    [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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                    U.S. GOVERNMENT PUBLISHING OFFICE

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    ____________________________________________________________________
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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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