It is common knowledge that the program to equip the US Air Force, Navy and ILC (Marine Corps) with 5th generation fighter-bombers raises many questions. This concerns both the combat qualities of the F-35 family aircraft and the cost of their development, acquisition and operation, while the cost issues are of no less interest than the tactical and technical characteristics of the latest aircraft. However, this is hardly surprising - today the F-35 program is the most expensive weapon system in the entire history of mankind.
Is it any wonder that almost every mention of the F-35 leads to disputes over its cost - while some debaters argue that the cost of one such aircraft is estimated at many hundreds of millions of dollars, others demonstrate the latest information from overseas, according to which The "price tag" for one F-35 is now "only" 85 million dollars, and this price includes both the aircraft and the engine, and not as before, for example, in 2013, when the cost of aircraft, depending on the modification, was for US Air Force $ 98-116 million, but without an engine.
In the article offered to your attention, we will try to deal with the issues of pricing of military products, including the F-35. But for this we need a little excursion into the economy.
So, all the costs of creating new products, regardless of whether we are talking about an ultra-modern fighter, the next version of the Apple smartphone or a new yogurt, can be divided into 3 categories.
The first is the cost of research or development (R&D). We, of course, will not now consider all the nuances of attributing a particular type of cost according to accounting rules, but we will use only the basic principles of cost allocation. So, usually the emergence of a new product occurs as follows: first, the requirements for the new product are determined. In the case of the Apple smartphone, such requirements can (very conditionally, of course) be formulated as follows: taking the indicators of the previous model as a basis, we want the new model to be 30% more efficient, store 50% more information, be 20% easier and finally have a beer opener.
Of course, such a model will not appear from our desire alone. In order to get a smartphone that meets our expectations, it is necessary to carry out a lot of work to improve the material base (electronics) and software (since it also affects the speed) of materials, etc. etc. And all the costs that we will incur when developing a new smartphone will be R&D costs.
It is important to understand that R&D costs are not costs of manufacturing a product. The result of R&D will be design documentation and a description of technological processes, following which the manufacturer will be able to establish the serial production of smartphones with the characteristics we need. That is, R&D makes it possible to produce the product we need, but that's all.
The second category of costs is the so-called direct costs (more precisely, it would be more correct to use the term "variables", which, strictly speaking, have a number of differences from direct costs, but recently direct ones are often used simply as another name for variable costs). These are the costs that the manufacturer bears directly for the production of products. So, for example, if a locksmith is able to make one stool from one board and four nails within two hours, then the cost of this board, nails, as well as the wages of the said locksmith for two hours with all the deductions relying on the law will be the direct costs of production of stools.
The very name of these costs suggests that they directly depend on the amount of manufactured products, direct costs are proportional to them. That is, for one stool we need: 1 board, 4 nails and 2 hours of locksmith's time, for two stools - respectively 2 boards, 8 nails and 4 hours, etc. And this is the key difference between direct costs and R&D costs, because the latter are almost in no way, in general, related to the volume of production. If, say, the development costs of a new smartphone model amounted to $ 10 million, then they will remain so, regardless of whether 10 thousand or 10 million new smartphones are produced. They will remain so even if Apple's management decides to cancel the release of these smartphones altogether and start developing an even more "advanced" model.
And finally, the last, third category of costs, let's call them overhead. The fact is that any firm is forced to bear a number of costs that are not directly related to the production of products, but are nevertheless necessary for the functioning of the enterprise. A simple example is the salary of accounting staff. The accountants themselves do not produce any product, but the functioning of a medium-sized enterprise is impossible without them - if no one submits reports to the tax office, calculates wages, etc. etc., then the company will very quickly cease to exist. Since overhead costs cannot be "tied" to a specific product, to obtain the full cost of goods produced, these costs are allocated to the cost in proportion to something - the quantity of products produced, the wages of the main production workers, or the cost of direct costs.
On this, the economic mini-lecture can be considered complete, and we move on to the specifics of the pricing of military programs. The point is that this pricing is fundamentally different from the pricing of conventional, civilian products.
