Ron Sugar Discusses the KC-45A Tanker Program on CNBC
Ronald D. Sugar
Chairman and Chief Executive Officer,
Northrop Grumman Corporation
On Thursday, March 13, 2008, Northrop Grumman Chairman and CEO Ronald D. Sugar appeared on CNBC’s “Squawk Box" program to discuss the company’s KC-45A tanker contract. Below is a transcript of the interview.
Joe Kernen: It is the $35 billion controversy that has Boeing crying foul, members of Congress up in arms, John McCain under fire, both Democratic candidates weighing in. The Pentagon awarded a lucrative Air Force tanker contract to Northrop Grumman and EADS. Despite the big win, though, Northrop stock, since the Pentagon’s decision: down about 1.8%. Now, in a First on CNBC, I interview Northrop’s Chairman and CEO, Ronald Sugar, speaking out for the first time since the decision came down. It’s interesting – I guess I’ll call you Dr. Sugar – It’s interesting: you’re a great US company, and here you are on the receiving end of a lot of protectionist and, some would say, even jingoistic rhetoric. I guess you knew you’d be in this position, though, if you were the winner.
Dr. Ronald Sugar: That’s right. Well, first of all, let me say that we are delighted to have been selected to provide the new refueling tanker for the United States Air Force. The Air Force needs these tankers desperately. Most of the tankers we’re flying are very old; most of them are older than the pilots who are flying them, and we do need to get on with the program. You know, we looked at this program a number of years ago. We had to determine two things. One: was the tanker that we would be able to offer going to be, actually, a superior offering for the war fighter? Secondly, did we think there would be a full, fair, and open and rigorous competition? About a year, year-and-a-half ago, we came to the conclusion on both that we did have the best tanker, and we were pretty well convinced that there was going to be a full, fair and open competition as advertised. It’s actually played out that way, so we’re absolutely delighted now that the tanker was selected. It’s a tanker which best we can tell, and certainly based on the Air Force’s assessment, is the best option for our warfighters. It has more fuel capability, more cargo, more passengers, can handle more medical evacuation, and it is a more attractive price, so we’re just pleased to be able to offer this.
Joe Kernen:
Will the contract stay in force even though Congress is upset? You don’t see anybody fiddling with it?
Dr. Ronald Sugar:
Well, actually, the contract has been awarded. We started work. The process is one in which, if there is a formal protest for the GAO, quite separate from Congress, then the Air Force has the option to temporarily stop work if it chooses; we’ll see how that plays out.
Joe Kernen:
You know, the winner normally would think that the process was fair, obviously. Boeing, though, says it was seriously flawed. There are those defenders of Boeing that say that the Air Force didn’t even, I guess, indicate to Boeing they wanted a bigger plane, that maybe they would have come with a bigger plane had they known that. Then, you’ve even got, for example – this is a good one – Senator Clinton: “Dr. Sugar says, ‘well, the WTO’s currently suing EADS because of all the – or suing because of the subsidies’, and here we are, in the US, awarding contracts to EADS. It doesn’t make any sense.”
Dr. Ronald Sugar:
Well, look, there’s a tremendous amount of misinformation, and I might even say disinformation, regarding this. The idea that two major worldwide defense companies, working from the same request for proposal, looking at the same specifications, would somehow not understand what the Air Force wanted is surprising to me. Nobody told us what plane to bid. We had to make our own decision in that regard, and we had a couple of different options. I’m sure they did as well. We took our best shot; we brought our “A-Game” to the competition. They selected what they thought was the best offering. With respect to the involvement of the World Trade Organization, that has never been and is not legally part of any competition process within the Department of Defense. It has no place in the Federal Acquisition Regulations.
Joe Kernen:
But our government is suing the WTO for EADS receiving these illegal subsidies. Simultaneously, part of our government is awarding the contract to the EADS. You can see how some people might at least seize on that, bring that up.
Dr. Ronald Sugar:
Look: this is a commercial dispute; in fact, Europeans are suing the United States on the other side of it. That’s a commercial dispute. We have, in recent history, almost every major weapons system which has been selected by the United States has very strong international content from all over: the presidential helicopter, the new joint cargo aircraft, the MRAPs that are going to keep our kids safer in Iraq. If you take a look at the new air defense system and the light utility helicopter, you have a situation where there’s a global supply base. There are always going to be trade issues and trade disputes, but we work with our allies. We sell to our allies. We buy from our allies. What’s most important here is that this is absolutely the best tanker. When we send our kids into combat, we want them to be in the right airplane. This airplane is going to have very substantial American content, as you know, more than 60% US content. You also know that both airplane companies have substantial international participation. So, to simplistically say – or jingoistically say – that one is an American tanker and one is not, is absolutely untrue.
Dennis Kneale:
Mr. Sugar, I’m sorry for the naïve question, sir, but why didn’t you partner with Boeing, the US guy, instead of partnering with EADS, the Euro guy?
