29 Nov, 2006 - Session 3 at the Rīga Conference: Integrating the Transatlantic Defense Industry

Mr. Alexander Nicoll, Director of Defense Analysis
The Hon. Jeff Sessions, United States Senator
The Hon. John Smith, Member of the British House of Common Select Committee of Defense
Dr. Thomas Enders, Chief Executive Officer, European Aeronautic Defence and Space Company

ALEXANDER NICOLL, DIRECTOR OF DEFENSE ANALYSIS, INTERNATIONAL INSTITUTE FOR STRATEGIC STUDIES: As in yesterday's sessions the intention is to make it a conversation, for it to be a highly interactive session. When the organizers said that, what they really mean is that they want me to do a lot of work and be the bad guy. But we do have here, a really excellent, perfectly constructed, one might say, panel to take us through this subject.

The defense industry, above all industries, involves the interplay of politics and business. And we have here two politicians and two businessmen. We also have two Americans and two Europeans. So I think, as I say, it's a perfectly constructed panel.

Senator Jeff Sessions is the senator for Alabama and has been so since 1997. He has within his own state of Alabama, a number of important military interests. He has, for example, the research and development of army missiles. Also the production of missiles. He has assembly of striker on the vehicles and many other programs and bases. And he's a member of the Senate Armed Services Committee.

John Smith has in his constituency- he's a British member of Parliament- he has in his constituency in Wales an aircraft repair facility that the government recently invested in. And then beside the scrap, something I'm sure he has thoughts about. He's a member of the House of Commons Defense Committee and which has been studying the U.K. and Dublin's innovative defense industrial strategy.

Thomas Enders has been a leader of integration of defense industries across borders. He's been really a strategic force behind mergers, and now he's the Chief Executive of the ADS, which is really a truly cross-border company and the ADS has made big inroads into the U.S. defense market.

And Scott Harris is also a leader of transatlantic defense integration. He's the President of the Continental European operations of Lockheed Martin based in Brussels and he's the prominent industry thinker and speaker on these issues.

Now, as I said - as I indicated before- there's not been very much integration across borders, so that's for lots of reasons - partly political, partly official and partly business. It's true that a number of tentacles have been stretched across the Atlantic. There have been, of course, sales, purchases of equipment, arrangements to maintain and look after equipment; there have been investments across the Atlantic.

European companies, British companies in particular, have invested in American defense capacity. And there have also been some joint programs, project cooperation - not very much - joint strike fighter is a prime example at the moment.

We have an American industry that perhaps, very sensibly, concentrates on its home market - its very large, dominant in fact, customer - the Department of Defense. And we have a European industry that's - has much smaller domestic markets and therefore, is very keen to expand its - but it's sort of the state of evolution fragmentation - especially at the levels below the top tier of companies like ADS.

National interests still predominate. National customers are the main reason for the shape of the industry that we have, because companies will naturally tend to shape themselves around the customers that they have to serve.

And American companies may not in fact be too bothered by the fact that there is - hasn't been very much integration across the Atlantic because their large customer is their primary concern. Their technologies are also heavily protected by American laws.

European companies want to expand, as I said. The customers and the tax payers they represent - that's us - just want - we want the best capabilities, the best - at the best price - as soon as we can reasonably get them. And that leads, therefore, to the first question.

Is the best way forward to have more transatlantic defense industrial integration - is it a good idea? Doesn't it mean that if it happens, that it'll just be a takeover? That Europe will just be swamped by American technologies, American companies?

And from an American perspective, if we have it, doesn't it mean the risk - is there a risk that technologies that the American taxpayer has funded may be passed on to other free - to other countries and indeed, to countries that the U.S. government wouldn't be terribly happy about?

So, Senator Sessions, is it a good idea to have more integration across the Atlantic?

SEN. JEFF SESSIONS, (R) ALABAMA: Well, I think so. It binds us closer together, that's one of the advantages of it. We create an interoperability so our systems can work together in the field in a combat area, and the parts trail would be left when the equipment is the same and it should be able to save money.

You can get in a situation - and I think we've done with space and NASA - that partnerships with other countries end up costing you more in delaying the project sometimes. A defense department cannot be considered a jobs program. It has a specific goal which is to provide the war fighter with the best equipment.

But I think those are three goals that would be served by a more joint effort, and I think we will continue to pursue in that direction. We may discuss it later. But I think the United States is pretty open to competition. Some of our biggest new systems are being competed aggressively right this moment. And I think you will continue to see that.

NICOLL: Thank you. Tom. Is it a good idea?

THOMAS ENDERS, CHIEF EXECUTIVE OFFIVER, EUROPEAN AERONAUTICS DEFENSE AND SPACE COMPANY: Well, before we speak about integration, I would start with cooperation. I think we have very little good cooperation going on transatlantically. JASF is one. MEAS (ph) is another one.

The lesson I take away from recent years is that the more multinational, I guess the more difficult it is to realize. Cooperation works best when it is bilateral between two countries, between two companies.

We had one example for instance, NATO HES (ph), one of the great NATO projects. It takes us forever. The requirement dates back to '92. It takes us forever to make a NATO project out of that. The main problem is that 23 countries want to cooperate in that project.

NICOLL: Mr. Smith, in your constituency, as I mentioned, you have interests, defense interests and you also have been part of looking at the defense industrial strategy, which is really a new way to examine the capabilities that a country should have and how it should best get them. Britain is the most open market I suppose among the industrial countries for procurement. How do you see it?

JOHN SMITH, MEMBER, BRITISH HOUSE OF COMMONS SELECT COMMITTEE ON DEFENSE: I think it is the only way forward. I go further than the Senator and say greater transatlantic integration in the defense industry is a condition for the future success of NATO.

I think since the Cold War, there were some excellent debates yesterday I know - but since the Cold War it has been harder to define the threat, which makes it difficult for us as politicians to sell the idea to our constituents, and it has been hard to define our role. And I think it is a change in role that will go on to change.

And therefore, what we need to do is integrate organically. And one of the things we not only can do but I believe have to do is to integrate our industries. Now that doesn't necessarily mean just open up markets.