For example, how is the price of an Apple smartphone formed? Let's say (the numbers are arbitrary), the marketing department of the company says - if the new smartphone has the characteristics listed above (and do not forget the beer opener!), Then in the next three years we will be able to sell 100 million of these smartphones at a price of $ 1,000 per smartphone, and the revenue will reach $ 100 billion. In response, the designers say that to develop a model with such characteristics, they will need $ 20 billion. $ 50, i.e. the direct cost of manufacturing one smartphone will be $ 500, and for the entire 100 millionth issue - $ 50 billion. The accountants said that the company's overhead, including taxes, would amount to $ 10 billion over three years. In total, if the company decides to implement this project, the costs for it will amount to $ 80 billion, including:
1) R&D - $ 20 billion
2) Direct costs for the production of smartphones - $ 50 billion.
3) Overhead - $ 10 billion
At the same time, the proceeds from the sale of 100 million smartphones will amount to $ 100 billion, and the company "shines" a profit of $ 20 billion over the next 3 years.
This looks quite acceptable for the company, and the head of Apple gives the go-ahead for the project. Let's say everything was planned correctly, and then you, dear reader, purchasing a smartphone for $ 1,000, will pay $ 200 for R&D on this model, $ 500 directly for the release, and $ 100 - payment of accountants and other company overheads … Also, thanks to your purchase, the owners of the Apple company will become richer by $ 200. That is, by paying for the smartphone at the cash desk of the store, you will compensate absolutely all the company's expenses for its development and production and do not forget to replenish the pocket of its owners.
But this is not the case with military equipment. Why? There are many reasons, but there are two main ones.
Competition in the military products market is built on the principle of "it's all or nothing." What does this mean? Let's go back to the “smartphone” example above. Let's say the global smartphone market is divided between two giants Apple and Samsung, and each of them is going to sell 100 million smartphones of a new model in the next 3 years. But the Samsung smartphone turned out to be better, which is why Samsung sold 140 million smartphones, while Apple sold only 60 million. This seems to be a disaster for Apple, but let's count.
Since Apple sold only 60 million smartphones, its revenue was not $ 100, but only $ 60 billion. And what about costs? R&D ($ 20 billion) and overhead ($ 10 billion) will remain unchanged, but direct smartphone manufacturing costs will drop to $ 30 billion - for a total of $ 60 billion. billion dollars the company will not earn profit, but it will not incur any loss either. In other words, such a failure is unpleasant, but not fatal.
Now let's imagine that the US Department of Defense wants to get a new model of a smartphone for military needs in a competitive civilian market. The Ministry of Defense chooses the two strongest manufacturers and informs them of the performance characteristics of the desired smartphone. Apple designers, on reflection, say that to develop this, they still need the same $ 20 billion.
So, Apple, of course, can take the risk and invest in development. But if Samsung can offer a better smartphone than Yabloko, then the US Department of Defense will order Samsung smartphones, and Apple will receive nothing. And $ 20 billion will become direct losses of the company, because, of course, no one will compensate them. What will you do if an Apple employee comes up to you in the store and says: “You know, we spent a lot of money here on a super-smartphone project, but it turned out to be worse than Samsung and did not go on sale. Could you pay us for this? I don’t presume to judge what your reaction will be, but I think that the answer option “I will get my wallet and support my favorite company” will be at the very end of the list.
There is also a second aspect. The fact is that, as a rule, the development of modern weapons is a long-term process, quite capable of stretching for 10-15 years. And the competition of military equipment is a little different than the competition of transnational corporations. If the same Apple invests in the development of a certain smartphone and nothing happens, then it will be a local tragedy for Apple, but the failure of rearmament programs means a hole in the country's defense, which is completely unacceptable for the state. In other words, the state is directly interested in controlling the R&D process on military products at every stage in order to be able to adequately respond to the troubles threatening the project. The Ministry of Defense of any country cannot wait 15 years for the weather by the sea and, upon their completion, hear from the developers: "Well, I didn't, I didn't."
So it turns out that the usual, civilian market model for creating new products does not work very well in the case of military supplies: it carries high risks both for the customer (failure to receive the necessary equipment on time) and for the contractor (loss of funds spent for R&D if another supplier is selected).
Therefore, for the most part, the creation of new types of military equipment is proceeding in a different way:
1) The Ministry of Defense announces a competition among the developers, bringing to them the approximate performance characteristics of the products it requires.
2) Developers make a preliminary offer at the level of demo versions - sometimes - at their own expense, sometimes even this is paid by the state.
