Paris Air Show

Remarks as Prepared By Robert J. Stevens
Chairman, President & CEO,
Lockheed Martin Corporation
Paris, France - 12-JUN-05

Good evening, and thank you for joining us.  We’re pleased that you are able to be with us this evening and have an opportunity to meet the senior leadership of our corporation.  We look forward to the informal dialogue at the tables during dinner.

 Tonight I would like to give you an overview of how we see the major global trends affecting our industry, how we are positioning Lockheed Martin in view of these emerging trends, and to highlight some of the critical challenges we believe we will face in the year ahead.  I’d also like to reinforce our continuing commitment to transatlantic industrial partnerships within this evolving business climate. 

Trends

Within the transatlantic community the demand for improved military capabilities is steady and growing.   These demands stem from peacekeeping operations, the fight against terrorism, support for operations in Iraq and Afghanistan, and a host of other military tasks that members of NATO and the European Union have undertaken, including missions undertaken on behalf of the United Nations.

While demand for capability increases, the resources available to obtain these capabilities continue to be highly constrained.  This is true even for the United States, despite defense budget increases over the past few years.  Requirements still outpace resources.  Part of the demand is driven by the need to obtain and deploy new technologies – think of the urgent need, for example, to counter the expanded use of improvised explosive devices in Iraq.  Part is driven by the high operational tempo that U.S. and allied military forces are being asked to maintain in various locations around the world.  Think here of the resources involved in sustaining expanded NATO operations in Afghanistan, while also responding to humanitarian and security crises in Darfur and the regions of Southeast Asia devastated by the recent tsunami. 
With forces deployed around the globe, in some cases far beyond traditional NATO theaters of operations, the need for improved information networks, logistics support for deployed forces, and comprehensive command and control systems has never been greater.  Industry must supply these capabilities.

 With demands so clearly exceeding the resources necessary to fulfill them, there are significant incentives for allies to cooperate.  Not only do we need to pool our capabilities and share the burden, but we can also no longer afford, literally, to have many different nations developing duplicative capabilities.  The economic, political, and business imperatives all point toward greater cooperation among allied governments and the integration of their defense markets. 

Lockheed Martin’s Response

 As a principal provider of the military capabilities and security systems that are in greatest demand by our global customers, we at Lockheed Martin have been positioning our corporation to respond to these global trends and to fulfill the rapidly evolving requirements of our customers.

 We are integrating systems, networks and platforms to provide capabilities to meet challenging security tasks.  We are deploying these systems globally with U.S. and Allied forces to expand required interoperability.  We are working with industrial partners to develop global products for the global marketplace.  We are striving through our business strategies and our business practices to create and sustain a credible, open and integrated transatlantic marketplace.

 For many years, Lockheed Martin has strongly advocated a more open and integrated transatlantic marketplace with the following essential features:

 It is a market in which nations work together to harmonize their military requirements, and then procure defense equipment on a scale that is sufficiently large to make economic production possible.  It is a market where transatlantic teams are formed to compete for work, and where procurement procedures are open and transparent.  It is a market where the benefits of competition and of access to the global technology base would be more available to all government customers. 

We remain committed to this goal, and we have been successfully working to achieve it through a number of very specific actions with tangible demonstrated results.  Our strength and persistence in this advocacy is energized by compelling strategic, economic, and operational forces.  I believe there is irrefutable evidence that the planet we all inhabit is increasingly connected – by information flows, by capital flows, by trade and tourism, and by the need to cooperate for our mutual security.  You are perfect examples of this connectivity.  You file a story from anywhere on the globe and, with a keystroke, reach a billion people.

We believe that a more integrated transatlantic marketplace is the logical and required response to the dominant trends affecting our industry as we provide systems that support our overall security interests.  In a time of increasing demand for capabilities, highly constrained resources, and concurrent military operations in multiple theaters, the market needs to simultaneously foster competitiveness, affordability, and efficiency.  Inefficiency, redundancy, and obstacles to industrial cooperation only increase costs and delay the provision of vital capabilities.

 The health of the industry as a whole requires further integration and open markets.  It is not surprising that we are seeing some of our European counterparts increasing their presence in the United States – because companies must seek business in markets where business exists.  But it is also the case that governments are increasingly looking to cooperative multinational programs as a way to achieve interoperability and affordability.  Industry needs to be able to access the entire transatlantic industrial base to provide best value solutions to our customers.  The military forces of NATO should expect no less.  Our military customers obtain the best capabilities at the best prices, with interoperability built in because of industrial cooperation.

 We may one day look back on 2005 as the breakthrough year in transatlantic industrial cooperation leading to the award of major contracts to international teams.  We also are seeing significant cross-border activity in the areas of acquisitions, joint venture formations and other types of partnerships.  Let me cite a few examples involving companies other than Lockheed Martin:

BAE Systems acquiring United Defense is the most recent development in BAE’s strategy of expanding its presence within the United States.  In addition, European consolidation and realignment continues, most notably in the activities of MBDA to acquire German missile companies and in the moves made by Finmeccanica to create a defense electronics business in the UK called SELEX, and to form two new space joint ventures with Alcatel in Italy and France. 

 Progress has been even more dramatic on the program front.  The Airborne Ground Surveillance program of the Transatlantic Industrial Proposed Solution, or TIPS, consortium, which includes Northrop Grumman, EADS, Thales, Indra and others, earlier this year passed a crucial contract milestone. 

For Lockheed Martin, this year has been particularly meaningful in terms of cross-border success as we bring reality to the rhetoric of transatlantic cooperation.  With respect to business combinations, our acquisition of the UK company, STASYS, represents an important step we have taken to expand our long-term presence in the United Kingdom. 

