[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]






 
                         [H.A.S.C. No. 114-122]

                   U.S. INDUSTRY PERSPECTIVES ON THE

                   DEPARTMENT OF DEFENSE'S POLICIES,

                    ROLES, AND RESPONSIBILITIES FOR

                         FOREIGN MILITARY SALES

                               __________

                                HEARING

                               BEFORE THE

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                      COMMITTEE ON ARMED SERVICES

                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                              HEARING HELD

                              MAY 11, 2016

                                     
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              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                  VICKY HARTZLER, Missouri, Chairwoman

JEFF MILLER, Florida                 JACKIE SPEIER, California
K. MICHAEL CONAWAY, Texas            JIM COOPER, Tennessee
JOSEPH J. HECK, Nevada               HENRY C. ``HANK'' JOHNSON, Jr., 
AUSTIN SCOTT, Georgia                    Georgia
MARTHA McSALLY, Arizona              GWEN GRAHAM, Florida
                 Heath Bope, Professional Staff Member
                 Katy Quinn, Professional Staff Member
                           Mike Gancio, Clerk
                           
                           
                            C O N T E N T S

                              ----------                              
                                                                   Page

              STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Hartzler, Hon. Vicky, a Representative from Missouri, Chairwoman, 
  Subcommittee on Oversight and Investigations...................     1
Speier, Hon. Jackie, a Representative from California, Ranking 
  Member, Subcommittee on Oversight and Investigations...........     2

                               WITNESSES

Davis, Tom, Senior Fellow, National Defense Industrial 
  Association....................................................     3
Nathan, Remy, Vice President, International Affairs, Aerospace 
  Industries Association.........................................     6

                                APPENDIX

Prepared Statements:

    Davis, Tom...................................................    33
    Hartzler, Hon. Vicky.........................................    29
    Nathan, Remy.................................................    45
    Speier, Hon. Jackie..........................................    31

Documents Submitted for the Record:

    [There were no Documents submitted.]

Witness Responses to Questions Asked During the Hearing:

    Ms. Graham...................................................    55
    Ms. Speier...................................................    55

Questions Submitted by Members Post Hearing:

    [There were no Questions submitted post hearing.]
    
  U.S. INDUSTRY PERSPECTIVES ON THE DEPARTMENT OF DEFENSE'S POLICIES, 
         ROLES, AND RESPONSIBILITIES FOR FOREIGN MILITARY SALES

                              ----------                              

                  House of Representatives,
                       Committee on Armed Services,
              Subcommittee on Oversight and Investigations,
                           Washington, DC, Wednesday, May 11, 2016.
    The subcommittee met, pursuant to call, at 10:02 a.m., in 
room 2212, Rayburn House Office Building, Hon. Vicky Hartzler 
(chairwoman of the subcommittee) presiding.

OPENING STATEMENT OF HON. VICKY HARTZLER, A REPRESENTATIVE FROM 
      MISSOURI, CHAIRWOMAN, SUBCOMMITTEE ON OVERSIGHT AND 
                         INVESTIGATIONS

    Mrs. Hartzler. Welcome. I'm delighted to convene this 
hearing. This is the second of three events for the 
subcommittee's oversight of the Department of Defense's role in 
our Nation's Foreign Military Sales program or FMS program.
    But before I continue, I would like to note that the 
gentleman from Texas, Mr. O'Rourke, may be joining us today. 
And so, therefore, I ask unanimous consent that Mr. O'Rourke, 
and any other committee members not assigned to this 
subcommittee, be permitted to participate in this hearing with 
the understanding that all subcommittee members will be 
recognized for questions prior to those not sitting on the 
subcommittee.
    Without objection, so ordered.
    The goal of our FMS oversight series is to take an in-depth 
look at the Department of Defense's role in the FMS process. We 
seek to determine whether DOD's involvement is efficient, 
effective, and timely in aiding the State Department's 
administration of the larger FMS program.
    While FMS is only one way in which the Departments of 
Defense and State foster security cooperation, it is probably 
the most visible. It is vital to provide the opportunity for 
our allies to acquire military equipment and services to 
bolster their security needs. It's also important to note the 
benefits the United States realizes from our allies' collective 
safety, especially as threats to democracy and freedom expand. 
But some believe the Department of Defense's FMS process is too 
cumbersome and bureaucratic. Others offer that the process is 
designed to be deliberately slow and methodical in order to 
achieve the correct outcome in determining whether or not the 
U.S. supplies military capabilities that appropriately further 
U.S. national security interests.
    Recently, the subcommittee was briefed about the 
intricacies of the FMS program and processes by representatives 
of the Departments of Defense, Department of State, and the 
Congressional Research Service. It seems the FMS is likely one 
of our government's most complex interagency programs, making 
our examination here even more significant.
    Over recent years the defense budget has declined, our 
military capacity has been reduced, and a corresponding 
contraction of the defense industrial base has occurred. At the 
same time, the world has become more dangerous and complex, 
military technologies and capabilities more prolific and 
globalized, operational tempo has remained high, and our 
military's readiness has reached critically low levels. In 
short, we are asking our troops to do much more with much less.
    So, while we strive to rebuild the capacity and capability 
of our military, many of our foreign partners and allies look 
to do the same. To that effect, they seek to procure military 
equipment and services from the U.S. But if this takes too long 
or if bureaucratic red tape proves too debilitating, our 
foreign partners and allies may seek help elsewhere. This 
potentially weakens our security, reduces military-to-military 
cooperation, and represents missed opportunities for our 
defense industrial base to keep workers with valuable and 
needed skills sufficiently employed.
    Industry and its representatives are critical stakeholders 
in a robust and thriving FMS program. As such, we are here 
today seeking valuable input from defense industrial base 
associations as to how they see Congress working with the 
Department of Defense to improve the execution of foreign 
military sales.
    But before I introduce the witnesses, I turn to the 
Oversight and Investigations Subcommittee ranking member for 
any opening remarks she wishes to make.
    [The prepared statement of Mrs. Hartzler can be found in 
the Appendix on page 29.]

    STATEMENT OF HON. JACKIE SPEIER, A REPRESENTATIVE FROM 
   CALIFORNIA, RANKING MEMBER, SUBCOMMITTEE ON OVERSIGHT AND 
                         INVESTIGATIONS

    Ms. Speier. Madam Chair, thank you.
    And thank you to our witnesses for joining us this morning.
    The purpose, as our chair has pointed out, of today's 
hearing is to provide members of the subcommittee an industry 
perspective on the U.S. foreign military sales policy and 
practices. I understand we will receive the governmental 
perspective on this topic at a future hearing.
    The goal is to ensure that this committee and its members 
are fully informed as we oversee the role of the Department of 
Defense in the FMS process and determine whether the FMS 
process is suitably efficient, effective, and timely. We've 
heard many complaints about the slowness of the FMS program, 
yet we must not forget that it is an instrument of our U.S. 
foreign policy. That means we must ensure the weapons systems 
and services we sell to foreign countries are used 
appropriately, responsibly, and are in our best interest. 
Although that may delay the process, it's a policy we can't 
lose sight of. At the same time, it's critical that we identify 
areas where we can make improvements to the process.
    We have representatives from two different associations 
with us today, and I'm interested in hearing from them what 
improvements can be made in the process and whether there are 
ways to reduce uncertainty and delays as well.
    According to the Defense News article from last week, 
through the first 6 months of fiscal year 2016, foreign 
military sales are on track to meet or surpass last year's 
total of $43 billion. The Defense Security Cooperation Agency 
[DSCA] has announced about $29 billion in FMS sales through the 
end of April. We are also aware of reports of pending U.S. 
aircraft orders that could increase that number if they are 
approved.
    Foreign military sales are clearly an important part of the 
health of the defense manufacturing base, and the growing rate 
of sales underscores why it is important that we look for ways 
to improve the process.
    Further, as we rely more on coalitions and our allies and 
partners around the world to address our global security 
challenges, we should be thinking strategically about FMS. 
Given the current global instability, it seems clear that FMS 
will remain strong based on demand from the Gulf, Europe, and 
the Asia-Pacific. As our allies and partners work with us to 
promote global stability, we should ensure our FMS process 
enables them to face our shared security challenges in those 
regions and encourages them to select the United States as 
their partner of choice to meet their defense capability needs. 
As demand for FMS grows, it's imperative that we are ensuring 
that the process is timely, while consistent with our national 
security and foreign policy interests.
    At this hearing, focus on just one aspect of the FMS 
process, I look forward to examining this issue further at 
future hearings.
    And I yield back.
    [The prepared statement of Ms. Speier can be found in the 
Appendix on page 31.]
    Mrs. Hartzler. Thank you, Ms. Speier. I'm pleased to 
recognize our witnesses today and I want to thank them for 
taking the time to be with us. We have Mr. Tom Davis, senior 
fellow at the National Defense Industrial Association; and Mr. 
Remy Nathan, vice president for international affairs from the 
Aerospace Industries Association.
    So thank you again for being with us today, and now we'll 
begin with your opening statements.
    Mr. Davis.

