Angry Planet - The Arms Business is Booming

Episode Date: March 8, 2019

War is a racket and damn, business is good. When it comes to the global arms trade, no one sells more weapons than the United States of America. The US controls about a third of the nearly 100 billion global arms trade. Its next closest competitor—Russia—doesn’t do even half the business America does. January 2019 was a record year for the defense industry—profits were up across the board. It was the best month for arms sales in a decade.Here to help us understand the war racket is Amanda Macias. Macias is CNBC’s National Security Reporter. She specializes in the business of war. Amanda, thank you so much for joining us.You can listen to War College on iTunes, Stitcher, Google Play or follow our RSS directly. Our website is warcollegepodcast.com. You can reach us on our Facebook page: https://www.facebook.com/warcollegepodcast/; and on Twitter: @War_College.Support this show http://supporter.acast.com/warcollege. Hosted on Acast. See acast.com/privacy for more information.

Love this podcast. Support this show through the ACAST supporter feature. It's up to you how much you give, and there's no regular commitment. Just click the link in the show description to support now. You know, you're always going to have a demand for artillery. You're always going to have a demand for, you know, combat vehicles. But that's the next line of effort, if you will, is these new domains. And that's what our adversaries are doing, by the way, is they're launching things into space and they're moving. at a lot quicker pace than we are. So those are probably the initiatives that I would focus on more. You're listening to War College, a weekly podcast that brings you the stories from behind the front lines. Here are your hosts. Hello, welcome to War College. I'm Matthew Galt.

And I'm Derek. War is a racket. Damn, business is good. When it comes to the global arms trade, no one sells more weapons than the United States of America. The U.S. controls about a third. third of the nearly $100 billion global arms trade. Its closest next competitor, Russia, doesn't even do half that business. January 2019 was a record year for the defense industry.

Profits were up across the board. It was the best months for arms sales in a decade. Here to help us understand the war racket is Amanda Macias. Macias is CNBC's national security reporter. She specializes in the business of war. Amanda, thank you so much for joining us. Thanks for having me. Who are the major players in the U.S. defense industry, and what kind of profits are they posting?

Right. So the top five for American defense firms is Lockheed Martin, undisputably, number one in world weapons manufacturing. Boeing is number two. And then we have General Dynamics, North of Grumman, and Raytheon. So those are the top big five players when it comes to U.S. military equipment. So Trump's current Acting Secretary of Defense, Patrick Shanahan, spent three decades working at Boeing, often at very high levels. And there have even been a lot of concerns raised about that causing potential conflicts of interest in terms of awarding contracts. Is history with one of the largest defense contractors in this country a cause for concern? You know, so I've read a lot of those reports.

And when Secretary Mattis resigned, I was the last person to sit down and do a profile piece with Patrick Shanahan, and we discussed his time of Boeing. And so what is notable is that a lot of people make this transition from they work years in the military, they're at the top bits of the Pentagon, and then they transfer over into defense industry. The same goes for those that reach the highest points within U.S. defense firms, and then they transition into the Pentagon. It's really just a natural fit because they're on either side of the table. And so the criticism that happened in the wake of Mattis's resignation and Shanahan being a deputy secretary defense will obviously become the acting secretary of defense, and so that's how the hierarchy works, about his time of Boeing and the fact that he most likely is going to greenlight Boeing's contracts with the Pentagon. And here's the issue that I take with that. Number one, that outcry didn't happen when he became the deputy secretary defense,

a position he had in the Pentagon for more than a year. And also, DOD brought in legal counsel to look at how Shanahan would approach these massive contracts. And so it's not like the contracts appear in the Pentagon and get sent over to Shanahan's office, and they sit on his desk, and he greenlights them through. That's not how defense industry works. It's a super complicated process. So the fact that it came from Boeing, Boeing got Air Force One. That's not surprising.