3) After that, the Ministry of Defense selects a developer and concludes an agreement with him to conduct R&D on the required product. In this case, the selected company, of course, is immediately paid all costs incurred by it earlier in order to fulfill the concluded contract.
4) The R&D plan is divided into many stages, the state accepts each stage and pays for it.
5) The cost of R&D includes not only compensation for the costs of the contractor, but also a reasonable profit for the work performed.
Thus, risks are minimized for both the MO and the developer company. MO knows exactly what state R&D is in, and the developer does not risk his own money. But at the same time, the contractor is very well motivated to work effectively, because the R&D data is the property of the Ministry of Defense, and it can take all the materials at any time and transfer them to another developer. However, even if this happens, the executing company still receives cost compensation and some profit from above.
It also means that by the time the R&D is completed, all of them are fully paid by the customer. In other words, in essence, the Ministry of Defense, wanting to receive finished products (say, combat aircraft) from the contractor, divides the deal into two stages: at the first, it buys design documentation and technological processes necessary and sufficient for the production of products, and at the second, they themselves these products. Of course, when the second contract is concluded - for the supply of products, the cost of this contract does not include R&D costs. Why, if the Ministry of Defense has already bought and paid for them under a separate, already executed contract? Of course, no one will pay twice for the same job. Consequently, the cost of a contract for the supply of military equipment will include the direct costs of its production, the share of overhead costs that the company will attribute to the production of products under this contract and, of course, the company's profit.
Therefore, when we open the same Wikipedia and see that in April 2007 a contract was signed for the supply of a batch of LRIP-1 from two F-35A worth $ 221.2 million each (without an engine), then we understand that the indicated cost is only the costs directly for production plus overheads and company profits. There is not a penny in R&D costs in this amount.
And how do the costs of R&D relate to each other and directly to the purchase of military equipment? Of course, in different ways - it all depends on the specific product and there is no single proportion here. But let's try to estimate how much R&D costs in the case of the F-35 program.
According to lenta.ru with reference to the report of the General Administration of Control (GAO) of the United States, the cost of creating the Lockheed Martin F-35 Lightning II through 2010 inclusive amounted to $ 56.1 billion. This amount includes expenses directly on R&D, including the purchase of prototypes aircraft for testing and the tests themselves. If the author of this article was able to correctly read the budget requests of the US Department of Defense (and why do they write them in English? It's inconvenient), then in the period 2012-2018. The F-35 program spent (and is planned to be spent in 2018) $ 68,166.9 million, of which $ 52,450.6 million were spent on the purchase of F-35 aircraft of various modifications, and $ 15,716.3 million were spent on the F-35 program. dollars - for RDT & E (Research, Development, Test, and Evaluation), that is, for research, testing and evaluation (of purchased equipment). True, 2011 falls out, for which no data could be found, but presumably we will not be much mistaken in taking R&D costs as the average annual in the period 2012-2018. those. $ 2,245 million
In total, it turns out that by 2018 inclusively, a little more than $ 74 billion will be spent on R&D of the F-35 program, but … most likely, this is not all. The fact is that the American control bodies and the budget clearly took into account their own, that is, American expenses, and besides the United States, other countries also spent on the development of the F-35. But allocate the amount that Great Britain, Italy, the Netherlands, etc. spent on R&D, the author of this article could not, so we will leave foreign funding as if it did not exist, and to simplify the calculations, we will take the R&D expenditure on the F-35 program in the amount of $ 74 billion.
What about direct and overhead costs?