    STATEMENT OF TOM DAVIS, SENIOR FELLOW, NATIONAL DEFENSE 
                     INDUSTRIAL ASSOCIATION

    Mr. Davis. Thank you, Chairwoman Hartzler, Ranking Member 
Speier, and members of the subcommittee. I appreciate the 
opportunity to testify this morning.
    I appear before you today in my capacity as a senior fellow 
in residence at the National Defense Industrial Association, 
the Nation's oldest and largest association promoting national 
security and industrial readiness, comprising over 1,600 member 
companies and 90,000 individual members.
    Allow me to express my appreciation to the committee for 
reviewing this difficult issue of foreign military sales that 
is a complex thicket of regulations and procedures developed 
over time to keep the Nation safe. I have provided the 
committee a written statement, but allow me the liberty of 
providing oral observations, having a slightly different 
approach from my more formal written input, and highlighting a 
couple of key points.
    I've had the opportunity in my professional life to examine 
this issue from many perspectives as an assistant professor of 
economics at the Military Academy, as an artillery commander in 
Desert Storm, as part of a 39-nation coalition, and as a 
corporate vice president of one of the Nation's major defense 
providers. In these roles, I've experienced firsthand the 
importance to the Nation of having and sustaining a vibrant, 
competitive, and technologically innovative defense industrial 
base. Having such an industrial base is not, as Defense 
Secretary Ashton Carter frequently says, a God-given right. It 
requires thoughtful planning, policy, and resourcing, which 
brings us to today's discussion on foreign military sales, an 
area earning considerable foreign exchange, enhancing military 
operations, and supporting our defense industrial base.
    For these three reasons, among many others, the Nation 
needs a process for military foreign sales and direct 
commercial sales which protects American interests and our 
technological edge, while allowing a timely market response.
    While today's hearing focuses on the specifics of the 
Department of Defense's involvement in foreign military sales, 
it is important to recognize that the FMS process itself is 
merely one component within a much broader governance regime 
regulating arms transfers. Over the past two decades, the FMS 
process has come under fire from numerous critics, including 
those concerned about protecting vital technological advantages 
enjoyed by U.S. forces and those interested in the health of 
the defense industrial base during this period of budgetary 
constraint.
    Industry understands its role in our national security 
strategy, but it also understands that FMS delays can 
contribute to slowing our efforts. The core problem with FMS 
are not actually problems with the process itself, but rather, 
with the burdens resident within the broader governance regime 
overseeing arms transfers and technology transfers.
    With that in mind, my statement this morning will attempt 
to frame FMS and the broader governance of arms transfers 
within the context of the 21st century international security 
environment. This committee has recognized this environment and 
the challenges it poses in its approach to acquisition reform, 
and FMS should be no different. The comments of both the 
chairwoman and the ranking member today indicate an awareness 
of the committee of all the challenges that exist.
    My written testimony to the committee focused on the 
following observations: first, foreign military sales are an 
integral component of our national defense strategy; second, 
criticism of the FMS process has been often too narrowly 
focused; third, the governance regime for foreign sales needs 
to adapt to the changes of the 21st century international 
security environment; and finally, foreign sales play a key 
role in sustaining a robust defense industrial base.
    But for my immediate purposes, let me focus solely on the 
last item, as that is the core mission of the National Defense 
Industrial Association. At NDIA, we believe the end goal of any 
reform is the enhancement of U.S. security cooperation 
objectives, not merely the generation of sales for industry. We 
believe this requires the system be made more transparent, less 
complex in an era of widely available component technologies, 
strategically rather than transactionally focused, and perhaps 
more centered on end users than components, and either reduced 
in procedural scale or expanded in administrative staffing. 
Allow me to elaborate a bit on why this is important to the 
Nation's contemporary defense industrial base.
    In brief, today's defense industry is a fraction of the 
size of the military-industrial complex referenced by President 
Eisenhower 55 years ago. It is now a handful of large providers 
and systems integrators supported by a large number of 
component providers, with many components having commercial 
origins. This means the list of dual-use items is growing, 
while at the same time globalization is ensuring that new items 
and services that were once solely the purview of the U.S. 
market are now readily available from numerous forces and 
foreign sources overseas.
    The Wall Street Journal recently had an article which 
referenced this phenomenon as ``the Hyundaization of the global 
arms industry.'' The post-Cold War contraction of our defense 
industry has left us with a base where the remaining five 
largest firms have combined annual revenues that are less than 
half that of Walmart. As their annual revenues have gone flat 
due to reduced domestic spending, international sales have 
become more relatively important.
    The quality of the military products we produce makes them 
very attractive to foreign customers, but the laborious process 
for securing the approval of a sale often reduces their appeal 
and general competitiveness. One of industry's major concerns 
is that uncertainty and lengthy delays in the FMS process 
forces potential international customers to turn to other 
nations, often including potential adversaries such as China 
and Russia, even though U.S. vendors offer better value. This 
undermines our international standing while allowing near-peer 
competitors who do not necessarily share our foreign policy 
objectives to forge greater ties and expand their influence 
with other nations.
    Industry's experience is that the current FMS governance 
regime is designed to operate transactionally rather than 
strategically. In other words, it focuses on individual pieces 
rather than the big picture. DOD and the other agencies with a 
role in international arms sales, the State Department, the 
Commerce Department, and even the Congress, need to take a more 
strategic approach toward supporting FMS as well as approving 
direct commercial sales.
    Given the sheer volume of licensing requests, largely 
driven by a shift towards component and commercially based 
items, either rules and regulations need to be reduced and 
streamlined or staffing at the review agencies increased. If we 
retain a 3-year process for completing an FMS case, officials 
on an 18-month tour of duty cannot efficiently administer it.
    In addition, international sales have their own version of 
Moore's Law. Conditions change rapidly in this market and most 
international customers want a capability addressing what we 
would call a near-term problem. If we cannot provide it, 
someone else certainly will. Foreign customers are increasingly 
reluctant to wait two or more years to complete a transaction.
    Again, it is important to remember that DOD's role in FMS 
is contingent on a determination that the sale is in the best 
interest of the U.S. national security and that FMS is a tool 
to enhance security cooperation. Both the government and 
industry share this fundamental perspective. Nonetheless, 
foreign sales should not be an afterthought. Such sales not 
only increase our strategic reach and operational capability, 
they also support a defense industrial base that many feel has 
contracted more than is prudent.
    To accomplish this, the government's regime encompassing 
FMS should be strategically aligned to meet national security 
objectives and to operate in the 21st century global security 
environment that has evolved.
    Thank you again for the opportunity for testifying this 
morning, and I await your questions.
    [The prepared statement of Mr. Davis can be found in the 
Appendix on page 33.]
    Mrs. Hartzler. Thank you, Mr. Davis. Mr. Nathan.