Boeing got the trainer competition instead of Lockheed Martin. Also not surprising. Boeing is situated to pick up these contracts. If Boeing started getting radar contracts, which is normally what Raytheonic sells up, then that would be interesting. But, you know, this is, to me, this is a very natural fit. I feel like the constant Shanahan used to work for Boeing. Boeing got this contract.

Everything is flawed is a bit tired. There's so many people within the Pentagon who are in positions of power that came from Rocky Martin's F-35 line, for instance, come from Boeing, come from North of Grimmons. That's sort of the nature of this, you know, when we think about industry and we think about the Pentagon. So no, I don't, I'm not one of the, I'm not. skeptical of Shanahan's career. And now that he's in the acting secretary of defense role, he's not touching contracts. And anything Boeing related, by the way, went through the comptroller in DOD.

They didn't get sent to Patrick Shanahan. But do you see where people's concerns lie? Because people look at the revolving door between the defense industry and the military. I mean, Shanahan's far from the only one, just like you said. but we have had corruption scandals around this stuff in the past, right? Operation Illwind during the 80s with the Air Force being the most famous example. Sure, absolutely. But I think most people in America, it's very easy to paint that picture of

ex-person came from X industry, X industry gets a lot of money. Boeing is always going to get contracts. They're the number two weapons manufacturing the world. And also, it should be noted, that Boeing's main business is not defense. It's commercial. They're the number one world's, their top world manufacturer for airplanes. And so while they do produce arms, that's not their main line of business. And so to me, it's a little tired.

I know that Shanahan had to go up for confirmation. They had to bring in legal counsel to change the manner in which contracts were dealt with the deputy sex death just because he came from Boeing. so there's extra lines of effort. Do I think the world's a fair place? No, do I think the Pentagon's a fair place? Do I think defense industry is a fair place? I don't.

But to place these breadcrumbs in a way that he came from Boeing, Trump likes Boeing, therefore Boeing wins. I don't think it's that black and white. Recently, Business Insider just came out with an article last month about the F-35 program and what the acting secretary of defense, Mr. Shanahan, actually thinks about it. And he's actually quoted into saying, and I won't use his own words, but he said that the F-35 Stealth Fighter program is, quote, effed up. And that Lockheed Martin doesn't know how to run a program, and he feels that Boeing could do a better job.

Now, it seems like the F-35 program is like the fire festival of DOD contracts. So who's benefiting from this financially? Like, who's the jaw rule in that? contract because the F-35 program seems to be failing miserably month to month year to year. What do you think? So there's a lot there. So I think that story actually originated with Politico saying that Shanahan was quoted in a meeting at some point. A lot of that's hard to prove unless you foyer for memos or notes. Not to say that the F-35 has not had its significant amount of criticism.

them. And so yeah, so this is the Pentagon's most expensive weapon system. I could definitely see people especially in the highest levels within the Pentagon criticizing it. And that, yeah, maybe Boeing could have done it better. There's a lot of shoulda-wit-a-cuda-cuda in that. But going back to the F-35 in its history, so when Lockheed Martin put up its pitch, the Pentagon had just moved away from the F-22, and the F-22 became super expensive because Congress got involved and said, you know what, the F-22's amazing,

we're not going to sell it to anybody. So that racked up the economy's getting. You can't get the financing right on that because the U.S. military is the only one that's going to buy it. So, you know, the F-22 line went down, and the Pentagon's like, you know what, it's fine. What's next thing? We want the next thing.

We want a stealth fighter jet. we want it to be operable for the U.S. Air Force, which has its own demands. The Navy has its own demands and the Marine Corps. So you have to make this new platform that doesn't exist anymore, and you have to tweak it to fit each of the needs of the sister service branches. So when Lockheed Martin made their pitch, Pentagon went for it, and what happened was literally everything that could have gone wrong went wrong. You know, the engine didn't work.

