2016-11-29 By Danny Lam
The Liberal regime needs to be cognizant that Canada will always be a modest sized customer in the world arms market.
As such, unique and irregular Canadian requirements and unorthodox procurement processes will sharply inflate cost and create long term issues of sustainability.
The Case of the Canadian Surface Combatant Program: Software Transfer as a Non-Starter
The Canadian Surface Combatant (CSC) program demanded that bidders hand over their intellectual property (IP) and data to prime contractor Irving Shipbuilding, including “foreground and background data” and software source code.
While it is no longer a disqualifier to not do so up front, this demand raises major issues for suppliers.
Requiring a bidder’s a priori disclosure of IP and data to a private company (and potential competitor!) like Irving shipbuilding is highly irregular.
The details required are down to specifications for the last nut, bolt and screw, including tools used and part numbers. While the intent may be to deprive the vendor of follow-on revenues for maintenance and upgrades, it is far more damaging to the world shipbuilding industry.
Serious questions arise as to how (if at all) the data can be safeguarded by the contractor and/or the Canadian government, and its leakage to both adversaries and other competitors. While the intent is that provision of this data enables Irving Shipbuilding to walk away from the vendor for future upgrades and maintenance, it has many other consequences.
The IP requirement means that the prime contractor and Canadian officials will be able to become a competitor to all bidders. Because they will be the only party to see everyone’s IP, Canadians will be able to aggregate the data, cherry pick and reverse engineer IP and designs from all bidders.
This goes beyond depriving vendors of follow-on revenues.
It means that Canada, and particularly Irving Shipbuilding, will have the unfair advantage of seeing the issues, flaws and best features in all bidder’s designs.
Canada would then be in a prime position to offer maintenance and support to not just the CSC, but for all vendor’s products, potentially becoming a competitor to every bidder, not to mention building its own next generation ship from bidders’ designs.
Whether it is the intent of the Government of Canada to facilitate this is not known.
Indisputably it is an unfair competitive advantage handed to anyone who has access to the data set.
It is not clear how far/much the IP requirement will be extended and how it will be enforced given the compromise. If the requirement is only limited to the hull of a ship, for example, it is one thing, but taken to its logical conclusion, it will require the vendor that used, say, an Intel microprocessor in a minor subsystem to hand over the IP behind the product.
Or, tell Irving Shipbuilding and the Canadian government everything they need to know to build a state-of-the art microprocessor for the sake of a handful of CPU sales in one box.
Such a requirement for IP handover, if extended beyond the most basic features of our hull example, will certainly preclude U.S. contractors from competing, as the software and hardware behind key systems like Aegis and every major weapons and sensor systems are some of the most closely held secrets in the world and tightly controlled by the Pentagon.
The US Department of Defense (DoD) and Department of Commerce (DoC) are unlikely to permit their crown jewels from being disclosed to any foreign party and they will veto U.S. bidders from participating with U.S. sourced or derived technology without an export license.
The only alternative for U.S. bidders will be to develop new, non-DoD restricted software and systems from the ground up outside of the U.S. for the CSC program —- an expense that will sharply increase program cost, compared to obtaining a licensed version of the “off-the-shelf” US or other software for a handful of units.
The Commercial IP Challenge: Why the Canadian Approach is a Non-Starter
This route is not feasible a priori, however.
Provision of the IP for non-U.S. software and hardware is only possible if the products pre-exist. While rudimentary and basic versions of the software owned by third or lower tier bidders might be available, no top-tier vendor will, up front, pay to develop an all-new software suite and release their source code as a condition for the submission of proposal.
Thus, the only vendors that will accept these terms are vendors with little good IP to lose.
If the requirement is limited to the hull design, there is a major question as to whether a “top drawer” vendor will part with its best technology. For example, many innovations pioneered in the Zumwalt class DDG-1000s, such as coatings, methods and means for signature reduction, automated damage control, resiliency and redundancy, etc. are highly sensitive and closely held technologies. Beyond that, the next generation of vessel designs will likely utilize electronic control systems to actively manage loads and provide envelope protection now commonly used in the aerospace industry, which entails very complex and high value software that dominates added value.