    STATEMENT OF REMY NATHAN, VICE PRESIDENT, INTERNATIONAL 
           AFFAIRS, AEROSPACE INDUSTRIES ASSOCIATION

    Mr. Nathan. Chairwoman Hartzler, Ranking Member Speier, and 
members of the subcommittee, thank you for the opportunity 
today.
    My name is Remy Nathan and I'm the vice president of 
international affairs at the Aerospace Industries Association. 
As the voice of America's leading aerospace and defense 
manufacturers and suppliers, we look forward to presenting our 
views on how the Defense Department can best work with industry 
to advance U.S. national security, foreign policy, and economic 
interests through the foreign military sales process.
    Indeed, a single sale of a U.S. defense platform can 
reenergize a strategic relationship with an ally, build a 
foundation for an emerging regional partnership, or provide a 
critical deterrent to military conflict. These transactions 
also create high-skill, high-wage U.S. jobs.
    In addition, security cooperation provides significant 
savings to the taxpayer through research and development cost-
sharing with partners and the lowering of unit production and 
support costs. U.S. industry recognizes the necessary checks 
and balances in the security cooperation enterprise to ensure 
defense exports are consistent with U.S. national security and 
foreign policy interests.
    Our industry is committed to making sure that America's 
warfighters always have technological superiority against any 
potential adversary. However, the dynamics of the current 
global security environment are placing significantly greater 
demands on the enterprise that need to be addressed. For 
instance, many of our international partners and allies do not 
possess a deliberate budget cycle, a professional acquisition 
core, a system lifecycle manager, or even an effective strategy 
development process for their security needs. They operate with 
much shorter time horizons and are looking for responsiveness 
from their preferred security partners of choice.
    Also, in the intensely competitive international market, 
our foreign competitors are heavily subsidized and supported by 
their governments. Our competitors also make frequent claims 
that they are easier to work with and quicker to deliver.
    Let's be clear. Industry is not calling for reforms that 
are simply going to change ``no'' to ``yes'' during reviews of 
potential defense exports. If the answer is ``no,'' we're okay 
with that. However, let it be a quick and early ``no,'' with 
industry-government consultation to develop alternative 
proposals that meet our partners' needs and advance U.S. 
national security objectives. Let's also have a sense of 
urgency for the ``yes'' calls so a potential partner turns to 
the U.S. first and not to countries like Russia and China, 
which are increasingly using defense exports to advance their 
own geopolitical objectives.
    If we do this, industry will be better positioned to make 
timely and correct investment decisions and business 
development choices to best support our warfighters and our 
allies and partners.
    Industry is deeply appreciative of the efforts of Vice 
Admiral Joe Rixey, director of DSCA, and his interagency and 
military partners in the security cooperation enterprise. They 
manage to make this significant and increasingly burdensome 
workload work under a great deal of challenge. We also welcome 
the opportunities we have been provided to engage with the 
security cooperation enterprise on reform proposals.
    I'll now focus on three areas of suggested reform and 
improvement in the foreign military sales system. First, we 
support our foreign customers' decision if they select firm 
fixed price contracts as opposed to fixed price incentive fee 
contracts for their FMS transactions. The latter require many 
foreign customers to commit an average of 5 to 10 percent above 
the price that they would pay for firm fixed price contracts in 
excess funds, even when those funds are rarely used. 
Additionally, fixed price incentive fee contracts must remain 
open as long as 5 to 10 years after final delivery is complete, 
further prolonging the period for committing excess funds.
    While we appreciate the committee's report language asking 
the GAO [Government Accountability Office] to look into this 
issue, we believe stronger action is needed now on this aspect 
of the FMS contracting process.
    Secondly, industry appreciates the committee's support for 
language requiring contracting officers to definitize FMS 
contracts within 180 days of a qualified proposal submission. A 
number of these undefinitized contract actions are now over 
1,000 days old, which is unacceptable.
    Finally, industry continues to engage with DOD's technology 
security and foreign disclosure process to encourage 
consultations, reforms, and resources to make that system more 
predictable, efficient, and transparent. Action in this area, 
coupled with continued export control reform initiatives aimed 
at technologies remaining on the U.S. Munitions List, will be 
critical in ensuring industry can best support security 
cooperation and build partner capacity most effectively.
    In conclusion, it is clear that America needs our allies 
and partners to step up and work with us to promote and protect 
global peace and stability. We therefore need security 
cooperation enterprise reform to ensure that America remains 
their first and best security partner of choice.
    That concludes my testimony and I look forward to your 
questions.
    [The prepared statement of Mr. Nathan can be found in the 
Appendix on page 45.]
    Mrs. Hartzler. Thank you, gentlemen. We really appreciate 
you being here and sharing your expertise on this really 
important matter.
    As far as Mr. Davis, I'll start with you for questions. You 
mentioned in your written testimony that the Department of 
Defense puts a higher priority in staffing weapons contracts 
for the U.S. military services than it does towards staffing 
foreign customer contracts, which ultimately leads to a delay 
in the licensing review and moving forward with a foreign 
customer contract. Can you provide us examples of which program 
contracting actions for which this was the case?
    Mr. Davis. Madam Chairwoman, actually, I probably cannot 
provide you any specific examples because these examples come 
from our companies, and many of them have proprietary 
restrictions on them. What I would point out is that the 
contracting officers themselves generally don't have any 
dedicated group dedicated and focused on FMS contracts.
    So when it comes to making a choice between working on a 
contract that has to do with the domestic program, that has an 
immediate degree of pressure on it because it involves a 
capability we're trying to get out to our Armed Forces in the 
field, inevitably, the focus will go there, which kind of goes 
back to the point that I made in my oral testimony that FMS and 
getting those contracts through can become something of an 
afterthought to the contracting community.
    I think Mr. Nathan's comment about some of these contracts, 
you know, lingering, getting pushed down to the bottom of the 
pile and going on for 1,000 days, which is, you know, better 
known as 3 years, 3-plus years, is really an unacceptable 
thing, when you're talking about a situation where we 
absolutely need to move at a quicker pace.
    I had a friend in the Air Force, senior officer in the Air 
Force years ago who was talking about our FMS process as well 
as our planning and programming process, and generally he made 
the comment to me that, over the course of time, we've 
developed processes to ensure that nothing bad happens quickly. 
Unfortunately, it also ensures nothing good happens quickly.
    So we have to take a look at our procedures and try to 
raise the visibility, the importance of the FMS sale to 
something which is on the par of the effort that we'll put into 
a domestic program.
    Mrs. Hartzler. Do you think separating the two out would be 
helpful and having one that deals just strictly with foreign 
military sales and the other dealing with our own?
    Mr. Davis. Well, my intuition is, is that if you were to 
separate the two out and give them their own force and their 
own sense of urgency and maybe even their own chain of command, 
so to speak, that you probably don't have to worry about having 
the competitive nature going back and forth between, do I work 
on this one today, do I work on that one. I'll tell you that is 
something that probably ought to be seriously looked into and 
considered as it might undo the logjam just a little bit.
    But the major problem in that, as I mentioned in my oral 
statement, is that, you know, we've got a situation right now 
where the demand on the system, because of the component-based 
situation that we have at the moment, things that get into the 
system with all the licensing requirements, tend to be 
components that are upgrades that provide this and provide 
that, those take a lot of individual review, which takes more 
staffing, which takes more time. So we need to start to look at 
the bigger picture and come up with a process that I think will 
get this thing through from a more general perspective as 
opposed to spending as much time as I believe we tend to just 
on evaluating a component to see if it has some sort of dual-
use technology--or dual-use capability.
    Mrs. Hartzler. Thank you.
    Mr. Nathan, you mentioned in your written testimony that 
while foreign customers prefer to enter into firm fixed price 
contracts with the Department of Defense for equipment because 
of less capital commitment up front, the Department of Defense 
has implemented a policy of requiring foreign customers to 
enter into fixed price incentive fee contracts instead. So for 
the record, could you explain to the subcommittee the 
differences between these two types of contracts and why you 
believe the Department of Defense has moved towards a 
contracting mechanism for which most foreign customers do not 
prefer?
    Mr. Nathan. So a firm fixed price contract has been the 
historical default since the inception of international sales, 
and it is the model that most other countries follow. A firm 
fixed price contract provides for a price that is not subject 
to any adjustment. A fixed price plus incentive fee contract 
includes potential increases or decreases in price, based on 
target sets such as cost containment.
    Since 2014, DOD has started to select this model. In their 
opinion, it is best for the foreign customer, arguing that it 
can provide the foreign customer with the best price for their 
systems. What DOD's reasoning does not fully consider is the 
extent to which foreign customers want to avoid paying that up 
to 10 percent additional in contingency fees that have to be 
held for up to 5 to 10 years longer in order to potentially 
realize some benefit through that contracting process.
    Further, a number of the traditionally firm fixed price 
contracts that our companies are operating under are for mature 
systems, which have very accurate cost estimates attached to 
them. So yet again, there is this extra fee structure that's in 
place that our foreign customers don't really understand what 
the benefit is for.
    And then finally, the reporting costs associated with the 
fixed price plus incentive fee contract that have to be passed 
back to the customer, and yet again, they see no benefit for 
it.
    Mrs. Hartzler. What do you think the implications would be 
if the country was given a choice; they could participate in 
either-or?
    Mr. Nathan. I believe that they would gravitate towards the 
firm fixed price contract because it's a model that they're 
very familiar with. It's a model that a number of our foreign 
competitors are offering. And in many ways, the fact that we 
are not being responsive to their needs can be considered a 
lack of good customer service, if you will.
    Mrs. Hartzler. Sure. Thank you very much.
    Ranking Member Speier.