The gun didn't work. pilots were passing out in the cockpit when they flew it and literally everything and so the one side is this has never been done before this is the price of business this is the price of innovation mistakes are going to happen that is the one line of thought the other thought is this is government waste there's no oversight um you know there's no one putting tabs on rocky martin and the contracts became like another subset of this that got even more complicated because the government would then say if, you know, Locky Martin and the Pentagon couldn't reach a deal on the next batch of jets because the government would say, you know what, this is really expensive, we're not happy with

this, you need to fix this, this is on your dime, you know, so, and then production lines would stop and then everything would get more expensive. So you had an issue of the contracts between the firm, Lockheed Martin, and the Pentagon. And then you had all the sister service branches involved and then all the different problems associated with it. And this went on for a decade. And so, you know, now the F-35 is out. It's operating with international militaries.

Yes, it's had issues. Yes, I could see someone from Boeing saying, you know, we could have picked up that contract and ran with it. To date, the F-35 remains the U.S. military's most expensive weapons system imaginable, which is hard to fathom when you think of this is a country that builds stealth bombers and nuclear warheads, but the F-35 has that undisputed title. So I'm not surprised that there's criticism of the F-35.

In terms of who benefits from this, I mean, Lockheed Martin is prime on the F-35 contract. there are several other contractors that involved in making the engine or making the gun or making the helmet. So there's a lot of defense industry involved. It's not just Lockheed Martin's baby, but it is considered the crown jewel. So on top of that, Trump's relationship with the F-35 has been kind of interesting. First, he hated it, right? Now he loves it. Now he thinks it's invisible.

Is he good for defense contracts? Yeah, what's the Trump effect just in general on defense contracts? Yeah. So I mean, nobody spends money on arms like the United States. And Trump's, both of his defense spending bills have been very friendly to the Pentagon. I mean, the grand total for 2019 was $717 billion. So, you know, that gives the Pentagon a huge pocket of taxpayer money to spend on the next set of emerging threats. And, you know, when we start thinking about early.

and sea and now space and cyber, that type of spending power is significant to defense industry. You know, they're right at the sweet spot of we have all these threats. We have an unpredictable administration. And we have a president who, you know, hails the military. And he also hailed, I mean, he's had, you know, the top five CEOs, you know, at the White House. You know, Maryland Houston is often at the White House sitting in the front row. when he talks about, you know, the Chinese stealing intellectual property. Lockheed Martin is a good example of that.

It appears that the Chinese have stolen lots of, you know, designs and therefore it saved a lot of money and research because they can take, you know, platforms that our defense industries are working on. So I would definitely say that while he has come out before and said, VF35 is a mess, we should cancel it. I want Boeing to make the equivalent, which Boeing doesn't have anything in their portfolio to compete with a stealth fighter. So, you know, while these seem to be threats, they're threats that move markets, they're threats that move industry. And, you know, shortly after Trump issued that tweet, Marilyn Houston came out and the F-35 got back on track.

So, you know, part of it seems like a checks and balances system. He said the same thing about Air Force One. He said it was too expensive. He tossed out the idea that maybe someone else could make it. Maybe the only competitor to make Enn Air Force One would be Airbus, but that's not an American company, and we probably don't want the President of the United States flying on a foreign aircraft with all of it, you know,

with its capabilities and its secrecy. But, yeah, I mean, he's come out against certain products, mislabeling them. but also he's praised them. So I think it's interesting to watch these massive companies react to the President of United States. But I do think that they have been benefiting from the significant defense spending bills that he's passed. You were talking at a tune of $700 billion. You recently said that there's been private industry and kind of been talks with the Pentagon.

Like Richard Branson is in talks with the Pentagon for, you know, the space force, if you will. And then you have the other guy, other folks like Elon Musk that are in talks with the Pentagon, something similar and already actively using their technology for under government contract. And in trouble because he was smoking weed on a podcast. Smoke it. Yeah, he was smoking pot on a podcast with Joe Rogan.

You know, how is the Air Force or Department of Defense in general, how are they going to kind of remain in charge of this when private industry is kind of driving. the train, no? Yeah, I mean, that's something that U.S. military is looking very closely at. So to have Richard Branson in the Pentagon, which this wasn't his first time in the Pentagon, you know, but someone who is sort of spearheading launches going to space, same thing with Elon Musk, they can move a lot faster than if you think of how bureaucratic the Pentagon is.

