Once upon a time there was much anxiety in the defense industry about the Obama administration gutting the Pentagon’s budget.
Those worries have been allayed, for now. Defense is the only portion of the federal budget that the president sheltered from the axe.
So the industry is breathing a sigh of relief, sort of.
Yes, the budget is huge, but the industry still feels vulnerable. Executives fear that weapons systems that for decades have been reliably profitable are becoming obsolete. They see the Defense Department shifting into new areas of warfare, but are not sure how to reposition their companies to succeed in non-traditional markets. They also fret about the nation’s oncoming fiscal train wreck, and wonder when someone will make the tough choices.
The much-anticipated Quadrennial Defense Review was supposed to give the industry “planning tools” to strategize about the future of the business. But the review was mostly a disappointment for its lack of specificity. One industry official compared the QDR to the Soviets’ infamous five-year plans for economic development.
In boardrooms these days, corporate bosses are brainstorming.
Many in the industry recognize that they are still stuck in the Cold War way of doing business. The 9/11 attacks were supposed to have shaken up the weapons-buying apparatus. That didn’t happen, except for a massive spending surge. It ultimately took a heavy hand from Defense Secretary Robert Gates to shift money and focus from planning for hypothetical future conflicts to dealing with today’s wars.
At a recent off-the-record industry gathering, a panel of high-ranking defense executives told the audience of contractors to stop living in denial about the coming shifts in the market.
Companies have to pay more attention to what Gates is trying to do, and not assume it’s just a temporary diversion until we go to war with China, members of the panel cautioned. Gates’ influence should not be underestimated, one panelist said. “He delivers the message across the river.”
For traditional defense companies, the operative word is “non-kinetic,” another speaker asserted.
“We love our kinetic weapons, and we don’t want to let them go,” he said. “But the world is moving in a different direction.”
Here’s the problem: Kinetic weapons only are useful in phases two, three and four of war. Gates is veering the emphasis to the fringes — to phases zero and one (prevention of conflict, interagency work) and to phases five and six (stabilization and policing).
The industry is “stuck in the middle three,” the official said. The companies that will thrive are those with the non-kinetic technology and skills that can help the military succeed in the outer edges.
Other pieces of advice to the industry:
- Think way out into the future, about what threats the United States might face in 10 years. The menace du jour, cybersecurity, from a strategic planning standpoint, is yesterday’s news, a senior exec said. “What’s next?”
- Keep an eye on U.S. Special Operations Command. SOCOM is growing by 30 percent a year. It is ahead of everyone else in understanding nonconventional warfare. Both the Army and Marine Corps want to be more SOCOM-like.
- Become more culturally aware. Executives on the panel said U.S. companies must think more globally, as opposed to just being American companies doing business internationally.
- Fix the supply chain. Prime contractors are exceedingly dependent on economically fragile lower-tier suppliers. Squeezing subcontractors for lower prices can be counterproductive, he said. “We have to watch this area closely.”
- Think more like commercial companies. One panelist recalled this comment he heard at the Pentagon: GM builds a car and then tries to sell it; the defense industry sells a ship and hopes it can build it.
- Prepare for China to challenge U.S. dominance in the global arms market. That means making better products at lower costs. “China will be a major change agent in the market,” one official said. “We need to be in a position to be competitive.”
- Read Andrew Krepinevich’s “7 Deadly Scenarios: A Military Futurist Explores War in the 21st Century.” The book had quite an impact on Gates and is shaping many of the Pentagon’s war games.
- Read another Krepinevich study, “Why AirSea Battle?” which discusses the potential consequences of Iran and China surging as military powers. It is a useful guide for planning investments in high-end weapons.
- Remember Abu Musab al-Zarqawi. Air Force Lt. Gen. David Deptula often reminds people how the Islamist militant was captured in 2006 in Iraq. It took 600 hours of Predator time, thousands of hours of intelligence analysis and only six minutes for an F-16 fighter to get him. In the old days, the most important part of that chain would have been the F-16. It’s not that way anymore.
It has become a cliché in Washington that the Pentagon has a checkered history in trying to predict the future. The good news for contractors is that the military budget is going to remain the world’s largest, even as the U.S. debt continues to balloon. “We’re the only nation that’s allowed to borrow from itself,” one of the panelists said. “The world admires us and lets us keep doing it because we’re their last best hope, and they know it.”