Neel Murlidhar's Blog

Russian re-industrialization dangers – lessons from Japan and USA

September 11, 2019
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It can thus be said that Kim Il-Sung of North Korea helped create the post-war Japanese economic miracle, and Mikhail Gorbachev helped destroy it.

Japanese re-industrialization can be characterized by rigidity, inability to react quickly and decisively to adversity, and ultimate failure. In marked contrast is the success of its US counterpart – the American military industrial complex – with its flexible approach and success in quickly adapting to changing realities.

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Source: Expert-online

George Kennan, intellectual father of the cold war and originator of America's 'USSR containment policies', famously said in the 1980s that if the Soviet Union were to vanish, the US military industrial complex would have to remain unchanged until a new adversary was found or created, since destabilizing it would result in a fatal blow to the US economy.

However, the American military industrial complex changed completely, reacting quickly, flexibly and effectively to reconfigure itself into survival mode, when faced with enormous budget cuts following big changes in the 1990s.

The ink had barely dried on Gorbachev's resignation as President of the Soviet Union when the Pentagon sprang into action. Anticipating drastic budget cuts after the fall of the USSR, the Pentagon actively guided and coaxed companies of the military industrial complex to merge, pool resources and position themselves to weather the coming budget storm.

During the now famous 'Last Supper' of 1993, Secretary of Defense Les Aspin, assisted by William Perry, who would succeed Aspin as SecDef in 1994, ordered CEOs of many of the U.S. aerospace defense contractors to merge themselves into three or four companies, to streamline processes and cut costs.

Major defense contractors such as Lockheed and Boeing went on a Pentagon approved shopping frenzy, acquiring many of the smaller defense contractors. In a few years, a defense aerospace industry that had previously had fifty-one principal companies was forced to consolidate into a mere five survivors – Lockheed-Martin, Boeing, Northrop Grumman, Raytheon and Litton.

Similar things happened in various other segments of defense procurement.

In forcing this re-alignment of the US military industrial complex, the Pentagon was taking several risks, since industry consolidation often results in monopolies, with serious adverse effects on innovation, cost-performance, quality and overall cost-effectiveness.

The Pentagon would also lose power in negotiating defense contracts, since there would be far fewer players and fewer sources available to the Pentagon for systems procurement.

But the budget cuts demanded drastic action and risk taking, as a matter of survival.

Besides, hi-tech warfare was changing dramatically. Especially with cyber- and info-wars, it would be more effective for the Pentagon to have its contractors buy and adapt innovations and technologies developed by America's civilian hi-tech world. This brought the US military industrial complex to the well-established and efficient American system of startups, venture funding, IPOs, mergers, acquisitions and high-growth models.

While large players of the old military industrial complex were still needed for expensive items such as warships, combat aircraft and so on, many new hi-tech approaches to war fighting could be developed by smaller companies, with the large companies doing program management and system integration.

This period of austerity, cost cutting and innovative military procurement models allowed the industry to survive, until the 9/11 attacks on the US led to boom years for the military industrial complex.

The anticipation, forecasting and flexibility of this US system have to be studied and lessons incorporated in the structure of any Russian re-industrialization, while avoiding Japan's mistakes.

Above all, bureaucracy and rigidity cannot be allowed, or the process will be doomed to mediocrity and failure.

The best model to understand technology innovation, and how it can create new industries, is America’s Silicon Valley.

Of course, as Aleksandr Svechin said about military strategy – each war has its unique logic and should not be the application of a standardized template. Similarly, in the re-industrialization of Russia, Silicon Valley cannot be a universal template for a Russian system. However, it offers extremely valuable real-world knowledge, in spite of the differences between Russian and American ways.

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