But I think that should be a very important part of it. It doesn't just mean mergers and acquisitions, and I think there are national concerns about that. But I think it does mean more collaboration and more partnerships and more transatlantic consortia. And I think that is the way forward.

NICOLLS: Thank you, but if there are to be transatlantic consortia, there need to be surely more programs. There needs to be a more common view across the, between governments about what requirements are needed and, therefore, how you meet those requirements. And we haven't seen too many of those programs so far.

SMITH: Well we haven't. The joint strike fighter has already been mentioned. And I think that is critical. And I am hopeful by the end of this year that the last negotiations will be complete. We will sign the memorandum of understanding and that will be very important for Britain.

But let me tell you that Britain is just on the verge of signing its largest defense contract ever - a $30 Billion private sector initiative, private finance initiative, in the military training sector. And we have two main competitors. One is a British-led consortium and the other is a transatlantic consortium. Well, I pursue the transatlantic consortium. Not because I'm not patriotic, but I want the best product for the British forces in the 21st century. And if we all want the best product, that's another reason why we've got to look at cooperation.

Defense I think, is different from other industries. Of course, we want the jobs and investments and as politicians. We would be foolish no to argue for them. But the bottom line is, we want the best product, we want the best technology, we want the best research and development. And I think that only comes with cooperation.

NICOLLS: Scott Harris, are we on the road to having the best products with the best prices? Or how do you see...

SCOTT HARRIS (ph): Well I don't know if we're on the road or if we're just trying to get out of the garage. We certainly have some good examples. The joint strike fighter is a good example, the medium extended air defense that Tom Enders mentioned is another good example. There are some projects coming like the training system. I favor the transatlantic solution too, you won't be surprised to hear.

But we also see a number of obstacles that are preventing true transatlantic integration. The biggest obstacle is the lack of harmonization of demand. The fact that the market still is so fragmented in terms of what people buy. If there were an ability of the European or the NATO allies to state a requirement in common, then industry would very naturally integrate transatlantically to satisfy that requirement.

The problem is national requirements fragmenting the market which leads to national solutions. That wouldn't be a big problem, in principle, if there were lots of resources. But what we have now is shrinking resources, especially in Europe, where defense budgets are down in historical terms. They're down in absolute terms from Cold War levels. They're down even in the sense of satisfying current ongoing requirements, you know, operational requirements.

So, because these resources are so scarce, spending them inefficiently just leads to a worse situation. And that's the fundamental structural problem we have.

NICOLLS: Right. Tom Enders, I think you probably have very strong views about the lack of integration within Europe. It's probably not reasonable to expect very much integration across the Atlantic (INAUDIBLE) itself to not get its act together.

ENDERS: Well absolutely, Alex. I mean, let's start with one concrete example - the European Defense Agency. European Defense Agency, I think 23 nations are aligned, and that's a good thing to have. But two years into the creation of the European Defense Agency, there's still some conflict about the mission. There's even more conflict about the budget, the operational budget.

I mean this agency has a ridiculously low budget. How is it going to change anything in Europe if it's not budgeted? We're talking about what is it, $5 million or $7 million a year for operational purposes, I find that is really ridiculous. If we look at the organization in Europe, you want to put it positively, it's moving at snail's pace - very positively. Look at the R&T, only I think six percent or less of the R&T, Research and Technology budgets in Europe are on cooperative projects. Let's start with that before we talk about big transatlantic corporations, particularly in Research and Technology.

So, yes, I mean Scott is absolutely right, the fragmentation in Europe is a major problem; it's hindering transatlantic cooperation. On the other hand, if I may - you know, it's one of those things. If we had in Europe a kind of export regulations and technology transfer restrictions, like the US has, then probably no transatlantic cooperation whatsoever.

That is something that needs to be tackled on the other side of the Atlantic, if I may say so. It's absolutely overdue. We could go on with examples that highlight that we don't have the time here. So there's a lot of homework to do on both sides of the Atlantic. And just to close, underlining another thing that Scott said.

Industry is not the problem. Industry can cope with that. I think we've shown that in numerous examples. The problem is the demand size, with as to if they do the homework.

SMITH: Senator Sessions, there is in Europe a strong view that there's a fortress America, you said in your opening remarks that you thought that the American market was quite competitive. We seem to have two different views here.

SESSIONS: It could perhaps be more open in a number of areas. The joint strike fighter is a good example. I was in London not long ago earlier this year with Senator John Warren, Chairman of the Armed Services Committee. And the British were very interested in providing part of the engines for the joint strike fighter. We went back and put that in the defense bill.

And it mandated that half the two different suppliers of engines for that aircraft, which means I guess the British will get that - get that half. Tom is bidding on the tanker fleet, 600 aircraft. And I'm excited that if he's successful, it'll be built in my home state of Alabama, assembled there.

They're making a very strong, competitive run at that. Ostel (ph), in my hometown of Mobile, Alabama, is building at least half of the latoral (ph) combat ships, the new ships that we're building. To me it adds as part of that the joint strike fighter. So we've done a lot of things.

The buy America language is not nearly as ferocious as it appears. As you can already see from these major programs that are being competitively bid. It works - we had some upset among the public when China got the bid to supply American uniforms, and that was eventually reversed. It is a - there is concern about that.

The United States is spending a lot of money on defense. When I came, we were about $277 billion defense budget ten years ago. Our base budget now is over $550 billion. And we'll have a war supplemental on top of that.

We are, as a percentage of the world's defense budget, very large. The Economist magazine in 2002 had an article - it's probably gotten worse since then - had the United States as the leader at 100, and then rated the other countries relative to that. I think no country was above 15.

The United States at 100, and these other countries - and we are able because we are larger to create in effect priorities and uniformity within our budget, although sometimes the Army, Air Force, Marines and Coast Guard compete with one another.

And so you have this smaller European budget that is fragmented. The Economist magazine also concluded that the American defense spending is smarter. It is more productive in creating real defense capability.

So, yes, I suppose we need to see - I would like to see Europe spend more. And I do think you need to be more harmonious. And I think that the ultimate goal would be a harmonious transatlantic defense industry. I think we can move in that direction.

