right now as they try to expand internationally, it's the offset challenge. And we went out and we sized the market on this to see how big the problem actually is, because the data doesn't really exist. Commerce has some data that's backward looking, but in terms of forward looking, there really isn't much data out there. So we actually sized the global offset market and it turns out by 2017, there's gonna be close to a half trillion dollars in offset obligations for the aerospace and defense sector. So big numbers for the whole sector. And the economist is writing about it now as well, so it's getting visibility. And we put it out there because not only are the numbers big, but they're getting bigger faster. So when you see growth internationally, it means this challenge around offsets is getting bigger and bigger. It's much like if you have an hourglass with a sand in it where it's been kind of steady saved with sand going through it, and all of a sudden you have a dump truck pouring sand into the hourglass and you can't discharge obligations fast enough. So as companies are trying to grow globally, they're struggling every time to come up with an offset project, finding the right offset partners. So when you think companies developing their right strategy, offsets invariably is linked to that strategy. I'm just gonna touch briefly that it's affecting every market which ties in closely with where growth is taking place. Offsets are in every market, so in Middle East it's driven by the Saudi Arabia and the UAE. In Asia Pacific, it's Indian, Korea. In Latin America, it's Brazil. And then in Europe, Canada, Canada's driving it. So this is something that's affecting every company and every major market. Finally, this ties in some of the data we have on analyzing the offset market plus the survey we did. And an interesting finding and also I think somewhat challenging finding is that the countries that have the biggest opportunities in terms of dollars, so like India, Saudi Arabia and UAE also are the ones that A&E executives are viewing as the most challenging to do business in. So in a perfect world, if you look at the upper right of the quadrant, that's always the good place on a chart. There's not much there. But if you look on the left, you've got big markets with big challenges. And then you have Greece in the lower left. So just to wrap up, so what does this all mean? So just five key points I just wanna take away is in terms of the challenges and then some high level recommendations. First, the way aerospace and defense companies have typically been operating, this is particularly true for the US, less so for Europe, is that there's been a fly in, fly out approach to international expansion. So while there's all this talk about global expansion, there's still an approach largely of the US companies in particular flying in and then leaving. And the customers on the ground notice that. So a recommendation is boots on the ground and an understanding of who to partner with regarding joint ventures. Somewhat anecdote I've heard from more than one company is the typical approach to finding a joint venture partner is you meet somebody in the Admiral's Club while flying on American Airlines and then that's your JV partner. There really isn't a real strategic approach to finding partners. Second, I think this gets to how to sell internationally. While it's important to sell products, having a solutions-centric approach I think can go a long way and actually understanding what the customer needs as opposed to just selling what's in your portfolio actually coming up with a real solution. Third, like I mentioned, offsets rapidly becoming important, the dollars and importance. So a recommendation is raise visibility and think of offsets as an opportunity, not a risk because it's part of doing business. Fourth would be the offset authorities. These are the economic development. They have economic development goals in countries. They need to be trained as well. They're also having a tough time while the US and European companies are the supply side on the demand side. They don't know how to discharge obligations in a way that's producing economic development. They need to be educated and trained better. And finally, I'll leave you with a point just building a global organization. US companies, European companies, US in particular have the biggest market in the world by far, obviously. So in a way, doing business internationally hasn't really been needed. There's FMS of course, but where this is going to sell more internationally requires operating more like a global organization. This means integrating strategy, policy, compliance, the branding, all these pieces together as opposed to being in silos which has been typically the approach. So there's a lot of change going on here. The reason we have such a turnout on a Friday afternoon on a hot day is because this is a top of mind issue for a lot of companies and certainly from a policy standpoint. So a lot to be done and look forward to questions. Thank you, John. That was a good overview and I like it also because there's actually some data in there that we can track back to. You know, the offset issue alone is a very powerful question, both from the point of view of generating at the deal and then executing upon signing. Companies clearly have to think about this, the information you've laid out from their own perspective. So David, I wonder if you might be able to shed some light on how they might approach that. Thanks, David. I did not bring slides. There's I guess makes me a pariah in the consulting community from this point on. Okay. You have your consulting card still. I do, I do. Anyway, I just want to make a couple to David's comment, I'm going to make a couple of comments about how some of the things we've seen in working with companies that are getting more and more involved, going overseas, this is primarily in our work helping US Primes and the tier one and tier two suppliers that look at these markets in particular over the past two or three years to John's point, suddenly it's back in vogue in the strategy discussions. There was a guy from actually I think it was BA Systems who told me in 2004, no one's going to return, no one's returning my phone calls. He was a VP of international sales. He couldn't get anybody's attention. Today he's a popular guy. So anyway, but I just want to give a few framing thoughts about how we're looking at it. For starters, again, a little bit different take, but again, to agree with John, when you talk about international we're really talking about 25 to 30 countries. I think you had 38. I counted quickly. It's in that neighborhood. These are your NATO person, golf allies, India, Brazil, a few Latin American countries and some East Asian allies. These are people basically with real threats, real money or both. The rest of the 200 countries in the world fall somewhere outside of that group when you're talking about strategy for an aerospace and defense company. We bucket them a little differently, not by size, but by how I think we need to approach them. One is a group that we would call customer nations and by that I'm talking about people that tend to buy more straight up FMS or direct commercial sales, people that want real capability at reasonable prices, people that have fairly strong alliance interests either with the US or Europe. They probably don't have much indigenous defense industry. Offsets are usually not the driver. There may be consideration, but they're usually not the driver of these defense deals. And historically it's been the Persian golf allies and a few European nations, but everybody's moving to your point, John. Offsets are becoming a bigger issue for everybody. The other group, which is growing, is what I call the partner nations. These are the biggest offset users. These are usually the emerging companies, countries with defense needs that can be real, but can also be to match their growing economic size, not necessarily because they have a threat on their border. They're often using offsets to, they haven't established aerospace and defense industry. They're using it to grow it. They're often using offsets to grow their airspace and their broader technical base. They're often using offsets to work share. They're more interested in work share and tech transfer. In some cases, that Trump system capabilities are alliance considerations. And in key issues from a US defense supplier perspective on this group are legality, of