Dr. Ronald Sugar:
Well, we thought there’d want to be a competition. Boeing has its own offering; Boeing doesn’t need to participate with us. It has its own offering. We looked around the world for the best potential airframe to use as the basis upon which to build a militarized tanker. I must point out to you that there’s substantial additional work that goes on in terms of militarizing a plain commercial airframe into a real war-fighting machine that has the ability to handle its own self defense, advanced cockpit communications, systems integration work, and long-term maintenance of the plane. We are very much involved in looking at the best airframe, and we found that airframe. It’s a very modern airframe. It’s in the middle of its life of production; it’s not at the end of its life of production, and it’s something that’s going to be in production for decades to come.
Dennis Kneale:
How much of that $40bn do you get, does Northrop get? How much of the $40 billion?
Dr. Ronald Sugar:
Well, first of all, it’s not $40 billion. We get all of it because we are the prime contractor. Then, we have a whole variety of partners on our teams – 60% of the work will be done in the United States. We’re going to have about 48,000 new jobs, both direct and indirect jobs, in the United States; 230 companies are part of our consortium of participants; and we’ll be in 49 of the 50 states. We see this as a very, very broadly-based offering. We’re very, very proud of the fact that we’ve brought the best capabilities that we can together on this team because that’s what the Air Force asked us to do.
Becky Quick:
Although, sir, you say that you’re in 49 of the 50 states, but there are senators in several states that are very upset about this because they feel their states will be losing jobs on a net-net basis.
Dr. Ronald Sugar:
There are two states which are particularly concerned. I don’t know that there are jobs going to be lost. These are not existing jobs, quite frankly. Also, I would say that the back orders for commercial aircraft on all sides of the Atlantic are very, very significant and very full. We are creating new jobs in the United States and we’re proud of that fact. We’re going to have absolutely the best equipment on this plane that we could possibly put together.
Carl Quintanilla:
I know you’d like to talk to – and we all want to look at – the specifications about the plane, and think that this decision was made on the basis of which aircraft was better. But do you think, with all the baggage that Boeing has, the fact that people went to jail, that somehow, politically, they’re being made an example of, or being taught a lesson? Do you think you won this on a fair fight?
Dr. Ronald Sugar:
Absolutely. I have no reason to believe that there was anything other than a full, fair, open, and transparent process. It’s been, probably, the most scrutinized process ever in the history of defense procurement. In fact, frankly, if any company would have some concern about entering an area where there was a long-term incumbent with a monopoly position, it might have been us. We basically decided that there would be a fair competition. We had our concerns early on – I’ll be very candid with you – but we passed those. What we watched was an extraordinarily careful process to make sure that it was all done openly, each company was talked to extensively, we had an opportunity to interact, and we all got to see the same request for proposal. We all took our best shot. We took our “A Game” to the party. It’s interesting; it’s as if you have a Super Bowl game and the Patriots and the Giants are playing. The outcome comes out in favor of the Giants, and you decide this is not right. What we have to do is we have to run – let’s play the game again. Let’s appeal to the NFL to see if they can play the game again because we didn’t think the Giants would win. By the way, I’m not a fan of either the Giants or the Patriots, and I don’t want to offend any of those who are.
Carl Quintanilla:
Understood.
Dr. Ronald Sugar:
To me, that’s the analogy.
Carl Quintanilla:
But if you coached the other team, if you ran Boeing, and you had survived the past five years, would you be contesting this like they are?
Dr. Ronald Sugar:
You know, I can’t speak for Boeing. Boeing is a very good company; it’s run by highly capable people. They have to take whatever actions they think. I would point out that there is a process, in the law, which allows the company, if it feels that it was an inappropriate competition, to file an appeal, which is being done. The appeal would go with the Government Accountability Office, and that’s a process which has to be determined within 100 days. What we have said, over and over again, is that, obviously, if they wish to appeal, that’s their right. We would just simply ask those members of Congress who are concerned – and by the way, most members of Congress are not; just a few are – to allow the process to occur, its regular process, and let that be determined. There are rules in places, because to do anything different, frankly, would undermine the integrity of the overall procurement process.
Joe Kernen:
What if one team was filming the coaching staff of the other team during the game? No, no. I just wonder how that enters into the mix? Let me get back to overall protectionist sentiment. You’re on the receiving end of it. That was really my first question. Do you see it, at some point, hurting business here in the United States? It’s rising, and the rhetoric is getting hot.
Dr. Ronald Sugar:
Yes, but let me tell you something which is really ironic. If you look at the companies in the United States that benefit most from internationalization, you look at our aerospace industry – Boeing and other companies included – we export substantially more aerospace product, both defense and commercial, to other countries and other governments than we buy from them. If you take a look at the largest purchaser of US aerospace products, single purchaser of US aerospace products, it’s Airbus, which buys $10 billion a year of United States aerospace products to put in its planes. If you take a look at Boeing and other companies, they buy substantially from countries all around the world. This is a global supply chain. We’re really concerned, both commercially and in the military sense, of getting the best. We cannot operate right now in a protectionist fortress America mode. The Aerospace Industries Association has come out very strongly for liberalized trade process. It’s really very good for our economy. Aerospace, by the way, is our number one balance of trade benefit of all the industries in the country.
