The F-35 Joint Strike Fighter

1. The F-35 Joint Strike Fighter An Update Supplemental Lecture for Chapter 5 Source: Image provided courtesy of Lockheed Martin Joint Strike Fighter Program Office. Available at www.jsf.mil/

2. Principal-Agent Model Application: the JSF • This lecture offers an extension of the JSF case study from pages 122 – 124 in the text. • Case study of JSF in text focuses on the bidding process completed in 2001. • This update details events that have unfolded since 2001 and applies them to the Principal-Agent model.

3. JSF since 2001 The major issue affecting the JSF since 2001 has been uncertainty and monitoring costs. Source: Image provided courtesy of Lockheed Martin Joint Strike Fighter Program Office. Available at www.jsf.mil/

4. The vertical landing system (STOVL) had to be crammed into the same body as conventional system. This added weight (3,500 lbs overweight) making it too heavy to fly desired distance or carry adequate bombs. Source: Image provided Courtesy of Lockheed Martin Technological Uncertainty

5. Increased Cost • Consequently, this caused the project to be delayed for one year and the DoD had to add $7 billion to the development costs of the project. • Lockheed committed 500 engineers to find ways to reduce weight. • 600 weight saving changes were identified.

6. Increased Cost • However, some of these weight saving changes, such as smaller bomb bays, make the STOVL version of the JSF very different from the other two versions. • This could reduce the potential for economies of scope, thereby resulting in higher costs for the project.

7. Technological Uncertainty has increased the costs of the project. Lockheed required more upfront pay before work could be performed. Principal-Agent Model Application Source: Image provided courtesy of Lockheed Martin Joint Strike Fighter Program Office. Available at www.jsf.mil/

8. Monitoring Costs: Background • Recall that Lockheed is not the only company involved in the production process. • European companies are also supposed to be participating in the production process. • The following chart breaks down the contribution of each European “partner” to the JSF project.

9. Joint Strike Fighter Partner Financial Contributions and Estimated Aircraft Production Source: “Joint Strike Fighter Acquisition: Observations on the Supplier Base.” General Accounting Office May 2004. p. 13

10. European JSF “partners” • “Partner” countries are divided into levels based on government financial contribution to project: • Level I partner: Contributes approximately $2 billion. Has direct influence on the make-up of the aircraft. • Level 2 partner: Contributes approximately $1 billion to project. • Level 3 partner: Contributes < $200 million to project.

11. Distribution of Subcontracts to Partners • In theory, companies in countries whose governments have contributed finances to the JSF project should be allowed to bid for subcontracts.

12. Distribution of Subcontracts to Partners • However, as of 2005, only British companies, such as Rolls Royce, have successfully obtained subcontracts.

13. Joint Strike Fighter Subcontract Awards Source: “Joint Strike Fighter Acquisition: Observations on the Supplier Base.” General Accounting Office. May 2004. p. 8 and 14

14. Is it economics or is it politics? • This has upset other partner governments • In past projects, subcontracts were typically evenly divided among partners. “When Lockheed distributes work, there’s a lot of politics behind it, beyond best value. That’s how it looks to me.” • Murad Bayar, Turkish Undersecretary for Defense Industries. Source: Spiegel, Peter. “The Serious Doubts Over $200 billion Jet Project.” Financial Times. January 30, 2005

15. Is it economics or is it politics? • Why is the U.S. reluctant to distribute the subcontracts more widely? • There are two possible answers, one economic and one political.

16. Economic Argument • This is because British defense industry is more sophisticated than defense industry of other partners. • Therefore, British firms can ensure low cost-high quality production (recall that cost is an independent variable with the JSF).

17. Political Argument • U.S. law restricts ability of Lockheed to disclose technological details, even to companies in UK. • Technology transfer has been a particularly sensitive issue because the European Union was considering the removal of its ban on weapon sales to China. Source on China Weapons Ban: Dombey, Daniel and Speigal, Peter. “Why Europe is ready to lift its weapon ban on China.” Financial Times. February 9, 2005.

18. Political Argument • Since China is viewed by the Pentagon as a potential future rival, the U.S. government does not want China to have access to technology used in the top-level US weaponry. • If US discloses technology to European countries and then European countries begin selling arms to China, this could result in US military technology going to China via Europe. • Though the EU has decided not to remove the weapons ban to China for the time being, it may reconsider this issue in the near future.

19. Application to Principal-Agent Model • Need to increase the monitoring of Partner countries (to ensure no sale of sensitive technology to China) raises the monitoring costs of the contract.