DAPA and CSIS hosted a conference on the ROK - U.S. defense industrial cooperation for a resilient global supply chain at CSIS on March 16, 2023. During the Q&A session following keynote addresses by Mr. Michael Vaccaro, Principal Deputy Assistant Secretary of Defense for Industrial Base Policy, and Minister Eom, Donghwan, Minister, Defense Acquisition Program Administration, Delta One's Senior Advisor Mr. James Grzella made comments on issues involving defense industrial cooperation. Here's the transcript copied and pasted from the CSIS website.
Q: Hi. Thank you so much for these presentations today on the government level. They’re very useful. I’m Jim Grzella. And sitting next to me is the CEO of our company, Delta One, LLC. We specialize in working with Korea SMEs, primarily, which are very important given the fact that the major companies in Korea, the big companies, have really become global suppliers. They’re great global suppliers.
One of the things – and we work probably right now with 10 strategic first and second-tier suppliers in Korea. And one of the things – one of the things that we’re finding is the – which might be helpful from the U.S. We also work with the biggest U.S. companies, such as Lockheed, Boeing, Raytheon Technologies. The challenges that the Korean companies are facing right now in supply chain are specifically related to the time it takes them to be integrated into the global supply chain. I can say without question, it takes a minimum of four months, but most likely six to eight months for that process to be completed by these big companies. And I know it’s frustrating to DAPA. I know it’s frustrating to KRIT. And so that’s an area that I would strongly suggest that maybe CIS (sic; CSIS) can take a look at. You know, because U.S. companies, what they have done – and I can say this because I worked in U.S. aerospace and defense industry for 25 years a senior director. The biggest challenge that they face are some of the areas of due diligence and compliance that all companies have to go to, to be integrated into that global supply chain. That is a huge challenge for Korean companies.
Now, on the Korean side, the biggest challenge for U.S. companies is still the offset guidelines in Korea. They are so outdated that they don’t reflect what you’re trying to accomplish on a government-to-government basis. Again, I can say without question that many U.S. companies say we’re so frustrated with these guidelines that we’d rather go other places, other countries, where we don’t face these barriers. We want to do true industry-to-industry cooperation. I’m not saying ditch the guidelines. But what I’m saying, please on the Korean side, take a look at those guidelines. How can you make them more relevant to what you are trying to do at the policy level. So any comments on that? I think the audience might be interested in hearing your comments, Mr. Vaccaro and Mr. Minister.
Mr. Vaccaro: Do you want to go first. Me go first? OK.
Yeah, so part of my responsibility, my team’s responsibility is actually encouraging more small business participation in the U.S. system. And we just actually – we just released a new small business strategy, like, last month. And because we’re really concerned within the department that the number of companies that are awarded – small business that are awarded contracts has dropped significantly over the past decade. And we don’t know why. And so that’s a real challenge for us, because we recognize that a lot of the sources of this innovation, it’s the small business guys, right? That’s what you want. And so we’re working on that, and we’ be happy to share – and I’m not sure – as familiar with the Korean system. But the U.S. system, as the U.S. companies here are well aware, we have actually targets that, you know, a certain percentage of our DOD contracts are supposed to be either awarded to small business or disadvantaged business, in various categories. And those targets have actually been increasing under this administration. So but that’s a key priority for us. I have been in meetings with the U.S.-Korea DICC to – and I’ve heard the conversation on offsets. And, again, as a U.S. government employee, you know, our official policy is that offsets are market inefficient and economically distorting. And we defer to industry on how to and whether or not to execute or participate in offsets. That being said, what we’ve told foreign governments is that if you’re going to have offsets, you should do it in a transparent manner. You should provide flexibility to industry that they can make a long business case as opposed to transaction to transaction. So if you’re going to do that. I also would, full disclosure, was in charge of, in my old job at Commerce, the annual offset report to Congress. So I’ve got some history with this. So the point you made about companies maybe transferring work out of Korea, I will say that, you know, looking at how the U.S.-Korean defense industrial base cooperation has evolved, you know, as I mentioned earlier, I think a lot of it was related to offsets to start with. I think in an ideal world, you know, U.S. companies who have invested time to develop a relationship with a Korean supplier, would like that Korean supplier to be part of a longstanding business case. That’s what you’re looking for, right? You invested this time, you don’t want it to be transaction, transaction specific. And I’ve met with some medium-sized Korean companies. And I’ve visited their facilities and asked – and supporting major U.S. primes – and asking: How did your work start with? And they say it was offset to start with. I said, oh, you still subject to offset transaction? No, no, no, we’ve evolved beyond that. I’ve also visited Korean companies where they’re highlighting work that’s offset related, you know, and I said: Oh, so how long you been doing this? Oh, eight or nine years. Oh, good, this is a long-standing business. No, we’re going to lose this work. This work is now being transferred to India, to satisfy another offset requirement. So that is a key, because there’s a lot of countries around the world who want work. And I didn’t even mention MRO support. But those are also areas, especially and we’re looking at the geographic environment right now. You know, does it make sense for us? And Korean industry is supporting a lot of our forces already. But that’s another potential growth opportunity. But there’s a lot of countries around the world right now who are trying to chase the business, some who are already well-established, but others are new entrants in that. And so Korea’s got to be cognizant of that as they’re going forward. They want to make sure that they foster an environment where it’ll help strengthen U.S.-Korean industrial collaboration, not deter it. Dr. Cha: Minister Eom, we’ll give you the last word for the session.
Min. Eom: About your question from the floor, I’m very familiar with your question coming at me from the Korean companies. This is one of the big challenges. And that made me think a lot about it. Korea’s SMEs with great capabilities are having a hard time entering into the U.S. market. The process is long. The process is complicated. And we totally understand. And we are trying to improve the process. But it’s not going well, unfortunately. And as you mentioned, they’re rather trying to turn to civil businesses. And I’ve seen a lot of them trying to do that, actually.
And offsets is one of the dilemmas that we have from the government perspective. Offset is allowed for the amount above a certain line, but the results of the offset implementation, et cetera, and speed is the most important. But then the realistic aspect of it is a little bit lacking. But today we’re talking about resilient supply chains at this conference. This resilient defense supply chains, when we’re creating it, all the problems that we’re talking about are slightly different. It has a different slant than what we’re talking about here. For Korea’s capable SMEs are trying to get recognized as a trusted supply chain participant. That is important. And they do good business with them. That is also important. And the stable defense supply chain and maintenance of that is also very important. These values should not conflict. And we need to coordinate that process. So DAPA is taking and playing that role. So from – based on your question, we will review that. And from the discussions today, we would like to search for some great wisdom to solve that problem. Sorry that I can’t give you the direct answer but hope that answers your question and concerns.