Becky Quick:
Dr. Sugar, at this point, you say that you are already off and running. That means you’re under work with this contract, and yet this appeals process is taking place. When do you expect to have a final, final decision from the Department of Defense?
Dr. Ronald Sugar:
Well, our understanding is that the appeal will have to be determined within 100 days or less. It is our understanding that the Air Force feels very strongly that it has a very strong defense of the process that it went through. It’s clear that they undertook this process with an understanding that one or the other competitors might protest. Therefore, they prepared for that from every step of the way over the last year or two, I’m sure. I would expect, within less than 100 days, there will be a resolution at the GAO level. I think, for those members of Congress who have concern, I would just simply say there is a regular process; there are regular rules. Let’s let the process occur. If there was some irregularity in the selection process, that will come out in the GAO. I doubt it, but if there was, it’ll come out. Meanwhile, the United States Air Force needs these tankers. We need to get these tankers to our airmen so that they can do the mission, because the ones we have now are basically running out.
Carl Quintanilla:
In addition to the complaint or the argument that it’s bad for jobs in this country, there’s the argument that, somehow, it’s a threat to national security, that these planes are not more sourced in the US. It’s not a missile, right?
Dr. Ronald Sugar:
No, no.
Carl Quintanilla:
It’s a tanker. Is that argument disingenuous?
Dr. Ronald Sugar:
First of all, it’s highly disingenuous because there is no major weapons system that I know of in the last decade or two that has been sourced that does not have substantial international content. Take the Joint Strike Fighter, for example, which is the largest defense contract that will ever have been let. It’s larger than tankers, by the way. It involves a consortium of probably on the order of twelve or thirteen different countries all participating in it. We’re getting critical lift fan technology for that thing from Europe. You take a look at the light utility helicopter; you look at the president’s own next-generation Marine One helicopter. That helicopter is an Italian airframe. You take a look at the MRAPs that we’re basically sending to our marines and soldiers. We do not have an example in history where any of our allies have interrupted supply or where we have a national security – and there are missile systems and there are missile defense systems where we’re looking for international content as well.
Carl Quintanilla:
You realize if there was ever any kind of incident that could be traced back to the sourcing of one of these machines that you’d have to eat those words, right?
Dr. Ronald Sugar:
Let me tell you something: I think we are way past that in terms of the sourcing decisions that our government has made. The reality is that we have allies; we have treaties with allies. We work together; we fight together. We also support each other. They buy, frankly, much more equipment from us than we actually buy from them.
Joe Kernen:
Doctor Sugar, you’re also director of Chevron which just hearkens back to – you remember CNOOC, and you remember how that started small and it just started snowballing, and the grandstanding, and the demagoguery, and everything starts up, and the national security concerns, and you remember Dubai Ports and the way that goes. Do you see this going that route? What do you think the chances are that you do end up not getting this contract?
Dr. Ronald Sugar:
Well, I think that – I like the hand we’re playing now, because we had the best tanker. It was clearly the best tanker. We were selected, and the process was apparently fair and open. That’s the hand we’re playing now. Clearly, there will be dissenters. I just want to make sure, and one of the reasons I’m talking with you all this morning is to make sure, that there’s not widespread misinformation about jobs or about this or about that. We believe that this thing will hold up, and we’re absolutely committed to moving out and building these tankers for the Air Force.
Becky Quick:
The Financial Times was reporting yesterday that EADS would be requiring its suppliers to bid in dollar terms. Watching the dollar facing more weakness yet again today, does that weak dollar help you out?
Dr. Ronald Sugar:
You know, the weak dollar actually is a further incentive for our partner to expand production of commercial aircraft here in the United States. You know, we are putting in together, jointly, four new factories in the Unites States. We’re putting in a significant assembly and military modernisation facility in Alabama. In addition to that, EADS has announced that, having been awarded the tanker contract, they are going to now move production of commercial freighters to Alabama. This is actually very good for them; it’s very good for America. We’re going to bring new aerospace jobs to the United States. We’re going to be able to allow them to take advantage of the dollar. By the way, the dollar, at some point in time, will go stronger. Sometimes it’s weaker. These things do tend to fluctuate, but I think any global supplier, whether it’s Airbus, Northrop, Boeing, you name it, is really well advised to have a broad international presence because, in fact, it is a global economy.
Carl Quintanilla:
Can I ask you to, really quickly, just put on your Chevron hat and give us some – can you give us any calming words about crude at $109, $110?
Dr. Ronald Sugar:
I think it would be inappropriate for me to make a comment on behalf of Chevron.
Carl Quintanilla:
I hate it when directors say that. Dr. Sugar, it’s been a pleasure. Thank you so much for your time today.
Dr. Ronald Sugar:
Thank you, all of you; thank you very much.