    Ms. Speier. Thank you. Let me start by asking both of you. 
What would you say are the main reasons for slow approvals? If 
you could just be short in your answers, please.
    Mr. Davis. I would say, Congresswoman, the main reason for 
slow approval is, right now, largely the volume of what is 
being presented to the contract officers and to the approval 
authorities. As we move away to----
    Ms. Speier. Okay. Let's move on.
    Mr. Davis [continuing]. Instate, we get different things.
    Mr. Nathan. If I may add, it's actually the aggregation of 
the numerous approvals that have to come in that are also a 
challenge. So you could have a number of fast approvals coming 
through, but the sheer volume of yeses that have to be 
accumulated for a sale to occur can be a challenge.
    Ms. Speier. To what extent is the FMS driven by the 
courting of U.S. defense manufacturing companies to foreign 
nations?
    Mr. Nathan. Obviously, our companies are interested in 
trying to meet with, engage, be responsive to our customers' 
needs, as much as they possibly can. But we are always mindful 
of the fact that we must be consistent with U.S. national 
security and foreign policy objectives. So if anything, I think 
you see the trend lines in foreign military sales being a 
reflection of the threat environment that our foreign partners 
and allies are facing right now.
    Ms. Speier. Okay. Each of you referenced that there are 
examples of countries turning to other countries to purchase 
military equipment because our process is too slow. I don't 
know that I agree with you on that because I think they like 
the superior product that the U.S. companies manufacture.
    But having said that, give me specific examples of 
countries that have shifted from purchasing something from the 
U.S. and gone to another country. And, you know, there's like 
two other countries, really. Correct?
    Mr. Davis. Well, I'd say it's more than two other 
countries.
    Ms. Speier. Okay. Well, tell us, who are our, quote, 
``competitors'' in terms of selling to foreign countries?
    Mr. Davis. The main two competitors that we have, and 
various markets are different, but when it comes to aircraft, 
which I think is the one that gets most of the visibility these 
days, the competitors are going to be Europe. I think right now 
you're seeing an uncertain situation in the Persian Gulf area 
because of decisions--pending decisions on the sales for F-16s 
and F-18s going forward, when an obvious alternative, which is 
being pushed rather hard, would be Typhoons that are produced 
in Europe.
    The Soviets--I am sorry, I slip back into my Cold War. The 
Russians, have upgraded a lot of their ground equipment lately. 
If you take a look at some of the silhouettes that I grew up 
familiar with, T-62s and T-72s and T-80 tanks and so forth, 
they've got a whole new set of equipment out there that they're 
willing to provide very quickly.
    So I think you're absolutely right, Congresswoman. I mean, 
most people out there would prefer to get what is obviously 
recognized in most places as the superior U.S. product. But 
if--as we both mentioned, most countries out there want a 
product because they believe they have a reasonably near-term 
security issue that they want to solve.
    Ms. Speier. No, I understand that. Can you just give me 
examples of countries that have come to us and because of the 
slow process have then left, withdrawn their requests, and 
moved to another country and purchased through them?
    Mr. Nathan. So there are a few examples that have been in 
the press. Of great concern, of course, the Turks at one time 
were contemplating a Chinese missile defense system whereas 
normally they would be turning to a partner like the United 
States for that purpose.
    If I can offer two anecdotes that perhaps help illustrate 
the problems that Mr. Davis and I are trying to illustrate. 
Both come from the Dubai Airshow, which took place late last 
year. In one case, we heard from one of our member companies 
that one of our Middle Eastern partners told us that they face 
a choice. They can buy a U.S. system, but for the same price 
they can buy a comparable or, you know, a competitive Chinese 
system and get 10 of them. Now, they conceded that eight of 
those probably wouldn't work, but they'd still have two, and 
they'd get it faster from that partner, from the Chinese, than 
they would necessarily from the U.S.
    The other anecdote I'll share----
    Ms. Speier. Well, and what did they do in the end?
    Mr. Nathan. These are ongoing sales, sales campaigns that 
I'm talking about.
    Ms. Speier. Well, I guess I want to know whether or not 
they chose to go with the Chinese manufacturer versus the U.S. 
manufacturer.
    Mr. Nathan. In both of the cases I'm giving you, these are 
cases that our companies are still pursuing, trying to make 
sure that the U.S. choice is the correct choice.
    The other anecdote that I'll relay, actually, this one is a 
little bit more final. We were told by one of our member 
companies that they were told not to bid, not to provide a 
response for the RFP [request for proposal].
    Ms. Speier. And which company was this?
    Mr. Nathan. I'm not at liberty to say. These anecdotes were 
provided for illustrative purposes to us.
    Ms. Speier. Well, okay, then I got to tell you. I'm not 
interested in anecdotes that we can't even, you know, then go 
to the company and find out specifically what the issue is so--
--
    Mr. Nathan. If I could take that back then for the record 
and follow up with you.
    Ms. Speier. All right, that would be helpful.
    [The information referred to can be found in the Appendix 
on page 55.]
    Ms. Speier. Mr. Nathan, in your statement, you assert that 
the FMS provides savings to the U.S. taxpayer via sharing of 
research and development [R&D] costs. You know what, as I think 
about the money we spend on our military weapon systems, we pay 
for the R&D. And then after the weapon system is built and the 
company goes to sell it to third countries, I'm asking the 
question to myself and to you, when does the U.S. benefit from 
the R&D that we have actually put into these systems when the 
companies go and sell to foreign countries and reap all of the 
benefits? Where is our share, so to speak, our licensing fee 
for having done the R&D and paid for it?
    Mr. Nathan. So the benefits----
    Ms. Speier. Outside of the F-35 program.
    Mr. Nathan. Sure. The benefits I would point to, I'd point 
to two or three here. First of all, when our foreign partners 
are purchasing systems that are in U.S. inventory, in many 
cases, they are purchasing systems that we are upgrading 
relative to the items that are in U.S. inventory because the 
U.S. has moved on to other technologies, like the F-35. In 
those cases, you have an opportunity to use the revenue from 
those sales for those systems also to test out new 
technologies, new improvements to the system, that can be 
cycled back into the actual U.S. arsenal. In doing so, it's the 
foreign partner that is actually paying for those upgrades, in 
a sense, that the U.S. warfighter is going to benefit from.
    There's also just the point of revenue. You know, these 
foreign sales that are increasingly upwards of 25 to 30 percent 
of what our companies' revenue comes from, ultimately end up 
coming back into the company used for research and development 
purposes.
    And then finally, I think there's a sustainment point here. 
In order to keep production lines open, oftentimes in cases 
where the U.S. military is making buys, having a pause, making 
another buy, you need foreign military sales in order to help 
plug those gaps. Because alternatively, you have a shutdown of 
the entire supply chain process, which ends up hurting, of 
course, our industrial base.
    My final point I would say is, these benefits on an R&D 
perspective do not just accrue to the larger companies. Any 
number of small- and medium-sized companies in the supply chain 
have an ability and often do offer innovations that they 
ultimately get funded through the foreign military sale 
process, which they can then offer to the U.S. warfighter at a 
much cheaper cost.
    Mr. Davis. Can I add one thing to that, Congresswoman? 
We're actually at kind of an interesting point right now. In 
days gone by, there's always been a bit of reluctance in the 
Defense Department to get involved too heavily in international 
development programs because they are, by nature, very complex 
and try to satisfy different needs. Back in an earlier life, I 
was involved with MLRS, the Army's Multiple Launch Rocket 
System, which was an international program, and it took a long 
time to get all the things together that were going to satisfy 
all the customers.
    At the moment, though, we have a lot of international 
customers, partners, who are coming to us wanting to team up on 
research and development for things going forward. There was 
recently our president at NDIA, Craig McKinley, was at a 
conference over in Sweden, and the Swedes were quite open and 
quite energetic about teaming with us and providing some R&D 
assistance, some R&D funding, and some of their own R&D 
investments they'd made into a couple of programs, the T-X 
trainer and a few other things.
    So there's technology out there, and I think that many of 
the people, major countries overseas are seeing the possibility 
and the potential for synergy if they join in with us, which 
would save some of that. And then, of course, eventually if you 
can keep production lines going, make more of a product, then 
you get the drop in the unit cost, which of course benefits the 
taxpayers as well.
    Ms. Speier. Thank you. I just have one comment that I'd 
like to make. I also serve on the Intelligence Committee. And I 
think while this is a very valuable conversation that we're 
having--and, you know, streamlining a process and making sure 
that we act in a timely fashion has relevance--I think it's 
very important to appreciate the fact that countries that we 
believe are our friends, that we then sell equipment to, who 
subsequently--and are told that they're not supposed to share 
the technology with persons, other countries that we are not 
friends with, and then subsequently, that is violated, there 
isn't a whole lot we do about it.
    And I don't want to see our technology transfer to foreign 
countries in a manner that makes it easy for them to benefit 
from all of the money we spend on R&D, where they do nothing 
more than reverse engineer a product that we have given to a 
friend that is now in the hands of a foe. And we have plenty of 
examples of hacking into many of the defense subcontractors. 
And we scratch our heads when we're spending, you know, three 
times as much money on military defense as China is and, yet, 
they're keeping up with us in terms of equipment.
    So this is a very delicate situation. And we have got to be 
very prudent in the commitments we make. And I understand that 
the defense contractors are interested in selling this 
equipment to foreign countries, but we have our national 
security to put first and foremost in all of these decisions.
    With that, I yield back.
    Mrs. Hartzler. Thank you.
    Representative McSally.
    Ms. McSally. Thank you, Madam Chair, and thank you 
gentlemen.
    In my time in the military I was an operator, so thank 
goodness I didn't have any experience in the acquisition and 
FMS process. So, you know, I'm trying to make sure I fully 
understand the complexities of the whole system. But I will say 
that I do believe, as part of our soft power, part of our 
engagement, our security cooperation doesn't just include mil-
to-mil engagements and training some of our partner nations, 
but this is also an element of it. It should be part of a 
broader strategy.
    And we in Tucson, Arizona, we trained dozens of countries 
in the F-16, as an example, at our Air National Guard base 
there. And the benefits that we have in those relationships 
that we build, we've sold the F-16 to them and then we train 
