Taking defense sourcing abroad: How to successfully harness international partners

For years the US has discussed how to integrate more closely with foreign partners to support the defense supply chain — with little success. But the global situation since Russia’s invasion of Ukraine may have finally provided the window for serious change. Below, Aleksandar Jovovic of Oliver Wyman lays out how he thinks America can seize this moment. 

In the wake of the Ukraine invasion, we are witnessing a groundswell of support for innovation in the defense supply chain — both domestic, and increasingly, international. While “friend-shoring” or “near-shoring” — sourcing diversification to allies or friendly nations nearby — is far from a new idea, this moment seems uniquely primed to advance the concept, if the US and its allies are willing to seize the moment.

This present-day attention is the result of an unusual combination of developments impacting the sector. Over the last five years, defense was buffeted by policy and funding retrenchment as engagement in the Middle East and Afghanistan diminished and the US role in NATO was openly questioned. In the midst of these policy and operational shifts, COVID dealt a blow to the global defense supply chain and workforce. Then as the situation appeared to normalize, Russia’s invasion of Ukraine put enormous strain on defense kit and consumables production.

Thus, for the first time in the recent past US and allied policymakers and industry appear truly aligned on the need to look beyond established domestic supply chains to cross-border sourcing and collaboration, with the intention of stabilizing and enhancing defense supply chains across the lifecycle. While haste and capacity may be front and center, burden-sharing and pooled funding also drive efficiencies and better planning, and they also incent allied capabilities and entrench interoperability.

There are already pathways in place that both model how to move forward and showcase opportunities for expansion. The most notable:

• Leading military powers such as the US have occasionally supported development and production partnerships with allies, bringing industry along. The successful SM-3 missile collaboration between the US and Japan neatly fits into this category and is now reportedly spawning further cooperation on hypersonics. The US is also leveraging Australian funding and development of the Wedgetail Airborne Early Warning & Control aircraft, soon to be the replacement for the USAF’s ageing E-3 AWACS fleet. The benefits do not stop at funding and industrial contributions—future US E-7 crews are already training on RAAF Wedgetail aircraft.
• Major defense spenders that traditionally relied on imports, such as GCC countries, have long championed offsets and industrial participation as a way to bring both defense dollars and know-how back home. While these programs were originally sustainment services-heavy, current emphasis and requirements heavily favor gaining a foothold in the defense production supply chain.
• Some defense programs or initiatives, as a function of size,importance, or geostrategic context were conceptualized as international at the onset, harnessing suppliers and sustainment providers worldwide. The F-35 is the most prominent among a modest number of similar efforts, but joint procurement programs—both binational and multinational like Scandinavia’s NORDEFCO or unique defense industrial ties like those between the US and Canada—have been around for decades.

But the episodic and unsystematic nature of these efforts is not just the result of naturally inward-focused defense ecosystems. Collaboration drives risk (e.g., safeguarding of classified technology), uncertainty (reliance on foreign budgeting and approval processes), and an element of surrendering control (development programs such as AUKUS and Europe’s FCAS are weathering some of these complications). These challenges are potential deathblows for international sourcing for understandably wary national policymakers and industry leaders alike. Nowhere is this more prominent than in the United States, and until the eye-opening aggression on Ukraine rudely intervened, these headwinds may have prevailed.

Armed with the lessons learned and best practices from occasional international sourcing and partnerships, and deeply cognizant of the risks that cooperation inherently carries, where do policymakers and industry go from here? A natural first inclination is to plug holes, with defense acquisition agencies scrambling to source defense products—155mm rounds and components most prominently—from abroad or to procure jointly. Next steps are less obvious and more complex but could lead to greater rewards long-term.

Think “international” at inception. As a result of their modest domestic market size, the defense industries of small countries have exportability baked in from the start. But this thinking must extend beyond traditional exports (or efforts such as the well-meaning but underfunded DoD Defense Exportability Features pilot) to true international sourcing. New international supply chain partners can inject more competition, lower costs, and avoid other risks. By identifying, qualifying, and/or incorporating non-domestic suppliers into the supply chain, industry may also open privileged international export markets. Engaging even earlier in the defense program lifecycle, defense departments or industry should look to international partners as potential R&D funders and implementation partners, at a time when resources and capabilities are in short supply, particular as the US and its allies confront an ever more assertive China.

Create industry and government incentives. Operationalize this effort by incenting and rewarding industry sourcing innovation and corresponding government acquisition support. Well-structured and intentionally international supply chains that can sustain potential shocks to the system like COVID or a major conflict should be rewarded from a funding standpoint, while procurement officials that think ahead and support such international collaboration should be commended. Too often, internationally-enhanced supply chain solutions are viewed as inherently risky or a burden to manage and oversee. If done right, however, they can drive down risk and costs (for both defense buyers and industry OEMs), increase quality, and improve profitability—directly as well as incentivizing future international sales and satisfying demanding “industrial participation” in core export markets.

Do not stop at two. An additional single international point of failure may not be sufficient. Seeking out a small cohort of key suppliers, geographically distributed among key allies and major importing nations, may be key in some segments, with all due appreciation for the complexity of qualifying and maintaining suppliers. The more OEMs boast a developed, documented, and repeatable international sourcing methodology, the smoother the process will be. Seek and harness any assistance allied governmental agencies offer (e.g., supplier matchmaking resources) to defray the costs of these exercises.

Start small. Look for programs that provide quick wins (e.g., less sensitive, higher-demand offerings such as precision munitions or counter UAV and C-RAM systemsthat prove the concept to stakeholders across the home government and industry—and also encourage international suppliers. With a proof of concept, international suppliers are likely to learn and adapt more quickly to defense OEM requirements and safeguards. Ultimately, this is no different from introducing a new domestic supplier.

There are no easy fixes for the strain that defense development, production, or sustainment providers and buyers face. While emergency measures—transactional procurements from foreign partners—may solve some immediate needs, structural challenges across NATO and allied defense markets remain.

Governments and industry have one chance to make systematic change to drive international defense collaboration and sourcing — because the next potential crisis, which we all hope to deter, is likely to be even more consequential.

Aleksandar Jovovic is a principal in the Aerospace, Defense, and Government practice of Oliver Wyman.