NICOLL: OK, well thank you. I know we have had some very strong and perhaps even contentious statements made so far. I would like to open it up to the whole room now and know who would like to ask some questions. If you do catch my eye, I will call on you. And if you could please identify yourself and keep your statements reasonably brief. And the first question is a gentleman over there.

QUESTION: Good morning, (INAUDIBLE) Nolan (ph) from Canada. Now that NATO is trying to put on track NRF and knowing that the netcentric warfare is the new era, the new way to go, how does the fact that the Americans control most of the technology that goes into this new way to do warfare, how does the transatlantic integration work out? Is it going to affect the capability of the new NRF?

NICOLL: Thank you very much. Who also would like to come in at this point? Yes.

UNIDENTIFIED PARTICIPANT: (INAUDIBLE).

NICOLL: Could you wait for the microphone, thank you.

QUESTION: thank you very much. I am Palina (ph) from Russia and I wanted to put the question to the whole panel, if there is a place for Russia in transatlantic defense cooperation?

NICOLL: Thanks, so let's start with those two, separate points. Scott do you want to kick off with those?

HARRIS (ph): Yes. On the last question, I think I would have to reverse it and the question is; would the Russians be open to defense cooperation with the west? In our experience as industrialists, the answer has been no. And so we haven't been able to make much progress in defense relations due to the fact that we don't have a willing partner on the other side. We do occasionally buy some things, but that is not a real defense relationship.

So, I think it is going to be a question of time there. Right now there doesn't seem to be much to do.

On the first question about networks, I think that is the perfect area where transatlantic integration should proceed. Networks are inherently integrational, they don't respect boundaries, they don't require a geographic base.

And with the architectures that are currently being developed, which are modular, it should be very possible with a set of standards for all kinds of international cooperation to occur around common network centric capabilities. So I think that the technology, especially the information driven technology, is inherently integrational. And that will be one of the driving forces of future integration.

NICOLL: I think it is a point that in the future we are going to have; currently there is quite a lot of equipment being built both in the U.S. and in Europe.

NICOLL: I think it is a point, that in the future, we're going to have - currently there's quite a lot of equipment being built - both in the U.S. and in Europe - but once that sort of generation of equipment is built, there probably won't be so much demand for new platforms, and the real demand will be to both maintain them and to supply them with new systems - to plant new systems on - although that does have indications for the supply chain and perhaps we'll have, in fact, a new shape of industry as time passes, much less platform dominated, much more service- oriented and systems-oriented. And I think that probably does actually give new opportunities for cooperation, for new companies to come on the scene.

But we have another question right here.

QUESTION: Thank you. Jan Passel (ph), Romania. I have two questions. First would be, to what extent are your responding to operational demands by the buyer - which means the military? And to what extent do you shape them? Because you know, research and development in technologies are really going on and, therefore, you know, you come up with products which would inevitably change the thinking of the military.

So - and the second question would be, to what extent do you fail - do you appreciate - or how do you fit in the tendency in Europe to really move away from the NATO standards towards some European standards.

And what does this affect, you know, the integration tendencies which you are talking about.

NICOLL: Thank you very much. Would anybody else like to comment at this point? Sir?

QUESTION: I'd just like to offer, I guess, a question in perhaps the two second summary but - I have been a previous NATO Commander operationally - both S4 and K4 - and now on the political side.

It just seems to me that it's very hard to move forward on this transatlantic notion while NATO is still struggling about what it's going to be. And until NATO decides what's it's going to be, it's very difficult to come up with operational requirements.

As we look at Afghanistan, Kosovo and other places, we continue to have caveat problems - caveat issues - national will that says they'll do this or they won't do that - and until there's a consensus within NATO of what it's going to be, and everyone signs up that that's what we're going to be, and we're willing to do that - then I think what emanates out of that are operational requirements.

I guess my question to panel is - it seems to me industry could have a huge impact on that in a positive way, but certainly, what is your assessment of, until we clearly define NATO now and in the near future - how do you come up with operational requirements that drive budgets and drive industrial cooperation?

NICOLL: Thank you very much. Well, we have two highly related questions about how you set requirements and how requirements then translate into actual procurements. Professor Smith, do you want to comment in on that?

SMITH: And the short answer is that it's incredibly difficult because the requirements, the operational requirements, are not going to stand still. I mean the themes are flexibility, agility and response to it. It's being able to change to the changing requirements.

Who'd have predicted the conflicts and the operational requirements we need now five years ago, let alone ten years ago. And that's why I go back to what I said in the beginning. That's why I think it's important that we do have greater transatlantic cooperation and more open markets to allow us to precisely be flexible, especially at a time when we already have the capacity.

Now, I'm in favor of European integration and speeded up European integration, not to compete and duplicate with the U.S., but to make it easier to collaborate because we have to rationalize, we have to downsize.

But I must say one thing. I am delighted with the Senator's response, but I do think it is an area where our principal allies need to do more. We always hear from the one side, the call for burden-sharing and to stand shoulder to shoulder with the Americans.

And I think the quid pro quo is that we do need to see more coming from the U.S., more leadership in terms of insuring better relationships across the pond.

NICOLL: Thank you. Tom Enders.

ENDERS: Well as to the question of input of industry into requirements and how does it shape up, I should say that my own observation these last five, six years, industry, particularly the big companies, have been doing that or have been trying that time and again. I would say in a nutshell, the experience on the industry side we have had has not been very encouraging because we have indeed had quite a couple of projects given inputs said what is technologically possible.

What do we think is affordable? What are the state of the art technologies when this particular system comes into service in ten years or in five years et cetera? But most of that, again, my experience, my company, has been bogged down in the NATO bureaucracies and the national bureaucracies.

I mean, to be very blunt about my own company; we are at the very core a German-French company, huge inputs from the UK and Spain et cetera. But, I have yet to see that we have been able to influence even a Franco-German joint requirement in the last five or six years. (INAUDIBLE) transport aircraft which is not a bilateral project, but multilateral European project, probably the last one. And that, by the way, came before the integration of the company. So, I would say, I have a very sober feel on that.

As to the early phase of research and technology et cetera, I would say in general that the taxpayer, go back to that, could benefit significantly in the early phase when we talk about research technology, upcoming new technologies, with the closer dialogue between those people who write the requirements and those people who understand something about today's and tomorrow's technology.

