Is it any wonder that almost every mention of the F-35 leads to disputes regarding its cost? While some debaters prove that the cost of one such aircraft is in the hundreds of millions of dollars, others show the latest information from overseas, according to which The “price tag” for one F-35 is now “only” 85 million, and this price includes both the aircraft and the engine, and not as before, for example, in 2013 g, when the cost of the aircraft, depending on the modification, was USAF 98-116 million ., but - without engine.
In the article that is brought to your attention, we will try to deal with the pricing of military products, including F-35. But for this we need a small 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 new yogurt, can be divided into 3 categories.
The first is the cost of research or development work (R & D). We, of course, will not now consider all the nuances of the allocation of a particular type of cost according to the accounting rules, and use only the basic principles of cost allocation. So, usually the appearance of a new product occurs as follows: first, the requirements for a new product are determined. In the case of the Apple smartphone, such requirements can (very conditionally, of course) be formulated as follows: based on the performance of the previous model, we want the new model to be 30% more efficient, to store more information on the 50%, to be 20% it is easier and, at last, to have a beer opener.
Of course, from our desire alone, such a model will not appear. In order to get a smartphone that meets our expectations, it is necessary to do a lot of work to improve the material base (electronics) and software (as it also affects the speed) of materials, etc. etc. And all the costs that we incur when developing a new smartphone will be R & D costs.
It is important to understand that R & D costs are not production costs. The result of R & D will be the design documentation and description of technological processes, following which the manufacturer will be able to adjust the serial production of smartphones with the characteristics we need. That is, R & D gives the opportunity to produce the goods we need, but only that.
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 ones, but recently direct ones are often used simply as another name for variable costs). These are the costs that the manufacturer bears directly on the output. So, for example, if a mechanic is able to make one stool within two hours from one board and four nails, then the cost of this board, nails, as well as the salary of the specified mechanic for two hours with all the contributions due to the law will be manufacture stools.
The very name of these costs suggests that they are directly dependent on the number of manufactured products, direct costs are proportional to them. That is, on one stool we need: 1 board, 4 nail and 2 hours of locksmith time, 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 completely unrelated to the volume of production. If, say, the cost of developing a new smartphone model amounted to 10 million dollars, then they will remain so, regardless of whether 10 thousand will be produced or 10 million new smartphones. They will remain so even if the management of Apple decides to cancel the release of these smartphones 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 not directly related to the production of products, but still necessary for the operation of the enterprise. A simple example is the payroll of accounting staff. The accountants themselves do not produce any product, but the operation of an enterprise, even of medium size, is impossible without them - if no one submits reports to the tax office, charges wages, etc. etc., the company will very quickly cease to exist. Since overhead costs cannot be tied to a specific product, to get the total cost of goods produced, these costs are allocated to the cost in proportion to something — the quantity of goods produced, the wages of the main production workers, or the cost of direct costs.
At this economic minilection can be considered complete, and we turn to the features of the pricing of military programs. The thing is that this pricing is fundamentally different from the pricing of ordinary, civilian products.
Here, for example, how is the price of an Apple smartphone shaped? Suppose (the figures are conditional), the company's marketing department 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 such smartphones at the price of 1 000 dollars for one smartphone , and revenues of 100 billion dollars. In response, the designers state that they will need 20 billion dollars to develop a model with such characteristics. The technologists reported that 450 dollars of materials and components will be needed for the production of one smartphone and the fact that wages and salaries will amount to $ 50., ie the direct costs of producing one smartphone will be 500 dollars, and for the entire 100-million production - 50 billion dollars. The accountant said that the overhead costs of the company, along with taxes, will be 10 billion dollars over three years. Total, if the company decides to implement this project, the cost of it will be 80 billion dollars, including:
1) R & D - 20 billion.
2) The direct costs of producing smartphones - 50 billion.
3) Overhead - 10 billion.
At the same time, the proceeds from the sale of 100 million smartphones will be 100 billion dollars, and the company is “shining” with a profit of 20 billion dollars for the next year's 3.
This looks perfectly acceptable to the company, and the head of Apple gives the green light to the project. Let's say everything planned everything correctly, and then you, dear reader, buying a smartphone for 1 000 dollars, pay 200 dollars for R & D on this model, 500 dollars directly for production and 100 dollars - payment for accountants and other overhead costs of the company . Also, thanks to your purchase, the owners of Apple will become richer by 200 dollars. That is, by paying the smartphone at the store’s cash desk, you will compensate absolutely all the company's costs for its development and production and do not forget to replenish the pocket of its owners.
