One secret of China’s military success is its military business model

If the U.S. is to prevail in the world's strategic hot spots, the Defense Department will have to adopt some of the strategies China seems to be using successfu...

If the U.S. is to prevail in the world’s strategic hot spots, the Defense Department will have to adopt some of the strategies China seems to be using successfully. For a closer look, Federal Drive with Tom Temin spoke with someone who has described a system of melding private capital and commercial technology into DoD’s own acquisition system. Pete Newell is the CEO of BMNT Partners.

Interview Transcript: 

Tom Temin And I guess the threat of a Taiwan related situation and this ongoing what you call, I think, correctly, a proxy war with Russia over Ukraine, much more than simply shipping stuff to someone and seeing what they do. It’s more strategic than that. Tell us your central theme here that you have outlined in an essay at Defense News, of this idea of a commercial blending and civil military integration.

Pete Newell It starts with a promise that China will be the only winner of the war on Ukraine. The concept of a proxy war is debated by people with political aspirations right and left. We are using some of the cream of the crop of our weapons systems and our industrial might to support Ukraine in a battle with what should have been a pure competitor. And the Chinese are watching that battle play out as very astute observers of the performance of the systems and the tactics and the combinations and they’re looking at Taiwan. They have a really good understanding of how this plays out. You have an opportunity and the capacity, which is more dangerous, to actually build solutions that make our advancers completely raw. And they have the ability to harness, what I would call, a whole nation approach to do that in a timeframe that is vastly faster than ours. That’s really dangerous to us.

Tom Temin So they’re seeing this slog that this Russian Ukraine war has devolved into. And they see the United States we can’t even replace Howitzer shells fast enough to get the supplies up, let alone the big stuff. The complicated, takes years to build stuff. And so is it a matter of Chinese agility here? And they’re seeing what it would actually take to win a thing like this, which is different from what we’re sending to try to win a thing like this?

Pete Newell You don’t call it a numbers game. I think the Chinese can do the calculus of the expenditure rates and our ability to refresh stockpiles of things, but more importantly, they are having an opportunity to look at how the systems are employed so that if they do it right, they can negate the use of a system by coming up with a completely different set of technologies or a completely different set of operating concepts. The operating concepts are probably more dangerous because we can’t see them until they actually show up on the battlefield. The Chinese for the past 20 or 30 years have really been focused on this whole of nation approach to the nexus of commercial capacity and military capacity and how to generate things at scale and speed. And that’s where I think that, you know, we have this terrible, painful conversation in the United States. We know how to do scale, but we don’t know how to do scale at speed when the scale is something other than what we were doing.

Tom Temin So would an example of that be, say, to compare World War II? And there were about 30,000 four-engine bombers built in a period of about three years that we could just throw all over the world, maybe 40,000. Whereas a Patriot missile bank takes years to construct and you give one away. You’ve got a gap you can’t fill next week.

Pete Newell Correct. And I think that there are just tons of examples coming out of World War II, whether it’s the Higgins boat that was developed for the landings in France or the bombers or even radar and systems like that that were built fairly rapidly because commercial folks were recruited to the effort and they converted commercial systems to do that. There’s a great debate of whether we have the capacity in the United States to do today what we did in World War II.

Tom Temin We’re speaking with Pete Newell. He’s CEO of BMNT Partners. Now, let me make an analogy. When the COVID came out, everyone thought we would need tens of thousands of respirators or ventilators or whatever they call them. We didn’t. But nevertheless, some industries that had never made ventilators managed to produce them in a matter of weeks, and they could turn them out in scale, like Ford Motor Company, which also made bombers, you know, even though it hadn’t been an aircraft company. Is that the kind of thing you mean?

