Joint Strike Fighter Acquisition: Observations on the Supplier Base
Released: 2004-06-02T00:00:00

Letter

Background

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.

Buy American Act and Specialty Metals Requirements Apply but Will Have Little Effect on JSF Subcontracting Decisions

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.

JSF Program Office Maintains Subcontract Information on Specific Areas of Interest

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.

Conclusions

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.

Agency Comments and Our Evaluation

We provided DOD a draft of this report for review. DOD provided only technical comments, which we incorporated as appropriate.

Scope and Methodology

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.

Appendix I: Joint Strike Fighter Partner Financial Contributions and Estimated Aircraft Purchases

Partner level

Appendix II: Joint Strike Fighter System Development and Demonstration Subcontract Awards