course, and this is something we all talk about, which is will US export regulations allow them to sell or transfer what the buyer wants? In some cases, the answer is just flat out no. So that's taken the US defense players off the field. And then operationally, and this is an issue we spend a lot of time on internally, is can the buyer absorb the work and the technology they're asking for? In some cases, the answer is yes. In some cases, the answer is not really. And that is an issue that is not insignificant. And these are often the larger emerging companies, countries like I said, some East European and some East Asian analyze. And the last group is the developed group. They use offsets as a group, but they're trending away from them. They have highly developed defense industries, but instead of trying to grow them, they're trying to save them. May have significant but declining or flat budgets and they're more interested in co-development to keep their R&D businesses alive or they're interested in co-production or industrial capability for jobs reasons. Alliances are important, obviously, interoperability is important to these folks. What we're seeing here, and these are the groups that you read about with the Ministers of Defense and the Minister of Finance talking about value for money and sustainable positions on long-term international programs. Little bit different than trying to extract concessions out of defense or Western defense companies. And then over time, some of these folks change position, but it's important when you look at them to know where they've been and where they're going. Couple other quick thoughts. One, the laws of economics apply even to defense offsets. Ultimately, the buyer country pays for the cost of the offsets. Sometimes you gotta get creative about this, but they do pay. Most of the defense companies, particularly U.S. defense companies are profit-seeking firms. They're not gonna knowingly do uneconomic deals. Offsets provided are not cash paid. Buyers use offsets for domestic political purposes, which they often need and to grow their, both the defense industry and their broader technology regimes. But again, just because you see somewhere that there's 100% offset on a project does not mean the contractor's paying the country to take their goods. Offset costs are included in the bids, although they're not spelled out. And I think this is a problem you guys have trying to collect these data. It is hard to carve that out because we've looked at it too and we struggle with that as well. The FMS regulations do not require disclosure as a line item of what the offset costs are. So you know they're buried in there, but it's not spelled out. There's a corollary to this, which means if buyer countries realize that they could get lower pricing on defense articles and services if they didn't require offsets, some of them make that trade. That's not the trend though. The trend is more offsets. The magic is in the credit multipliers. If you can get a 10 to one credit for a multiplier versus dollars expended, that's a good deal. Sometimes you can get 20 to one. It depends on how bad the host country wants, whatever it is, the particular offset you want. There's no international standards, so it's whatever you can negotiate and that's why it's an art and not a science. And it's probably gonna remain an art and not a science for the foreseeable future. It's a blessing and a curse in two more broad categories. One is a blessing and a curse. Positives are it's a marketing tool, both the US and the foreign defense companies know how to use them, some of them very well. I don't think that's gonna go away. US companies in particular, I think bring a lot to the table in terms of access to the range of offsets they can offset, the way they can discharge their offset obligations, but also to access to larger business networks, both in the US and worldwide. The subsidiaries, JVs and suppliers that they create through the offsets can be part of their global supply chain and having a landed presence. Again, to John's point, it's not a bad thing. Negatives though, and this is where we also get stuck in a group is they create competitors, if not immediately in the mid to long term. US export restrictions I've already talked about and some of the management problems, we've been seeing a lot of this lately, not having one responsible party for an offset obligation. Sometimes the program manager in the business unit is handling the direct offset obligations. The indirects are all handed by some corporate group who's not necessarily talking to the program manager in the business unit that's handling that contract. So there's a disconnect. No one is responsible for or more importantly incentivized to make sure that the total offset was worked off. Purchasing incentives get conflicted. This is an operations issue. If you're a purchasing manager, you're paid to get a certain part or a supplier that can provide a certain part at a certain price with reliability and a certain quality level and not for the maximum offset credit. Usually if you go in and say, okay, we understand what you're doing, but now we want you to take out the group of suppliers and just hire this other local country because we're gonna get 20 to one offset credits. But they don't qualify, they don't satisfy any of the major procurement guidelines that this guy's evaluated on at the end of the year. So you get some friction. Time-facing of offsets are an issue because what's offset discussions in the early part of the procurement cycle may be very different by the time the contract's gotten signed and some of these contracts for large programs can be very long, can be years. As you're following the fighter competitions in India and in Brazil and in South Korea, those are taking half a decade more in that range. So, and the last thing is defense firms are not always good at non-direct offsets. There's a lot of sore stories of Polish hams and shrimp farms in the desert and vacuum cleaners and shoes and anybody that's been on this for a while has been watching these. You can come up with an example of what's gone wrong on an indirect offset deal. And the last thing is there's relatively two newer models for discharging offsets. One's a civil military trade-off and you have to have a military business to play this game. Boeing, Sikorsky, some of the tier one, tier two guys that do have both civil and military business lines can sometimes use civil work to offset military work and vice versa. The other option is to try to sell offset liabilities to somebody else. And this is always gonna be an indirect offset issue but it seems non-defense companies are better at non-defense businesses. On its face, that's reasonable. In the case of an entity, in this case an entity would buy the contract's indirect offset liability at a discount and take some responsibility for executing it. You need a financial player to foot some of the bill for that and then, but the crucial stumbling blocks are you have to get the buying country to formally release the defense contractor from its indirect offset liability responsibility and that doesn't always happen because that loses the country's leverage over the contractor to get the offsets worked off and then assigning responsibility for penalties. So in the end, these offsets are gonna be used, gonna continue to be used by buyers for political, economic development and social ends. They're gonna be used by sellers for competitive marketing reasons and if managed well and in the case of the US with some thoughtful and timely reforms by the existing export, by the government for export trade restrictions, the US Airson Defense Companies can use offsets to their advantage, particularly to the partner nations I talked about earlier. So lots to talk about. I'll stop there and look forward to your questions. Thank you, David. That was a good summary of a lot of key points, if you will. I gather it's your feeling that a company actually can market as a part of its marketing scheme, its ability to manage offsets effectively. We've talked so far about this whole dynamic though, as if it's largely an exchange between US companies and perhaps their global competitors and the markets, that is, the buyers among those 36 or 38 countries that were on the screen there. But there's clearly a third major player in this dynamic and that's the US government and the Defense Department itself. Jim, you've looked at this from both sides of that