Many U.S. companies trying to open businesses in China have learned the hard way what it is like to deal with state-sponsored capitalism where the rules constantly change and the only real goal of the Chinese is to gain access to technology, capital and markets. Since Deng Xiaoping opened up his country to the world some 30 years ago, U.S. companies have been trying to establish themselves in a marketplace of more than a billion people. Some have done rather well. But others have told tales of woe about how they thought they had a deal with their Chinese partners only to find that joint ventures were stolen out from under them, their partners learned the business then opened up a competing enterprise down the road or the rules were changed by local government officials with personal or financial ties to their Chinese competitors. Often the Chinese competitor produces an inferior product or one that includes toxic substances, but these matters little so long as they can take business away from foreigners.
One can perhaps understand why Chinese companies behave the way they do. Their owners and managers have only emerged recently from decades of centralized planning and dictatorial rule. There are few rules, weak commercial and property laws, an unsupervised bureaucracy and little judicial recourse. Chinese accounting is so bad that it is difficult to know the true costs of doing business, whether you are running a foreign-owned firm or a native one.
What is more difficult to explain is why some elements of the public defense industrial base, specifically the Air Force’s three Air Logistics Centers (ALCs) seem comfortable with Chinese-like business practices? I am specifically referencing the practice of trying to subvert working relationships with private companies, some of which are decades old, in order to take the work inside the public ALC. The common term for this is insourcing.
There are too many examples of this practice for it to be simple accident. One is the military jet engine work being done at the Oklahoma ALC. Pratt & Whitney (P&W) formed a strong working relationship with the ALC, bringing in machinery, processes and trainers to enable the local work force to do maintenance and overhaul. Now it seems that the ALC is trying to increase its agreed on work share at the expense of the private company. What makes this all the more problematic is that the ALC wants to seize control of activities such as supply chain management, despite the fact that P&W has decades long experience in this area and has the advantage in several cases of also doing the maintenance and overhaul of the commercial variants of the same engines. The ALC does not seem to care if it is as cost efficient as P&W or that it is offering the Air Force a worse deal so long as it can gain work share at the expense of the private sector.
Most recently, there are reports that the Ogden ALC wants to take over management of the longstanding privately-run (Northrop Grumman at present) effort to manage modernization of the ICBM force. Of course, the ALC has no track record of successfully modernizing any portion of an ICBM. Nor does it have demonstrated expertise managing a very tenuous yet sophisticated supply chain. Then there is the problem that taking this work inside the ALC is likely to cost the Air Force more at a time when its budget is being cut. Most questionable of all is that the ALC wants to learn on the job while trying to maintain one of the three legs of the triad, the nation’s strategic deterrent. But what is more important, national security or more work for the ALC?
Sometimes the ALC’s have started down the road to insourcing private sector work but thought better of it. One example I can point out is the C-17 Performance-Based Logistics (PBL) arrangement between Warner Robbins and Boeing. Even though this contract had demonstrated savings to the Air Force of over $1 billion and resulted in a major improvement in aircraft availability to the warfighter, the ALC tried to take over control and management of the effort. However, when it became clear that maintaining the arrangement between Boeing and the ALC was the most cost-effective solution for the warfighter, the Air Force essentially went back to a variant of the original PBL contract. Perhaps the other ALC’s need to take note of the C-17 example.
Were we dealing with fly-by-night companies, there might be a rationale for how the ALC’s sometimes behave. But I am talking about Pratt &Whitney, Northrop Grumman and Boeing. These are world class companies with decades of experience in both commercial and military work, great supply chain management skills and unique engineering talent. The ALC’s need to stop treating the private sector companies as enemies.
The ALCs serve an important role. In collaboration with the private sector they perform well, both sides benefit and the Air Force overall is stronger for the partnership. But when the ALC’s “go Chinese” to take work away from private companies that are doing the job right and provide cost-effective results in order to increase their own work, it is time to call such practices what they are: predatory.
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