Strategic Defense Review Should Address Industrial Base Concerns

By Lawrence F. Skibbie

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 guns, etc.

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 arena.

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.

Topics: Industrial Security, Buy American, Export Control Reform

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