Creative Disruption JUNE 2014 Technology, Strategy and the Future of the Global Defense Industry By Ben FitzGerald and Kelley Sayler Foreword by the Honorable William J. Lynn III and ADM James Stavridis, USN (Ret.) Acknowledgements We would like to thank our colleagues at CNAS for their support of the project and their critical feedback on the report. In particular, we are grateful to Michael Horowitz for his substantive guidance and expertise in developing the project’s sur- veys, to Shawn Brimley and Dafna Rand for their editorial guidance and to Liz Fontaine and JaRel Clay for their media and publication assistance. This project would not have been possible without the leadership of the Creative Disruption Task Force co-chairs, Bill Lynn and ADM Jim Stavridis, USN (Ret.), nor without the intellectual vision of the project steering committee: Denis Bovin; ADM Giampaolo Di Paola, ITA N (Ret.); Geoff Hoon; ACM Angus Houston, AC AFC (Ret.); Linda Hudson; Brett Lambert; Senator Joe Lieberman; Ellen Lord; James Murdoch; Sean O’Keefe; and Bob Work. We also benefited tremendously from the insights and expertise of the Creative Disruption working group: CDR Clay Beers, USN; Marty Bollinger; Chris Bowie; Jonathan Caverley; Pierre Chao; August Cole; Steve Cortese; Frank Finelli; Stephen Greene; Steve Grundman; MG Kevin Kennedy, USAF (Ret.); Larry Korb; Peter Levin; Joe Militano; Carlo Musso; Mark Mykityshyn; Pete Newell; James Peddell; Ben Riley; Russ Rumbaugh; Pat Ryan; Neill Sciarrone; Andrew Shapiro; Zach Sherman; and Tom Thornhill. Readers should note that some of the steering committee and working group participants are affiliated with organizations that support CNAS financially. CNAS maintains a broad and diverse group of more than one hundred funders including private foundations, government agencies, corporations, and private individuals, and retains sole editorial control over its ideas, projects and products. A complete list of our financial supports can be found on our website at http://www.cnas.org/ content/cnas-supporters. The views expressed in this report are those of the authors alone, who are solely responsible for any error of fact, analysis or omission. TABLE OF CONTENTS Foreword 5 Appendix A: Survey I 31 I. Introduction 7 Appendix B: Survey II 34 II. Trends in Technology, Strategy and Business 9 Appendix C: Survey III 38 III. Disruptive Effects 15 IV. Recommendations: Success and Failure 21 in the 21st Century V. Conclusion 25 JUNE 2014 Creative Disruption Technology, Strategy and the Future of the Global Defense Industry By Ben FitzGerald and Kelley Sayler Foreword by the Honorable William J. Lynn III and ADM James Stavridis, USN (Ret.) Creative Disruption JUNE 2014 Technology, Strategy and the Future of the Global Defense Industry About the Authors Ben FitzGerald is a senior fellow and director of the Technology and National Security Program at the Center for a New American Security. Kelley Sayler is a research associate at the Center for a New American Security. 2 | CREATIVE DISRUPTION: TECHNOLOGY, STRATEGY AND THE FUTURE OF THE GLOBAL DEFENSE INDUSTRY By Ben FitzGerald and Kelley Sayler Foreword by the Honorable William J. Lynn III and ADM James Stavridis, USN (Ret.) Creative Disruption JUNE 2014 Technology, Strategy and the Future of the Global Defense Industry FOREWORD Google’s recent acquisition of Boston Dynamics, a DARPA-funded organization that develops some of the world’s most innovative robots, served the Pentagon with an unsettling notice: the center of gravity in cutting edge, military applicable research is shifting abruptly away from the defense estab- lishment to relatively new commercial firms with loads of cash to invest. This is just one example of a broader trend in which commercial and interna- tional firms are taking the lead in what once was the technological province of the Department of Defense (DOD). As the world becomes increasingly globalized, such trends are likely to produce even greater disruptive effects. Indeed, globalization is an inevitable force of change, erasing boundary lines not just between countries but between industries as well. It sug- gests a borderless world in which China could make iPhones or the leading U.S. auto export could be a BMW made in South Carolina. Such trends will present economic and technological risks to state By the Honorable William J. Lynn III and non-state actors alike. Cyber crime and attacks, and ADM James Stavridis, USN (Ret.) proliferating weapons of mass destruction, black market arms, sophisticated smuggling methods and a range of other capabilities provide unparalleled power and influence to illegitimate regimes, crime syndicates and super-empowered individuals. This ever-growing range of threats, further expanded by traditional