them and then we build relationships. I mean, some of this 
stuff is very difficult to measure strategically the outcome, 
but I do believe that it all needs to be considered as part of 
our strategy of engagement and soft power and coordinating with 
our friends and ensuring that they have the ability, you know, 
as we build their capacity, so that they can deal with issues 
in their regions so that we don't have to deal with it. And so 
I believe that's just the philosophy that I come into looking 
at this issue.
    Last week I went to Afghanistan. On my way back, I had a 
stopover in New Delhi and visited with an official from the 
Indian Government there. And they highlighted the issue that 
they, right now, are in discussions of a potential direct 
commercial sales of either F-16s or F-18s. This is an open, you 
know, open source here so I can address it just from the--
what's in the media. But we're being potentially put against 
one of our European partners related to the negotiation.
    So I guess the first question would be, direct commercial 
sales versus foreign military sales. They definitely want the 
direct because they want it all produced in India. What's 
industry's perspective on either of those processes and which 
one is just preferred, even from an engagement point of view?
    Mr. Davis. I think, Congresswoman, this is a very 
unsatisfying answer, but one would have to say it very much 
depends upon several things, the principal one being the 
customer preference. In some cases, the customer definitely 
wants to have a direct commercial sale which avoids the FMS 
dimension. In other cases, they prefer it because there's a 
desire to have a closer relationship with agencies of the 
United States Government for other reasons.
    So it can really depend very much on the customer, on the 
product, on what their own estimation is of the timeframe that 
may or may not be involved, and going in one direction or 
another. So it's very hard to say how the customer feels about 
it. The provider will go whatever way the customer basically 
wants to go and whatever the preference of the U.S. Government 
may be.
    Going back to Congresswoman Speier's comments, I think 
industry, at least the people I have ever been familiar with in 
it, are very much of the view that, you know, we are part of 
the U.S. national security process and national security 
establishment. I think the former chairman of Lockheed Martin, 
Mr. Augustine, used to always refer to the defense industry as 
the sixth military service. Secretary Carter always says it has 
to be looked at and managed as part of the national force 
structure. And we basically see ourselves in that capacity. I 
can assure you of that.
    So industry will go whichever way it makes more sense and 
whichever way the customer prefers and the government prefers. 
In general, commercial----
    Ms. McSally. Great. I want to ask another quick question 
before I run out of time.
    So, you know, this process starts supposedly with a letter 
of request, right. But I guess going back to my comment of this 
should be part of our strategy, what's going on prior to the 
letter of request and what can we be doing better as far as 
building a whole-of-government strategy, the engagement with 
our partner nations, making suggestions to them of capabilities 
that we should be partnering on?
    I mean, there's got to be a whole lot of front end as 
opposed to sitting back waiting for a fax to come in with a 
letter of request. So what can we be doing better on that front 
end?
    Mr. Nathan. That is an excellent observation. I think 
within the government and certainly within industry, there's a 
recognition that we can and should be doing better in being 
more anticipatory to help shape what our allies and partners 
feel like they need to ensure that they are best in alignment 
with what we are comfortable with them having and what advances 
our security and foreign policy objectives. There's a lot of 
work that still needs to be done.
    In the absence of that activity, which has kind of been the 
historical problem, you do end up with a lot of churn because 
you have industry unable to understand where, in essence, the 
U.S. Government wants us to fish. If we have better alignment 
on those decisions, on those priorities--and I emphasize that 
word--it makes our companies better able to make the right 
business capture decisions, the right investment decisions to 
be responsive in the way that you're talking about.
    So it's certainly top of mind for we in industry. I believe 
it's top in mind in the government as well.
    Ms. McSally. Great. Thank you.
    I'm out of time. I appreciate it and yield back.
    Mrs. Hartzler. Thank you. Representative Graham.
    Ms. Graham. I am up next. No worries. Thank you so much, 
and thank you for coming. Thank you, Madam Chairwoman, I 
appreciate it. And thank you for being here today.
    This is a process that I'm just learning about. I can see 
the challenges that this presents and I'm concerned with what 
Congresswoman Speier said. So I want to--can you please just 
kind of--what are the comparisons between this process and the 
normal Department of Defense procurement process?
    Mr. Davis. I tell you, you just need to kind of look at 
this as a parallel, separate process. I mean, the Department of 
Defense has, of course, a well-established acquisition system, 
which itself takes a long time for a piece of equipment to get 
from conception all the way to in the field. Once that's 
happened, then you've got a parallel process over here that 
goes into the foreign military sales.
    One of the things that I think we're implying in our 
testimony is that when you get to the foreign military sales 
side, you bring in a whole set of other players that normally 
you do not have to deal with on the acquisition side itself, 
the State Department, the Commerce Department, the executive 
branch in a different side. So you've got an additional 
complexity that begins to set in involving issues of policy as 
well as issues of just operational capability.
    Mr. Nathan. So if I may add to that.
    Ms. Graham. Of course, of course.
    Mr. Nathan. Two other differences, I suppose. You know, you 
have the added complexity of trying to navigate what the 
foreign partner actually wants, what are their priorities, what 
is their timeframe. And you also have foreign competitors much 
more so in a way that you have in the normal domestic process.
    The other difference I'd point out to, and I think it's 
something that was highlighted earlier by Chairwoman Hartzler, 
we're slowly, slowly getting to a level of seriousness and 
focus on the security cooperation enterprise that historically 
has not really been there. We're no longer in a position 
anymore with the security environment that we have to take 
security cooperation for granted. It has to be more top of 
mind. And I think that's why this hearing is happening. I think 
that's why there's more effort to make sure that that system is 
more responsive in its parallel nature. So----
    Ms. Graham. And thank you for that.
    So in terms of the challenges that you see, are the delays 
at the same points and for the same reasons that you would see 
in the normal DOD process?
    Mr. Nathan. In some ways, yes. Certainly, on the 
acquisition side of things, you know, it's all flowing through 
that acquisition process. So all of the activities of this 
committee in considering acquisition reform have some relevance 
to the FMS process. But beyond that, because it's such a 
multifaceted process where you have really multiple gateways 
that have to turn to green in order for you to get to success, 
you can get gummed up pretty much anywhere. And then you have 
that aggregation of time that ends up being problematic.
    The good news is, the system has survived as long as it has 
because in crisis mode, it responds really well. For 
operational urgency, it operates really well. But we need to 
get to the point, which I believe Representative McSally was 
making, that we need to be more strategic, anticipatory; not 
just deal with the crisis when it happens, but rather plan for 
it and have the answers in place earlier.
    Mr. Davis. I guess I would add one thing to that is, as Mr. 
Nathan said, the process works well in times of crisis, but it 
works well because we basically waive a lot of the requirements 
that are embedded in it and that can make it go faster.
    I would--I think, just to generally answer your question, 
developing a piece of equipment through the acquisition process 
has its own risks with technology, maturity, and all of that. 
So you have that, but then on the other side, when it gets to 
foreign military sales, you come face-to-face with a lot of the 
issues that Congresswoman Speier brought up. Do you want to 
provide the piece of equipment to this particular person and do 
you believe it's going to be secure for some time?
    I was a little major sitting in the room when we had the 
discussion with a former Member of the House named Charles 
Wilson about Stingers going to Afghanistan years ago. And there 
was a much different view about whether or not that was a good 
thing when the system got developed and it was coming along 
nicely. And the whole issues that Congresswoman Speier brought 
up were just really out there and prominent. So you've got that 
complexity it sits in.
    Ms. Graham. I was with Congresswoman McSally. She actually 
was leading the CODEL [congressional delegation]. We recently 
just came back from Afghanistan. We still face a lot of 
challenges there, I think we can both agree.
    Totally unrelated topic. Switching gears for a second. 
Which foreign government do we sell the most to? Is that 
classified or is that--I don't know what's classified in this--
--
    Mr. Davis. Well, I haven't looked at the data lately, but 
my--in days gone by, it's basically been Saudi Arabia has been 
a major market. And as the defense companies look around for 
where potential international sales are, I mean, you have to 
look at places where, one, there's a strategic concern and a 
strategic or tactical threat; and secondly, where there are 
resources available to procure the equipment. And more or less, 
that takes you to the Middle Eastern region.
    Mr. Nathan. The answer also varies by system, and there's 
various historical trends. If we could take that for the 
record, we could come back with some more detailed responses 
for you.
    [The information referred to can be found in the Appendix 
on page 55.]
    Ms. Graham. That would be terrific. I'm actually meeting a 
general in my office 3 minutes ago. So I appreciate the chance 
to ask the question. Thank you all for being here.
    Thank you. I yield back my 4 seconds.
    Mrs. Hartzler. Thank you, Representative Graham.
    Representative O'Rourke.
    Mr. O'Rourke. Thank you, Madam Chair and Ranking Member, 
for allowing me to join you today.
    And I would like to thank the witnesses for their testimony 
and the answers to the questions so far.
    I want to make sure that I understand the answers that you 
gave to the ranking member's question about specific sales that 
have been lost. And you may have--you may have mentioned some, 
but you talked about potential lost sales. There were some 
anecdotes that you couldn't disclose the details of. Are there 
specific sales that you can point to that defense manufacturers 
from this country have lost----
    Mr. Nathan. Well, besides the one I mentioned earlier, you 
know, one of the bigger ones was the Indian Medium Multi-Role 
Combat Aircraft sale, and that went to the French.
    Mr. O'Rourke [continuing]. And lost specifically because of 
delays connected to this process? I guess to ask the full 
question.
    Mr. Nathan. So there's any number of reasons why a partner 
may choose someone else versus the United States. You know, I 
guess the point that we're both trying to emphasize here is 
that we're not guaranteed preeminence the way that we used to 