This situation is anything but optimal. But Alex, if you allow me just to pick up on the lady's question regarding the cooperation with the Russian (ph) industry and they have a little bit more upbeat here.

And Scott, I see a lot of upside potential coming out of consolidation that is now seriously started at least in the aeronautics industry on the Russian side anticipating that we have invested a couple of years ago in a company that could. Before we developed business primarily in the commercial area, but why not in the future, if that is what makes sense from a political point of view.

Obviously politicians have to take (INAUDIBLE) here from the military requirements point of view, from a technology point of view to cooperate also on fields like UAVs and others. I mean there is a long-standing cooperation in space already. Scott, your company has it. My company has it. Increasing cooperation on the commercial

ENDERS: With these and others. I mean there's a long standing corporation in space already it's called Your Company Has It. My Company has it. Increasing cooperation on the commercial aeronautic field and military aeronautic could be a new, provided that politicians decide they want to try for that direction. It's not for industry to make that decision obviously.

NICOLL: Thank you. (INAUDIBLE).

SESSIONS: I'm concerned about the growing cost and - of some of these weapons systems, aircraft and other things of tremendous, tremendous cost. And we think we can do better. A lot of that is not the industry's fault as Tom indicates, it's poor planning on the part of the defense departments and the governments. So we need to definitely work on that.

We also need to ask ourselves very rigorously, what systems do we really need, which ones are we going to need in the future and where we need to spend our money.

At this point, we are finding in Iraq and Afghanistan more intensity of interest in how to help the soldier do combat on the ground. How to maintain order in a disordered society and what kind of equipment vehicles and that kind of thing are important for that.

In the future, maybe we'll need the aircraft; the joint strike fighters and the FA22's and that sort of things, national missile defense, which we have invested tremendously in and have been successful.

We've got a national missile defense system that I believe will protect the United States right now from a North Korean missile launch. And we're prepared to offer that to Europe in a way they can protect all of Europe from one site and would also provide any additional protection to the United States.

So we have got a lot of things of very great expense that are out there.

And with regard to the Russian question, I'm not sure we can do business with a country that would be providing arms to Iran or North Korea. So we have to have some real serious discussions about that if we're going to have a serious relationship with Russia and that kind of thing.

And some of the problems that people complain about deal with proliferation of technology. It's easier to provide that technology to a nation than it is to a private industry who may then sell it around the world.

We've had proliferation of technologies. It could advance or could provide a weapons system - make a weapons system obsolete much quicker if your enemy knows all the technology that you have. So that is not an insignificant thing.

We invest all of this money into developing a system and you don't want it, the technology, out there so it can be (INAUDIBLE) quicker than otherwise would be the case.

NICOLL: Thanks. I would just bring you together some of these points about requirements. Isn't it a major problem that you have large amounts of industrial countries' budgets taken up by these very large programs that have been decided long time in advance and perhaps for requirements that were from an earlier, really an earlier conflict?

And that we actually have heard soldiers and seamen and airmen on the ground around the world, lots of them, who find that they actually need things urgently and they can't get them?

So as you refer to this, no they can't get them because all of the budget is taken up by other things that may or not be needed some time in the future. Scott, do you want to, just to comment sort of about that?

HARRIS (ph): Well, I probably sound a little provocative here, but I think you've captured the European dilemma. The European dilemma in defense spending is legacy programs like Euro Fighter, like A400M, which is a legacy program that doesn't exist yet. But I mean these big platforms that have lasted a long time are soaking up 70 percent to 80 percent of the procurement budgets of some countries.

And when you have that kind of concentration of defense spending on a very few programs, then it is hard to do anything new. And the only way to do something new is to increase the resource, which governments don't appear to want to do or to make some choices about what you spend it on.

And in Europe, defense policy is half the time industrial policy and the rest of the time social policy. And so it is never defense policy. And as a result, people aren't spending money on real capabilities that are really needed in real conflicts going on right now.

NICOLL: Mr. Smith, does Britain offer a way forward?

SMITH: We have in Britain a system that is called "Urgent Operational Requirements," where some of the requirements from the field get fairly quick - translated fairly quickly into actual equipment. And there is also the Defense Industrial Strategy in which the Ministry of Defense has basically looked at the whole industrial picture, looked at what actually Britain needs to have within hits own shores regardless of ownership, which is also innovative (ph).

And so actually we don't really need to make very much at home. Let's have an open market. So this is often more a way of getting requirements translated into equipment more quickly.

HARRIS (ph): I think it does. I think it does point to the way forward, that Britain, as many of you will be aware, went through a bottom up strategic defense review in 1997, which paved the way for reconfiguring our entire forces away from a Cold War scenario to the modern challenges which can vary greatly.

We then reconfigured our platforms and tried to decide basically what the requirement would be, and there are changes. I mean the new kind of warfare points from or to upgrade existing platforms than buying more expensive kit. And that's the problem that you refer to is not just a European problem, it is an American problem as well, the cost of putting as service (INAUDIBLE) is just so expensive.

And if you look at NATO's future role, can we afford to put the large numbers of troops in? And will we have to look to other countries, non-NATO countries, to do it? But the defense, industrial strategy was - is the next phase. We sat back as a country and tried to say, you know, what are the basic requirements for the next 20 years?

And we produce for our industry an indication of where we want to be in 20 years time, what we want to keep as a national sovereign capability and what we are prepared to open up to other countries to get best product at the best price. And I think those sorts of strategies we'd like to see in allied countries.

NICOLL: Thank you. Tom Enders.

ENDERS: Well I don't know, Scott, whether your remark was perceived as provocative by anybody else, but it certainly was by me. I mean the two examples you picked are exactly for me examples that show that we can adapt during the long running period of developing big platforms.

I mean Euro Fighter is indeed adapting from a, originally a purely air to air fighter to an air to ground fighter. And I think we are doing that quite successfully. And A400M -hey, if Europe needs anything, it needs transport capability. It needs medium range, medium lift transport capability. And so the A400M, I can understand your disappointment that the C130J (ph) wasn't chosen, but that is certainly an area that we have a big need.