dynamic, both on the outside now for a company and previously on the inside for DOD. Help us round out this discussion and maybe bring those players into it as well a bit. First off, thanks for the opportunity to be here today and to hopefully share something of value. I can see all y'all moving to the edge of y'all's chair as y'all wait with bated breath about what I'm gonna say here. Hey, there's a, this whole thing about offsets is kind of interesting. All you have to do is read an article that there's gonna be more people in this world than there gonna be jobs in the next 20, 25 years. So that's why offsets become such a big deal because everybody wants to have an employed population. We're no different. How many of y'all have had an opportunity to travel to someplace like Afghanistan, Yemen? Y'all must have taken a vacation there, I'm sure, so. So. It's part of the offset deal. Yeah, it's part of the offset deal, yeah. Tourism. So the y'all who raised your hand and y'all said y'all were in the industry, how many y'all are in international sales? Raise a hand with pride, yes. Hey, if, so let me just kind of lay this sort of in a perspective and I don't pretend to have any great knowledge and background in this, but if doing international sales is like doing a 12-star Sudoku, all right? All you have to do is grab ahold of what offsets is and understand that is one other variable now that you have to take into consideration, a different set of laws, different culture. I mean, it just goes right on down. And it's not, it's a fact bearing on the problem. And so what I wanna do today is just the things that I have gone over the past several years in working with L3. I had an opportunity to work in the building. Some of the people that I had a very wonderful chance to work in the building or in the audience today and they're great friends and all. If anybody here is from Denmark, would you ask them to leave please? No, he's a friend, that's all. So, okay, how many y'all have seen the Defense Acquisition University's mother of all slides? It's about 20 megabytes of information. It's about 20 years of, not of effort, but of 20 years of process on one chart. It could cover a wall, it's a mosaic. If you have it, I don't have slides today, I'm gonna use John's, no, I'm not, but if I'm gonna have charts afterwards. You need to take a look at this. And if I could leave you with anything today, it's about what industry needs in foreign military sales or foreign sales is predictability and it needs transparency. Well, those are the two key words here. And those should be how we measure the effectiveness of anything that we're trying to do. And why I ask about whether you're an industry and about whether you are in foreign sales. The first two hurdles that we go through in a gated decision is an interest, no interest, and a pursue, no pursue decision. And the level of detailed information that you have got to have for those kinds of decisions is readily available when you understand the Defense Acquisition University's chart. So at the top is a thing called the J-SIDS process. Basically is how we build and define a requirement. You with me? Right at the top. Right down below it is about the acquisition process. And as you go through these acquisition decisions that lay out in a decision memorandum that we have done together, some of us. And then at the bottom of it is this wonderful process that just makes people so happy is the budgetary process. Requirements, the people that build the print, and at the bottom the people that provide the money. All right? Now, so to simplify that chart, what happens is that at the top, every service has an architect for the future. Army, Navy, Air Force, Marine Corps, and Coast Guard. And you generally in the US government have somebody that fills that roles. Now they might not be very robust in their size, but they're wonderful professionals who try dramatically to do a good job. Inside the acquisition process is a wonderful acquisition, very professional. And while we might want to sometimes critique them and how well they perform, when you compare them to some of the people that you deal with internationally, and I'm not saying that they are not professional, they are better trained here in this country. And at the bottom, you might not like the process that we go through with the budget, but guess what? You get to see in business the money seven years out. So think about that. So that's this process that we live with. And in L3, for example, we are slightly above 70% of our businesses with who? DoD. We jump up towards 80% when we get the US government in there. So that's what you see. Why do I bring this? Because there's a predictability and a transparency. The architects of the future are basically telling you where they are investing their RDT and E-dollars. So you can see it. So you can, industry can make that decision about whether you're interested in pursuing, excuse me, you're interested in that you want to pursue it. You with me? It's non-verbal feedback would be great. All right, that's good. Okay. So now, let's walk into international sales. When you start dealing with an international customer, do they have people that have this defining of the requirement? They probably do. Are they as professionally trained? Probably not. Do you have a very professional, the depth that you have in a material command that manages life cycle of a product? Not in every case. And nobody, what I want to witness here today is nobody would want our budgetary process either, but we've got one. And, but again, it allows you the visibility, the transparency to see a requirement coming your way. And the case of when you're budgeting with international partners, most of them, a lot of them, especially some of those that are perhaps with the term was legacy here, they have a process that allows us to see it. And that's why when you look at most of us large, and L3 is number six domestically, when you look at your large defense contractors, who do we do business with? About 25. They command better than 70% of what we do in L3. And a lot of them, some of them are in the audience and that's why I joked about Denmark because they're one of our customers here in a nice way. And so that's why I'm framing for you then this acquisition process, and then when you go internationally. So then you walk that back in. So let's talk about export reform. You know, if you want predictability, if you want to design exportability in, then design it in approaching milestone B. Get it where we can make a decision that we're gonna now be able to invest research and development dollars in this process so that what we can do is we can get certainty so that now we don't have to worry about whether there is gonna be, when we petition in order to now see if something is in the national disclosure policy is okay for us to now transfer the technology, we can start marketing that product right up front. It's a little bit like what we do with JSF. And so that's kind of a model for this. And so then let's walk into the transparency piece. So downrange, I mean, the embassies that I've touched, whether it was when I was in uniform or those that I've touched now when I have to worry about whether my sock color matches my suit, all right. What happens is is that they are wonderful professional downrange, whether they're in defense defense cooperation or whether in commercial services of commerce or it's the embassy staff themselves, they are all exceedingly helpful, but they have knowledge and they know what it basically what it is that they want that ambassador knows what the capabilities are that he wants that country to have. Well, how do you find out? You've got to go visit. That's one way, but there's no promulgating of that information from inside of that embassy through a combatant command that then lays out in a document form. Now, this is perhaps utopia, you're saying, but I'm just now beginning to lay out a process that we need to now be moving towards. Now, there are people who understand this and I applaud what the combatant commanders are doing. I'm just gonna mention two that I know specifically. One is to pay comm. What do they do once a year? They make you come to Hawaii and they bring their scows in, they're security cooperation's officer and they begin an interaction. Now, that's about the best we can do, all right? That's about the best we can do and it's replicated also across some of the other commands. I know that Central Command, for