be for many of our allies and partners. And increasingly, that 
question of timeliness, responsiveness, you know, ability to 
predict when and where and how our customers are going to be 
able to get their technology, whether or not they can have the 
contract type that makes the most sense for them, these are 
things that are weighing heavily on their mind as their 
operational requirements are increasing to a level that is 
pretty much unheard of for them.
    So as I'd said earlier, they have the short time horizon. 
They need the response, they need the capability. We need to 
have a system that is capable of matching them and meeting them 
where they need to be at that point in time.
    Mr. O'Rourke. Yeah. And as my colleague said, this is a 
topic that is relatively new to me, so I have a lot more to 
learn. But what would help me if you're trying to create 
urgency around changes to the process are very specific 
instances and examples where this has hurt this country, the 
people that we represent, our national security or that of our 
allies. And so far, beyond potentially improving, you know, the 
efficiencies and effectiveness of the process, I don't clearly 
understand the cost of doing business the way that we're doing 
it currently.
    And then my only other question would be, again, as 
somebody who's new to this, I'd love to understand how your 
member companies are able to influence the process within DSCA, 
within State, within the embassies, those who vetted. Once the 
sale has been proposed, are your member companies out of the 
loop completely or are you still able to answer questions or 
intervene or influence the decision?
    Mr. Davis. That's a great question, Congressman, because it 
does bring up an issue that is kind of germane to this whole 
discussion. The companies do have the opportunity to go in and 
ask questions, participate, to provide information, to answer 
queries, and so forth. But it tends to be very much a push as 
opposed to a pull function.
    One of the problems that I think we have in this process 
and in the acquisition process at large right now is something 
of a lower tendency on the part of the government to want to 
solicit information and to protect information that it has. 
There has just been an, over the course of time for a lot of 
reasons, a distance that's sort of settled in between our 
government and the providers. I think that's something we 
really do need to get over.
    Secondly, a lot of the companies, during my time in the 
industry when I first started, a lot of companies had overseas 
offices that were out there talking to local governments, 
getting a sensing from local militaries, getting a sense from 
local defense ministries and so forth. Over the course of time, 
those have become fewer and fewer and fewer, which means that 
the companies are relying more on targeted efforts to put 
somebody out there and they're relying on information coming 
from the government.
    So this need for dialogue and cooperation going back and 
forth, I think, needs to be improved and it needs to be more 
casual, continuous, and comfortable than I think it is right 
now.
    Mr. O'Rourke. Go ahead.
    Mr. Nathan. If I may simply add.
    Mr. O'Rourke. Yeah.
    Mr. Nathan. Given the multiplicity of decision points that 
exist within the system, our companies do end up having a 
multiplicity of opportunities that they need to take advantage 
of to provide whatever information is necessary for that 
decision to take place, whether it's DOD, State Department, 
Commerce Department for advocacy, so on and so forth. As was 
discussed earlier, there's no one place that we go to try to 
make our case for, you know, why this sale makes sense. 
Ultimately, that decision is completely in the hands of the 
State Department. So----
    Mr. O'Rourke. But your member companies are able to provide 
information, influence the decision. Can you point to an 
instance, so that I understand this better, where through the 
vetting process, you know, State or the ambassador recommends 
no, or DSCA recommends no, and then a member company's been 
able to shed additional light or provide additional information 
that has helped to reverse a decision, or maybe gone to a 
Member of Congress, or a committee, or a committee staffer, to 
help influence that decision?
    Again, from the member company's perspective, it would be 
to add information, make sure the decisionmakers have all the 
information that they need. But, in other words, I want to 
understand how industry works with the decisionmakers.
    Mr. Davis. Let me just offer one. I'll be kind of general 
about it as opposed to being specific. But there have been 
several instances such as this one. There was a ground combat 
system that was being marketed to a Middle Eastern country. 
There was competitors available from Europe and other places. 
The system that the American provider had had many advantages 
over the one that was provided that they were not comfortable 
were being fully articulated, you know, by the government to 
the potential customer.
    So in that case, yes, they went in, made an explanation 
that this system here has enough commonality with a similar 
system that the customer already had, that there would be some 
synergies that would be allowed through the supply chain. So 
that was useful information, I think, eventually changed the 
focus that the country had from this country back to our 
domestic product.
    Mr. Nathan. If I could offer another quick example.
    Mr. O'Rourke. I've got about 7 seconds, so----
    Mr. Nathan. When it comes to tech transfer, the decision by 
this Congress to reverse its decision about placing commercial 
satellites on the U.S. Munitions List was very much a joint 
effort, industry, government, and Congress, to try to provide 
the information necessary to make that decision and say the 
risk management could be better done in other ways.
    Mr. O'Rourke. Thank you very much.
    Mr. Nathan. Thank you.
    Mr. O'Rourke. Thank you.
    Mrs. Hartzler. Sure. Thank you. Glad you could be with us 
today. I appreciate your questions and your input.
    Mr. Davis, your written testimony makes reference to a 
Department of Defense pilot program called the Defense 
Exportability Features Pilot Program, which has been applied to 
15 different Department of Defense programs. Can you explain, 
for the record, what this pilot program entails and what issues 
the program is trying to address and whether or not you believe 
the program has had a positive impact on FMS case processing?
    Mr. Davis. Well, the program was initiated through the NDAA 
[National Defense Authorization Act] back, I believe, in 2011. 
One of the things that I also do is I'm the industry chair 
providing just an industry perspective at DAU, and I know--the 
Defense Acquisition University--and they're looking very 
closely at ways to try to get this into their curriculum.
    One of the major things that this effort attempts to do is 
to try to think about the potential for exportability from the 
very beginning of the system. If we're going to provide it and 
we're going to export it to also meet the concerns that people 
would have about getting key technology out to other places, 
you know, how do we actually do that up front as opposed to 
later on go back and try to make some changes to the system so 
that we can take things out and put different things in.
    This has been expanded to 15 programs. Currently, it is a 
pilot program. I don't think we've got the jury fully in yet on 
exactly how beneficial it's been. But I think it's been a 
useful thing to get people thinking ahead that we need to take 
a look at our systems and how we're going to actually provide 
them so that where there is a necessity to have a slightly 
different capability for the foreign variant, we thought about 
that in advance.
    Mrs. Hartzler. Just sounds like commonsense to me, 
something that should be done anyway. But I'm glad we're 
looking at that.
    For both of you, you both mentioned in your written 
testimony that the Department of Defense needs to update its 
technology release and disclosure processes.
    And, Mr. Davis, you specifically described the process as 
``obtuse, stovepiped, and prone to delays.''
    And, Mr. Nathan, you state that industry is continuing to 
engage with DOD in making the technology security and foreign 
disclosure process quote, ``more predictable, efficient, and 
transparent,'' end quote.
    So can you describe for the subcommittee what problems 
industry sees with the technology disclosure process and what 
might be done to make the process more efficient and effective?
    Mr. Davis. This gets back to the very issue that we've been 
talking about up front, is there's many different agencies that 
one has to deal with as you go through this process. And the 
opinion of one of the stakeholders in this, one of the 
oversight agencies that this particular technology is okay to 
go, it's available widely, so there's no need to have 
restrictions on it, may not be the opinion of another agency 
over here.
    Mrs. Hartzler. Excuse me, if I may interrupt. Just for the 
record, I don't think it's been stated here yet today that 
there is the Department of State involved and intelligence 
communities involved, as well as Department of Defense. So are 
there any other major players that we need to make sure the 
public is aware of that's involved in this process?
    Mr. Davis. No, Madam Chairwoman, I think that pretty much 
covers the waterfront on all the various stakeholders. But as 
you might imagine, I mean, this is certainly no mystery, it 
happens here in the U.S. Congress. You know, different people 
have different perspectives on different things. And it's very 
difficult, as Mr. Nathan has stated, to try to make sure you're 
talking to the right stakeholder, the right review agency at 
the right moment.
    So this is an effort to try to get a view more quickly 
established and more widely accepted so that we know exactly 
what we're doing and we don't think we've got something that's 
moving forward when it turns out that there's going to be a 
need for delay which is recommended by another agency.
    Mr. Nathan. So in talking about predictability, efficiency, 
and transparency, just to define terms a little bit, 
predictability, we're looking for having repeatable outcomes 
when we're selling like technologies to like countries and the 
like out of this review process. And also the duration of time 
it takes for those decisions to be made.
    When it comes to efficiency, by no means are we trying to 
shortcut this process. Rather, we're calling for a sense of 
urgency to run these processes as much as possible concurrently 
as opposed to consecutively, and ensure that there is good 
cross talk, which doesn't always occur among them, to be sure 
that the answers that are put forward are reconciled among the 
review processes, as opposed to having five different opinions 
of what a rock should look like that the company should then go 
back and bring another rock to take another shot at going 
through the review process.
    And then transparency, I think this is an important issue, 
and it relates, I think, to what Congressman O'Rourke was 
talking about as well. To the extent that there's greater 
consultation--and we're heading in that direction, more can be 
done. If industry knows the parameters, the right and the left 
of what this review process, other review processes are 
comfortable with, we will constrain and measure our bids and 
our proposals to that.
    In the absence of that information, that's when we often 
struggle. Because we go in and we're told, well, you know, 
bring me another rock. And we have to try to figure out what 
makes the most sense pass muster. If it's more collaborative, 
we get to that answer that meets the U.S. national security and 
foreign policy objectives, gives the company an ability to sell 
overseas, and meets the partner's objective. We have alignment 
