As DOD grapples with multiple fiscal challenges, the Army and the Pentagon are stepping up efforts to sustain and preserve the health of the U.S. defense industrial base (IB) by assessing vendor capabilities, watching for mergers and acquisitions, and analyzing the supply chain for critical capabilities.
In its 2013 report to Congress on the health of the defense IB, the Office of the Deputy Assistant Secretary of Defense for Manufacturing and Industrial Base Policy (MIBP) notes DOD?'s tightening fiscal constraints and widespread concern about their effects on the IB, but says only a small portion of the IB is truly at risk. "DOD recognizes [that] only a small fraction of our enormous industrial base capabilities are truly at risk (fragile) and, therefore, in danger of disappearing without dedicated efforts to sustain them," states the October 2013 report from MIBP, in the Office of the Undersecretary of Defense for Acquisition, Technology and Logistics (USD(ATL)).
That does not mean, however, that the risk is insignificant, the report states.
"The United States is in danger of losing some key industrial capabilities that will be vital for our future national security. Insufficient near-term demand for certain products will keep some companies below their minimum economic sustaining rates, making it financially challenging to keep workers with unique, technical expertise active enough to maintain their proficiency in these advanced skills," the report states.
The fiscal pressures on the U.S. military in the coming months and years include a shrinking defense budget, the lingering effects of deep sequestration cuts last year, and the prospect of further sequestration cuts in 2014.
"We are now entering the second year where we are likely to face sequestration. The health of the industrial base is a question that is near and dear to the department's leadership interests," said Elana Broitman, acting deputy assistant secretary of defense for MIBP.
The policy office is focused on vendors' production capacity as well as the need to preserve or maintain a highly skilled, technically competent workforce. "In order to equip the warfighter, we depend upon a healthy industrial base that continues to innovate," Broitman said. "The assessments of the industrial base that we do are an important tool in understanding how the industrial base will fare during this downturn."
"We have to be aware of what's happening with the industrial base with this country," Rep. Mac Thornberry, R-Texas, vice chairman of the House Armed Services Committee, told a reporter for Breaking Defense on Nov. 22, 2013. "Whether you need a separate program to fund R&D or other things to keep some suppliers alive, I think that's another question, but it's worth asking."
POLICY OPTIONS
Army leaders often cite multiyear procurement contracts, foreign military sales (FMS) and industry outreach as examples of ways to support a prosperous path forward for industry.
Through the multiyear deals for the UH-60 Black Hawk utility helicopter and CH-47 Chinook cargo aircraft, the Army can help solidify and sustain production expertise while simultaneously maintaining production capacity. The Army also is continuing a variety of IB assessments to identify potential areas of difficulty or challenge.
FMS, too, continue to have a strategic impact by helping to build partner capacity and, in some cases, sustain production capacity for a variety of needed technologies and systems. FMS have been a part of programs such as the Patriot missile, Guided Multiple Launch Rocket System and AH-64 Apache helicopter, among others.
As an example of how these various approaches can come together, the Army has conducted IB assessments related to Abrams tank modernization at the Lima Army Tank Plant, OH, also called the Joint Systems Manufacturing Center. These efforts focused on maintaining needed production capacity as well as engineering and manufacturing expertise. FMS are a part of this calculus as well, because there is an upcoming period of time in which the Army plans to temporarily pause its tank modernization line.
The Army works closely with the other services and Pentagon leadership to coordinate efforts and collectively develop mitigation strategies. If one of the services is producing a given technology, that may help another service maintain production capacity for a desired system.
INFORMED DECISIONS
The MIBP office relies on a data repository created through a Pentagon-led multiyear IB assessment called Sector-by-Sector, Tier-by-Tier (S2T2). The S2T2 database looks at vendor capability, supply chain issues and manufacturing details regarding the production of critical components, platforms and technologies.
S2T2 is a starting point for assessments of all defense components. The information in S2T2 is used to manage DOD's investments more effectively, to ensure a healthy IB for key sectors that are critical to future capabilities. All of the vendor-specific information is kept in strict confidence and is therefore not publicly available.
While still an ongoing project, most of the work of S2T2 is complete, Broitman said.
She described S2T2 as an invaluable resource. "With S2T2, we really delve deep into each tier of the supply chain in order to be accurate [as to] whether a particular company is critical, meaning if it goes away, no other company could fill its spot, so the entire supply chain is at risk," she said. The S2T2 data repository includes a detailed examination of relationships between second- and third-tier suppliers.
"The effect on these firms is especially important to emphasize, since a substantial portion, often 60-70 percent, of defense dollars provided to prime contractors is subcontracted," states the 2013 MIBP report to Congress. "Many of these subcontractors, and their own suppliers, are small and innovative firms."