example, they under General Mattis specifically, what they did is they formed an FMS section in order to facilitate farm military sales in order to now begin to help build the partner capacity. And so, as you step back in a larger sense for us, when you look at that defense acquisition university chart and you see the requirement that's built years out, if that knowledge is somewhere, how does it get to you in industry? L3 is a company that has over 80 companies. We are 120 profit law centers and we deal in 155 countries. And so the ability to know what's going on in that the dots that was presented by John, it becomes problematic. There's not a process that then brings it up to us that says this is where we would like for y'all to build partner capacity. You find out when once you petition and whether they grant you permissions to transfer that technology or not. Now perhaps y'all are saying I'm looking at the glass half full or the half empty. And so I say maybe. But if you want to now begin to move this in a way that it facilitates industry to build partner capacity, which is part of the national security strategy, then those are the things you need to do. And once again, I hit one time, one time more, allow us to find out earlier in the acquisition process if you're gonna allow us to market a technology and export it. That's all I got. Thanks, look forward to your questions. Thank you, Jim. And I think the powerful role of the Defense Department and of both the requirements, acquisition, cycle, and the budget. I'm gonna actually move I think to this chart of yours, John. For those of you on the web, it's a chart that shows essentially the DOD budget probably flat, perhaps less than flat going forward, depending on which scenario you wanna follow. And the cumulative defense spending of the rest of the world going up. And that's a bit lumpy. Not every country is going up the same. And we here at CSIS put out a number of reports documenting that and looking at the trends and the breakdowns of those data. But what it implies from the point of view of the company, and I'd like to ask a question, this question of each of you, on the left side of that chart, the US Defense Department, it's pretty hard right now to get clear demand signals from the department of what they're gonna be spending their money on. We have on the one hand a president's budget and a future year defense program associated with that budget, it's up on the hill for review now. We have a Senate budget resolution, a House budget resolution, very consistent with that number, at least for fiscal year 14, starts to deviate in the out years. But none of those numbers are compliant with the statute and the Budget Control Act caps. In fact, they're off by roughly $300 billion. It's hard to get demand signals with any clarity with that level of variation and variability. And particularly given that the vast majority of those cuts, a disproportionately large section of those cuts will come in the investment accounts in procurement and research and development. We sort of know that even though we don't know exactly how this is gonna play out. So it's true that for domestic sales, demand signals are hard to come by. It may also be true though for foreign sales. And I guess, what does industry look for in the absence of those clear demand signals? To what do they pay attention? And you can go in any order, but I'd like each of you to kind of comment on what you think industry should be looking for in the absence of these clear demand signals. David, do you wanna go first? You're writing, so I'll buy you time. No, I don't really wanna go first. Okay. One of the things that I think you do is you show up with what you have and figure out where are you loud and solid and where have you maybe not focused before. Some companies have been much better at keeping boots on the ground in their international business as a priority. They all slacked off in the last decade, but they've all to different degrees with one notable exception, come back to the table and trying to do more internationally. What do they look for? Which I don't know, from international, yes? David? Yes. Yeah, not US. Right, yeah, we'll do US another day. That'll be another day. You're looking at threat. You're looking at, well, who's got the money? Who's got the threat? Who are the powers that be that make the decisions in that country and where are their needs? Sometimes you're doing a deep dive on what are their installed fleets, be it ground vehicles, be it airplanes, be it ships, whatever. There's usually a modernization cycle involved. There's always electronic refresh cycles involved. So from that standpoint, you're somewhat looking at what you have. There is, I think, a growing trend toward, and it gets to that middle group, or I guess in another slide, it's the major countries, they're radically changing their defense profiles, and that's when it gets a little bit harder. John, what do you see when you're looking at this from an analytical point of view? Sure. I think there's three components to this for a company as they're looking around international sales. I think it's first, I agree with David around, understanding the threat, the risk, which I think companies actually do a pretty good job of that, just by the nature of being the aerospace and defense sector. There's, I think, an understanding at a high level, certainly, what the threats are, the risks, but I think there's two other components to this where I think companies often aren't as strong as they could be. So first is understanding threats and risks. Second is around understanding, really, what the capabilities are within the country. And this is not just kind of counting the number of ships, not just counting the number of ground forces, it's just kind of understanding strategically how do those capabilities of a country line up with what the strategic challenges are and really doing that kind of, I call it like a gap analysis of really understanding what the gaps are. Then the third piece is I think where companies, and it's one of the points I made at the end, where I think they've struggled a lot, is then understanding how do your, as a company, your capabilities line up and what's the solution? It's something we've seen repeatedly where I do think a company should understand, like sell a product, but it's actually going in with a solution and offering, is saying, well, based on your country's threats and capabilities, here's what a solution could be based on what we can do, as opposed to just kind of flying in, selling a product and leaving. So I think understanding, again, to come back, the threat piece, I think companies do a pretty good job, at understanding the country's capabilities, but then doing that internal look and understanding what do you actually have and how does that line up with what the country really needs. We hear stories and stories of just companies flying in saying, here's some stuff, open up my jacket, here you wanna buy some stuff, and then leave. And then the countries just scratch their heads saying, well, I don't know. Doesn't really line up with where my needs are. But the companies that do that well understand that, but I think if you make a generalization about the aerospace and defense sector, I think a lot of them still approach it that somewhat negative way. So I think there's an opportunity to do that analysis a little better. Jim, you actually have to wrestle with this in the day-to-day sense of your job, as well as in the observing analytical and interpretation sense. What do you look for in the absence of clear demand signals for international sales? Well, first off, I mean, the obvious is that, and I think both John and Dave alluded to it, but this thing called relationship is such a, it's not that it's not a big deal domestically, it is a huge deal in the international community. And so this relationship here with understanding and so that you're not viewed as an industrial tourist is become so powerfully important. So whatever you do and how you approach a customer, they've got to see you as one of them, not one of them, but you are there with them full time. So you just can't, like I think, John, you can't parachute in, all right? And so I think that becomes very, very important. So that's the obvious thing. This thing called capabilities is kind of a, everybody thinks they understand what it is. We in industry can be too quick to market whatever it is that we have. And so the point is, is