There's so many chains of command. getting a contract to move from point A to point B, I mean, stuff like this takes years. So the fact that private industry doesn't have to go through all of the levels that the Pentagon does, if they decide, you know, if Richard Branson decides, hey, you know what, I want, I want to experiment with small rocket launches. I want to see how quickly we can get something, we can get a payload into space. And if he's able to execute that, the U.S. Air Force is looking over and saying, we need to move that that speed, that speed of relevancy became the sort of throw-around phrase in the Pentagon

for a long time, because by the time you have a threat and you go to industry and make a contract and it goes through all these levels and someone petitions because they're upset that ex-contractor got that contract and there's a whole other investigation involved. I mean, by the time you get bogged down with all of the different procedures and processes, industry can move way faster. So that's what Dr. Roper, who's the head of Air Force's acquisition head, mentioned to a bunch of reporters in the Pentagon a week or two ago that Richard Branson was in. He was talking about his small rocket capability, how fast they can go, and the Air Force is trying to learn from that. And the Air Force is also willing to invest in that. So you have this new market where you don't have traditional defense industry able to compete.

with, you know, for instance, Richard Brinch and Virgin or Musk and what he wants to do with Rourgen and SpaceX. And so you do have this new entrance of Titans that start to make, you know, especially the space investment and Trump's goal to have a six and separate space force interesting. There's a whole other pot of money and venture capitals that are tied. to that sort of new entrance, if you will. I want to kind of switch from, you know, space force and airplanes and kind of ask you something, a question as long as defense contractors.

So we've got, we've got U.S. military, U.S. forces pulling out of Syria, and we have U.S. involvement in the Yemen conflict. And Trump's already said he's pulling troops out of Syria. Is this a, is this a windfall for private military corporations or private security corporations? because obviously Saudi Arabia is going to want to have that subject matter expertise.

And if they're not getting it from the U.S. government, obviously they're going to go to the PMCs, right? I mean, they could or they could go to, you know, one of the U.S.'s adversaries. And I think that was a big point of Secretary Mattis resigning was that if we give up the spot, who's to say that Russia's not going to move in? You know, you see the sort of witches brew in Syria. And you see it also in Yemen of all of these other players. So while I do think that, you know, the U.S. defense industry has benefited from a lot of these wars because they have to continue to provide service members abroad with technology, I mean,

you have all of the – you basically have America's wars financing. a lot of what industry is there for. And so when you pull out, you don't have that same line of effort coming from industry. So I don't know if it's going to be a big win for not to say that we need to be at war, so industry does well. But I don't necessarily think that that's, you know, that private military would move into that. I mean, my bigger concern and I think the larger dialogue is it's not going to be the Americans anymore. Someone else is going to move in. And the same thing happens when countries decide we're not going to buy American. Like we could buy the Patriot missile system from Raytheon. We could buy the bad system from Lockheed Martin,

but we might turn to Russia and buy their S-400 because you know what, it's cheaper. And it doesn't take forever and we don't have to get cleared by the State Department. We could buy it off the shelf. So I think that's the bigger concern is it might not be American anymore. If we pull out and there's a gap in the market, who's to say that Russia's not going to fill it or China's not going to fill it. Well, let's talk about that, Russia and China. You know, they're always trying to court new buyers. They would like to, I would assume, they would like to be making more money off of defense sales. Europe specifically is pretty competitive. What's that competition like? Who are Russia and China courting and what are they selling? Yeah. So for Russia, Russia is an interesting one,

because, so here's like one example. The Indians have always bought Russian, and they still need to keep buying Russian because we need to buy replacement parks, that type of thing, or some of the systems that they've always had. The U.S. is starting to sweep in and say you can partner with the United States. You can buy our equipment. We can invite you into higher security treaties where you get to. share some of our intel, what have you. So there's this courting process where the U.S. is trying to find a big player, a very distinct country that could be a significant ally.

