welcome to "this week in defense news." i'm vago muradian. with defense spending dropping and the threat of sequestration looming, we will talk to one analyst who says that the pentagon could save big money by getting rid of outmoded regulations. plus, a top lockheed martin executive on the future of long- running programs like the f16 fighter and the c130 transport. but first, counterfeit parts making their way into the global supply chain is a worldwide program in virtually every industrial sector, from automobiles to commercial aerospace, and from health care to handbags. that these fake components end up in weapons used by american war fight ares and their international allies is causing a headache for the defense department and its contractors. how big is the problem and what is the pentagon doing to solve

it? here to tell us are gerald brown, head of the anticounterfeit working group at the pentagon, and christine met the technical and thanks very much for joining us today. i want to start off with finding out exactly how big a problem this is for d.o.d., what's being done to keep from buying counterfeit parts and what's being done to remove them from the supply chain. >> thank you very much for having us. i'm a big fan of the show. >> thank you very much. >> this is a serious problem for the d.o.d. anything that would impact war fighter safety or mission assurance we take very seriously. we're treating this as a very serious problem. what we're doing to counteract counterfeit in the d.o.d. supply chain and we're premayoral focused on weapons systems parts, things on airplanes, et cetera, is essentially identify those items that are critical to safety and mission performance, exercise particular due diligence and care in procuring those and testing them, sharing information across the supply

chain on counterfeiters, their methods and their targets, and then making sure that we follow up with investigations, administrative and criminal sanctions. chris, you may want to talk about some of the things they're doing in particular. >> in microcircuits and semiconductor compls is a high risk commodity area, we established policy a couple of years ago to give preference to buying from our original manufacturers and also from their authorized distributors but in many cases the parts they're buying are no longer in production. so we have followed up with establishing a process for qualifying other distributors and their authentication processes. and if we're -- the part isn't available from any of those sources, then we'll bring it in and do our own testing in our test centers. >> how extensive of a problem is? can you say sort of six out of every ten parts that are out there are in some manner

counterfeit? >> again, it's hard to prove a negative. >> right. >> certainly globally this is a big issue because what you've got is the electronics that are making the taping of the show possible are similar to what we're using in our weapons systems. as these parts get recycled, they'll go to china and other places in asia. >> to be refshished -- refurbished. >> right. there are literally thousands of items if you look at this as a funnel. the d.o.d. uses restringent testing and verification process starting from whether the items are built to when they're complete to when ir' integrated. we catch a lot of counterfeiters, suspected counterfeit parts in the course of that process. we believe the number that actually make it on to weapons systems is very, very small. as a matter of fact, we've never had a catastrophic mission failure because of a counterfeit item. >> so actually these parts work

is part of the problem? >> they may work initially but the question is will they withstands the rigors and have the same reliability as a military part and probably not. >> how are they getting into the system in the first place? if we are being diligent and doing the testing and doing the supply sources accurate, how is the stuff getting in? >> this is a very, very large business in china. the people who are doing it are getting better and better frankly. it's a very large addressable market. and what will happen is you will get a part that again based on the -- was based on the original component so it looks like the original component. >> it's in the same box. >> yeah. and as you said, the ones that fail early, those are the good ones. those are the ones that are easy to catch. the ones that work are a little harder to catch, which is why we're moving our focus to prevention, early detection as chris mentioned, working with people who are reliable, dot testing early so that before

these parts get into the system, we will have eliminated them. >> just about everybody has said this is a global program that has national implications along every aspect of life, medical industry, automotive, everybody is facing the same problem. it's not just the hand bags that are the issue. and so folks are saying there really needs to be a whole government solution. what is z.o.d.'s role in this broader national way of combating this? >> we have been working with the intellectual property enforcement coordinator that has an interagency approach involving d.o.d., nasa, department of energy, other agencies. we play a key role in that. the d.o.d. plays a key role in that. the intellectual property enforcement coordinator has a report that's in coordination on as you said whole of

government solutions. the d.o.d. has a particular interest and a particular urgency because right now of course we've got airplanes that are flying critical missions. we want to make sure today that those -- that those pilots and airmen can complete their mission. >> do you think -- and maybe i'll put this question to you. how much of this is just criminal and how do you differentiate that which is just i want to make money by selling bogus parts and how much of it is malicious, somebody, for example, trying to introduce malware or another component into u.s. military systems? because i know there's a bit of that going on as well. >> majority of cases we've seen when we detected the counterfeit is economic motivation. >> you treat that as a criminal thing and debar people and you get rid of them. >> absolutely. >> but in terms of the malicious, how did that work and how extensive is that or how serious of a concern is that? >> the malicious part is even more difficult to detect of

course. we may not be -- we may not know what we're not seeing right now. so right now we are just looking at ways to improve our detection methods for that. >> let me ask you one other question. does the industry -- the industry has established a series of standards to address the issue. does d.o.d. have to have a second approach to combating the program or is broader industry efforts -- should there be the same benchmark? >> we work very closely with our industry partners, and they have been a key front line of defense against counterfeiting. the -- we will -- our approach is to do what we need to do to make sure our weapons systems work and maintain the safety of our war fighter. we sit on the standards committee. we work closely with one ever the standards body. and we hope we can be part of driving these standards but they have to work for the war

