Blackmail or Bad Math?

Lockheed Martin must be getting nervous about Ottawa’s decision to entertain alternatives to their F-35 fighter jet.  The company has indicated that $10.5 billion of potential work for Canadian companies could disappear if Canada doesn’t buy the plane.  Oh my gosh let’s run out and confirm that we want the F-35 right now, or they might kill the hostage!

Or not.  Let’s do some simple math: $10.5 billion over 40 years is about $250 million a year.  Which is not peanuts, but in defence spending terms, it is not that big of a deal. 

However, there are clearly heaps of budgetary consequences if the government does choose to buy the F-35.  This Lockheed Martin calculation ignores the ‘opportunity costs’ of the purchase – that is, the money that could be spent elsewhere if the F-35 turns out to be more expensive than the alternatives.  Indeed, the government could not buy any plane and just spend $250 million a year for the next 40 years on industrial policy, and it might just be better for the Canadian economy. 

Of course, the government is going to buy a new fighter plane, since the old ones will eventually be un-flyable.   The other planes are costly, but may not be quite as costly as the F-35.  More importantly, this “threat” ignores the reality that if Canada does purchase a different plane, its manufacturer will be spending some money on Canadian co-production.  Indeed, I am pretty sure that is one of the factors being considered in the decision process, especially with this government suddenly thinking of defence spending as industrial policy.

While some of the competitors may not promise as much investment in Canada’s high tech sector as Lockheed Martin is promising, if they are smart, their bids will respond to Lockheed’s gambit with high tech promises of their own. Given this government’s approach to spending, it would be stupid of them not to, as long as there is a profit to be made in building the next fighter.  And given Lockheed’s behaviour, is there any doubt?  Of profit, that is.  We should have significant skepticism about the promises.

The government, if it actually cares about the Jenkins report, should make it clearer that investing in Canada’s aerospace industry and other high tech areas is a requirement, not just a good idea.  Then Lockheed’s threats would be entirely empty.  While I am not a huge fan of making defence policy based on what is best for Canadian companies (as it can raise the costs of contracts), in this case it makes sense to level the playing field.

So, this effort at blackmailing reminding Canadians what they might lose by choosing another plane is very lame.  I am beginning to understand why so many defence programs have cost over-runs  – these guys suck at math and perhaps basic economics.