that we're cute by half because we can talk about our product, but are you really able to talk about what is the gap, which is a short term need that is, a gap means you have a gap that's right in front of you. A functional need is something that you can plan towards that has a little bit more distance in it and so. But that's where you have got to now build this network and that's where you have to rely on the embassy to support you. I mean, the embassy is a wonderful source of information, both commercially and on the military side. And I'll tell you this, back here in DC, state commerce, all of them, I deal with them, I find them eager, well, eager might be able, I mean they act nice when we show up, but I'm assuming they act nice when we leave also, but, and so, and so therefore it's really understanding what it is that your customer wants. And so if they want, you know, something that's blue, you know, is it Duke blue? Is it Carolina blue? Is it, you know, does it look like wolf pack red to them when you walk in the door? And so I mean, so this thing about understanding really what it is that they want, because I think that they go through a process, although how rudiment it is on the dictum approach, whether it's doctrine, organization, you know, the training, the leader, all those things. I mean, in the material solution, they go through it, but they don't have this robustness that you have with the U.S. market. And so the more you pay attention and it requires more dialogue than anything else, but there's sources of information here in state, in DSCA, and NIPO, AI, and user sec. I mean, these are wonderful organizations that can be a source of information for you, so. Thank you. Let me ask one other question and we'll open it up to the audience here. We've talked a lot about the U.S. government's role here. We've also talked a lot about offsets and the role of offsets in these deals, but let me bring those two together. You know, typically, the companies are kind of on their own on the offset side of things, and I think at least one of you pointed out, two of you pointed out, we don't really even get good data on what the deals are. And yet, in a very real way, the U.S. government and DOD have a vested interest in both the nature of the agreement and the executability of the agreement over time. How consistent is it with our foreign policy objectives? What does it do to sustain and support the defense industrial base that we need to have? How does it comply with all the constraints and restrictions of everything from export controls and ITAR to the process that security cooperation funds have to go through? So does the government, should the government have different expanded or altered role in offsets? And if so, what should that be? Go ahead, John. To cut out, just to kind of come to, why is this even coming up now? I think it's probably important to set the stage. So offsets have been around a long time. I mean, this isn't something that's new, that just got invented. You know, and again, as I think both other speakers said, the purpose is about economic development in countries and jobs ultimately. The reason it's a big deal now where you have a convergence of companies trying to sell more internationally and making it a real push. You also have countries where there is demand, they are buying, and they're also becoming just more sophisticated about it. They're looking around and you have leaders in countries who have been living outside their countries, who've been trained in Western schools and are becoming more sophisticated in terms of what they want. So the idea of a shrimp farm, it's not as prevalent anymore. They want actual investment and jobs and partnerships. So this gets to the question that David posed is why for a long time it didn't really matter that the US, there would be data tracked by commerce, but the difference now is that it is becoming important and it's becoming significant for companies. It's becoming a strategic issue for companies. So I mean, I don't think I have an answer in terms of what that exact role is, but in terms of having the visibility around offsets and what it's going to mean because it is affecting every company. Every time you see a statement by a CEO saying, we're going to sell more internationally, offsets comes up. And as David said, can this be a source of real economic development? Absolutely. I mean, that's the intent. So this is I think a kind of an untapped resource that somehow has managed to be inefficient for all parties. You know, the US government gets a little out of it, companies get a burden out of it, then countries where the economic development is supposed to take place are not getting the resources used either. So it's actually a perfectly bad outcome for all parties. The only thought here is David, for instance, DSCA used to require disclosure of the amount of offset costs in the bids and that's been removed. That is no longer required. So we're going in the opposite direction. So we're going in the opposite direction. Just, I appreciate your hypothetical, but we're going in the opposite direction. That's number one. Number two, I think this is one of those carriers where the US government has to be careful. I think you're right. They do have an interest in helping direct where some of this development needs to go, but I think it needs to be very careful how it applies it because a heavy hand here could really hose it up. And in some ways, this is not the first time this has come up, it came up in the 90s when same exact thing happened. Defense budgets went down, defense contractors went overseas and it became, and that's when the gear started grinding and that's when eventually they said, we're going to take a lighter touch. My mind works as a sort of operations research gas. I'm attracted to data, all right? And I think that why it becomes important is, is that we don't take credit, necessarily credit for it internationally because what it is, is an investment then in that country. And so I'm not trying to say then that that's something that we beat our chest on and that we brag about, but I think it's something that we need to now understand how we leverage so that it, when you hear about China and their investments internationally, and so are these not investments also in countries? That's the first thought. The second thought also is, is that I was part of a forum and in the discussion was about when the US invest in jobs internationally, what does it mean back to the US? And it was a, it's a return, there is a return, multi-fold from what we invest in a foreign country and what we get back because of what they buy. And so from that perspective, I think it's something that we need to understand and not look at, although it's a challenge, it's an en route march to a lot of bureaucracy that we go through. But how do you then take that and make it in so that it is something that shows what America with the United States is doing internationally? I think that's what how I'll pursue it, so. Well, you've been very patient about, got about 140, 150 people in the room here for questions. We also have about 50 more on the web. If you are on the web and you'd like to send a question in, you can email it to me at dberteau at csis.org. If I can understand your question, I'll try to ask it. We've also got a great audience here. So there, if there's some tough questions that actually we can't answer, there's a number of folks in the audience we can call on to answer those questions as well. Who's got the microphones here? All right, what we'll do is raise your hand, I'll recognize you and then we'll try to go and order around the room and then we'll wait for the mic and identify yourself and ask the question. Let's start right down here in front and then we'll move back and then to the two sides. So raise your hand again, sir. So the microphone carrier will know where to bring it. Thank you. Thank you, Mr. Butler. My name is Hasmukh Shah from Business Times, which has been promoting US commercial interests overseas that's very South Asia. Can you hear me? Can you hear me? My question is, defense sales is very important for the US economy and overseas defense sales, especially in security, energy and defense is the prime tool promoting US exports and which will help promote, which will help attain President Obama's objective of doubling our exports in the next two, three years. So my question is this. Recently, Secretary of State John Kerry went to India and there