fighter. that's our number one concern. >> you were going to say? >> well, industry -- we have a little different challenge than industry in that we also have requirements to be competitive in our acquisitions. we also have the issue with obsolescence. because we keep our systems employed for so long, that the parts are not available so it is a little bit different than industry. but certainly the standards that industry has developed we have used at least to shape our program. and then in addition, we are looking because of the technology of the counterfeit is improving so much, we are also looking at tech lodge cal solutions ourselves. we did research on authentication marketing which uses botanical d.n.a. to establish a unique signature. it can be included in the ink that manufacturers use in their normal production process to mark a part. then it stays with the part for the whole life cycle. >> that's fascinating. >> we're also looking at employing fraud detection software, like companies use for credit card fraud. they see an unusual pattern in

your spending. and we're looking to see if we can identify characteristics of suppliers items and price that in combination might indicate that this is a counterfeit transa up next how the pentagon can save billions of dollars a k, and i was trapped.

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regulations and congressionally mandated reporting requirements to improve oversight. but our next guest, dan guray of the lexington institute in a new study concludes that the regulations and reporting requirements end up costing taxpayers many billions of dollars a year. his report, why the pentagon wastes money, and how to fix the problem, is available at the lexington institute web site. dan also is an advisor to republican presidential candidate mitt romney, dr. dan guran, thanks for joining us. welcome back,. >> my pleasure, always. >> how bad is the pentagon's regulatory oversight burden? how did we get here and what are the costs associated with it that you found? >> it is a very heavy burden. the estimates from varies studies are that on an individual contract basis or program business, it can be as high as 60% of the value. overall, it could be in the range of $100 billion a year of added costs over what things would cost without those regulations, law, and requirements. >> the range is 45 to $95

billion. or so. which is what the size of it is. >> yes. >> how did you figure out how much that costs? and is there any one particular regulation or category of regulations that puts you into that kind of a cost category? >> well, we figured it out by going through the varies kinds of these cost categories, for example antiquated acquisition procedure, the lack of modern supply chain management, regulations that restrict what can be done and the way in which you purchase, or how things are built, or how they're maintained. and there is a whole bunch of studies that look at it from varies kinds of contracts, varies kinds of activities, a wide range, the average is a certain percentage, it can be as high as 18% on average, and the nominal figure is about 3% for regulatory costs, and that's what we use, when we say you could save $10 billion a year by eliminated unnecessary or burdensome regulations. >> one of the points i think that you are trying to make is that oftentimes the government goes out of its way to figure out if it is getting a best value, even if doing that

actually burns up whatever savings they would have generated in the first place. >> that's right. for example, when they go and they want to buy something as a commercial item, which means it is the same buying procedure as if you or i were to do it, an airline were to buy an engine, the air force buys an engine, except then they want specific and additional and excess, really, price and cost data, which is proprietary, among other things, and that takes time for the government people, and that takes time for the engine manufacturing people, that takes time for the auditors, all of that is a cost. and the government never accounts for those personnel costs, that time cost, when they're imposing those kind of regulations. >> but the counter argument would be to that we are stewards of the taxpayers dollar, therefore we should find out and give the guy a modest profit, the commercial airline might pay a 400%, not that they would, but they're more than welcome to pay a large premium for that, the taxpayers shouldn't. >> and you don't want a commercial item actually. if in fact you treat this in a sense as a unique government

item, you're either in the commercial marketplace or you're not and the government has rules for both situations. but if you're in a commercial marketplace and the government wants to act as a monopoly buyer, then you have a problem. you cannot go for commercial practices to lower of the costs and demand the initial burdensome to initiate the savings. >> every single regulatory change that was made was in response of something. the perception of $600 toilet seat and the perception of sole source contracting. what is the best way to balance this sort of ying and yang of making sure you have the appropriate degree of oversight but not having gone too far, nor having to live with regulations that are actually out moded? >> you do it sort of on a case by case basis, we will never get out of the situation. what you really need is fundamental principles. those regulations that are driven for safety, military performance, security, for example, or basic reporting and oversight. that's legitimate. but when you start telling the

contractor, sort of how to do every bit of his business, and when you ask upon review upon review upon review, when you for example require the kind of cost accounting on the private side that you don't require on the public side, when you put them in the competition, then you're over the line. and over the time, we cannot afford that excess. >> let me just go -- the big part of this obviously, a lot of the reporting requirements, let's take the f22 program, which has always been said that 25% of the cost of that program had been oversighting and reporting requirements. secretary gates is part of the better buying power initiative said look, let's review deuce the number of refareports but n prominent members of congress, including the house armed services committee chairman buck mckeon says we don't want a short flimsy report, we want a beefy report. what is congress' role in this and what has to start with congress? >> in terms of reporting, almost nothing. the cost of every report that is brought to congress, is lost