And that's why Secretary Mattis was one of his very last trips was he was in India and he was talking to his counterparts there. India, however, is interested in buying Russia's S-400 missile defense system, which is quickly becoming the thorn in America's side, because it seems to be, the fear is that it could be like a backdoor because of its radar capabilities. So if India were to buy a very brand new, expensive missile defense system from Russia, they are subject to U.S. sanctions. So we're trying to court a country away from Russia. if they do buy Russian, they get hit with American sanctions. And then there's this back and forth of, you know,

you want something and you also slap it away at the same time. So the U.S.'s biggest selling point is don't buy Russian, because if you do, you'll get spanked with sanctions if you do business with Russia. But there's certain countries that can't help it. Turkey, when you talk about the European dynamic of it, is also interesting because they also want the S-400 system. So they want this missile defense system. NATO has decided we don't buy Russian.

If you buy Russian, you can't sit with us. On top of that, Turkey's also buying the F-35. And Turkey has helped finance, by the way, the F-35's production line. So you have this dynamic of Russia has a very lucrative product. the U.S. will get upset with you and throw down consequences in the form of tariffs if you play with Russia. But a lot of the times you can't help it. So it becomes a very complicated when you think of who wants what alliances are in place, what laws are in place, what has this so complicated. So this goes to show that I really don't think it's as easy as, you know, the Deputy Secretary

defense, formerly Patrick Shanahan, gets a contract on his desk. I mean, there's so many agencies involved. So I really don't think that it's that quick and dry, you know, of a, of a business. There's so many levels to this. It takes forever for money to exchange hands and for equipment to exchange hands. If you do business with the United States, you're in it for the long haul. The thing about Russia and China, once you buy their products, you're kind of on your own. They provide maintenance. They don't send over troops to help you learn how to work any of the equipment. If you buy American, if you buy a Patriot battery system, you have American troops over there that teach you how to use every bit of it and that do rotations to make sure that everything's

going accordingly. If you buy the S-400, you know, you get it a lot quicker and a lot cheaper, but potentially not with the friendship that you had in mind. tangent. It reminds me of a story a friend wrote about separatists in East Ukraine using Russian weapons systems and having to train themselves on it using simple video games.

Yeah, I mean, that's horrifying. Like, what are we doing? But yeah, I mean, that's... But some countries, you know what? They don't care about the layered ballistic missile defense. They don't care about all the bells and whistles that defense industry wants to sell you. They just want to take care of the threat.

and they just buy that off the shelf and it comes and maybe the directions aren't in the language that you need, but it's there and it's operating. And sometimes that does it. That is absolutely frightening that you can buy an S-400 with links to a YouTube page. For a surface-to-air missile system, that's insane. Metal Gear Solid 4 was more right than we know, but don't pay attention to that question. I'm going to cut it out. So another thing I've been thinking about, another thing I've been thinking about as we're talking about this is

the effect weapon systems and weapons sales have on actual policy, like foreign policy, and I will ask a grotesque question. And I think one thing I've gotten from our conversation is that all this stuff is way more complicated and way more nuanced than people would make it out to be. But I look at the INF, right, and the upcoming new start renewal that, you know, we're on shaky ground about what's going to happen with it. And do you see these as, and do, I guess, more importantly, defense contractors see these changes as opportunities?

Yeah. So with the INF Treaty, what was amazing about it was that the U.S. and Russia decided, or the Soviet Union decided we're going to get rid of an entire class. of missile. So it was a ground launch short-range missile that menaces Europe. So because Russia is cheating on it, they develop this missile. It's not in compliance with the INF. Like that conversation's been going on for a long time. The U.S. decided to pull out. So that sparked fears with a lot of nuke experts that why would we let Russia off the hook? They're going to start making these short-range ground-launch missiles, like crazy now.