But with military technology is not at all the case. Why? There are many reasons, but there are two main ones.
Competition in the market for military products is based on the principle of "either all or nothing." What does it mean? Let's return to the “smartphone” example above. For example, the global smartphone market was divided by two giants Apple and Samsung, and each of them is going to sell 100 million smartphones of the new model in the coming 3 of the year. But the Samsung smartphone turned out to be better, which is why Samsung sold 140 million smartphones, and Apple only 60 million. It seems to be a disaster for Apple, but we’ll count.
Since Apple’s sales were only 60 million smartphones, then revenue was not 100, but only 60 billion dollars. And what about the costs? R & D expenses (20 billion dollars) and overheads (10 billion dollars) will remain unchanged, but the direct costs for the production of smartphones will be reduced to 30 billion dollars - our total costs will be 60 billion dollars. With 60 revenue billion dollars. the company will not earn profits, but will not incur any loss. 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 smartphone model for military needs on a competitive civilian market. The Ministry of Defense selects the two strongest manufacturers and brings them to the attention of the performance characteristics of the desired smartphone. Constructors Apple, on reflection, say that for the development of this they need all the same 20 billion dollars.
So, Apple, of course, can take a risk and invest in development. But if Samsung can offer a better smartphone than Apple, then the US Department of Defense will order Samsung smartphones, and Apple will not get anything. And 20 billion dollars will be a direct loss to the company, because no one, of course, does not compensate for them. What will you do if an Apple employee approaches you in the store and says: “You know, we spent a lot of money here on a supersmart project, but it turned out to be worse than Samsung and did not go on sale. Could you pay us for that? ” I am not going to judge what your reaction will be, but I think that the answer option “I will get a wallet and support my favorite company” will be at the very bottom of the list.
There is a second aspect. The fact is that, as a rule, the development of modern weapons is a long-term process, which is quite capable of stretching over 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 fails, then this will be a local tragedy of Apple, but the failure of rearmament programs means a hole in the country's defense capability, which is completely unacceptable for the state. In other words, the state is directly interested in controlling the process of R & D on military products at each stage in order to be able to adequately respond to the problems facing the project. The Ministry of Defense of any country cannot wait for the 15 weather for years at the sea and, after their completion, hear from the developers: “Well, I couldn’t, I didn’t.”
So it turns out that the ordinary, 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 (not receiving the necessary equipment in time), and for the contractor (loss of funds R & D in case of choosing another supplier).
Therefore, for the most part, the creation of new types of military equipment is different:
1) The Ministry of Defense announces a competition among developers, bringing to them the indicative TTX of the products it needs.
2) Developers make a preliminary offer at the level of demo versions - sometimes at their own expense, sometimes even this is paid for by the state.
3) After that the Ministry of Defense chooses a developer and concludes an agreement with him to conduct research and development on the required product. In this selected company, of course, all expenses incurred by it earlier in order to fulfill the concluded contract are immediately paid.
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 the compensation of the contractor’s costs, 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 the R & D is in, and the developer does not risk his own money. But at the same time, the performer is very well motivated to work effectively, because the R & D data is the property of the Ministry of Defense, and it can at any time pick up all the materials and transfer them to another developer. However, even if this happens, the executing company still receives compensation for costs and some profit from above.
And it also means that by the time R & D is completed, they are all fully paid by the customer. In other words, in fact, the Ministry of Defense, wishing to receive finished products from the contractor (for example, combat aircraft), divides the transaction 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 these products. Of course, when a second contract is concluded for the supply of products, the cost of this contract does not include the cost of R & D. Why, if MO already bought and paid them on a separate, already executed contract? Of course, no one will pay twice for the same job. Consequently, the cost of the 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 output 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 r was signed a contract for the supply of a batch of LRIP-1 of two F-35A worth 221,2 million dollars for each (without an engine), then we understand that the specified cost - This is only the cost directly to production, plus overhead and company profits. Not a penny of R & D costs in this amount.
And how do the costs of R & D relate directly to the purchase of military equipment? Of course, in different ways - it all depends on the specific product and there is no uniform proportion here. But let's try to estimate the cost of R & D in the case of the F-35 program.
