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Competition within the U.S. National Security Regime: A Study of the U.S. Aerospace Defense Sector

Competition within the U.S. National Security Regime: A Study of the U.S. Aerospace Defense Sector. Presented at Temple University, Fox School of Business CIBER 6 th Annual International Business Research Forum April 2, 2005. Christine Nielsen

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Competition within the U.S. National Security Regime: A Study of the U.S. Aerospace Defense Sector

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  1. Competition within the U.S. National Security Regime: A Study of the U.S. Aerospace Defense Sector Presented at Temple University, Fox School of Business CIBER 6th Annual International Business Research Forum April 2, 2005 Christine Nielsen Professor of International Business and Strategy University of Baltimore, Merrick School of Business

  2. World’s Top 10 Defense Competitors Rank Company Country 2003 Defense Defense % Revenue* of Revenue 1 Lockheed Martin U.S. $30,097.0 94.6% 2 Boeing U.S. $27,360.0 54.2% 3 Northrop Grumman U.S. $18,700.0 71.4% 4 BAE Systems U.K. $17,159.0 76.7% 5 Raytheon U.S. $16,896.0 93.3% 6 General Dynamics U.S. $12,782.0 76.9% 7 Thales France $8,476.0 63.7% 8 EADS Netherlands** $8,036.5 21.3% 9 Finmeccanica Italy $5,895.0 54.3% 10 United Technologies U.S. $5,300.0 17.1% * In millions of U.S. dollars. ** EADS represents a merger of French, German, and Spanish aerospace companies in 2000. Source: Defense News “Top 100 in 2004” CIBER Seminar: Global Security Risks and International Competitiveness

  3. World’s #1 Customer: The U.S. Government • Aerospace defense market size in 2002 = $932 billion 90% in defense spending CIBER Seminar: Global Security Risks and International Competitiveness

  4. U.S. Dept. of State Defense articles, services, data Arms Export Control Act International Traffic in Arms Regulations Munitions List U.S. Dept of Commerce Commercial or dual use equipment and technology Export Administration Act Export Administration Regulations Control List World’s #1 Regulator: The U.S. Government • U.S. aerospace defense market exports in 2003 = $12.5 billion CIBER Seminar: Global Security Risks and International Competitiveness

  5. Purpose of this Exploratory Study • Better understand U.S. government’s central role in the aerospace defense sector • Focus on its regulatory role over U.S. defense exports • Better understand U.S. companies’ motivations and performance effects of noncompliance • Focus on 8 case studies drawn from industries in the sector • Contribute to theory-building • International competitive advantage • Competitive rivalry CIBER Seminar: Global Security Risks and International Competitiveness

  6. 8 Aerospace Defense Sector Case Studies • ITT Industries • Raytheon • Boeing • McDonnell Douglas • International Signal and Control Corporation • Lockheed Martin • Hughes Electronics • Loral Space & Communications CIBER Seminar: Global Security Risks and International Competitiveness

  7. 8 Aerospace Defense Sector Case Studies • Date of settlement • Types of Exports and Violations • Size of fines • Other costs and performance effects • Motivations CIBER Seminar: Global Security Risks and International Competitiveness

  8. ITT Industries (2004) Night vision devices and NPOESS infrared sounder • Lack of control over temporary exports of devices • Permanent export of devices exceeding authorized level of technology • Technical data and services to Canadian subcontractors • $ 3 million fine • $ 5 million for export compliance system • Compliance officer • Training: Employees, operational and senior levels • Record Keeping • Automated export compliance system • Ombudsman • Extensive audit Motivations: Profits, Customer Satisfaction, Lack of Knowledge, Lack of Compliance Management System CIBER Seminar: Global Security Risks and International Competitiveness

  9. Raytheon (2003) Troposcatter communications system (AN/TRC-170) • Defense hardware • Related technical data, and technical services to Canada and Pakistan • $23 fine • $ 2 million to improve compliance system • Special compliance officer direct report to CEO • Periodic reports to DOS • Total reorganization of export control management • $ 2 million to Raytheon’s Pakistani broker Motivations: Profits, New Market Development CIBER Seminar: Global Security Risks and International Competitiveness

  10. Raytheon (1999) Joint Primary Aircraft Training System (JPATS) • Technical data (manual, report, software) and hardware (crew assembly boxes) to Canadian companies • Violations at all stages of the export life cycle • $500,000 fine • $50,000 for compliance audit Motivation: Profits, Customer satisfaction CIBER Seminar: Global Security Risks and International Competitiveness

  11. Boeing (1998) Sea Launch satellite launch joint venture • Defense articles, technical data, technical services to Ukrainian, Russian, and Norwegian partners • Design and production entities built the SA-18 in 1988 • Ukrainian companies: 90% international revenues in 1998 • $7.5 million fine • $2.5 million for export compliance system restructuring and strengthened compliance procedures • Computerized document control system with remote access by U.S. government for prior review of technical data and assistance considered for release in any form; releases to be archived. • Extensive audit • Extensive delay caused by suspension of DOS TAA • Loss of first customer, PanAmSat Motivations: Increased technical performance with business partners, lack of knowledge, lack of compliance management system CIBER Seminar: Global Security Risks and International Competitiveness