was a strategic dialogue between India and USA. The most important topic discussed was defense, security and energy, where US can play a very important role in promoting bilateral relations. Now, India is keen to buy US defense equipment for us. India, as you know, is the largest importer of defense equipment in the world. Now, but it has its own requirement that it wants some defense joint production of technology, other things. So can you experts, let us know what are the opportunities of promoting our defense exports to India, which is a big market. Thank you. Somebody restate the question. Yeah, I'll make sure. I think the question that I got is what can we do to increase exports to a country, India specifically, but I think India also represents a category of offsets that really looks at developing domestic technology and production capacity as part of that offset equation. And what makes sense in terms of export promotion and foreign military sales promotions from that perspective? Is that a fair characterization of the question? Yeah, I mean, it makes up for some industry observations. Again, a positive and maybe not so positive, but India. It is, without a doubt, one of the markets that comes up, I think, as I mentioned, in any discussion with a company around where to grow internationally. As I said, like these busy markets, you can see on the chart there. It is both large and expected to grow. So there's universal understanding that it's a significant market. Now, among the US side, there's been frustrations. I think it's getting better, particularly in the last maybe year or two with the visits by the president, undersecretary Kendall, et cetera. There's been a lot of interest in India. But the challenges they've had have been, first, opaque procurement processes that take a very long time. You have international competition that's hard. There's a number of US companies that have been in India for a long time without really seeing the results. Not no one's pulling out, but they've just been frustrated. A lot of this gets back to opaque, very, very lengthy acquisition processes. But I think if you went to any major company, they would all say universally that India is a significant opportunity. So I think on the industry side, what they would like is just be able to have a little more visibility, like you're hearing on the comments, going out farther and understanding what is really gonna be procured. I heard a joke once, somebody saying, India would have a $1 trillion defense budget if everything was announced, that was announced actually came true. And that's obviously not the case. So I think if there was more visibility in transparency, I think that would go a long way for US. Let's, I think I saw one more in the middle here. Third row, two, we got one here. Raise your hand again. There we go. There you go. David, a couple, Joel Johnson, that teal group, US Crest, whatever. Two quick comments on offsets, then a question. I think it's worth noting that industry has spent 25 years trying to keep the government out of information on offsets, because the better we make an offset, look to the foreign customer, the worse it looks to a domestic constituent. All nine amendments we've had over 20 years from Congress have all been trying to stamp out offsets. So we've had good reason not to want the government messing around in this area, because it's a lose-lose for industry generally. And secondly, I think the trend on offsets, you started out as a way to gain currency in the 70s, that was the Swiss chocolates in the Danish hams. Then it was essentially jobs and technology. Then it was essentially a way to convince parliament, to let them spend the money to buy the foreign product. And more recently, what you've seen is offset management being turned over to development ministries and economics ministries who could care less about the weapons system. And so part of our problem now, if you want to hire a consultant, go get Fleur, or Beck Tell, don't get Lockheed Martin to tell you how to do shrimp farms. But you've got this tension now that we have to deal with, I think, among our customer base between the guys that care about development, the guys that care about having a weapon system that works. Anyway, enough of that. What I've been through, this is a third by build down I've been through, and of course each time, if you were to add the must-win contracts of US industry, it will be more than global demand, not even counting the must-wins for the European competitors. We don't talk very much about the competitors in all of this, and no one's even mentioned it today. What do you have to know about what the French are offering? What do you know about the British are offering? What do you have to know about what your other companies are offering? What are the implications that are coming up now for bribery, worse offsets, more shenanigans, because this is real tough stuff that's gonna be happening. Demand is gonna depend on threat and resources. There's a lot more supply than there is demand. And so I think we need to take a look at what are the implications of our foreign relations with our European friends, relations within even agencies of the US government who might favor Boeing versus Lockheed Martin on a fighter program, for a very good reason. Each of them wanna keep their industrial base alive. So we haven't looked at any of that part of this in all of the articles I've read on defense exports and the need for them to look at the supply side as opposed to the demand side. Assuming we agree with that, is your question, do we agree with that? Yeah, and what should we be looking for in terms of what the implications are for our relations with our European colleagues with some of the Israelis, others that are all doing the same kind of meetings right now? Thank you, Joel. I mean, I think you've actually got two very different but very well closely connected questions there. One is how do we look at the competition, if you will, and not only the countries you mentioned, but obviously to a very large extent, Russia and China are a part of our competition now in ways that they were not before. And while we may, for US national security purposes, want our companies to view those competitors in a non-potential collaboration way, not all of our global competitors view either China or Russia as a non-collaborative, as a non-opportunity for collaboration. Many of them see a very different line in that regard. I think it's a much more complicated overall business dynamic and national security dynamic than you mentioned early on. This is your third time. I'm pretty sure it's your last one because this one's gonna last long enough that we're not gonna see a fourth, but at least those of us of our generation. But it is a very different complexity, I think, in terms of both the global dynamic and the global market. And so let me pose to our panel sort of observations you might make of how we think about the competition and how we think about the potential collaboration amongst our competition as well. I'll take this one, unless you want to. My only thought about competition is- If you get it right, I'll disagree with you then. Yes. I think I'm guaranteed to get it wrong then, right? The competition is gonna get worse. It's already getting worse. But the one thing, there's a couple of counter trends, I think, Joel. One of them is it's interesting the foreign corrupt practices act started here in the United States. But it's been, if you watched the last 10 years, the serious fraud office in the UK, checking out things that happened 10 years ago in Saudi Arabia, even what's going on and if in Mechanica in their dealings with India, the fact that they would take the CEO and put him in jail means that some of the ethics of doing business, at least in the Western countries is actually spreading. Now, not everybody's on the same page, I agree. But it's a general trend that I think is going on there. The other issue I think is, when you're talking about Russian China, which are an interesting and important case, depending on the system you're talking about, it's gonna have to do with, can they keep, there's still a defense, as long as there's a defense, as long as somebody is in the loop that cares about defense, they don't have the level of equipment yet to compete with most of the US systems and even argue most of the European and Israeli systems. They may get there in the next 10 years, but I don't think they're there today. You can