Joint Strike Fighter Acquisition: Observations on the Supplier Base
Published: 2004-05-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As the Department of Defense's (DOD) most expensive aircraft program, and its largest international program, the Joint Strike Fighter (JSF) has the potential to significantly affect the worldwide defense industrial base. As currently planned, it will cost an estimated $245 billion for DOD to develop and procure about 2,400 JSF aircraft and related support equipment by 2027. In addition, the program expects international sales of 2,000 to 3,500 aircraft. If the JSF comes to dominate the market for tactical aircraft as DOD expects, companies that are not part of the program could see their tactical aircraft business decline. Although full rate production of the JSF is not projected to start until 2013, contracts awarded at this point in the program will provide the basis for future awards. GAO was asked to determine the limits on and extent of foreign involvement in the JSF supplier base. To do this, GAO (1) determined how the Buy American Act and the Preference for Domestic Specialty Metals clause apply to the JSF development phase and the extent of foreign subcontracting on the program and (2) identified the data available to the JSF Program Office to manage its supplier base, including information on suppliers of critical technologies. DOD provided technical comments on a draft of this report, which GAO incorporated as appropriate.
section_title: What GAO Found
paragraphs: The Buy American Act and Preference for Domestic Specialty Metals clause implementing Berry Amendment provisions apply to the government's purchase of manufactured end products for the JSF program. Currently, only one of the three JSF prime contractors is under contract to deliver manufactured end products to the government in this phase of the program. The Buy American Act will apply to manufactured end products delivered to DOD during subsequent phases, but it will have little impact on the selection of suppliers because of DOD's use of the law's public interest exception. DOD, using this exception, has determined that it would be inconsistent with the public interest to apply domestic preference restrictions to countries that have signed reciprocal procurement agreements with the department. All of the JSF partners have signed such agreements. DOD must also apply the Preference for Domestic Specialty Metals clause to articles delivered under JSF contracts. All three prime contractors have indicated that they will meet these Specialty Metals requirements. While the JSF Program Office maintains more information on subcontractors than required by acquisition regulations, this information does not provide the program with a complete picture of the supplier base. The program office collects data on subcontract awards for international suppliers and U.S. small businesses. In addition, it maintains lists of the companies responsible for developing key or critical technologies. However, the lists do not provide visibility into the lower-tier subcontracts that have been issued for developing or supplying these technologies.

section_title: Letter
paragraphs: As the Department of Defense’s (DOD) most expensive aircraft program,  and its largest international program, the Joint Strike Fighter (JSF) has the  potential to significantly affect the worldwide defense industrial base. As  currently planned, it will cost an estimated $245 billion for DOD to develop  and procure about 2,400 JSF aircraft and related support equipment by  2027. In addition, the program expects international sales of 2,000 to  3,500 aircraft. If the JSF comes to dominate the market for tactical aircraft  as DOD expects, companies that are not part of the program could see  their tactical aircraft business decline. Although full-rate production of the  JSF is not projected to start until 2013, contracts awarded at this point in  the program will provide the basis for future awards, if companies  continue to meet cost and schedule goals.
The JSF program is viewed by many within DOD as a model for  cooperative development and production between DOD and U.S. allies.  The eight foreign countries participating in the program are contributing  over $4.5 billion in the development phase. These countries expect to  realize a significant return on their investment in the form of JSF contract  awards to their defense industries. To meet these expectations, the JSF  program office has encouraged the three JSF prime contractors— Lockheed Martin, Pratt & Whitney, and General Electric—and their  suppliers to provide opportunities for companies from partner countries to  bid on contracts. In our July 2003 report on the JSF international program,  we recommended that the program office collect and monitor information  on the prime contractors’ selection and management of suppliers to  identify and address any potential conflicts between partner expectations  and program goals.