According to lenta.ru with reference to the report of the United States General Administration for Control (GAO), 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 acquisition of prototypes test aircraft 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 million, of which $ 166,9 million were spent on the purchase of F-52 aircraft of various modifications, and $ 450,6 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, 15 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 716,3-2011. those. $ 2012 million
In total, it turns out that a little more than 2018 billion dollars will be spent on the R & D of the F-35 program in 74 g, but ... most likely, this is not all. The fact is that the US control bodies and the budget clearly took into account their own, that is, US spending, and besides the US, other countries spent the development of F-35. But to allocate the amount that the United Kingdom, Italy, the Netherlands and so on. spent on R & D the author of this article could not, so let's leave foreign funding as if it was not, and to simplify the calculations we take R & D expenditures for the program F-35 in the amount of 74 billion dollars.
And what about the direct and overhead costs?
In 2014 g, the acquisition cost of the F-35 family (LRIP-8 batch, without engine) was:
F-35A (19 pcs) - 94,8 million dollars / pcs
F-35B (6 pcs) - 102 million dollars / pcs
F-35C (4 pcs) - 115,8 million dollars / pcs
How much are the engines - alas, so easy to not understand. It is known that for a batch of 43 aircraft, which included 29 machines for the USA (listed above) and 14 machines for Israel, Great Britain, Japan, Norway and Italy, a contract was signed for the supply of engines worth 1,05 billion. But the matter is That engines for various modifications of the F-35 vary greatly in price. So, in 2008, the Pentagon stated that the engine for the F-35A aircraft costs 16 million dollars, and for the F-35B - 38 million dollars. Unfortunately, the author of this article could not find information about how much of 14 acquired the United Kingdom (only she buys F-35B, the rest of the countries take F-35A), but assuming that the other powers purchased two planes, and that the cost of the engine for F-35C is 20% more expensive than for F-35A, we have the increase in the price of engines on 13% in comparison with the level of 2008 g - which is quite logical, and more than explainable by inflation (which, surprisingly oh, the dollar is also subject). If the author is right in his assumptions, then we are not too mistaken in estimating the cost of the F-35 family of aircraft together with the engine as of 2014 g:
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 (the site "News MIC), the cost of the F-35 family aircraft gradually decreased (although it is not clear for how long).
This data is indirectly confirmed by the Wall Street Journal, which in February 2017 reported that
“The planned deal for 90 jets with Lockheed Martin Corp. program leader The F-35A is a model of the planes that have been used for the US Air Force.
What the translation (if prompt does not cheat) sounds like
"The planned agreement for the supply of 90 aircraft according to the general supplier of Lockheed Martin provides a price for F-35A for the US Air Force and US foreign allies at the level of 94,6 million dollars, which will be cheaper by 7.3% than those supplied for 102 million dollars . aircraft of the previous batch "
At the same time, according to the portal warspot, another 11 June 2016 g
“Lockheed Martin’s CEO Marilyn Hewson told CNBC television that the cost of the aircraft that will be delivered to customers in 2019 on contracts concluded this year will decrease from more than $ 100 million to $ 85 million per unit.”
Why is the reduction in the cost of aircraft? “Blame” for this is both the improvement of production and the increase in the volume of purchased equipment. But how does the growth in sales reduce the price?
In order to understand this, you need to deal with the economic concept of "margin". Imagine a situation that there is a certain company engaged in the production of cars and selling their cars for 15 thousand dollars apiece, while the direct costs for the manufacture of these cars are 10 thousand dollars apiece. So 5 thousand dollars the difference - this is the margin.
And if, say, the overhead of a firm is 300 thousand dollars per month, and the company considers itself a normal profit in the amount of 200 thousand dollars, then the company needs to earn a monthly margin in the amount of 500 thousand dollars. How many cars need to be sold to provide such a margin? 500 thousand USD / 5 thousand USD = 100 cars for the price of 15 thousand USD
But the same 500 thousand dollars can be earned by selling monthly 200 cars with a margin of 2,5 thousand dollars. That is, selling 200 cars at the price of 12,5 thousand dollars will provide the company with the same profit as selling 100 cars by 15 thousand. There is an effect of scale - the more we sell, the less we need to earn on one each unit of goods in order to cover our costs and earn profit that suits us.
But there is one more important aspect. Here, for example, we provided ourselves with 200 auto orders for 12,5 thousand dollars and suddenly we had another buyer for 10 machines - but he is ready to purchase them from us for the price of only 11 thousand dollars. Can we imagine that allow? Of course we can. Yes, the margin will be only 1 thousand dollars, well, so what? After all, the existing contract base allows us to fully cover all our overhead costs and provide us with the profit we desire. Accordingly, the execution of this contract will simply increase our profits on 10 thousand dollars, that's all. Simply, since other contracts have already covered all overhead costs, everything that is beyond direct costs goes to profit.