in a way that, you know, I think it takes a little bit longer 
now than it needs to.
    Mrs. Hartzler. Very good. I want to go to your written 
testimony again. Just a few other things here.
    So, Mr. Davis, you talk about that, ``The governance regime 
for foreign sales needs to adapt to the challenges of the 21st 
century international security environment.'' Can you expound 
on that a little bit?
    Mr. Davis. Yes, Madam Chairwoman. What that really is 
referring to, what I'm referring to in my comment right there 
is that we're in an environment right now that is really much 
different than what we've seen before. I mean, I watch it every 
night when I see my wife sit down and order clothes for our 
granddaughter on Amazon and it gets delivered to the house and, 
you know, we never even see it. I like that because I don't 
like going to the mall.
    But we're in an environment right now that I have mentioned 
has its own--in this particular domain of foreign military 
sales, we're in an environment that has got its own version of 
Moore's Law here. Things are speeding up. People are--
information moves more quickly. Needs and strategic 
circumstances change rapidly. No mystery to anybody, we've got 
a situation right now which is much different than the one that 
I grew up in during the Cold War era and--but we've still got 
processes in the government, as was mentioned by Congressman 
O'Rourke, both internal to the Defense Department with its 
acquisition process, its budgeting process, and so forth, and 
in this domain of foreign military sales, that are a very 
sequential step-by-step review process, that basically means 
we're continuing a process that has length and sometimes 
increasing length during an environment that requires speed and 
quick agility.
    So trying to reconcile this is, I think, a major challenge 
that we all have. We've got to try to do things that are going 
to increase timeliness and agility and speed, because that's 
what the environment is basically demanding right now.
    Mrs. Hartzler. Very good. You also--we've talked about this 
a little bit, about the need to be more strategic in the 
planning. But in your testimony, Mr. Davis, you talk about we 
tend to operate transactionally rather than strategically. Then 
you go on and say, ``Our allies and partners need a complete 
package, including training, integration with existing 
capabilities, and configuration management throughout the 
lifecycle.'' And they want, the FMS customers want capabilities 
the U.S. Government hasn't already procured yet.
    And--but you say, ``without a domestic program office to 
stand up an FMS program or a MILDEP [military department] to 
champion the sale, sales take far longer and run a higher risk 
of languishing.'' So could you expound on that a little bit 
about what changes you would recommend to make all of this 
happen?
    Mr. Davis. Let me try this, at the risk of looking like I'm 
stealing thunder from the late great Milton Friedman, the 
economics professor at the University of Chicago. Essentially 
what I'm saying is, from a strategic as opposed to 
transactional dimension and perspective, you know, Milton 
Friedman used to always hold up a pencil. I'll just hold up a 
pen since I got it right here. And this has many components to 
it. I mean, we've got this cap on this side. We've got the ink 
cartridge here, we've got the case at the bottom.
    The issue is getting the pen into the market and getting it 
sold out there. But that gets slowed down because we spend a 
lot of time talking about the suitability and the 
transferability for military purposes, or other purposes, to 
the components and the parts.
    Everything involves a certain degree of analysis regarding 
risk. From the strategic perspective, if we have a partner out 
there, a potential customer, who has a need that he needs to be 
filled--and as I said, most of these are near-term things. 
We're about the only country in the world that bothers to put 
together a 5-year, even in some cases, a 30-year defense plan. 
Most people don't do that. They need the item and they're 
talking about getting the item.
    So my comment there was, let's try to look at the item from 
a holistic point of view and perhaps spend less time on the 
various components. And what we're seeing right now is great 
efforts have been made over the last several years to reduce 
the number of items on the munitions list. But as that list has 
reduced on the commercial control list over at Commerce, 
components have moved over there in at least as much, if not 
greater quantity.
    So I think we have to think about it in terms of getting 
things that are thought of in a larger perspective as opposed 
to a components perspective.
    Mrs. Hartzler. And for the record, can you share, when we 
make a foreign military sale, does it involve a package, as you 
referenced, as well, training and future service and things--
can you expound on what one of these sales might look like, 
besides just the airplanes?
    Mr. Davis. Generally speaking, when we make a foreign 
military sale, one of the things that we want to make sure 
happens is that there is a package involved that would include 
training, would include a supply chain, would include some 
other, not necessarily equipment training, but let's say 
tactical training, so that we all agree on how we're actually 
going to use the item, how it will fit in. Just sending an item 
over there so that it's there and present, but there's none of 
the other things I just mentioned that are in evidence or are 
part of the package, you eventually wind up with a piece of 
equipment that's just sitting in a corner of the airfield and 
doesn't operate or can't operate as intended.
    Secretary Gates had this experience several times and he 
always talked about it, that he thought it was necessary to 
have the complete package.
    Mrs. Hartzler. And the last question--thank you--is for Mr. 
Nathan. In your written testimony, you talk about, ``We must 
consider the question of whether or not the security 
cooperation enterprise is able to manage on a sustainable 
basis, FMS, direct commercial sales, and hybrid cases that are 
growing in complexity.'' And you say, ``In the absence of 
greater resources, training, and a focus on security 
cooperation enterprise reform, we will discover the answer is 
no at the worst possible time.''
    So what recommendations would you have for resources and 
training and focus that would help address these concerns?
    Mr. Nathan. Thank you for the question. I think that there 
needs to be more of an emphasis, more of a focus, even as the 
government is looking at its own reforms and as this committee 
is considering ways of being supportive, more focus on making 
sure that the security cooperation enterprise has its own 
dedicated resources, has the specialized training that's 
required in order to understand the nuances of foreign sales 
that are oftentimes lost on people that are steeped in domestic 
acquisition processes.
    I'll tell you quite candidly, when it comes to that 
complexity of all of the different gateways you have to go 
through, it's a challenge to find anybody that's able to figure 
out where they fit in relative to every other part.
    What we have right now is a system where people are 
optimizing their own responsibility. They're not looking at how 
they fit into a broader whole and how they can help support a 
timely movement from start to finish to get out to the other 
side.
    Very specifically, when you talk about the resources piece 
of it, it is a concern that you have an acquisition core that's 
under a lot of stress with budget cuts, with manpower 
reductions, and so on. So if you already have a deficit of 
expertise within that group and then you're overall shrinking 
that acquisition workforce, it exacerbates the problem that I 
and Mr. Davis were talking about earlier.
    Mrs. Hartzler. I really appreciate you all being here and 
ask you that, if you have anything else you wanted to share, 
but in that, in your--any closing statements you might have, I 
am curious, as you, from your experience, look at the entire 
process and you work with and see Department of State, you see 
the Intelligence Community, you see the Department of Defense. 
Now, we are here today specifically focused, since we're the 
Armed Services Committee, secondly, on the Department of 
Defense. But which aspect do you tend to see holdups in more? 
Which step along the way? Is it the Department of Defense, is 
it the State Department, or intel, or just a combination?
    So I'll open it up to you for any closing remarks you want 
to make and if you have any comments regarding that.
    Mr. Davis. Well, let me preface what I'm about to say, 
Madam Chairwoman, with the direct observation that I don't have 
any data that I'm going to offer you here, but this is just 
intuition from experience that I've had in days gone by. It's 
always seemed to me that the major holdup on a lot of these 
tends to occur outside of the Department of Defense. And that 
gets into issues that have to do with broader policy 
considerations that are going on.
    Let me just go back to my example I was using that I was 
sitting there talking about, which was, you know, the Stinger 
issue going to Afghanistan back in 1987, 1988. You know, the 
particular variant we were talking about wasn't really there 
yet, but it was very close. It was going to happen soon. So, 
you know, there was no issue about providing the equipment. The 
issue was, as Congresswoman Speier pointed out, you know, 
should you do that? We're concerned about who's accountable for 
them, who's going to keep track of them. And the last thing in 
the world that anybody wants is some incident at an American 
airport created by a missile that we provided to some group of 
people on the other side of the world.
    So but I think by and large, my experience has always been 
that the holdups tend to not be as much in the Defense 
Department as they tend to be in some of the larger, broader 
policy debates that are going on elsewhere. And, of course, as 
all of you have made--commented on in your own statements, none 
of these are illegitimate concerns, but they are ones that need 
to be more quickly addressed and more quickly reconciled, if 
the objective is to get something out there quickly before a 
potential customer turns to somebody else.
    Mr. Nathan. So I was smiling because I was actually going 
to disagree with Mr. Davis about where the problems actually 
are because I've heard quite a lot about how the problems 
oftentimes manifest themselves within the Department of 
Defense. And that's not because he's right or I'm right. It's 
because there's so many different ways that you can go off the 
rails as you're trying to go through this process. It really is 
snakes and ladders, and you never know on any given sale, any 
given transaction, any given day, when you have to go back to 
the drawing board and try to figure out how to get to a ``yes'' 
answer.
    This is hard, okay. It's not an easy process. And we're 
having to recognize that now because getting to the right 
answer at the right time has become more important than ever.
    I guess a final point I'll make here is that traditionally 
when you look at security cooperation, I think the biggest risk 
that we end up talking about is making sure that we don't let 
technology get into the hands of the bad guys. Well, since 9/
11, you know, we're finding ourselves in a situation where 
there's a national security cost of not getting the technology 
into the hands of the good guys as quickly as possible. We want 
to get to the right answer, the right answer for our country in 
a timely fashion that best advances our country's national 
security and foreign policy objectives.
    Mrs. Hartzler. Very good. Thank you so much for your 
comments today, your insights, and your service to our Nation.
    This hearing is now adjourned.
    [Whereupon, at 11:17 a.m., the subcommittee was adjourned.]