With regard to programs, genuine transatlantic cooperation is not another label for U.S exports – it means truly cooperative, global products with multinational technology content.  As we have advanced transatlantic cooperation, we have been faithful to this definition.  Let me highlight a few examples, beginning with the helicopter for the President of the United States.
 
 Presidential helicopter/US101.  Earlier this year the team of Lockheed Martin, AgustaWestland and Bell Helicopter was selected to provide this next generation capability.  This program includes significant European participation in an important U.S. initiative, and creates opportunities for future programs as well, such as the U.S. Air Force’s Personnel Recovery Vehicle.

 Medium Extended Air Defense System (MEADS).  The German Parliament gave final approval In April for the next phase of design and development of MEADS – a successful cooperative air and missile defense program.  Lockheed Martin and our German and Italian partners will proceed to develop this critically important next-generation system.  MEADS is setting new precedents for transatlantic technology sharing and cooperative development.

 F-35 Joint Strike Fighter.  Later this year the participating governments on the JSF, including five in Europe, will begin the process of finalizing arrangements for production and sustainment of this aircraft.  This is a truly global product and a truly global program.  Our industrial partners are participating in the most technically complex and advanced multinational military program ever attempted.  

 These three Lockheed Martin programs are our most significant and highly visible examples of international partnership, but we have others that reflect the same trends:  multinational suppliers of technology and industrial participation who are creating products for the U.S. and the global marketplace.  Examples involving Lockheed Martin include Aegis frigates for the Spanish and Norwegian navies, the EADS/CASA CN-235 light transport platform for maritime patrol in the U.S. Coast Guard’s Deepwater program, the adoption of an Embraer platform for the U.S. Army’s Aerial Common Sensor program, and the Italian Fincantieri design for U.S. Navy’s Littoral Combat Ship program.  On this program, which today is solely a product for the U.S. Navy, the Lockheed Martin ship already contains approximately 20% content from outside the United States, much of that coming from Europe.

 To me, this suggests that we have now reached a point in the development of new programs where the global supply chain is a necessary part of the industrial package, where the best available technology at an affordable price is the dominant criterion for inclusion, and where multinational teams are the norm for new program starts.  Lockheed Martin has been at the forefront of this trend for more than a decade.  We intend to continue to be the international partner of choice as we move forward, and we will be expanding this business model into other domains, such as homeland security and civil government services.

Challenges Ahead

 I would like to conclude on this optimistic and upbeat message.  But there are also developments on both sides of the Atlantic that cause concern.  These potential obstacles to enhanced transatlantic cooperation could set back the progress we have made and make further cooperation extremely difficult.

 First, let me comment on developments in Europe.  It is widely recognized that the European marketplace needs to evolve toward a more unified single market in defense.  The European Defense Agency is working to foster this trend and to develop a code of conduct for procurement and to harmonize requirements.   The European Commission has also issued a Green Paper aimed at increasing competition in the defense market.   These developments are most welcome, but it is very important that this trend toward more integration and competitiveness in Europe not become a trend toward a closed and protected European market.  The European defense market needs to be open to transatlantic and global players in order to continue to develop technologies and to provide the products that are needed.  And it must remain open if European companies are to be able to continue their efforts to enter the American market.

 At the same time, there is a trend among some European governments to increase the requirements for industrial participation, or offset.  Offset is an outmoded and inefficient aspect of defense trade, but is often seen as a political imperative or necessary aspect of the overall deal.  In some countries, the demands in these offset requirements are approaching levels that will make the risks unacceptable to private-sector companies that provide defense equipment and services.  In an effort to benefit local industry through offset, governments will actually be inflicting damage – not only on industry but on the military customer, who either will not obtain the necessary equipment or will pay too much.  Expanding offsets is not the answer for addressing the lack of investment in some European industries or for addressing shortfalls in capability.

 Turning to the United States, we have some in the political arena who believe that expanding “Buy American” requirements are beneficial to U.S. taxpayers and to the U.S. military.  Others believe that technology should not be shared, even with close allies.  We understand and respect that people may have those concerns, but we also believe defense trade is good for American industry, good for the U.S. military, and good for us taxpayers.  We believe that the global marketplace can provide many capabilities not present in the U.S. market.  We believe in the value of open and competitive markets.   And we believe that reasonable safeguards of sensitive technology can be achieved to enable international arrangements at no risk to the security of our forces. 

 Finally, there is one additional worrisome trend.   We have recently heard calls in Europe to lift the current embargo on arms sales to China.  And we have seen an extraordinarily strong reaction in the U.S. Congress to such proposals.  The potential for further action by the US Congress should be taken seriously, as it could take the form of restricting the flow of technology from the United States to Europe.  This action would have very serious implications for transatlantic defense industrial cooperation.  I have been asking that our European friends consider quite carefully the risks of lifting this embargo, and I hope any decision is preceded by thorough transatlantic consultations.  I know that many of my European industrial colleagues agree that this issue poses significant risks to transatlantic cooperation. 

If transatlantic defense industrial cooperation is derailed for any of the various reasons I have just mentioned, we will all be worse off – industry, governments, and the military forces.   It would be nothing short of ironic if now, in the year of the greatest cooperative transatlantic industrial successes ever, actions were taken to scuttle this progress.   For those who are counting on the fielding of state of the art military equipment as soon as possible, it would be worse than ironic, it would be tragic.

We should not let that happen, and we at Lockheed Martin will continue to work for the open and integrated marketplace that will provide benefit to us all.  Our focus and commitments are clear.  And while the challenges ahead are formidable, the benefits and rewards of increased cooperation are, I am confident, worth the effort.

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