Accordingly, it is not surprising that with the increase in the supply of F-35 to the United States Air Force, their price began to fall. Now Lockheed Martin can afford not to earn as much on each plane as it did before, but the size of its profits does not suffer from this. The “scale effect” will be felt until the United States reaches the planned production level and, in theory, this should happen in time for 2019 g - unless, of course, there is another shift in the graphs so typical of the F-35 program.
But you also need to understand something else - the margin cannot go down to infinity. The dollar is subject to inflation, raw materials, materials and other costs for the production of F-35 are getting more expensive every year and the cost of direct costs (and the size of invoices) will increase, and the economies of scale will stop as soon as the maximum planned performance is reached. Therefore, if the Lockheed Martin forecasts are nevertheless justified, then towards the end of this decade, the F-35A can really reach the 85 million mark with the engine - well, then the cost of this aircraft will grow in proportion to inflation. Or higher, if the United States Air Force cannot order such large batches of aircraft (the price of 85 million was announced for a batch of 200 aircraft), then the scale effect will start working in the opposite direction and Lockheed Martin will either have to accept losses or increase price of their products.
How much will the F-35A aircraft cost the American taxpayer the cheapest of the whole family? Well, let's try to count. As we have said, the total R & D costs for this aircraft for 01.01.2019 g will be 74 billion dollars - without taking inflation into account, of course. If we take into account that the indicated amounts were spent in the period from 2001 to 2018, when the dollar was significantly more expensive than it would be in 2019 g, then at 2019 g prices the cost of R & D will be approximately 87,63 billion dollars - and this is VERY cautious estimate because it assumes approximately uniform annual spending, while in the period 2001-2010. on average, they spent a lot more on research and development 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 at 01.01.2019 g and will not require a cent in excess of the expenses that were included in the budget of the US military for 2018.
2) The United States implements its initial rearmament plans and will supply all planned 2 443 aircraft of all modifications (1 763 units F-35A, 353 units F-35B and 327 units F-35C) to its armed forces,
then the F-35A cost 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, at the lowest of the above prices, the purchase of 94,6 million dollars and the R & D cost reduced to 2017 g, the cost of F-35A for the USAF was 129,54 million dollars.
But this, we repeat, provided that the cumulative production of aircraft of the F-35 family will be 2 443 machines. If it is reduced to, say, 1 000 machines, the cost of the F-35A in 2019 g, subject to the purchase price of 85 million, will amount to 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 for its research and development costs, so it has already compensated them, and it makes no sense to re-deposit these costs in the price of their aircraft for other countries. Moreover, deliveries to the USAF compensated all the overheads related to 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 producing the aircraft and will receive some other profit from above. Therefore, we can expect that for third-party consumers in the same 2019 g the price of the F-35A may fall even lower than the 85 million dollars. But, again, this is possible only because American Sami and Johns have already paid for R & D to develop F-35 and overhead "Lockheed Martin" - foreign buyers to pay these huge costs (and we are talking about tens of millions of dollars in terms of one aircraft) is no longer necessary.
And, finally, a couple of words about the price ratio of the Russian and American aircraft industry. More recently, in parallel with the supply of F-35, Su-35 began to flow into the Russian Air Force. The author of this article does not possess expert knowledge in the field of aircraft, but, if we discard the extreme estimates, then these machines are at least comparable in their fighting qualities. At the same time, the price of Su-35 under the contract was 2 083 million rubles. - given that the contract was agreed in December 2015 g, and the dollar in 2016 g did not fall below 60 rubles, the cost of one Su-35 can be estimated at about 34,7 million dollars. The cost of F-35A in this period fluctuated by about The level of 112-108 million rubles. That is, the purchase price of the Russian fighter was three times less than the American. And that's not counting the completely incomparable costs of developing the aircraft ...
But when selling to China, Rosoboronexport did not bargain - Su-35 were sold at 80 million dollars apiece. What does this mean?
While the Russian Federation is extracting super-profits from selling at its market prices its very cheap in aircraft production (where this super-profit settles is another matter), the US is forced to shift the cost of developing its F-35 onto its own taxpayers in order to “squeeze” the price of their new products in the market framework.
Thank you for attention!
PS On the screen saver - a screenshot from the Air Force briefing.
Major General James Martin suddenly became ill, and he lost consciousness during a press conference on the Pentagon’s budget project for 2017. We wish Mr. Martin good health and all kinds of well-being. But we state that fainting happened after he was asked a question about the financing of the F-35 program ...