But you know what? I think it's more of, you know, Eastern Europe has lived with a threat of Russia since forever. Europe is very aware of Russia's presence. I don't think that this new class of missile, and by the way, the U.S. is, you know, if Russia starts making these missiles, the U.S. is going to compete. and continue to make its whistles. But the main thing to me is that everyone is subject to everyone else's ICBM and that new capability. So the short-range missiles, while it is unfortunate that INF Treaty couldn't be saved,

New Start is the bigger brother of that treaty, which hopefully can be resolved before its deadline runs out, next year, but the ICBM threat is much greater and the hypersonic threat is also much greater. So while the INFT treaty has disintegrated, I do think that defense industry is going to jump on the opportunity to take care of that newfound territory of we're going to need to make sure that we're able to challenge these threats. Now, the nuke money is under Department of Energy, not necessarily Department of Defense. But one sort of entrance could be the hypersonic threat.

And Lockheed Martin has already scooped up both of the Pentagon contracts or both Air Force contracts that have come out last year. Lockheed Martin got both of those. So yes, short-range nuclear missiles, are a menace, more so to Europe than the United States. But we don't really live in that spread anymore. I think we live in the bigger picture of the world's nuclear club and the foreign players like North Korea, for instance,

that have now forced their way into that, a very exclusive club. You don't think we're going to return to a world where we're making Davy Crockett's or those, I can't remember what they were called, but those nuclear artillery launchers that we had during the 50s and 60s? No, I think we've moved away from that. I honestly do. I mean, not to say that it's not a threat and not that we shouldn't pay attention to it, but I think there's bigger fish to fry.

And, you know, I am actually more concerned with the pace that Russia and China have made in their hypersonic pursuits because right now we're able to know when an ICBM is launched, or when a nuke is headed our way. We're not at the stage yet where we can be warned in advance of a hypersonic missile. And a hypersonic missile carrying a miniaturized nuke on top of that is even more terrifying. So the level of threats has kind of moved out of the Cold War era. And I'm not saying that we shouldn't have treaties with other nations that keep arms control in check. but we've moved into this.

I mean, militaries are building up colossal arsenals, and it's no longer about these short-range Cold War era missiles, and there's higher threats out there when you start thinking about space and cyber that I think, you know, I do wish that and after you were saved at the same time. I think it's going to be okay. So do you think things like AI, And, you know, the Trump just signed that executive order, kind of trying to kickstart an AI initiative in America. Do you see things like AI and cybersecurity's growth markets for the defense industry?

Yeah. I mean, all of the defense industry, when they posted their Q4 earnings last month, and all of their conference calls, they talked about cyber and they talked about space. Like, those are the next domains that they're really financing and they're pushing towards. And, you know, similarly, you're watching this happen, you know, in the pandemic. these contracts are coming out. They're looking at tech and they're looking at space. So it's moving, you know, you're always going to have a demand for artillery, you're always going to have a demand for, you know, combat vehicles.

But that's the next line of effort, if you will, is these new domains. And that's what our adversaries are doing, by the way, is they're launching things into space and they're moving at a lot quicker pace than we are. So those are probably the initiatives that I would focus on more because I do think we've moved away from you build a nuke, I build a nuke. And, you know, the U.S. and Russia are the world's two greatest nuclear powers. But, yeah, I mean, definitely we don't have sensors in space that can predict when there's a threat coming into the U.S., like a hypersonic missile. We don't have that yet. And that's where industry is moving, and that's where our frenemies are.

moving. Amanda, thank you so much for coming onto War College and laying all this out for us. Thanks for having me, guys. That's all for this week, War College listeners. Thank you so much for tuning in. War College is me, Matthew Galt, and Derek Gannon and Kevin O'Dell. It was created by me and Jason Fields, who's been on an extended reporting project to Shadow Moses for some time now. If you like us, please drop us a comment on iTunes and rate and subscribe. You can find more of us Twitter at war underscore college and on Facebook at facebook.com forward slash war college podcast. We'll be back next week with a long teased episode about Russia. For real this time, I promise.