Pentagon puts Trump’s cost cutting promises to work

Pentagon puts Trump’s cost cutting promises to work
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President Trump’s vow to save billions on military purchases is taking hold at the Pentagon, spurring officials to pursue new cost-saving measures in their dealings with defense companies.

One such measure, announced just last week, is a “deep dive” into the F-35 costs at Lockheed Martin and the “20-25 major subsystems that are underneath it,” according to the Defense Department’s pricing director, Shay Assad.

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“I believe President Trump was right on the money when he initially said, look, this Joint Strike Fighter [program] is just too expensive, we’ve got to get the cost down,” said Assad, a Pentagon official involved in negotiations on nearly every major defense system contract.

“So our focus is on how we can reduce the cost of the Joint Strike Fighter. And it is not the simple concept of, ‘Well, we’ll just increase rate and that reduces price.’ That’s not what this is about. This is actually reducing the cost of building the product.”

The most recent Pentagon purchase of the F-35, called Lot 10, included 90 aircraft for $8.5 billion. The purchase brought down the price from the last batch of planes by $728 million and dropped the cost of the F-35A variant below $100 million for the first time.

Trump, who in December tweeted that the F-35 was too expensive, took credit for driving down the price. Analysts and Pentagon insiders argued it would have come down year over year regardless of his involvement.

Assad isn’t disputing that the price of each plane is improving with each contract, but he says the question is whether the cost could go down even more. To get an answer, he’s working with the F-35 program manager, Lt. Gen. Chris Bogdan, on a six-month look at costs across the supply chain — and for longer if needed. 

“We know what we’re paying, but the real question is, what does it cost? What should it cost?” he told attendees last week at a defense conference sponsored by McAleese and Associates and Credit Suisse. “That’s something that you will see focus on here over the next few months.”

Bogdan, who also spoke at the conference, said his office now wants an $80 million A-model fighter jet by 2020, whereas Lockheed has repeatedly stated it was working toward an $85 million model by 2019.

Lockheed will be hard-pressed to raise the issue publicly on the difference, as resisting could mean losing out on valuable contracts. The Pentagon is in the midst of a review comparing the F-35C against the Boeing-made F/A-18E/F Super Hornet.

“There are things that industry could be doing today to drive costs out of this airplane that they ought to be doing themselves, and if they don’t, then the government is going to help them do it. Like de-layering the supply chain, for one,” Bogdan reportedly said.

Assad also brushed off Lockheed’s “Blueprint for Affordability” — an initiative to lower F-35 costs that was touted by company CEO Marillyn Hewson only a day before the conference — as “modestly effective.” He said he wants to see “different ways and different approaches than Blueprint for Affordability that you can use to get costs reduction.”

The Pentagon is “not where we need to be, and we expect to be more efficient, more effective” going forward, Assad told reporters. “We’re looking very closely. There’s a lot of room for improvement in my opinion, both at Lockheed Martin itself and a lot of room for improvement within their supply chain.”

The firm replied to Assad with this statement: “Lockheed Martin with its industry partners remain committed to aggressively reducing the price of the F-35. To that end, it is our view the Blueprint for Affordability initiative has been highly successful in reducing the price of the jet.”

Assad’s scrutiny has irked those in industry before. Some say Assad — a former Raytheon executive who spent 22 years in the defense industry — has needlessly hounded firms for the past six years, demanding they justify down to the smallest detail what they charge for weapons and services.

But with the White House now more engaged in the F-35 and the larger pricing battle, many in the defense industry are wondering how far the Pentagon’s cost-cutting measures will go.

One defense industry consultant called Trump’s F-35 tweets “a major shock to the system” of the prime defense contractors. Trump’s attacks, when combined with the Pentagon’s long-standing push for cost savings, creates “a threat.”

“This Pentagon and White House pressure is palpable in the supply-chain; the public nature creates grave concern about how the markets will react,” the consultant said. “[The Defense Department] needs to think through the reaction to this approach looking to sustain an industrial base, not squeeze every penny in the short term.”

One lobbyist said many in the defense industry are not surprised by Assad’s latest move as they have dealt with his tactics before, but they are now more aware of the Pentagon’s power with Trump behind it. 

“They’re annoyed now because they have to go run the numbers and do all this additional work to please the buyer,” the lobbyist said of defense companies. “But they’re paying attention to it. It could be a problem.”

Lawmakers are also taking notice of the Pentagon’s new savings push.

Rep. Marc Veasey (D-Texas), whose district includes the Fort Worth factory where F-35s are assembled, said it is of “paramount importance that the Pentagon assess potential cost-saving measures on major, multi-year programs such as the F-35” and that pricing changes within the supply chain be closely monitored.

Veasey added, however, “the hunt for cost-saving measures should not compromise the safety of the hardworking men and women who manufacture the aircraft. These measures should not undermine the infrastructural integrity of the fighter jet and the technology that enables it to be the superior defense stealth fighter that it is.”

Assad says Trump’s cost-cutting focus and all the project reviews are helping to level the playing field between the major defense contractors and those that hold the purse strings.

“Leverage is not something that we do very well at the department,” he said at the conference. “That’s something that I think he brings to the table: an awareness of the leverage that we actually do have. So I, for one, am excited about the opportunities that are coming forward.

“I’m looking forward to the next four years and what that’s going to bring.”