Pete Newell Yes and no. I mean, that’s a great lightweight example of the types of things that will have to be done. Ford didn’t step up to the plate and say we’re here to make respirators. There was a lot of back and forth between the president, Congress and the people who said, you either do it or we’re going to revert to a couple of the things that we have that can make you do it. Let’s take unmanned systems. The Navy has done some tremendous [indistinct] others with Task Force 59 and and are producing these things. We don’t have shipyards today that can build thousands of unmanned surface and subsurface systems. They don’t exist in the United States. The Chinese, on the other hand, not only can do it, but they can redo their shipyards, do all kinds of things. So that’s the type of scale that we’re thinking about. I had this conversation with the CNO not too long ago, and when I posed that question to them, they looked at me and said that the industry is going to have to do that because we, the Navy, don’t have the capacity to build shipyards of that type. Yet we know that’s the direction the technology and capacity is going to go. So when you look at the technologists and the venture capital folks and the admirals of the world you have great is who’s going to be the SpaceX boats because it’s not going to be built inside the US government. It’s going to come from the commercial side.

Tom Temin Right. And that then bumps into the acquisition system, which we know all the issues around that. And coupled with that is the budgeting system and the disbursement system and all of those kind of sclerotic systems that have been built up since the 1960s. So maybe that’s the crux of the issue. The use of, as you call it, private capital in military use or that kind of fusion. What would that look like in the United States?

Pete Newell First and foremost is the system prevents DoD in particular from adequately signaling where the big bets need to be made in terms of commercial capacity. They’re good at signaling where the big bets need to be made and hypersonics or or things like that. But they’re not good at signaling where the bets need to be made in things that will be largely a commercial endeavor that increase the U.S. capacity to do something. Part of that is because the commercial world looks at money across the table as signaling. The way the system built today, there’s not a program executive office for things that aren’t programs of record.

Tom Temin Well, what about the U.S.?

Pete Newell Even if they say they want to do it, they can’t do it.

Tom Temin But what about these innovation units and these types of AFWERX and SOFWERX and Defense Innovation Unit and all of the armed services have a works. They spell it werx. Isn’t that where that’s supposed to happen?

Pete Newell You know, they own the front end of the pipeline. They are increasing the number of things we have the opportunity to grow, but that didn’t change. At some point we hit the acquisition system and no kidding, what’s the requirement? How are we going to scale it? How many years are we going to buy it over? So it’s like increasing the volume of water you’re trying to shove through the same garden hose. And don’t get me wrong, we needed to increase that volume. Now we need to increase the size of the hose to get the velocity. We need to actually get things out the other up. I’m not saying replace the hose. I actually am saying replace the hose. Add another hose. The current acquisition system does what it does for a reason and it does it really well and it’s not bad. We’re just asking it to do something that it’s not built to do. We need to keep the current system to do things like build stealth bombers and build tanks and build aircraft carriers. But all that other stuff that we need to get done needs a separate system of not just acquisition, but how they hire people, how they move money, how they confront things and the scale and capacity which they’re allowed to control. It’s just a completely different set of rules.

Tom Temin And you have a series of recommendations for Congress to make this happen.

Pete Newell Absolutely. And I think and I won’t build an order. I think first and foremost, it was a mistake to move the defense innovation, you know, out of the secretary of defense purview and into R&E. And simply by moving the DIUs, reporting to the SecDef did not fix the problem because DIU’s manning and its budget is still coming from R&E. The Office of Strategic Capital, if paired with DIU and given the authorities necessary to do not just prototyping but actually small scale production and the ability to combine capital and do that segment would be hugely powerful. So imagine and honestly, the services need the same thing. So the question I ask folks is, you talk about the Task Force 59. There are some great success is out there in Bahrain with technologies and systems and the way that people look at it say, well, great, we need more Task Force 59s. And I’d say the answer is no. We need to know what happens next. What are you doing with the technologies and the systems to show that you can actually scale their deployment. Not scale more exercises, but actually scale the deployment of those systems. Can you produce them? Can you integrate them? Can you come up with the operating concept to do that? Nobody owns that work. It’s all diffused back out in the current system. The only other recommendation is recognize that the DIUs and NavalXes and AFWEKS folks are still fighting an uphill battle to get the attention of senior leaders, to get the budgets they need, to get the freedom of operations they need. Largely because they’re not represented at the table where the resources are carved up. So one of the recommendations we’ve made is create a new undersecretary whose job it is to do innovation and commercialization, who has the budget and the authority to create a different system, a different set of rules, and to operate it alongside the current system.