In July 2003 you requested that we review the extent of foreign supplier  involvement in the JSF program and its effect on the U.S. defense  industrial base. To do this, we (1) determined how the Buy American Act  and the Preference for Domestic Specialty Metals clause implementing  Berry Amendment provisions apply to the development phase of the JSF  program and the extent of foreign subcontracting on the program; and  (2) identified the data available to the JSF Program Office to manage its  supplier base, including information on the suppliers of critical  technologies. On February 12, 2004, we briefed you and your staff on our  work. This report summarizes that briefing and provides updated data on  JSF subcontract awards. We performed our review from August 2003 to  March 2004 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: The JSF program is a joint program between the Air Force, Navy, and  Marine Corps for developing and producing next-generation fighter  aircraft to replace aging inventories. The program is currently in year 3 of  an estimated 11-year development phase. The current estimated cost for  this phase is about $40.5 billion. In October 2001 Lockheed Martin was  awarded the air system development contract now valued at over  $19 billion. Lockheed Martin subsequently awarded multi-billion-dollar  subcontracts to its development teammates—Northrop Grumman and  BAE Systems—for work on the center and aft fuselage, respectively.  Lockheed Martin has also subcontracted for the development of major  subsystems of the aircraft, such as the landing gear system. This is a  departure from past Lockheed Martin aircraft programs, where the  company subcontracted for components (tires, brakes, etc.) and  integrated them into major assemblies and subsystems (the landing  gear system).
In addition to the Lockheed Martin contract, DOD has prime contracts  with both Pratt & Whitney and General Electric to develop two  interchangeable aircraft engines. Pratt & Whitney’s development contract  is valued at over $4.8 billion. Rolls Royce plc (located in the United  Kingdom) and Hamilton Sundstrand are major subcontractors to Pratt &  Whitney for this effort. General Electric is currently in an early phase of  development and has a contract valued at $453 million. Rolls Royce  Corporation (located in Indianapolis, Ind.) is a teammate and 40 percent  partner for the General Electric engine program. The General  Electric/Rolls Royce team is expected to receive a follow-on development  contract in fiscal year 2005 worth an estimated $2.3 billion.
All the prime contracts include award fee structures that permit the  JSF Program Office to establish criteria applicable to specific evaluation  periods. If, during its regular monitoring of contract execution,  the program office identifies the need for more emphasis in a certain  area—such as providing opportunities for international suppliers or  reducing aircraft weight—it can establish related criteria against which the  contractor will be evaluated to determine the extent of its award fee.
section_title: Buy American Act and Specialty Metals Requirements Apply but Will Have Little Effect on JSF Subcontracting Decisions
paragraphs: The Buy American Act and Preference for Domestic Specialty Metals  clause implementing Berry Amendment provisions apply to the  government’s purchase of manufactured end products for the JSF  program. Currently, only one JSF prime contractor—Pratt & Whitney— will deliver manufactured end products to the government in this phase of  the program. Under its current contract, Pratt & Whitney is to deliver  20 flight test engines, 10 sets of common engine hardware, and certain  other equipment. The other engine prime contractor, General Electric,  will not deliver manufactured end products under its current contract.  However, its anticipated follow-on development contract will include the  delivery of test engines that will be subject to Buy American Act and  Specialty Metals requirements. Finally, Lockheed Martin will not deliver  any manufactured end products under its development contract. The  company is required to deliver plans, studies, designs, and data. Lockheed  Martin will produce 22 test articles (14 flight test aircraft and 8 ground test  articles) during this phase of the program, but these are not among the  items to be delivered.
Although the Buy American Act will apply to manufactured end products  delivered to DOD during the JSF program, its restrictions will have little  impact on the selection of suppliers because of DOD’s use of the law’s  public interest exception. This exception allows the head of an agency to  determine that applying the domestic preference restrictions would be  inconsistent with the public interest. DOD has determined that countries  that sign reciprocal procurement agreements with the department to  promote defense cooperation and open up defense markets qualify for this  exception. The eight JSF partners have all signed these agreements and  are considered “qualifying countries.” Under defense acquisition  regulations implementing the Buy American Act, over 50 percent of the  cost of all the components in an end product must be mined, produced, or  manufactured in the United States or “qualifying countries” for a product  to qualify as domestic. Our analysis of JSF development subcontracts  awarded by prime contractors and their teammates showed that nearly  100 percent of contract dollars awarded by the end of 2003 went to  companies in the United States or qualifying countries. (See appendix II  for Joint Strike Fighter System Development and Demonstration  Subcontract Awards to the United States, Qualifying Countries, and  Nonqualifying Countries).