in the noise, compared to the day to day cost of reporting to government agencies, to the audit agencies, to the test and evaluation people, to the program managers, and that's where the billions in excess, if you want to call it, are. so you could give to congress a 1,000 page report a day,nd and you still wouldn't be anywhere near the cost of that drip, drip, drip. >> and that's where you think the better buying power initiative failed in your -- >> it is added layers of bureaucracy. it is added layers of reporting in the system. it is more. should cost, and would cost. if it was simplifying the system, it would be great. since it is not, it is an additional tax on an already burdened system. >> how do you control the amount of stuff, the layers upon layers upon layers? nothing is sun et. >> the large part is nothing is sun set. there is no value proposition related to even the

regulations. if it cost me 1,000 regulators to ensure that i get the best price on a 10-cent widget, i'm obviously spending to much relative to that widget. so we can do this on a cost, as an independent variable, for regulation, if we want to. >> dan, thanks very much. up next, what lockheed martin is doing on international markets to remain the world's numb

for man a decade, lockheed martin has ranked as the world's number one defense contractor according to the defense news annual top 100 global listing of military suppliers and international sales of signature products like f35 lightning and c130 transports and missile systems and radar, while always key to the company, are becoming even more important as domestic defense spending drops. when we were at the farm bureau international air show outside london last month, we talked with rick kirkland, lockheed martin's vice president for

south asia, and asked him where the company was growing to find growth. >> when we look at the international markets, you have to sort of look at three major segments. you see modernization of capability, integrated air missile defense, or f35 for fifth generation air force, modernization of existing platforms. there are modernization programs on f16s and c130s for example. and a new dimension on national security which is the personal or internal security of the nation. so border patrol. personal control of transportation. and energy security. so those three markets pretty much around the world where we're concentrating. >> any particular market more important? mid east asia? >> predominantly the mid east and asia are predominantly the ones. there is turmoil and people are focused on what to do to modernize. >> the f16, a spectacular product for you guys, more nan

4500 jets delivered, almost two dozen air forces, what is supposed to be be replaced by the joint strike fighter and that is delayed and unit costs are rising. and analysts say the aircraft is getting unaffordable for the a lot of the f16 operators. >> there is a large market for upgrades but remember the whole program for a long time is the long-term replacement of f16s, f18s, carriers by an f35 but for a number of years, there will be -- the u.s. air force will be operating both f16s and f35s. but the program is to bring new avionics on the eastern radar, and the upgrades. there are several countries right now that have programs to begin that upgrade process. so we see a very robust market to bring new capability into an airplane, that has been serving almost two dozen nations around the world. >> how much longer do you think the f16 is going to be viable? how much longer, from a production, new builds perspective? and what are the capability differences it will have from

existing versions? >> as we have seen, a whole series of block upgrades in the f16, the next will be a retrofit of existing f16s, which will add those new capabilities, and new mission computers and new sense ers and new weapons on board to keep the f16 viable for the next several decades. >> and in terms of production, when do you see production itself -- >> it depends on a couple of customers and what they will do to look at additional airport. >> the em bri air is working on the kc99 twin engine airport and aims to be a a c130 for less cost, less purchase price and less operating cost. boeing has teamed with them. how serious of a threat is this to the c130 franchise and what are you doing to keep that product -- >> the c130 has been the air lift of choice for 53 nations now. i think we have a very robust future, because it is the rugged air lift, to be able to go into locations, because of its inherent structural strength, but also the

propulsion system, and obviously, upgraded with the j, to give it more capability. and we're also looking at a number of system upgrades in there, so it can also be used as a c4rfi program and those activities as wem. we think -- well. we think it is a very good market going forward. >> every time we see a drop in budgets you see a drive toward increased collaboration, between companies and between and among governments. have you been in this game a long time. what are some of the international new partnerships that you will see lockheed striking and in what markets? >> we see a consistency in our approach to the international marks which is collaboration. we have over 350 partners and suppliers around the world to do this and we're seeing a demand from customers who say we really want to see collaborative joint ventures for technology development, for creation of jobs, to begin to look at low we blend that in with the products as they're looking at them. so i think it is a consistent fast going forward to plain thain those partnerships and

alliances. >> any particular market areas or particular countries or regions that you're looking to strike some of these new partnerships? >> are partnerships are fairly global. we have decades of partnerships in north asia and japan and korea. obviously when you look around at the partners who have been on f16, and now migrating into f35, in europe, middle east is asking for more collaboration and joint ventures, so if there is a new area, that is probably where it is. >> rick, thanks very much for joining us. >> thank you for your time

no government department is subjected to more scrutiny or legislative constraint than the pentagon. and with good reason. the defense department spends some $400 billion a year on goods and services. and when things go wrong, they tend to go wrong big and end up

costing many billions of dollars. plus, given dod's actions can spell successor failure for contractors and you communities, lawmakers have a watchful eye to protect programs and people and facilities. each administration has added new layers of regulations, guidance and requirements, to keep from repeating past mistakes. all of which adds up. and dan guran of the lexington institute estimates all that costs between 50 and $100 billion a year without adding all too much to national security. others say the number is not that high and without tight regulations and oversight the governments costs would be higher. for their part, dod leaders recognize their government should improve and the government gets the best value from suppliers. as the defense spending drops, pressure to get the most out of every dollar rises and so there this is a