For Defense Industry, the Path Forward Is Still Clouded by Uncertainty
By Lawrence P. Farrell Jr.
With the release of the president’s 2012 budget, one now begins to see an outline of the future awaiting the defense industry. There are no surprises. The picture looks quite similar to the downturn of the Reagan budgets about 1986. The curve is heading down. Members of Congress now are increasingly calling for the defense budget to be on the table as part of future deficit reductions.
For industry, what does this all mean? One industry professional has described the current environment as “Eisenhower’s big nightmare.” Could a reasonably competitive industry survive large reductions in funding?
First, let’s review the broad outlines of the 2012 budget proposal. One notes right away that Defense Secretary Robert Gates is nervous about where we are. “We face a crisis on our doorstep if the Department of Defense ends up with a year-long continuing resolution,” he said. “This would damage procurement and research programs, causing delays, rising costs, no new program starts and serious disruptions in the production of some of our most high demand assets, such as unmanned aerial vehicles.”
Any major reductions in 2011 would hurt operations and maintenance accounts, aircraft would be grounded, there would be cutbacks in training and a subsequent loss of readiness. “That is how you hollow out a military,” Gates said. His minimum number for 2011 is $540 billion. A full year continuing resolution would fund the department at $526 billion.
The secretary is worried, and justifiably so. The year is half over with no budget. Even if a budget were passed today, there is too much broken glass to sweep up. We are already in the hurt locker.
And recall, the $540 billion is already factoring $178 billion in efficiencies across fiscal years 2012-2016. If the savings don’t materialize, the situation gets worse.
Industry is already feeling the pinch, and many companies have already made adjustments.
It is important for industry to preserve its fighting form. First, a number of critical industrial capabilities must be secured. Most companies only do defense. If funding dries up for a program, it goes away along with the industrial expertise that created and sustained it. Careful industrial planning is essential. Examples of critical skills are aircraft, ship and submarine design. Prime contractors also have to make tough decisions about which of their sub-tier suppliers they should protect.
Over the coming years, it is expected that war funding (known as OCO, for overseas contingency operations) will wind down. As of today, there are still critical programs supported by OCO funding. What happens to them in the long term is unclear. The services have a huge backlog of equipment that has to be reset, and that also is being paid with OCO funds. Particularly at risk will be ammo producers, because as any programmer knows, in peacetime, the first cuts are the ammo accounts.
Insourcing also is a concern for industry. Shifting work from the private sector to the government is important in areas such as acquisition, contracting and engineering. But the insourcing effort almost from the beginning overreached its original worthy goals. In some cases, government agencies are hiring contractor personnel who previously performed the task as private sector employees. Military depots are taking over contractor workload without a clear business case. This is a serious question. Design, innovation, modifications and commercial work are best accomplished in industry. And if critical industrial design and creative capability is to be maintained in industry, this question needs to carefully examined and balanced. We don’t want to go back to a government arsenal system.
Manufacturing as a key capability requires much more attention than it has received for a long time. Much noise has been made about U.S. manufacturing as a key source of jobs. But a national policy is sorely lacking, and investment in advanced manufacturing capability and technology is lagging badly. U.S. manufacturing is still, in many respects, quite competitive, but the pace of innovation and investment is too slow. The coming crunch could deal a serious blow to this underfunded sector.
Finally, there is the modernization crisis. Weapon systems in all the services are getting older, manufacturing rates are decreasing and slipping to the right. The services are pushing life extension programs far more than almost anyone could have anticipated. Ship production rates won’t sustain the Navy’s fleet objective of 313 ships. In the Army, the emphasis is on replacement and reset, not on new buys. In the Air Force, the recapitalization rate for its fleet is on a 50-year pace and life extension programs are under way for bombers and fighters. The anticipated acquisition rate for the F-35 is 80 aircraft per year. During the Vietnam War, McDonnell Douglas was producing 75 F-4 Phantoms per month. Maybe former Lockheed Martin CEO Norm Augustine was right: We are approaching a time when we will only be able to afford to produce and sustain one aircraft, and “everyone will take turns flying it.”
And the salient questions remain: Will we be able to retain the nation’s world-class industrial capabilities. And will the Pentagon be able to afford to buy sufficient quantities to modernize the force for the 21st Century?
Still waiting for answers.