The Preference for Domestic Specialty Metals clause applies to articles  delivered by Lockheed Martin, Pratt & Whitney, and General Electric  under JSF contracts. Generally, this clause requires U.S. or qualifying  country sources for any specialty metals, such as titanium, that are  incorporated into articles delivered under the contract. This restriction  must also be included in any subcontract awarded for the program. To  meet Specialty Metals requirements, Lockheed Martin and Pratt & Whitney  have awarded subcontracts to domestic suppliers for titanium; and  Lockheed Martin has also extended to its subcontractors the right to buy  titanium from its domestic supplier at the price negotiated for Lockheed  Martin. General Electric does not exclusively use domestic titanium in its  defense products. However, in 1996, the company received a class  deviation from the clause that allows it to use both domestic and foreign  titanium in its defense products, as long as it buys sufficient domestic  quantities to meet DOD contract requirements. For instance, if 25 percent  of the General Electric’s business in a given year comes from DOD  contracts, then at least 25 percent of its titanium purchases must be  procured from domestic sources.
Similar to the Buy American Act, the Specialty Metals clause contains a  provision related to “qualifying country” suppliers. It provides that the  clause does not apply to specialty metals melted in a qualifying country or  incorporated in products or components manufactured in a qualifying  country. As a result, a qualifying country subcontractor would have  greater latitude under the clause than a U.S. subcontractor. Specifically,  the specialty metals incorporated into an article manufactured by a  qualifying country may be from any source, while an article  manufactured by a U.S. subcontractor must incorporate specialty metals  from a domestic or qualifying country source. (See fig. 1.)
The data we collected on JSF subcontracts show that by  December 31, 2003, the prime contractors and their teammates had  awarded over $14 billion in subcontracts for the development phase  of the program. These subcontracts were for everything from the  development of subsystems—such as radar, landing gear, and  communications systems—to engine hardware, engineering services,  machine tooling, and raw materials. The recipients of these contracts  included suppliers in 16 foreign countries and the United States;  73.9 percent of the subcontracts by dollar value went to U.S. companies  and 24.2 percent went to companies in the United Kingdom (the largest  foreign financial contributor to the JSF program). (See appendix I for Joint  Strike Fighter Partner Financial Contributions and Estimated Aircraft  Purchases and appendix II for Joint Strike Fighter System Development  and Demonstration Subcontract Awards). Finally, 2,597 of 4,488  subcontracts or purchase orders we obtained information on went to U.S.  small businesses. Although these businesses received only 2.1 percent of  the total dollar value of the subcontracts awarded, DOD and contractor  officials have indicated that all companies in the development phase are in  good position to receive production contracts, provided that cost and  schedule goals are met.
The gathering of these data, which most of the contractors have made  available to the JSF Program Office and DCMA, has increased the breadth  of knowledge available to DOD and the program office on the JSF supplier  base. Neither DOD nor the JSF program office previously collected this  information because, according to program officials, this information is  not necessary in order to manage the program. At least one major  subcontractor, on its own initiative, is now separately tracking JSF  subcontracts on a monthly basis.
section_title: JSF Program Office Maintains Subcontract Information on Specific Areas of Interest
paragraphs: While the JSF Program Office maintains more information on  subcontractors than required by acquisition regulations, this information  does not provide the program with a complete picture of the supplier  base. The JSF Program Office collects and maintains data on subcontract  awards for specific areas of interest—international suppliers and  U.S. small businesses. The program office has used the award fee process  to incentivize the prime contractors to report on both small business  awards through the third tier and subcontract opportunities and awards to  international suppliers. In addition, the program office has some visibility  over certain subcontracts through mechanisms such as monthly supplier  teleconferences, integrated product teams, informal notifications of  subcontract awards, and DCMA reports on the performance of major  suppliers. Finally, the JSF Program Office maintains limited information  on the companies responsible for supplying critical technologies.