No vendor will turn source code of this nature over for the sake of bidding.
Apart from the IP in the hull, the source code for key systems like sensors and missiles will be unlikely to be released — especially at the proposal stage when it is not subject to stringent licensing terms.
It is a mystery how any bidder from any nation will be able to bid and provide IP up front if any U.S. system is included, be it weapons, sensors, propulsion, communications, etc. Basic data on form factor, power and cooling loads for up and coming systems are closely held for now and certainly not releasable without authorization from the U.S. Government.
The contractual language, as it stands, is impossible for any vendor who intends to use “top drawer” U.S. systems to comply with as part of their proposal. The U.S. Government will likely exercise their veto.
The IP problem becomes impossible once disclosure requirements are extended to the subsystems and components level. There are no CSC candidates that do not use U.S. technology, especially commercial technology, in some way or fashion.
It is flatly impossible to provide the IP “fore and back” for these technologies without compromising the commercial secrets of the firms involved.
Apparently no one at DND or Irving Shipbuilding thought about how they would build a CSC without access to commercial electronics like devices from Xilinx, Intel, IBM, Freescale, Siemens, TSMC, etc. None of these firms will consent to their technology being handed over and if that is a condition, they will likely bar the use of them in the CSC program, causing bidders to find new and, as yet, non-existent sources.
Even if bidders agree to these terms, only one whom will be successful will still have to deal with the likelihood of theft of their IP and the likelihood that their software, intentionally or otherwise, will be compromised. Canadian government institutions and firms have a sorry record of protecting their intellectual property in this regard.
IP Security and the Threat of Theft from Non-Liberal Regimes
The U.S. was recently victimized by a Canadian subsidiary of United Technologies who illegally handed over to the PRC software intended to be used in their Z-10 military helicopter on the pretext of bidding for a civilian helicopter contract. That incident will weigh heavily on any decision to permit disclosure of sensitive US technologies to Canadian subsidiaries.
The very fact that it is now known that bid documents will contain sensitive IP that can compromise every bidder’s product will make Canada and Irving Shipyards a high priority intelligence target for Russia, China, Iran, North Korea, etc. facing threats from the bidder’s home countries.
Compromise of CSC bidding documents data in Canada will result in the damage not just to CSCs, but also to other operators of the same platform — potentially creating a nightmare for every country foolish enough to authorize their vendor to release the IP.
And a bonanza for Chinese military shipbuilders eager to clone the best designs.
Without access to U.S. IP on stringent license terms, it is not clear that any non-U.S. supplier can provide systems that will be compatible with U.S. systems that Canadian equipment must work with beyond rudimentary levels. That will exclude features like data fusion or cooperative engagement capability beyond Link-16 level.
DoD is almost certain to move to limit Canadian access and participation in systems like BMD when Canadian systems may be one of the weakest links in the chain. To wit: none of the candidate bidders is believed to be proposing an Aegis BMD capable design.
No vendor that develops these leading edge technologies will be willing to part with them for the sake of an order of a handful of units unless Canada paid, up front, the entire development costs plus profit to the vendor. In effect, a one time, worldwide, unlimited, license fee.
What those terms resulted in for the Canadian Ranger Rifle procurement was a unit cost of CAD $4,810 for 6,820 bolt action rifles when Walmart COTS rifles retail for $300.
The Fighter Case in the Broader Context
The larger question is whether such IP giveaway for the privilege of bidding will be replicated in other government procurements like the replacement Fighter program.
If so, the U.S. can make it difficult simply by refusing to allow release of APIs and other interfaces, resulting in a low level of integration into U.S. systems, making the CSC and F/A-18 Super Hornets effectively unintegrated “one off” pieces in the age of network centric warfare.
Upgrading the systems ex post to U.S. standards for security to enable them to work closely together will likely be costly (if permissible at all) and be subject to stringent licensing terms — frustrating the original IP “hand over” requirement.