To underline your point that beyond big platforms we need a lot more equipment, more systems, more communication equipment and so on in Europe. That is a point of underfunding. We don't have enough defense spending in Europe. I mean that goes less for the UK. That goes less for France. That certainly goes for Germany and a couple of other countries. That I think is far more the problem.

I mean the platforms - the recapitalization of platforms is something that I think we all unanimously agree you need to do from time to time. You know you have certain waits (ph) on helicopters and transport aircraft and fighters. You do it in the United States. We do it over here. That is not the issue.

The issue is we have serious underfunding of European defense procurement, class defragmentation. It is a great thing that you have done your industrial strategy. I would like to see that in the other nations in Europe as well in the same consistency like you have done it.

And then say, what is the overlap? I mean, what can we do jointly? What remains national? What can we do jointly? Rather than creating institutions time and again that our again underfunded and underutilized and create additional frustration. Let me be provocative in that respect.

NICOLL: I think that is a very strong point.

HARRIS (ph): Actually Alex if I could (INAUDIBLE).

NICOLL: Yes.

HARRIS (ph): That really is the point I was trying to make. I mean I wasn't trying to criticize those programs but to describe the concentration of spending on a couple of platforms which leaves everything else underfunded. And that is exactly the point Tom Enders just made. And that is the problem in European spending in a lot of cases that after the big programs suck up the funding, there is nothing left for new requirements.

We could probably make better examples if we wanted to criticize programs in land vehicle building than in the two I mentioned.

But that is the key point, where does the money come to buy the new capability.

SESSIONS: One way you can get it is canceling programs that really aren't necessary. We ended up canceling the Comanche Helicopter. We cancelled Canon (ph). That caused some controversy. Secretary Rumsfeld in his transformation plan succeeded in canceling those programs. Some say he didn't cancel enough, not enough china was broken in doing that.

He has resisted and taken some criticism expanding the number of uniformed soldiers. As you say, they're so expensive. And what we know about combat is that a highly trained, phenomenally well-equipped soldier can be exceedingly capable on the battlefield and quality beats quantity any day, any time, well-supported and equipped. However, now we are learning you got to have a certain number of soldiers.

UNIDENTIFIED PARTICIPANT: Right.

SESSIONS: You just, you get in an environment we are in now. How do you get those numbers at the same time? So the constant trade-offs are very real.

But I do believe that governments have got to be more far-sighted and their analysis has got to be correct because the systems are so expensive. If you make an error you have given up all kinds of opportunities to have done good things.

NICOLL: And I think that everybody would agree that well coordinated and faster solutions to...

SESSIONS: Faster is the best.

NICOLL: I'd like to bring in another round of questions now. If you do want to speak, please catch my eye and I'd also like to move the discussion to the ways forward. It's very easy to get bogged down in the problems of defense integration, but let's think about the ways forward too. The first question is here.

QUESTION (ph): Thank you so much. Constantine Agus (ph) from Moscow. Gulf War One is one that is perceived to have (INAUDIBLE) military technology. So are there any lessons to be drawn from Iraq too and probably Afghanistan for future military technology. Thank you.

NICOLL: Thank you. And the next question is over there.

QUESTION (ph): Thank you. John Bullhead (ph) from Istanbul. At some point you had mentioned the difference between industry policy and defense policy and if you want to move towards a defense policy, I think you have to deal with threat perceptions as well.

Do I sense that there's a difference of threat perceptions now in the two sides of the Atlantic?

NICOLL: And Mr. Bertram (ph) over there.

QUESTION (ph): Christoph Bertram. We've heard yesterday from the Secretary General of NATO. He said NATO's top priority now is stabilizing. To what extent does this percolate through into the procurement plans of governments and companies?

Or are governments and companies still very much interested in high-tech, high-end military wherewithal, which in these new circumstances is probably not as urgent as other things are in which perhaps the companies are going to earn less money.

So, it's probably a lot of money in the high-end stuff, which we need much less, why we do need stuff for stabilization?

NICOLL: Thank you. Question over there.

QUESTION (ph): It's Paulie Oncoush (ph) from Belgrade, Serbia. I have a question about the issue of subcontracting in the defense industry. It talks about the - essentially about the big companies within Euro Atlantic arena.

My curiosity about - is about the value added, both in terms of R&D and other technology development and perhaps perception on the capabilities that need to be developed that can be genuinely provided by the subcontractors, both within the Euro Atlantic arena and outside of it. So if you could elaborate a little bit on that, (INAUDIBLE) subcontractors. Thank you.

NICOLL: Thank you. OK we have a range of questions there about Iraq - what the lessons of Iraq are, about differing threat perceptions, the demands for stabilization, that we should be looking not for so much high-tech very expensive stuff, and also about subcontracting arrangements. Scott do you want to -- care to kick off on those?

HARRIS (ph): I'll attempt to answer Christoph's question by simply referring to what my company has been doing lately. And I think it (INAUDIBLE) tantalizes the shift of the industry.

We have just made two acquisitions. One is a company called Savvy Technology that makes radio frequency identification technology. And this is going to be used for Homeland Security applications for logistic support applications, all sorts of required security services that have nothing to do with weapons.

And the other acquisition we've made is a company called Pacific Architects and Engineers who are engaged totally in support of deployed operations - peacekeeping, military, et cetera.

We think there's a $30 billion market in logistics and support and that's where the company is. I just cite those, if you look at the largest U.S. defense contractor and where its investments are going, it's going to support and logistics and to Homeland Security technologies.

So that's one answer, and I think that answers actually the first question about lessons learned from Iraq and Afghanistan. There's a huge premium on awareness. Where things are and where people are. And so the information technologies and the ability to move that information rapidly is the driving technology that we're coming out with these conferences.

NICOLL: Senator?

SESSIONS: I think the question of Iraq and what we've learned is very important. One of the things is, as I said, technologically equipped soldier can be very effective against much larger numbers of inferior equipped soldiers. We've learned that quite clearly. But that does not mean advance weapon systems won't be necessary in the future. And it takes so long to bring them online that will we need an advance fighter aircraft? I think so.