argue with certain examples saying, hey, we just went to the Paris Air Show and saw the SU-35 fighter, that looks pretty good. Most of the US and most of the Europeans will say, yeah, but it doesn't matter because they're not gonna sell any to us. They're gonna sell them to people that may not even be on this chart or at the lower end of the chart. So it's a different context. They're gonna play, they're gonna be in the market, they don't have the technology ability to compete yet. They do play the development game pretty well though and the trainings in particular are really getting really good at that. And so that's gonna be stiff going forward. Hey, one quick comment, because as I listened to you speaking, and I accept the critique about not mentioning competitors, but that is part of your interest no interest decision. And that is what that is. You have to understand who you are about to compete against because while you assess a PGO opportunity, which would be my comment to the gentleman about India is about, it's also gets into P win. You've got to decide whether you can compete or not. And so the issue gets to be, as I listen to this and I try to discern a larger issue out of this, is that so if it's an industrial base, defense industrial base issue, as I would describe it, where do you want to be strong US? Where do you want to now have a capability where you have overmatch and you want to continue to have it? Or do you want to allow that to be competed so that it is then something that you rely on an ally? But do we have an industrial base, defense industrial base policy that is well enough to find so that allows those kind of decisions to be made about what you are or are not gonna take transfer? I would say maybe not. And so as we begin to define, then let's broaden that because how do you define the readiness of the defense industrial base? One last piece of information. Hey, here's the deal. Why were we able to transform our armed forces after 2003 when we went into Iraq and transform it over a period of about three years? It was because of our defense industrial base. Because we had a defense industrial base that was able to, it had a depth and capacity, it had an intellectual component that allowed us to change the vector of our own forces on the ground, how we fought the kinds of ways we used our munitions in our armaments. And so it wasn't all of a sudden somebody over here at the Pentagon that made these decisions, but it was able to then be manifested out of a defense industrial base that had the agility. And so do you wanna have that for the next conflict? Because it's not about whether there will be one, there will be, and how good are we gonna be? We right now have the best armed forces in the world. And so do we wanna keep it that way? And so I get back to the industrial base issue when you start the discussion about the competitors. Because when you're downrange, I'll tell you what, you see a heck of a lot of French. You see a heck of a lot of Europeans. When you go to IDEX, you know, I mean, not U.S. shows, but not in the ways that others do internationally. How many of y'all went to IDEX? Okay, well I could be lying, y'all wouldn't know. So. That sounds good, that sounds good. Yeah, just three quick points. First, agree with general on boots on the ground. That's a big difference between U.S. and European firms. U.S. has not done it historically. Second, is that companies in general don't really, I think understand who the international competitors are. I mean, we have sat in meetings and typically they take a very narrow view. So I think understanding the broad landscape, both with U.S. firms, European firms and international firms and who are actually your competitors, what's the landscape is critical. Then third is understanding who your partners are too, because sometimes a competitor of course can be a partner. And this is particularly true in markets that involve offsets. And for a reason, we didn't bring this up, I think this is again an important point is that if you are doing an offset, you make a sale in the UAE or Saudi Arabia or Brazil or India, you need to have a local partner. So understanding who the local partners really are, what they can bring to you, not just from a compliance standpoint, but what business capabilities do they bring? I think companies often kind of neglect that part of it because doing business in any of these markets often involves a local partner understanding that JV partners is critical. Those are all good key points. Let me, they had a number of questions here on the side. Let me go to the middle of the third row here and then we'll work our way forward. We've actually got about 40 questions and so I'm gonna try to ask our questioners to keep your questions succinct and I'll ask our panel to do the same with our responses so we can maximize the input here. Hi, so Steve Schooner at the George Washington University first comment and then a question. Interesting in the discussion of offsets, what I didn't hear anyone talking about is what may be one of the more interesting developments to watch on this is that the World Trade Organization's government procurement agreement now prohibits offsets. Now of course, it excludes defense and it excludes some of the players like India, but for the first time we have something akin to an internationally binding agreement among all of the major trading partners that we're opposed to offsets. Now nobody believes it and nobody abides by it but it's a different rubric or benchmark than we've had in the past. The other one, been very, very impressed by the conversation, really enjoy it. This is a very friendly group as we look around to our panelists. Let's just change the perspective for a second. Since we're at CSIS and not NDIA or AIA or something like that, my question's kind of on DOD leadership. So if you've been reading David in his group studies, what we see is a lot of these partners on this chart, they're decreasing their defense spend faster than we are. So our solution is we're gonna sell more of our stuff to them, they're spending less stuff as well, but one of the real questions are going particularly back to the general's questions as we look at the world, should our defense department be tactically thinking about which allies they should be encouraged to buy which weapons? There is at the end of the day, we're talking about exporting power and to the extent that the rhetoric from the defense department is as we spend less will rely on our allies more, our allies aren't spending money, should we have some tactical leadership with regard to integrating this discussion rather than just letting the private industry or in fact the supply side be driving the discussion? Steve, thank you. That was a very provocative question and I don't feel like it's a friendly audience at all. No, in reality, let me make three observations and then ask the panel to expand on it. I mean clearly the companies don't really want guidance from DOD as to who can sell what to whom, all right? And actually I'm not sure that the government is smart enough to be able to make business decisions for business. If they were, we probably wouldn't be in the situation we're in today. But it is also true that there are national security interests at stake here and they're complex and deep and abiding both in terms of their temporal nature and in terms of their importance. And it is very useful to bring those national security interests and it should not be up to the companies to determine what those national security interests are. That is clearly an inherently governmental function even though it's not included in the definition of inherently governmental functions by the Office of Federal Procurement Policy. But then there's a third dynamic really which is the money, all right? And while it's true that there are a number of dots on this chart that those of you at home can't see but the major and legacy customers whose budgets are going down, there are also a couple of pretty substantial reasons in the world that spend a pretty good bit of money where they're going up. I mean our Asia study shows that defense spending in Asia is roughly doubling every five years and we fully expect that trend to continue and that's a new and very competitive market but it's also one in which determining exactly what our national security interests are a little bit harder than they were in the Cold War in Europe and NATO. And maybe harder than they are in the Middle