In 2014, the cost of purchasing aircraft of the F-35 family (batch LRIP-8, no engine) was:
F-35A (19 units) - 94.8 million dollars / unit
F-35B (6 units) - $ 102 million / unit
F-35C (4 pieces) - 115, 8 million dollars / piece
How much do the engines cost - alas, it's not so easy to figure it out. It is known that for a batch of 43 aircraft, which included 29 aircraft for the United States (listed above) and 14 aircraft for Israel, Great Britain, Japan, Norway and Italy, a contract was signed for the supply of engines in the amount of $ 1.05 billion. the fact that the engines for various modifications of the F-35 vary greatly in price. So, in 2008, the Pentagon announced that the engine for the F-35A aircraft costs $ 16 million, and for the F-35B - $ 38 million. Unfortunately, the author of this article could not find information on how many of the 14 aircraft were purchased by Great Britain (only it buys the F-35B, the rest of the countries take the F-35A), but assuming that the other powers acquired two aircraft each, and that the cost of the engine for the F-35C is 20% more expensive than for the F-35A, we have an increase in engine prices by 13% compared to the level of 2008 - which is quite logical, and more than explainable by inflation (which, surprisingly, the dollar is also subject to). If the author is right in his assumptions, then we will not be too mistaken in estimating the cost of the F-35 family aircraft together with the engine as of 2014:
F-35A - 112, 92 million dollars / piece
F-35B - 142, 77 million dollars / piece
F-35C - 137, 54 million dollars / piece
According to other data (cited by the site News of the military-industrial complex), the cost of aircraft of the F-35 family gradually decreased (although it is unclear for what period of time).
This data is indirectly confirmed by the Wall Street Journal, which reported in February 2017 that
“Тhe planned deal for 90 jets with program leader Lockheed Martin Corp. prices the F-35A model of the planes used by the U. S. Air Force and overseas allies at $ 94.6 million each, a 7.3% drop compared with $ 102 million for the prior batch."
Which in translation (if prompt does not cheat) sounds something like
“The planned agreement for the supply of 90 aircraft, according to general supplier Lockheed Martin, stipulates a price for the F-35A for the US Air Force and foreign allies of the US at $ 94.6 million, which will be 7.3% cheaper than the $ 102 million supplied.. USD aircraft of the previous batch"
At the same time, according to the warspot portal, as early as June 11, 2016
"Lockheed Martin CEO Marilyn Hewson told CNBC that the cost of the aircraft to be delivered to customers in 2019 under contracts signed this year will drop from more than $ 100 million to $ 85 million per unit."
Why is the cost of aircraft declining? Both the improvement of production and the increase in the volume of purchased equipment are “to blame” for this. But how does an increase in sales reduce the price?
In order to understand this, you need to understand the economic concept of "margin". Imagine the situation that there is a certain company that manufactures cars and sells its cars for 15 thousand dollars apiece, while the direct costs of manufacturing these cars are 10 thousand dollars apiece. So the $ 5,000 difference is the margin.
And if, say, a firm's overhead costs are $ 300,000 a month, and the firm considers itself a normal profit of $ 200,000, then the firm needs to earn a monthly margin of $ 500,000. to provide such a margin? 500 thousand dollars / 5 thousand dollars = 100 cars at a price of 15 thousand dollars.
But the same 500 thousand dollars can be earned by selling 200 cars monthly with a margin of 2.5 thousand dollars. That is, selling 200 cars at a price of 12.5 thousand dollars will provide the company with the same profit as selling 100 cars $ 15 thousand. There is a scale effect - the more we sell, the less we need to earn on each unit of goods in order to cover our costs and earn a profit that suits us.
But there is one more important aspect. For example, we provided ourselves with orders for 200 cars at a price of 12, 5 thousand dollars, and suddenly we found a buyer for another 10 cars - but he is ready to buy them from us at a price of only 11 thousand dollars. Can we afford it? Of course we can. Yes, the margin will be only $ 1,000, but so what? After all, the existing contract base allows us to fully cover all our overhead costs and provide us with the profit we want. Accordingly, the execution of this contract will simply increase our profit by 10 thousand dollars, that's all. Quite simply, since our other contracts have already covered all overhead costs, then everything above direct costs goes to profit.
Accordingly, it should come as no surprise that with the increase in the supply of F-35s to the United States Air Force, their price began to fall. Now Lockheed Martin can not afford to earn as much on every plane as it did before, but its profit margins are not affected. The "economies of scale" will make themselves felt until the United States reaches the planned level of production and, in theory, this should happen just in time for 2019 - unless, of course, another shift in the schedules so characteristic of the F-35 program occurs.
But you also need to understand something else - the margin cannot go down indefinitely. The dollar is subject to inflation, raw materials, materials and other costs for the production of the F-35 are becoming more expensive every year and the cost of direct costs (and the size of overheads) will grow, and the economies of scale will stop as soon as the maximum planned performance is achieved. Therefore, if the forecasts of Lockheed Martin nevertheless come true, then by the end of this decade the F-35A will indeed be able to reach the $ 85 million mark with the engine - and then the cost of this aircraft will grow in proportion to inflation. Or higher, if the US Air Force cannot order such large quantities of aircraft (the price of $ 85 million was announced for a batch of 200 aircraft) - then the economies of scale will start working in the opposite direction and Lockheed Martin will have to either put up with losses or increase the price of their products.
