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Affordability is R&D focus for arms industry: executives

By Andrea Shalal-Esa

NATIONAL HARBOR, Maryland (Reuters) - The single biggest driver for research and development in the U.S. arms industry is not a hot area like unmanned weapons, cyberspace, or surveillance, but the need to make systems affordable, executives and defense officials say.

Top U.S. defense officials are pressing industry to chip in more of its own funds for new projects and to make weapons more quickly and at lower cost.

These officials say they will also try to safeguard some government funding of new leap-ahead technologies as U.S. military spending declines in coming years.

General Mark Welsh, the top uniformed officer in the Air Force, told industry executives at the Air Force conference this week that mounting budget pressures meant they had to "break the price curve" that has sent the cost of weapons systems skyrocketing over the past decades.

"We can't afford it. We've got to come up with a different approach," Welsh said.

Lockheed Martin Corp , Boeing Co and other arms makers are paying close attention as they scramble for a piece of the few new acquisition programs on the Pentagon's horizon at a time when military budgets are facing nearly $1 trillion in cuts over the next decade.

Across the industry, executives are working to introduce new production techniques such as 3D printing, accelerate software development, switch to lighter materials that reduce fuel use, and leverage computer systems to streamline maintenance.

Companies are also funding their own research efforts.

Textron Inc this week unveiled a small composite military jet called the Scorpion that it says would cost under $20 million and could be used for National Guard and Air Force reserve operations, light attack missions, border patrol, maritime surveillance, or emergency relief.

Edward Hackett, head of Scorpion project that developed the plane, said Textron invested a "sizeable" sum to respond to the Pentagon's call to industry to develop more affordable and exportable weapons systems.

He said the company saw a potential market of 1,200 to 1,500 aircraft worldwide from countries like the Philippines and Libya that could not afford larger fighter jets.

But Welsh told reporters on Wednesday that the Air Force was fighting to hold onto the resources it needed to fulfill its core missions, which left few if any resources for "peripheral" missions such as building up the capacity of partner countries.

He said the Air Force was focused on maintaining its three top priority programs, the Lockheed F-35 fighter jet, Boeing's KC-46 refueling planes, and a new long-range bomber, despite across-the-board budget cuts required under sequestration.

"It's a zero-sum under sequestration and the sum is decreasing," Welsh said. If extra funds became available, Welsh said his next two priorities would be a new training aircraft and a replacement for the Northrop JSTARS surveillance plane.

Executives say they understand the budget situation, but warn that there is a limit to how much they can invest before shareholders demand a return of some kind.

A growing chorus of executives is sounding alarms about the shrinking level of government investment in new weapons technologies, which has slipped to just a quarter of a percent of gross domestic product, down from 1 percent in the 1960s.

"These ever thinner R&D budgets are insidious for many reasons," Wes Bush, chief executive of Northrop Grumman Corp told the conference on Monday, He warned that cuts in research funding could undermine the technological superiority of the U.S. military in the longer run, as well as the health of the companies that develop and build weapons.

It could also hamper efforts by his company and others to attract young talent to replace the huge number of technical professionals -- about half the industry's total workforce -- who are eligible for retirement, Bush warned.

Daryl Davis, president of the Phantom Works advanced research and prototyping arm of Boeing Co's defense business, told Reuters that Boeing was committed to investing its own funds for research and development, at least for now.

"We in industry can only do this for so long. We cannot do this in perpetuity without a return," Davis said in an interview at the conference. "I understand the great road map, but when are the dollars going to follow the road map?"

Davis said Boeing's research work was focused on developing more affordable weapons systems and adopting quicker commercial-style development practices for software and hardware.

Such thinking, he said, helped Boeing develop a new type of electric propulsion satellite, which is lighter, cheaper to launch and already having commercial success. The new satellites also offers the military more options for launching sensors into space at lower cost, Davis said.

"You don't create markets unless you have a differentiated product at a price point that people are willing to pay," he said. "An awful lot ow hat we're worrying about is affordability."

(Reporting by Andrea Shalal-Esa; Editing by Andrew Hay and Leslie Gevirtz)

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