The JSF Program Office’s information on the suppliers of key or  critical technologies is based on lists that the prime contractors compile  as part of the program protection strategy. These program protection  requirements—not the supplier base—are the focus of DOD’s and the  JSF Program Office’s approach toward critical technologies. DOD  acquisition regulations require program managers to maintain lists of a  program’s key technologies or capabilities to prevent the unauthorized  disclosure or inadvertent transfer of leading-edge technologies and  sensitive data or systems. The lists include the names of key technologies  and capabilities, the reason the technology is sensitive and requires  protection, and the location where the technology resides. The lists do not  provide visibility into the lower-tier subcontracts that have been issued for  developing or supplying these technologies. Given the limited supplier  information these lists provide, the JSF Program Office is aware of  two instances where a foreign company is the developer or supplier of  an unclassified critical technology for the program. In both cases, a  U.S. company is listed as a codeveloper of the technology.
section_title: Conclusions
paragraphs: The JSF program has the potential to significantly impact the U.S. defense  industrial base. Suppliers chosen during the JSF development phase will  likely remain on the program through production, if they meet cost and  schedule targets, and will reap the benefits of contracts potentially worth  over $100 billion. Therefore, contracts awarded now will likely affect the  future shape of the defense industrial base.
The JSF supplier base information currently maintained by the JSF  Program Office is focused on specific areas of interest and does not  provide a broad view of the industrial base serving the program. In our  July 2003 report, we recommended that the JSF Program Office assume a  more active role in collecting information on and monitoring the prime  contractors’ selection of suppliers to address potential conflicts between  the international program and other program goals. DOD concurred with  our recommendation, but did not specify how it plans to collect and  monitor this information. Collecting this information will be an important  first step for providing DOD with the knowledge base it needs to assess  the impact of the program on the industrial base.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided DOD a draft of this report for review. DOD provided only  technical comments, which we incorporated as appropriate.
section_title: Scope and Methodology
paragraphs: To obtain information on the Buy American Act and the Preference for  Domestic Specialty Metals clause implementing Berry Amendment  provisions, we reviewed applicable laws and regulations. We interviewed  DOD officials in the JSF Program Office, the Office of the Deputy Under  Secretary of Defense (Industrial Policy), the Office of the Director of  Defense Procurement and Acquisition Policy, and the Defense Contract  Management Agency to obtain information on the applicability of the Buy  American Act and other domestic source restrictions, critical foreign  technologies, and DOD oversight of subcontracts. We reviewed prime  contracts for the JSF program and met with JSF prime contractors,  including Lockheed Martin and the engine contractors, Pratt & Whitney  and General Electric, to discuss the applicability of the Buy American Act  and other domestic source restrictions and to collect data on first-tier  subcontract awards for the System Development and Demonstration  phase. Furthermore, we collected data on subcontract awards for the JSF  System Development and Demonstration phase from companies that were  identified as partners or teammates by Lockheed Martin, Pratt & Whitney,  and General Electric. These companies included Northrop Grumman,  BAE Systems, Rolls Royce plc, Hamilton Sundstrand, and Rolls Royce  Corporation. We did not independently verify subcontract data but,  instead, relied on DCMA’s reviews of contractors’ reporting systems to  assure data accuracy and completeness. We performed our review from  August 2003 to March 2004 in accordance with generally accepted  government auditing standards.
As arranged with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after the  date of this report. We will then send copies of this report to interested  congressional committees; the Secretary of Defense; the Secretaries of the  Navy and the Air Force; the Commandant of the Marine Corps; and the  Director, Office of Management and Budget. We will also make copies  available to others upon request. In addition, this report will be available  at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-4841; or Thomas J. Denomme, Assistant Director,  at 202-512-4287. Major contributors to this report were Robert L. Ackley,  Shelby S. Oakley, Sylvia Schatz, and Ronald E. Schwenn.
section_title: Appendix I: Joint Strike Fighter Partner Financial Contributions and Estimated Aircraft Purchases
subsections: section_title: Partner level
section_title: Appendix II: Joint Strike Fighter System Development and Demonstration Subcontract Awards