How much will the American taxpayer cost the cheapest of the family, the F-35A? Well, let's try to count. As we have already said, the total R&D expenses for this aircraft as of 01.01.2019 will amount to $ 74 billion - excluding inflation, of course. If we take into account that these amounts were spent in the period from 2001 to 2018, when the dollar was much more expensive than it will be in 2019, then in 2019 prices the cost of R&D will be approximately $ 87.63 billion - and this is A VERY prudent estimate, because it assumes an approximately uniform annual expenditure, while in the period 2001-2010. On average, much more was spent on R&D per year than in 20011-2018.
So, if, we emphasize, IF it happens that:
1) R&D on aircraft of the F-35 family will be fully completed as of 01.01.2019 and will not require a cent in excess of the expenditures that were included in the budget of the US Armed Forces for 2018.
2) The United States is implementing its original rearmament plans and will supply its armed forces with all the planned 2,443 aircraft of all modifications (1,763 F-35A units, 353 F-35B units and 327 F-35C units), then the cost of the F-35A for the American taxpayer in 2019 prices will be $ 85 million (purchase price) + $ 87.63 billion / 2,443 aircraft (R&D cost per aircraft) = $ 120.87 million.
But in 2017 prices, with the minimum of the named purchase prices of $ 94.6 million and the R&D cost reduced to 2017, the cost of the F-35A for the US Air Force was $ 129.54 million.
But this, we repeat, provided that the total production of aircraft of the F-35 family is 2,443 aircraft. If it is reduced to, say, 1,000 vehicles, the cost of the F-35A in 2019, assuming a purchase price of $ 85 million, will be $ 172.63 million.
But the US allies can get this plane much cheaper. The fact is that American taxpayers have already “kindly” paid Lockheed Martin its R&D costs, so it has already compensated for them, and it makes no sense for it to re-factor these costs into the price of its aircraft for other countries. What's more - deliveries to the US Air Force offset all the overhead costs associated with the F-35! That is, Lockheed Martin will be enough if the price of the aircraft exceeds the direct costs of its production - in this case, the company will cover its costs of manufacturing the aircraft and receive some other profit from above. Therefore, we can expect that for third-party consumers in the same 2019, the price of the F-35A may fall even below $ 85 million. But, we repeat, this is only possible because American Sam and John have already paid for R&D for the development of the F-35. and the overhead costs of Lockheed Martin - foreign buyers no longer need to pay for these colossal costs (and we are talking about tens of millions of dollars per plane).
And, finally, a few words about the ratio of prices between the Russian and American aircraft industry. More recently, in parallel with the supply of the F-35, the Su-35 began to arrive in the Russian Air Force. The author of this article does not have expert knowledge in the field of aircraft, but if we discard the extreme estimates, then these machines are at least comparable in their combat qualities. At the same time, the price for the Su-35 under the contract was 2,083 million rubles. - taking into account that the contract was agreed in December 2015, and the dollar in 2016 did not fall below 60 rubles, the cost of one Su-35 can be estimated at about 34.7 million dollars. The cost of the F-35A during this period fluctuated approximately at the level of 112-108 million rubles, that is, the purchase price of the Russian fighter was three times less than the American one. And that's not counting the completely incomparable development costs of the aircraft …
But when it was sold to China, Rosoboronexport did not sell too cheap - Su-35s were sold at $ 80 million apiece. What does this mean?
While the Russian Federation extracts superprofits from the sale at market prices of its very cheap aircraft in production (where this superprofit settles is another question), the United States is forced to shift the costs of developing its F-35s onto the shoulders of its own taxpayers in order to somehow "squeeze" the price of their new products within the market framework.
Thank you for the attention!
P. S. The splash screen shows a screenshot from the Air Force briefing.
Major General James Martin suddenly became ill and passed out during a press conference on the 2017 Pentagon's draft budget. We wish Mr. Martin good health and every well-being. But we state that he fainted after he was asked about the financing of the F-35 program …