How many do we need? We're building a lot of different kinds. We ought to be smarter about that. So ships, so much money in ships. You wonder, "Do we need all these ships?" But you do in a different kind of conflict; capacity of ship is important. So we've got to think through carefully. There's no money to waste. We're spending more money than ever, but I'm more and more convinced that every dollar has got to be wisely spent.

It's even more difficult, I assume, for Europe to develop on the kind of scale that's necessary to keep costs down.

Our systems take too long to produce and we take too long to fund. They would be cheaper if we bought a larger number of these defense equipments quicker, instead of stretching it out so long.

UNIDENTIFIED PARTICIPANT: Yes, yes.

SESSIONS: So, there's a lot of inefficiencies yet, in the system, I think.

NICOLL: Mr. Smith, yes. How do we move forward?

SMITH: Shrinking markets and shrinking demand. I just make the simple point that, that should be a driver for greater cooperation amongst us. Lessons from Iraq? Our biggest lesson was tracking assets in theatre. We made a right cock of it first time around. We got it pretty right second time around.

The other big lesson was equipment and its relevance. You know, we tried to move equipment straight, that was used in Iraq and put in to Afghanistan.

Completely different environment. And now we've got to meet these emergency requirements. But I'd like to pick up on the point about sub-contracting.

NICOLL: Please.

SMITH: Because I think that's absolutely key in terms of future research and development. Because that's where the good ideas come from. It's the smaller, medium size companies. And if there was a fault in our defense industrial strategy, and I recommend you all read the strategy, it was the neglect of sub-contractors. We focused on the primes, because they're the biggest companies they're providing the key platforms.

And we had to go back again and look at that. I think we're drawing a conclusion that whatever you decide, you must have transparency. You can't just leave it to the prime contractors. You've got to make sure that they have a competitive structure within their sub-contracting and these small companies are not neglected. Because if they are, we'll pay for it dearly.

NICOLL: Tom Enders, you might also want to pick up the supply chain issues.

ENDERS: Sure. On that point Sir, I fully agree. Quite often small companies are more agile, have better ideas than huge companies and (INAUDIBLE) bureaucracy et cetera. Now there's certain lemmery (ph). I mean ideally we should leave these companies outside. We shouldn't acquire them, because then we make them a part of our bureaucracies and the many burdens that come with having huge companies. Much as you practice lean management and restructuring et cetera.

On the other hand, we quite often experience that these smaller, agile companies are very weak financially. And if we rely on these companies for critical items, for critical systems or sub-systems, here comes the dilemma.

How can we balance that? And that's not always easy. I think acquisition is the easy (INAUDIBLE), but it's not always the best. But critical dependence on smaller companies, on sub contractors, is an error.

The big companies are by and large not going for vertical integration, but the opposite - horizontal system integration, looking for new fields of business, is a real question mark. And can only be answered case by case.

As to Christoff's (ph) point here, and it was already alluded to. I mean, we are all making strides into new business areas. The services. I mean, we are from (INAUDIBLE). Decide we are happy to serve the U.K. government in the biggest ever services contracts. The Skynet Five (ph), and hopefully the tanker thing soon.

We are also venturing into areas which, some years ago, were called Homeland Security and now more global security. We're executing a very exciting contract in Romania to provide security for the Romanian borders. As kind of the prerequisite for Romania entering the E.U.

We're using our core competence for instance in civilians. We are intranetting (ph) certain civilians and sensors into command and control centers. But that is not military. That is commercial.

I mean, for me there's a certain border. Other companies can do that, but my company will not. My example, fold towels for the soldiers in the barracks. Others can do that better, and certainly much more inexpensive than we can do it. A bulletproof vest, et cetera.

But yes, even the big behemoths are making progress into new business fields to cater for the changing requirements that our military leaders have.

NICOLL: Thank you. I'd like to move this discussion forward a bit now. I mean, I think we've reached a certain level of agreement on requirement issues and some of the barriers. But what are the ways forward for industry? You know, a number of different models.

Merger/acquisitions is one thing you've just mentioned. The influence of new technology is -will that offer a different way forward? Does it really require joint programs, of which we've seen very few, to really force business into a more integrated approach?

And can any of it really be done without breaking down some of these export control technology barriers?

Let's try to be positive about where we can realistically go with this. I mean, Scott Harris (ph), Lockheed Martin, has a program - well, an approach that it's been very keen on for many years now in the form of partnerships with the companies outside the United States.

Does that offer a way forward? Or does that really only offer limited progress? I'd like all the panelists really, to address this. And also to bring in, if there's any questions, on the way forward actually for industry. I'm very open to questions on this point. But Scott Harris, why don't you take off on this?

HARRIS (ph): Well, I think the necessity of joint programs to drive integration, I don't think can be demonstrated. I think we can get a lot of partnership and a lot of industrial cooperation...

HARRIS (ph): ...joint programs to drive integration I don't think can be demonstrated. I think we can get a lot of partnership and a lot of industrial cooperation without having to insist that governments all have joint programs and the complexity that comes with that.

That is because the industrial environment is globalizing. Our supply chain is global. Our subcontractor base is global. And when we go out to look for technologies to apply to a program, we are looking globally. Take the Letoral (ph) combat ship, which the Senator mentioned a few minutes ago, that is a U.S. program, it is not a joint program. In our, we are one of the contractors on that. There are two competing teams right now, and Lockheed Martin is one front contractor.

On our Letoral (ph) combat ship we have 25 percent foreign content. In other words, we have applied technologies to this U.S. program from around the world but mostly from Europe because they were the best that fit our program.

And so you are going to get a lot of industrial integration simply by letting industry do what makes sense for industry. It doesn't have to be a joint program. But you are not going to be able to go as far as we might like because of the complex regulatory and legal framework of our industry.

And so there is, directly to answer your last question, there is a need for regulatory reform, technology control reform and a relaxation of some of these restrictions on national procurement. There is no question about that. If we are going to get real integration, we have to have some relief.

NICOLL: Thank you.

Senator, don't politicians get worried about the supply chain getting too diverse, fearing perhaps that when it comes to the crunch, when there is a crisis that there won't be some absolutely crucial component because some other country won't supply it because they don't agree with what America is doing?