East although that's getting a little more difficult as well. So wrestling with all three of those together I think we see a situation in which the companies do have an important role to play. That has a lot more to do with technology and the execution and the individual deals. The government clearly has a role to play in terms of the aggregate. How you mesh those two, I don't think we have a good mechanism in place for that right now. And in fact I'm a little concerned that the outcomes may not be optimal but I'm equally concerned about the creation of any kind of a framework in which it would take even longer to figure out what to do and we'd end up essentially losing out to our competition almost across the board and gaining neither a national security benefit nor a domestic industrial base or technology benefit and ultimately sacrificing all of that. That's a long-winded answer to when I said I wanted succinct but I think it's a pretty important question and it really is the overarching issue that frames everything that we're talking about here today. Anybody wanna add anything to that? Yes, not to be. But first off it's a great question and you said it much better than in what I was trying to portray. I think that we do want, if you have as a platform of your strategy to build partner capacity, then it portends then that you have a process that tells you and so I mean in a process or in a world then you would have this. We have the elements there but how do you now get them so that they are integrated so that you can go from an embassy in the middle of Latvia wherever and then bring that information in a holistic way. It's hard. It is hard. And I know that DSEA, both Emma Landay and Dick Janiel, they have been working that issue but that is a monstrous issue and that is a course change from how we have done that in the past. And so but let's make that then sort of a orienting factor about how we want to proceed in the future. And I think that that's what government wants to do but I don't see necessarily how we are correcting that so. Let's go to the. Hi, my name is Bernie Lee. I'm a graduate student at Seton Hall University. My question is about kind of the end user situation that you guys have been putting forward here. It's about who's buying these systems, the defense systems. So a couple of questions that kind of relate to each other is there's a number of issues that a lot of foreign countries see with investor state arbitration issues that the U.S. firms are hard to deal with when they deal with the state and then also do these foreign states understand at a very granular level their security needs. Maybe they're being vague because they just really don't understand how to create the systems that they are. So this, my question then goes to can U.S. firms, I mean the defense contractors, the other, the contractors that do other sorts of systems and energy and so forth work, collaborate creating more complex systems that can be offered up and changed around based upon a number of coordinated strategic ventures between U.S. firms to meet the needs of these foreign states. This also would spread the risk to many U.S. companies and then maybe make it more effective to market these products to the rest of the world. Yeah, the answer is yes. I think that U.S. firms, I put up there as a comment, they absolutely can help shape it. I think this goes back to the idea of offering a solution instead of a product. I've seen a number of cases where a country will come to a U.S. firm saying I have this challenge. Help me think through what I need to do because you've done a similar solution in three other countries. I think a challenge for U.S. firms has been to think that way and to be proactive as opposed to saying here's my 10 products I could sell you and just kind of stepping back and saying like here's an actual solution. So I think there's a big opportunity there to help shape it from start to finish and I think countries in general would really kind of welcome that. Sandra, here's your mic. Thank you very much. I had a question for the general. You might tell everybody else who you are even though I don't know who you are. Yes, I'm sorry. Sandra Irwin with National Defense Magazine. General, I don't know if you saw a study that came out from Deloitte recently talking about the global defense market and they were saying that the trends are shifting more to low intensity conflict and special operations and that's what's going to drive the market. I was just wondering how you see that playing into the international sales for U.S. firms. I mean what are the products that are going to be in high demand? I'll defer to John here. No, it's sort of an interesting question. I'll tell you, I'll start off with a tail. So we are trying to expand the national training, we were trying to expand the national training center back in the 1990s. The national training center is out in Fort Irwin, California. And we were trying to add to it, but the problem is that you had to, you had the desert tortoise, which was becoming extinct. And you had another, and you had a vegetation call, I think it was like a milk veg or something like that, that was also becoming extinct out there. And the problem was is that we could not, we had to be careful about these animals becoming extinct or the vegetation becoming extinct. And so I was dealing with the Department of Interior. So I got asked, why, and this was in 1998, why would you ever want to now extend what was the maneuvers on? We were trying to maneuver for 50 miles, 50 miles. And if you all have ever been to Fort Irwin, it's a huge place. It's next to Death Valley, all right? And it's not, it's just formidable. But, and so, and the question was is that because we will never fight another great land war, like we did during Desert Seal and Desert Storm. Five years later, where were we? We're in Iraq. And so I think the question that you give is great because we needed to discuss it. And so, but, and some people would offer that the kind of warfare that special ops does and the insurgency warfare is really, is while they call it asymmetrical, it is really what goes on in a normal way most of the time. And it's episodic when you do these high intensity kind of conflicts. The problem is, is that you cannot divest yourself of that capability because it takes too long. It, we wanted to grow the army from 489,000, the active duty force. And we could just grow that in a period of six years. It took, we went to 547, it took forever. And so as you ask the question, I give a question back. You know, are you, is it a zero sum game? Is it about growing, because I think the capabilities that they're talking about are very much needed for the kinds of things that we see going on. But at the other point, what I don't wanna do is forfeit a capability that we have in our active duty and in reserve forces. And that balance there has to be with some foresight because we're not gonna get it right when we set a strategic aiming point for how we structure the force. It'll never be a zero mills. And so, you know, that's, I'm not trying to be evasive but you're asking for an absolute in a time when you can't give it because it's not gonna be right. All I know is is that what we don't wanna do is have it on forces that's not ready that like it was during the Korean conflict when there was, you know, a outburst. And then, because we were all, hoped that peace was breaking out after World War II. Like traditional warfare? I think that General Dempsey, General Orillero, and then they will figure this out. I mean, it's not for me to second guess it. Ladies and gentlemen, I think the world does, so. You are very generous to give us an hour and a half of your time. One of the ways in which we persuade you to come back is we actually stop when we say we're gonna stop so that you can plan your schedule around it. I sorta hate to do that because there's a lot more questions and a lot more discussions. What I can commit to you is that this is not the last discussion we're gonna have on this topic. I think the issues raised today, the complexity of the issues raised today and the tangents that fall off from those clearly warrant additional further discussion. We will be inviting you back. I wanna apologize to those that we didn't get to your questions. I wanna thank those on the web for sending questions in. We didn't get to very many of those either. And I wanna ask you to join me in thanking our panel here and thank you all for coming.