In its 2001 report on Industrial Capabilities, the Defense Department
outlines emerging global security and industrial environments, as
well as the strategy that is needed to meet the new challenges.
The report is required by Congress and—incidentally—was
precipitated by NDIA’s testimony to the Senate Armed Services
Committee, in which we recommended periodic assessments of various
defense industry sectors such as ammunition, aircraft, ships, large
The report is a respectable piece of work and a good start at coming
to grips with the post-Cold War industrial landscape.
Consider the changes experienced by our defense industrial base
since the demise of the Soviet Union.
First, the business base for defense industry is down 60-70 percent
since 1985. This has triggered a series of consolidations with consequent
downsizing of capacity and people. Many suppliers have left the
market for other opportunities, or in some cases, have gone out
of business entirely.
Second, the globalization of defense industry presents a new paradigm.
National borders have become increasingly irrelevant as multi-national
companies set up production in multiple nations. A corollary to
globalization is the growing possibility that there may be no U.S.
domestic industrial capability for certain weapons systems or components.
The globalization of the defense markets has made the “Buy
American Act” relatively impotent with regard to domestic-versus-overseas
purchases of critical components.
Third, the new industrial base also faces a blurring of distinction
between the civil and military component sectors. The United States,
as well as its friends and foes, will rely more and more on commercially
available technologies to either provide or enhance military capabilities.
The Industrial Capabilities report, for the most part, recognizes
these realities. It discusses, for example, the financial health
of our industry as the defense market shrinks, with a decline in
the number of defense programs and associated smaller production
runs, and greater uncertainty with regard to future business.
But, while the report is a promising beginning, several of its
conclusions raise questions and reinforce the need to find ways
to mitigate some adverse trends in our industry.
First is the question of defense industrial dominance. The report
states that the U.S. defense industry continues to be the most technologically
innovative, capable and responsive in the world. While this may
be currently true, we are not assured that it will continue. What
are the prospects in the long term, given 15 years of reduced funding?
This is a problem, as evidenced by the current moratorium on defense
budget increases until after a strategic review is completed later
in the year.
The report also posits that the Pentagon has been successful in
its acquisition reform efforts. While many positive changes have
been implemented during the past decade, the major barrier to the
entry of commercial firms into the defense market—the cost
accounting standards required of defense contractors—remains
in place. While this unique accounting system facilitates the auditing
of defense contracts, it is considered anathema to a large part
of the commercial world, where it would be unacceptable to increase
accounting staffs by 300 percent, merely to accommodate defense
audits. The Secretary of Defense needs to challenge explicitly the
acquisition reform effort, to find ways to overcome this major hurdle.
The Industrial Capabilities study, additionally, says the Pentagon
is encouraging defense firms to reduce underutilized capacity. Unfortunately,
according to leading defense contractors, until financial incentives
are established for the industry to divest excess capacity, that
capacity will remain within the defense base. This is an important
issue for the new leadership to address.
Finally, the Pentagon has made a major effort to streamline the
export control process. But the gatekeeper in this area is the Department
of State, which continues to maintain a choke-hold on defense exports.
Here, we can only hope that Secretary Colin Powell becomes aware
of the need to ensure our defense industry is allowed to be competitive
in the global arms market.
As I stated before, the Industrial Capabilities study is a worthwhile
effort that highlights important issues surrounding the future viability
of our industry. But more needs to be done.
The ongoing strategic review by Secretary Rumsfeld offers an ideal
opportunity to determine what role the Pentagon will play as the
defense industry’s principal customer. The challenges outlined
in this article—the poor financial health of the industry,
the growing globalization, the shortfalls in acquisition reform
and the overly-restrictive export controls—can be solved over
time if government and industry work together. Industrial leaders
are now looking to Secretary Rumsfeld for strong leadership in this
Much is at stake. Decisions made today will determine whether the
technological superiority of U.S. forces can be maintained in the
future. The nation’s industrial base is a critical factor
in this equation.