Alan Merbaum: “OPPORTUNITIES AND CHALLENGES FOR ALLIED DEFENSE INDUSTRY COMPANIES IN UKRAINE: PRACTICAL ASPECTS”

Let me start by disclosing that the views and recommendations contained in this presentation are my own.

This monologue is to discuss the opportunities and challenges for allied defense industry companies in Ukraine. In my opinion, opportunities and challenges can be determined within a framework within which European and American defense contractors can collaborate with Ukrainian companies. Therefore, I propose ten tenets for reform that the Government of Ukraine should consider if our industries are going to cooperate.

1. Demographics. The defense infrastructure in the Donesk and Luhansk regions has been compromised if not destroyed. An immediate effort must be undertaken to secure and protect critical military infrastructure in the Dnipropetrovsk region, and to build new, secure and defensible infrastructure in the western region. This is an expensive but urgent undertaking in order to secure Ukraine’s military supply chain and manufacturing centers. There are three benefits to this approach: first is the opportunity to attract foreign direct investment; second, it involves colocating critical supply chain industries adjacent to Poland and Romania, both of whom have modern defense industries, opening up the opportunity for increased trade and defense cooperation; and third, it provides Ukraine the opportunity to build modern state of the art facilities.
2. Industry Benchmark. Reestablishing military production facilities cannot occur without a thorough benchmarking Ukraine’s defense industry. An independent audit must be performed of manufacturing capacity for key military hardware as well as the secondary and tertiary supply chain in order to identify manufacturing gaps and redundancies. A rigorous Technology Readiness Level (TRL) evaluation of existing capabilities would assess gaps and investment requirements. In addition, the organization of Ukraine’s defense industrial base should be reviewed in terms of its competitiveness, quality control, production rates and acquisition processes.
3. Research and Development (R&D) Centers of Excellence. Assess how Defense Research and Development funds are allocated and prioritized. R&D activities t hat do not support warfighter capability should be suspended. The Government of Ukraine might consider establishing strategic research initiatives with foreign companies to leverage investments in technologies of mutual interest. In addition, the Finance and Defense Ministries might consider investment programs that attract and reward Foreign Direct Investment (FDI).
4. Supply Chain mapping. Second and third tier suppliers are crucial to sustaining a defense industrial base. First, they create jobs within the Small and Medium Enterprise (SME) sectors of the economy. Secondly, they tend to be more innovative and efficient than larger organizations. Third, a distributed supplier base offers both higher security and increased competitiveness. Suppliers represent the ‘upstream’ component of equipment manufacturing. The ‘downstream’ component, consisting of Maintenance Repair and Operation (MRO), and sustainability, can be privately or government operated – or a combination of both.
5. Standards. Adoption of standards and specifications are necessary if Ukrainian and western defense industries are to collaborate effectively – and if desired – interoperate. A robust standardization program should be established to align with NATO standards and quality control practices.
6. Simulation and Training should be given special attention for two reasons. The establishment of simulation facilities will – over time – save vast amounts of money while simultaneously building next generation training capabilities. While live training is still important, the establishment of simulation facilities aid in the development and modernization of capability and support a sustainable training environment.
7. Governance. Enforceable policies on fair negotiations, ethical behavior, and anti-corruption are crucial if Ukraine is to become a stable country with the ability to grow a strong workforce and attract foreign investment and cooperation. For example, the Foreign Corrupt Practices Act (FCPA) adopted in the US ensures ethical behavior among defense contractors and international customers. Policies that punish corruption while embracing fair business practices are tantamount to successful cooperation.
8. Defense Procurement and Acquisition Policy. Using the United States Department of Defense as an example, Defense Procurement and Acquisition policy is “Responsible for all Contracting and Procurement policy matters including e-Business in the Department of Defense (DoD).” In addition, this policy maintains a Vision of Acquisition excellence through leadership with integrity, with a Mission to Enable Components to effectively deliver equipment and services that meet the needs of the warfighter through innovative policy, guidance, and oversight while being good stewards of the taxpayers’ money. American Defense Procurement and Acquisition Policy is an acquisition model to consider. The United States continually assesses its defense acquisition process, and will change its approach to assure adaptation to military requirements, threats, technologies, and budgets.
9. Foreign Sourced Acquisition. Ukraine has the ability to build and deliver indigenous weapon systems. However the ability to meet urgent needs in the face of increased aggression from the east, a foreign supplier acquisition policy should be considered. In the case of the United States, Ukraine will benefit from working within the US Foreign Military Sale (FMS) and Foreign Military Financing (FMF) programs to fulfill acquisition needs that are currently approved.

10.  Export Policy and Market Strategies. Ukraine can supplant Russian companies during the period of sanctions against the Russian Federation. Ukrainian suppliers who sold through Russian middlemen and Original Equipment Manufacturers (OEMs) should approach end-users directly. Ukrainian companies can upgrade obsolete components currently in many national inventories served by Russia. US defense companies are expanding internationally. The opportunities and risks of strategic partnerships should be approached.

Way Forward

Based on the aforementioned ten items for consideration, it is suggested that Ukraine consider the following in terms of addressing defense industry reform:

1. Establishment of an independent tiger team to immediately put in place Benchmarking activities. This will require the highest level of government support and backing. Confronting the ‘old way of doing business’ will be difficult but is necessary in order to effect change. In the absence of the political will there will be no effective change to Ukraine’s defense infrastructure, and this will maintain the country’s vulnerability as well as deter cooperation by western industry.
2. Establishment of budgets for the reform process, in terms of the prerequisite studies, and eventual execution of reform solutions.
3. Defining the Ministry of Defense acquisition policy that will define defense industry reforms to meet capability requirements.
4. Continued engagement with western industries, who if convinced that Ukraine is serious about reforming its defense industry, will consider various levels of investment.

Alan Merbaum, Lockheed Martin