      
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                            A P P E N D I X

                              May 11, 2016

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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                              May 11, 2016

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              WITNESS RESPONSES TO QUESTIONS ASKED DURING

                              THE HEARING

                              May 11, 2016

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              RESPONSE TO QUESTION SUBMITTED BY MS. SPEIER

    Mr. Nathan. AIA has found that the U.S. share of global aerospace 
and defense trade struggled to maintain pace in the face of foreign 
competition, and has gained less than 2% since 2010. This trend is due 
in no small part to aggressive foreign competition supported by foreign 
governments. A good illustration of the concerns from industry can be 
found in the Avascent White Paper on Dynamics of International Military 
Modernization 2016. Excerpts from the Executive Summary are as follows:
      ``Over the next 10 years, Western defense suppliers will 
face increased competition in international markets historically 
considered to be the near exclusive preserve of American and European 
firms. Specifically, Western firms will see rising pressure from three 
vectors:
          The increasing number of countries seeking to satisfy 
        requirements ``internally'', from domestic defense industries, 
        rather than importing from abroad;
          The growing role of emerging non-Western suppliers 
        that are capable of competing against more established defense 
        suppliers; and
          The encroachment of Chinese and Russian suppliers in 
        markets formerly aligned with Western sources.''
      ``While U.S. and European companies retain a number of 
critical advantages, they increasingly compete in a marketplace that 
requires new business strategies and penalizes the status quo.''
      ``Emerging non-Western suppliers have been steadily 
expanding their presence in many markets, as defined by both geography 
and technical categories. Bolstered by an accumulation of technical 
expertise and intellectual property, more and more countries have the 
ability to not only serve their own defense requirements, but also to 
compete for global export opportunities.''
      ``China and Russia increasingly serve markets that 
Western nations regarded as fenced off by Cold War-era U.S. or European 
political relationships. This dynamic is influenced by many factors, 
including the increasing political influence that China brings to bear, 
the increasing capability of Chinese and Russian products relative to 
Western counterparts, and a perceived loss of international influence 
by the United States.''
      ``Moving forward, the effect of these dynamics will vary 
by product sector and geography. But on the whole, U.S. and European 
defense companies can expect a more crowded marketplace.''
    AIA does not have program-specific anecdotes to amplify these 
points, but we will continue to work with the Subcommittee to provide 
those examples should they become available in the future.   [See page 
11.]
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              RESPONSE TO QUESTION SUBMITTED BY MS. GRAHAM
    Mr. Nathan. Attached to this letter is a list of the top five 
destinations for U.S. military exports during calendar years 2010-2015, 
based on data from the U.S. Department of Commerce. [See list on next 
page.]   [See page 17.]

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