SESSIONS: That is a problem that we have in the United States. You do not want to be in a position where a critical component of any system may be in the hands of a nation and a Parliament meets and says we don't agree with your military action, therefore, we are ordering no more production of this critical component.

We have had difficulty moving troops sometimes in Europe or getting air space even with our allies sometimes because they didn't agree with the policies of the administration. So that is a reality that we wrestle with.

But Scott was mentioning the components - EADS Northrup is proposing to build, assemble in Alabama a tanker fleet of 600 aircraft if that is done. And they want to make sure they have a level playing field and they have an opportunity to win that contract.

But what I learned was this, they have partnered with an American corporation, EADS has. They are going to use American workers to assemble it. And they have convinced me that about half of the components will be American made, whereas the Boeing competitor has maybe 60 percent of the components American made and 40 percent non-American made.

So this incredible supply chain sometimes, I think you indicated Scott, transcends all of our plans. It is just happening anyway.

NICOLL: The question then is, is that best value for money if the contractors have to convince you that actually everything is going to be done in America, so it is all OK. In fact, there may be some wonderful technology, wonderful helicopter, wonderful transport aircraft, tanker aircraft that actually doesn't need to have that American input to get the best value for money.

So, are you serving different interests there. You are saying they must have American jobs, we must have American technology. That must be protected. But actually is there is a conflict there perhaps between getting the best value for money.

SESSIONS: Well, the engine for the joint strike fighter - that will be built in the U.K. - half of them will. With regard to the tanker, that will be assembled in the United States of a multiplicity of suppliers - presumably these chosen supplies are based on who provides the cheapest and best product.

So, I think - is there a conflict there? I don't think so.

NICOLL: OK. Mr. Smith - do you think there's a conflict?

SESSIONS: All I'll just say is that our voters do expect that our - that jobs - wherever possible - are done in our countries. All of us have that expectation.

NICOLL: Of course, and that's ...

SESSIONS: And they want us to defend our local industries. But the truth is large - the large industries are all international already. That's the...

NICOLL: There's a legitimate interest - that politicians are absolutely...

SESSIONS: You have to ...

NICOLL: Yes.

SESSIONS: Be responsive.

NICOLL: Yes. Yes. Mr. Smith?

SMITH: I sometimes think that we've gone further than most other countries in opening up our defense markets in the last two decades. Not just the current government - previous governments. We've produced this strategy, which I think is a good one. But we want to see movements elsewhere.

I sense, just at this moment - with the publication of the defense industrial strategy in the U.K. - we're standing back just a little bit and saying we've got to move forward together, you know, or we aren't going to move forward at all.

So I think it's a huge onus on politicians to go out there and sell the argument that by opening up our defense markets, we get the best profit. We get the best value for money. We get better operability, which I think is absolutely crucial for the future.

And I think, ultimately, we get more jobs as an investment by having freer markets in defense.

But I'll just say this, we're not doing too bad in the U.K. at protecting our defense budgets. We had one of the biggest increases in our defense budget in our last comprehensive spending review. But as a proportion of GDP, it actually slipped. So we have the biggest real increase. And that worries me, as a politician with a defense interest.

Now we don't have quite the state that the Americans have. I can't remember - I think the C-17 - it is spread across 30 states at the footprint for its construction.

NICOLL: Yes.

SMITH: So, there's a lot of vested interest in Congress. And we don't have that. And it sometimes worries me that we don't. Our footprint is much narrower and that means as the defense industry contracts, our vested interest in defense is contracting with it.

So, we've got to be careful on this argument and I think you do have to get a balance.

NICOLL: But again, doesn't the fact that the vested interest contracts then enable you, enable the government, to actually make the value for money decision more simply.

SMITH: It does. It does, in a nutshell, I think it does. And I think we are getting value for money, you know. Our inland communications, we go to General Dynamics, our land surveillance, we go to the French.

We think we go out there and get the best products. We just wish that, you know, everybody else would do the same.

NICOLL: Yes.

SMITH: Not to sound like a conceited Brit, incidentally.

NICOLL: Tremendous, I mean EADS has seen both sides. It's seen the challenges of...

NICOLL: Tom Enders, I mean EADS has seen both sides. It has seen the challenges of moving across borders within Europe. And you have already talked about some of the problems that has involved. And in moving into the United States, you have a strong American operation. But you have really had to work very hard to build that foothold with some successes.

Of course you have to often to (INAUDIBLE) American partners to move forward as the Senator has already mentioned. I suspect that you probably feel that there are many barriers in the way of the integration that you want to see.

ENDERS: Well I mean Alex it starts with the barriers we have in Europe. As I mentioned before, I would like to compliment the UK on what is really or has been kind of revolutionary in Europe in the sense that you said, companies come to us and offer something. Ownership doesn't matter.

What matters is hi-tech. What matters is ITRs generated in the UK. What matters is, yes, hi-tech employment in the UK. These are legitimate points. These are legitimate requests I think from any government customer. And as to your question to Senator Sessions, you should have really asked me.

NICOLL: OK.

ENDERS: Do we still have a good business case even though you could say kind of duplicate skills in the U.S. I can assure you yes we do. And we will have a much better offer of value for money than our competitor Boeing. And we still, you know, make good money on that. I am convinced of that. We just have to win this.

I mean, we have a little hurdle Senator that we just have to win it.

But the U.S. markets, I mean there can be no doubt this is the single largest market and will probably stay in our lifetime worldwide for defense and security-like products. It can't be wrong to try and try again to get a good footstep, a good footprint into this market.

It is a little bit like in the old Frank Sinatra song right? If you can make it here, you can make it everywhere.

So this is why all the European companies who have something to offer in terms of platforms, in terms of centers, in terms of systems are well advised to try to make further inroads into the U.S. market as difficult as it is.

But let me say something about how do we move this forward. Sometimes it seems there is a political concept that says the more countries align their requirements the better. I mean I mentioned one project where we go to the extreme, 23 countries align on the NATO airborne ground surveillance system.

While with, in six years now we kind of revitalized that, we have made very little progress. And I think there comes a point, by the way, where companies will say enough is enough. We spent millions after millions each year. We don't believe in this any more.

The best working constellation is clearly that one country has a requirement or lease or where one company has the lease and then has a lot of self contracting relationships and partnerships.