The U.S. may limit Canada’s access to compiled modules and ban Canada from updating mission data files altogether.
Beyond security considerations, the Trump Administration will likely take a dim view of a Canadian military procurement process that places U.S. defense contractors at a serious disadvantage (or rule them out altogether) as is presently done in the CSC RFP.
The IP handover requirements under CSC are more onerous than demands by the PRC on foreign firms that resulted in China being singled out by the Office of the US Trade Representative in the 2016 Special 301 Report.
Another onerous anti-competitive requirement is the ban on advertising and public discussion of the merits of proposals by vendors that implicitly favor certain bidders. This ban resulted in the cancellation of a port call by an allied navy.
The Coming of the Trump Administration
The Trump Administration will also be zeroing in on Canadian defense procurement demands like “100% offset” requirements and take a close look at how those deals required of Boeing if the F/A-18 Super Hornet “interim” buy goes ahead.
Particularly, the Trump Administration will examine how Canada’s refusal and/or failure to go through their commitment to buy the F-35 impairs the competitiveness of Lockheed Martin’s ability to offer benefits to buyers with signed contracts. Offset contracts that may be awarded to heavily subsidized conglomerates that nearly went bankrupt will be reviewed carefully for evidence of de facto hidden commercial subsidies stashed in the Canadian defense budget, already famous for Enron like accounting.
Over and above the assessment of benefits to the U.S., if Canadian Requirements for handing over IP in the CSC program undermine U.S. national security interests, and if terms that compromise commercial secrets are replicated in other programs like the “interim” fighter buy or other government procurements, it will likely result in US DoD vetoing the F/A-18 Super Hornet procurement even if Boeing secured the deal as a Direct Commercial Sale.
The Liberal regime cannot assume that their deal with Boeing under typical Canadian terms will be routinely approved by the U.S.
Questions will be raised by both the Administration and Congress as to how the deal benefits the U.S.
Indeed, the “interim” fighter deal will likely to be seen as another example of Canadian free riding to delay meeting NORAD and NATO commitments by a decade or more.
The Trump Administration and Congress will raise major questions such as why Boeing should not receive as “credit” the CAD $1billion in contracts issued by Lockheed Martin (LM) under the JSF program to Canadian firms that to date, have resulted in no orders.
Conditions for approval of the “interim” fighter buy may include full compensation and interest to LM for F-35 contracts awarded and not rescinded.
Or, alternatively, Boeing to receive “offset” credit with interest for the amount Lockheed Martin is presently committed to, with incremental “offset” awarded to US firms.
Alternatively, the Trump Administration may simply demand Canada do away with the offset requirement altogether as a non-tariff barrier when a new trade deal to replace NAFTA is negotiated.
Canada is not presently targeted as a high priority for unfair trade practices by the Trump Administration besides currency issues and a few minor irritants. Though Canada is indisputably regarded by the Obama and incoming Trump Administration as a defense free rider.
These issues generated by recent Canadian government procurement directly damages the U.S. are economic and defense interests.
They cost Americans thousands of well-paying jobs. It will be difficult to keep them isolated when Trump negotiates a new bilateral trade agreement to replace NAFTA with Canada.
Trudeau’s legacy may be defeat in a bruising trade war with the United States.
Danny Lam is an independent analyst based in Calgary.
Editor’s Note: As the U.S. and core allies shift their platforms to a software defined and upgradeable focal point, the Canadian government’s proposed policies clearly run against this trend line in which apps based software will provide transient advantage.
No platform developer in the U.S. or Europe will wish to hand over its core software code; it would be akin to asking Apple to hand over the core source code to the I Phone and let the Canadian government and a local producer have it and run with it.
And the focus on shaping integrated force structures such as discussed by core Commonwealth partners, the UK, and Australia, is not about handing core software code to every country which desires to have it; it is about custody of the core code for tight configuration control, shaping a middleware on top of that and then allowing for apps based development, the latter certainly being an area where Canadian firms could make significant contributions to the allied forces.
It is not just about the U.S.; it is about the trend line of platform development for the 21st century.