state-based threats, constitutes a signifi- cant challenge to the United States and its allies. Globalization also blurs boundaries between defense and commercial industries, vastly diluting the sources of technological innovation and placing them well beyond the control of any individual govern- ment or entity. For the United States, the question hanging in the balance is whether or not the domestic defense industry can pull out of the cul-de-sac it now finds itself in – one in which it is chasing a declining share of a market with fewer funds allocated for the research and development of tomorrow’s technolo- gies. Unfortunately, there is little reason for optimism. Independent research and development (IRAD) | 5 Creative Disruption JUNE 2014 Technology, Strategy and the Future of the Global Defense Industry spending by the top U.S. defense companies dropped environments. The short-term financial focus on by one-third as a percentage of sales from 1999 to keeping stock prices high through share repurchases 2012.1 Today, there are no defense companies among and increasing dividends has thus far deferred the Top 20 industrial research and development more substantial integration of and investments in spenders worldwide.2 In fact, the IRAD budgets of the next-generation technologies. The Pentagon and top five U.S. defense contractors combined still would the defense industry must take a far more active not put defense on the Top 20 list. role in shaping their own intertwined futures. To harness change, the U.S. defense establishment must No one doubts that globalization, declining post-war increase spending on research and development and defense budgets and the increased pace of technological leverage the world’s best technology, especially from change are combining to reshape the defense industry. commercial firms and from nations that train and For generations, the Pentagon has been a technology fight alongside our own armed forces. exporter to the commercial sector of transformational capabilities such as the Global Positioning System To address these issues, the Center for a New (GPS) and the Internet. Today, DOD is increasingly American Security established the Task Force on becoming an importer of the technological advances Technology, Strategy and the Global Defense Industry taking place all around the world, from information and asked us to act as co-chairs. We were pleased to technology and 3-D manufacturing to autonomous serve given the critical need to consider these three vehicles and synthetic biology. Information technology subjects together rather than as separate disciplines. alone has had a profound impact on national security, In a hat tip to the economist Joseph Schumpeter, we enabling soldiers to use smartphones to obtain real- adapted the concept of creative destruction and called time surveillance from drones and to coordinate with the project Creative Disruption. fellow troops via text messaging. We assembled an impressive cast of experts from a Such swift and dynamic change will become increas- range of backgrounds to participate on the task force. ingly disruptive if not properly managed. A central Their names can be found in the acknowledgements question of this project is thus whether the Pentagon section of this report. Based on a series of fascinating and the U.S. defense industry are adapting fast meetings and innovative research methods, the CNAS enough to the pace of technological change or just team, led by Ben FitzGerald and Kelley Sayler, drew hunkering down with short-term policies to maintain out a number of important insights into the critical an archaic status quo. While previous adjustments in trends and predictable disruptions impacting tech- the defense industry have been successfully managed nology, strategy, and business, and formulated clear with direct input and guidance from the government, recommendations for both government and industry. many of the resulting mechanisms – from acquisition to regulatory policy – are now standing in the way of We endorse these findings, recommend this report industry’s ability to adapt. and ask that those with a stake in maintaining com- petitive advantage for the U.S. and its allies continue The defense industry is moving too slowly to adjust to think and act creatively to improve our future to current trends in the technology and security strategic circumstance. 1. Zachary Fryer-Biggs and Marcus Weisberger, “U.S. Giants Skimp on Research, Development,” Defense News, August 19, 2013, http://www.defensenews.com/apps/ pbcs.dll/article?AID=2013308190005. 2. Strategy&, “The Global Innovation 1000: Top 20 R&D Spenders 2005-2013,” Strategyand.com, http://www.strategyand.pwc.com/global/home/what-we-think/ global-innovation-1000/top-20-rd-spenders-2013,