{"id":36291,"date":"2017-12-03T00:54:56","date_gmt":"2017-12-03T00:54:56","guid":{"rendered":"https:\/\/one.sightlinemg.com\/defensenews\/uncategorized\/2017\/12\/03\/the-next-sputnik-us-stands-to-lose-technological-edge-to-china\/"},"modified":"2026-08-07T22:54:42","modified_gmt":"2026-08-07T22:54:42","slug":"the-next-sputnik-us-stands-to-lose-technological-edge-to-china","status":"publish","type":"post","link":"https:\/\/one.sightlinemg.com\/defensenews\/digital-show-dailies\/reagan-defense-forum\/2017\/12\/03\/the-next-sputnik-us-stands-to-lose-technological-edge-to-china\/","title":{"rendered":"The next Sputnik: Here\u2019s why US stands to lose technological edge to China"},"content":{"rendered":"
<\/atype-video-jwplayer>
On a panel at the 2017 Reagan National Defense Forum, U.S. Navy Secretary Richard Spencer says the United States is at a “Sputnik” moment when it comes to overmatch against potential adversaries.<\/figcaption><\/figure>\n\n\n

SIMI VALLEY, Calif. \u2014 As defense companies struggle to balance the interests of the military customers with those of shareholders, it seems the Pentagon needs to rethink how it buys or else risk sacrificing its technological edge.<\/p>\n\n\n\n

The Pentagon can\u2019t shut its eyes to the fact that a healthy bottom line for defense companies is in the best interest of the military and essential to ensure future capabilities, said Navy Secretary Richard Spencer, speaking on a panel at the Reagan National Defense Forum Saturday.<\/p>\n\n\n\n

\u201cI am an unapologetic capitalist and free marketeer,\u201d said Spencer, who worked on Wall Street for 16 years. \u201cOne thing we need to be responsible for is the health of the industrial base. It\u2019s a dance that has to be done. You\u2019re out there with a fiduciary responsibility to buy the best gear in the most efficient, best way you can. Now you add in, \u2018I have to help an industry in a certain area,\u2019 or \u2018I have to make the capital investments myself\u2019 \u2014 it flies in the face of full and open competition. But we have to live with that to get gear.\u201d<\/p>\n\n\n\n

L3 CEO Mike Strianese pointed to his own company\u2019s tactics when defense budgets were flat or declining during the last decade: funnel hundreds of thousands of dollars to share repurchases to ensure a particular return for investors.<\/p>\n\n\n\n

\u201c[That investment] wasn\u2019t in tomorrow\u2019s technology,\u201d because there was no confidence or assurance from DoD that such an investment would result in business opportunities, Strianese said. \u201cSimply, that was the only place to go for a number of years when the budget was contracting and shrinking, if you wanted to sustain your company and operate in this competitive market.\u201d<\/p>\n\n\n

<\/atype-video-jwplayer>
Michael Strianese, the outgoing CEO of L3 Technologies, discusses with Defense News the effects of sequestration.<\/figcaption><\/figure>\n\n\n

Thankfully, as defense budgets have stabilized, so have earnings for the top companies. J.P. Morgan\u2019s executive director for Aerospace and Defense, Michael Leskinen, estimated that the sector is valued at the top 5 percentile \u2014 a solid place to be, even if expansion will likely be modest. L3 has shifted its corporate investment policy from predominantly share repurchasing to acquisition and research and development. <\/p>\n\n\n\n

Leskinen would like to see players that invest in internal R&D, or IRAD, get disproportionate amount of top line growth \u2014 meaning they get some means of an advantage from customers in competitions. But that is an example of discretion that DoD can\u2019t easily take. While companies in Russia and China can often move faster infusing funds into companies, partly because they\u2019re state owned or operated, the Pentagon can\u2019t easily reward private sector investments without a specific contract or opportunity driving that investment.<\/p>\n\n\n\n

Procurement restrictions also impede a company\u2019s ability to replicate commercial best practices. Leskinen pointed to Boeing\u2019s Partnering for Success model of negotiating with suppliers on key commercial programs \u2014 the 737 and 777 to name a couple \u2014 with the understanding that a better price could provide the supplier future opportunities. Such a model could trim costs for the P-8, a modified version of a 737, but Spencer confirmed it falls outside procurement rules on validated prices. <\/p>\n\n\n\n

\u201cWhy can\u2019t we take the mindset that we\u2019re buying readiness? I don\u2019t want to own parts in the bin. I want to buy readiness,\u201d he said. \u201cHow the supply chain gets it there and does it, that\u2019s the value they provide me.\u201d<\/p>\n\n\n\n

The biggest threat to U.S. technological dominance, according to DIUx Managing Director Raj Shah, \u201cis candidly ourselves.\u201d<\/p>\n\n\n\n

\u201cWe\u2019re fortunate we have a senior leadership team focused on modernization; the operators on the ground \u2014 they\u2019re the most innovation people in the world. But what we do have is an incentives problem,\u201d Shah said. \u201cWe have built a set of structures and rules that does not encourage speed. You have processes where you don\u2019t get fired for going slow but you might get fired for making a small mistake.\u201d<\/p>\n\n\n\n

Furthermore, if the Pentagon along with Wall Street continue to look past the smaller startup companies developing future capabilities, unable to rationalize investment without a specific contract attached, the U.S. will fall further behind. If you look at all venture deals in the U.S. in 2015, 12 percent had an investor from China, Shah said. That\u2019s up from 6 percent in 2010. In robotics specifically, 17 percent of funding is from China.<\/p>\n\n\n\n

\u201cYou can make determinations of why,\u201d Shah said. \u201cBut if we think things are going to be military relevant in the future, getting a seat at the table early, is a big deal. …The challenge for us \u2014 we look at our economic arm and national security arm quite separately. Our adversaries don\u2019t.\u201d<\/p>\n\n\n\n

Spencer made an analogy to Sputnik when describing the risk of falling behind in technology, saying U.S. overmatch is not as great as it used to be.<\/p>\n\n\n\n

\u201cWe used to own this space,\u201d he said. \u201cAnd now, all of a sudden, we\u2019re hearing the pitter patter of feet coming behind us.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

As defense companies struggle to balance the interests of the military customers with those of shareholders, the Pentagon needs to rethink how it buys or else risk sacrificing its technological 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