Tom Temin And how does private capital come into this? Because the government has other transaction authority to buy prototypes and look into some of these things, as you said earlier, to fill the pipeline initially with good ideas that could be scaled. But then you’ve got the PPBE, the whole program budgeting allocation process that takes years before something can be scaled and the money to do it. In the meantime, what’s the incentive for a contractor? So how does the capital and the financing work into this?

Pete Newell Look what we’ve done with the EV world by providing tax incentives for people to buy American made electric vehicles. That created a fairly significant shift in the operating behavior of GM, Ford, Tesla and a whole bunch of other people. But you realize is there is no tax incentive for people to do defense commercial work. None. And in my mind we’re missing this massive opportunity, for providing the same types of incentives. I go back to the comment the CNO made of industry is going to have to build a shipyard that allows us to build thousands of attritible unmanned systems. That’s not going to happen without a solid business case, but probably not going to happen without some type of tax incentive for people with commercial capital to do. We’re not talking about that at all.

Tom Temin And China does operate that way.

Pete Newell Yes. Has been operating that way for some time, which means even the day we decide to do it, we’re still behind.

Tom Temin Because they have a command and control economy controlled by the party to the point where if they don’t like someone or someone in the bureau there doesn’t like a certain capitalist, the ANT group guy, the next thing you know, they could be in jail or, you know, they could be confiscated. I mean, we don’t want that type of model either. Right?

Pete Newell No, I was going to say, don’t get me wrong, I’m not saying be like the Chinese. I’m saying being better than the Chinese. We’re not going to beat the Chinese by copying that. We need to be better, faster, more agile and actually make changes. We were better than everybody in the eighties and nineties and even in the early part of the 2000s. But that’s not guaranteed anymore.

Tom Temin And the underlying assumption, too here, maybe is that the future will be in some semblance like it was in the past, where volume and numbers have their own weight. And despite all of the technology advantages and stealth and use of 5G and whatever, there’s a million of them. You still need lots of stuff to throw at the other side and you need a way to scale up that stuff. It might be smarter, it might be more precise than the old stuff, but it still has to be a lot of it.

Pete Newell And in this case, speed counts in a way that it never has before. The speed of delivery counts more than it used to. And that’s the part that the current system just can’t seem to handle.

Tom Temin Right. I need 10,000 drones that explode or I need 200 submarines that are unmanned next year. And under the current system, it would be, if we’re lucky, in ten years, we could have it.

Pete Newell Yes, correct. So I go back to the Higgins boat example, which is one of my favorites, is I don’t know how we would do that in the United States today, but you remember the, you know, the thousands that they had to build and how fast and how fast they went through the design and deployment. And it’s like the move from the early Hellcat aircraft to the P-51 Mustang on the Corsair. Well, it’s crazy how fast that happened and then how fast we ramp up production.

Tom Temin All right. And there’s a flip side to that, too, or a post-doc side to that also, is that some of the technologies developed for those items did have extensive commercial application after that.

Pete Newell And I think even more something I think we are more and more taking things that are more completely devolved from a commercial standpoint and integrating them into operating concepts as a whole than we have in the past. I think that, one of the other recommendations, and I don’t want to say that I’m opposed to the larger integrators out there because I think they still have a role. Lockheed Martin, Northrop Grumman like L-3, they are the master integrators of complex things into complex operating concepts. And there is a more significant role in doing that at speed than there ever was in the past. So this isn’t get away from them and do something completely different. It is give them the things that they need at speed to actually become better at what they’ve done in the past.

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