Let's not fool ourselves about that. That is not necessarily the political concept. But from an industry point of view, if you talk about feasibility, can we do it? Can we do it against the requirements in the time and quality that is requested? That is the best constellation. And we as industry will do what the political customers will ask us for. But the best constellation is one country, one industry lead.

NICOLL: Yes indeed. I mean the ultimate joint program is a NATO program, you know, where people try to move forward, 26 countries at once and clearly is very difficult. I suppose with joint strike fighter, we do have a project where there's a clear lead. And indeed, a clear lead company, Lockheed Martin, that could - so perhaps that, following Tom's model, does offer the way forward. But even there, Scott, there are quite a few obstacles.

And, you know, Britain has said, "We're not getting the right access to technology," and so forth. And there's lots of negotiations going on, with lot's of...

HARRIS (ph): Well, there are lots of issues and lots of complications, but I do think it's a good model. The problem with using it as a more general model is it's such a unique program. Because it's huge. You know, it's billions of dollars.

And it's the manned fighter aircraft for the next 35 years. So you have a very dominate program. And when you've got that, you can rearrange the pieces efficiently. You don't really have that in most other military procurement, so you have to think of other, more creative models.

But having one customer or one contractor in charge is the key, I think, in all of that. General Joseph didn't say it yesterday, but I heard him say it before. Whenever he has an operational requirement in Afghanistan - and if it's a NATO requirement, it becomes a 26 nation industrial base competition.

And not something that produces the requirement. So there is, in general in NATO, a need to make our system more efficient. To be able to select systems and contractors, and get the material procured efficiently.

NICOLL: Okay, thanks. We've got time for just a couple quick questions, if anybody has one. Sir?

QUESTION: My name is (INAUDIBLE). I am from Greece. I work for the (INAUDIBLE), and my question has to do more for rads (ph) and Lockheed Martin. Knowing that there are formational aircraft (ph) programs running together - I'm referring to UNICEF, to Britain, to (INAUDIBLE) Euro Fighter. And on to this full programs will dominate the markets an extra 30, 35 years.

What is more realistic? To see the peak generation advert as a Shahoy (ph) with British Aerospace and in (INAUDIBLE) electronics, and (INAUDIBLE) to see the common project between us and Lockheed Martin?

NICOLL: Thank you.

Right here.

QUESTION: I would like to pick up the Homeland Security issue, because I feel that it's going to attract, as has been said, a great relevant investment in the near future. I would like to know, do you see a NATO role in this field? First of all in secondary crime rates, in coordinating the joint program.

Like standardization agreements and things like that, and accepting the right balance between the two sides of the (INAUDIBLE) like the good transatlantic cooperation. Thank you.

NICOLL: Thanks very much.

Any more questions from the room? OK. I'd like to ask our panelists to address those questions, and also to make any final remarks they want to make at the end of this discussion. Senator, why don't you kick off the answer?

SESSIONS: Well I would just - on the Homeland Security, I think we can do better. And a lot of it needs to be harmonized. We want to have, for example, an entrance/exit system for our people, and a biometric identifier with a fingerprint based would really work, but I think the international airline industry opposed that at one point. So that's never quite happened.

So some of these things that we got together and worked on might be a little difficult at first. But could really add to the security and add to the mobility of people as they move.

And the technology, we're always hoping for a breakthrough in technology where you have the capability of identifying explosives from some distance in ships and that sort of thing. That's a big deal. And I know, Lockheed and other companies are working on it. We really need to do that together, and to the extent to which it can be unified, we would all be better off.

NICOLL: Scott Harris (ph).

HARRIS (ph): Well, I'm not sure what the role for NATO in Homeland Security or Global Security will really be in the future, but there's definitely a boundary between the defense requirements and the security requirements. Wherever that boundary is tough, there's a significant transatlantic issue, whether it's the E.U. and U.S. or NATO.

And I think in the next five years that problem is going to be one of the most urgent that needs to be addressed. Because we're going to need common responses to the changing security requirements and we're lagging behind the potential threats.

NICOLL: Mr. Smith.

SMITH: I don't think we should limit NATO's role in terms of Homeland Security or the fight against terrorism. It's my view that that is the core interest of NATO. More people died in three minutes in New York than died in 30 years of terrorist atrocities on the British mainland and in Northern Ireland. This is the threat of the future. It's a global threat. It's an unprecedented threat, and I sometimes think in Europe it hasn't quite sunk in as much as it has in London, New York and Madrid.

NICOLL: Tom Enders.

ENDERS: Well as to NATO in Homeland Security, I think Jim Jones would be the first one to say that for instance countries like Afghanistan cannot be pacified just militarily. And why shouldn't NATO try to compete amongst industry requirements for something like border security?

I mentioned the project we are currently doing in Romania, providing the border security in an internetted way for the entire country or for particular borders. So something like that, NATO could do just as well. You know, run a competition and say, "we want the contractors for prime companies who are in this business to make us an offer." How could we do that in Afghanistan, supplementing the military efforts? How can we do that in other countries?

As to the very interesting question, I don't know, it's the $1,000 or $10,000 question? How will the future of military flight (ph) look like? Well I should say, I believe in one thing. I mean it's no KSF (ph) nor Euro Atlantic that will be the last manned fighter aircraft. There will be fifth generation, sixth generation manned fighter aircraft also in the future.

As to what extent, what the mix will be between manned and unmanned in the future, well that's up for everybody's guess. But we in Europe, I think should do some homework. Right now you were mentioning that we had three fighters that are partly competing with each other. I'd be quite happy in the next generation if we could settle for one.

And I believe that the Euro fighter (ph) consortium, where we had four countries, their requirements already under one roof, should be the modules (ph), nucleus modules (ph) core for driving that consolidation on the European side. That would probably make Scott a perfect partner for a transatlantic program in the future, provided we find some money for it.

NICOLL: That's the key question, where will the money come from. I'd like to thank all of our panel for a really interesting discussion. I think we've covered a lot of the ground; this discussion on defense industry integration will go on and on.

But for now, I think we've really covered this. And thanks very much indeed, and thanks to all our audience members.

(APPLAUSE)

END