POSSIBLE POINTS OF FAILURE
"Single points of failure" is another key phrase in the lexicon of Pentagon IB policymakers, who look for instances in which the ability to produce a certain product could go away. "On single points of failure, we look at the fragility and criticality of the supply chain," Broitman said.
She added that these points tend to be more common among products or technologies that are manufactured solely for DOD, meaning that there is no alternative commercial use or market for the product.
One analyst agreed, explaining that industries with a large commercial audience are likely to be more stable in what they can provide DOD during a downturn. "For example, you have a commercial airliner industry that is going really well. Companies without diversification elsewhere [beyond DOD] will have a much harder time," said Richard Aboulafia, vice president of analysis at the Teal Group Corp., a Virginia-based consultancy.
Aboulafia added that the Pentagon, in its examination of the IB, might want to emphasize individual companies on a case-by-case basis instead of taking a sector-by-sector approach, because there is significant diversity within sectors. One company in a given sector might be diversified with commercial products or multiple defense programs, whereas another may not, he explained.
At the same time, Broitman noted, an IB issue could emerge regarding a product available in parts of the world, but that the United States would like to ensure is produced domestically.
Another analyst wondered if single points of failure might, in reality, merely translate to market price increases for particular products.
"A single point of failure may become a price increase because there is almost always someone who will make something if the price is right," said Benjamin H. Friedman, senior fellow in defense and homeland security studies at the Cato Institute, a Washington, DC-based think tank.
Friedman said globalization and the "netting" together of markets are likely to make DOD less dependent on one particular source of supply. He emphasized that the free-market would is well suited to address most IB issues.
"The more technically difficult or complex it is to produce something, the more we should worry about an ability to make it at low cost," he added.
MITIGATION STRATEGIES
Mitigation strategies also are a large part of the IB policy equation, wherein the Pentagon employs a particular approach to foster competition, sustain production or identify key areas of needed investment.
Such strategies may involve DOD investment in a particular product or area in order to preserve the supply chain and critical core capabilities.
DOD recognizes its responsibility to maintain a robust IB for the long term and to enhance industrial capacity "by investing in those defense unique items that will support future acquisition programs," the report to Congress states. Sequestration and longer-term budget cuts could limit capital market confidence in the defense industry. "Faced with this continued uncertainty, companies will be less willing to make internal investments in their defense portfolios or more likely abandon them altogether," particularly smaller, innovative and niche-product companies with fewer resources to cushion the fiscal pressures, the report states.
This is where DOD can play a role. The report notes that earlier Pentagon decisions to invest in important IB technologies and capabilities when defense spending was on the decline led to pivotal programs such as the F-16, the Abrams tank, and the Patriot air and missile defense system.
"We're not looking to invest forever," Broitman said. "When we do this, it is a temporary solution. We need to know if, at the end, there is a way forward for the company without us." DOD is careful to analyze the market to ensure that any investment will prove both relevant and worthwhile. It is important to keep pace with market changes and technological progress, Broitman said.
"We don't want to spend money if a particular product will be moving to the next generation by the time there is an exit strategy," she explained.
DOD has invested in a number of areas over the past several years to preserve critical capabilities--for example, lightweight materials, GPS-related technologies, rocket components and battery items, Broitman said.
There are various avenues of funding for mitigation strategies, including use of the Defense Production Act and the DOD technology program ManTech, Broitman said.
"We try to do small, flexible, nimble investments," she said.
CONCLUSION
MIBP's 2013 report to Congress warns against expectations that DOD will simply spend more on procurement to solve IB challenges. "Now, more than ever, buying products beyond what is required is not an option, no matter how much those products may protect key industrial base capabilities by generally exercising the entire industrial base," the report states. "We simply cannot pursue a strategy that ultimately results in solving 'million dollar' problems with 'billion dollar' solutions."
Rather, DOD is weighing options along a spectrum between program cancellation and completed full-scale production. "These options include upgrading or extending the service life of existing programs, hovering or slowing ongoing programs, shelving or rolling over technology for future systems, executing planned low-rate procurements, and/or choosing silver bullet procurements of successful prototypes," the report states.
Of those possible approaches, the report identifies two with the greatest promise for keeping the IB intact during long intervals between new major weapon program starts:
• Selective low-rate procurements, also known as block production.
• A hedging approach that produces a highly capable system with a high-technology operational advantage against current or near-term threats and, at the same time, forms a basis to build out larger production runs if necessary, while preserving critical human, manufacturing and technical capabilities.
For more information, go to http://www.acq.osd.mil/mibp/.
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