  12. Boeing (2001) Wedgetail military surveillance aircraft • Offering higher levels of technology than authorized to Australia, Turkey, Spain, Italy, Singapore, and Malaysia • $3.8 million • $400,000 for special compliance officer • 1 year suspension between winning bid and contract signing for 4 aircraft + option for 3 = $1.5 billion sale • $.41 drop in stock price on day of announcement Motivations: Profits, New market development CIBER Seminar: Global Security Risks and International Competitiveness

  13. McDonnell Douglas (2001) Machining equipment for military aircraft parts • 13 items to PRC-owned export corporation (CATIC), of which 6 went to Nanchang Aircraft Manufacturing for military production • Criminal charges brought against companies and individual • Statue of limitations barred prosecution of Director • U.S. govt. had interest in keeping cases from going to trial due to risk of release of secret information • $2.1 million fine to Boeing for $1.7 million sale • $2.3 million in fines & penalties to CATIC • Export restrictions McDonnell’s/Boeing’s military division 1999-2001. Motivation: Profits CIBER Seminar: Global Security Risks and International Competitiveness

  14. International Signal and Control Corporation(1997) Military equipment • Night vision devices, missile and navigation components, missile testing and tracking systems, power supplies for proximity fuses, and grenade technology through South Africa to third countries. • ISC purchased by Ferranti PLC, British defense contractor. • $2 million fine paid by Guerin, CEO; 8 executives found guilty • $11 million fine of South African cos. • Fuchs paid $5.5 million to South African government to set up a national export control regime • Fuchs set up internal compliance system, including U.S. origin defense items manual, U.S. monitoring system, and ombudsman • Fuchs debarred until systems put in place; additional $5.5 mil fine suspended Motivations: Profit CIBER Seminar: Global Security Risks and International Competitiveness

  15. Lockheed Martin (2000) Loral Space & Communications (2002)Hughes Electronics/Boeing (2003) Launch vehicle, kick motor, & ballistic missile tech LM analyzed China Great Wall kick motor after failed testing • Sent 50 page report without waiting for DOD review; 5 pages authorized to AsiaSat • $8 million fine • $5 million for improved export compliance system Loral analyzed failure after Long March vehicle crashed, killing 100 and destroying Loral-built satellite • Faxed report to China without internal or DOS approval • $14 million fine • $6 million for improved export compliance system Hughes analyzed 2 Long March vehicle testing failure • Transferred technical data to improve fairing design • $20 million fine • $8 million for improved export compliance system + $4 million already spent Motivations: Customer and launch insurers satisfaction, technical quality CIBER Seminar: Global Security Risks and International Competitiveness

  16. Conclusions from Case Studies • Regulatory Reach of the U.S. Government • Extended to foreign companies and foreign governments • Performance Effects of Noncompliance on U.S. Companies • Fines and penalties impact on the bottom line is increasing • Delays • Debarment • Loss of customers, contracts, and reputation • Negative impact on stock price • Motivations in Conflict with National Security Priorities • Profits and new market development • Satisfaction of customers, launch providers and insurers, business partners • Technical quality improvements CIBER Seminar: Global Security Risks and International Competitiveness

  17. Implications forInternational Business Management • Leadership in Legal and Ethical Issues • Management of Export Compliance Systems • Education and Training • Role for Business Schools CIBER Seminar: Global Security Risks and International Competitiveness

  18. Implications forInternational Business Research There are many unanswered questions: • What are the costs, benefits, and firm performance effects of the U.S. national export controls regime? • How do these compare with regimes imposed by national governments of the major foreign competitors? • Is there a performance gap imposed on U.S. aerospace defense companies versus their major foreign competitors? • If so, how can the competitive positions of U.S. players be strengthened, while preserving U.S. national security interests? CIBER Seminar: Global Security Risks and International Competitiveness

  19. Do traditional models of international competitive advantage fit this sector? Firm strategy, structure, and rivalry Factor endowments Demand conditions Related and supporting industries GOVERNMENT CHANCE Source: Adapted from M.E. Porter, The Competitive Advantage of Nations, Harvard Business Review. March - April 1990. p. 77.

  20. Do traditional models of international competitive advantage fit this sector? Source: Rugman, A.M. and D’Cruz, J.R. (1993). The “Double Diamond” Model of International Competitiveness: The Canadian Experience, Management International Review. Special issue 2, 1993, Figure 3, p. 34. CIBER Seminar: Global Security Risks and International Competitiveness

  21. Implications forInternational Business Research • Develop paradigms of international competitive advantage that portray: • National governments’ central role • Aerospace Defense Sector • Other Strategic Industries • Multiple, overlapping, contradictory roles of all actors • Governments as Customers, Regulators, Business Partners • Defense Companies as Competimates: Competitors and Collaborators across national boundaries • Extend competitive rivalry research to international arena • Integrated Framework of Competitor Analysis and Interfirm Rivalry (Chen, 1996) CIBER Seminar: Global Security Risks and International Competitiveness

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