Soldier Equipment Industry Struggles to Find Path Forward

By Valerie Insinna

When the wars in Iraq and Afghanistan began, the military found itself grappling with a $56 billion equipment shortage.

Now soldier equipment vendors are worried that the coming transition from war will leave them without adequate funding and — perhaps more importantly — without a concrete roadmap of future requirements.

In order to address industry concerns, the Warrior Protection and Readiness Coalition was formed in 2009 to provide an organized voice for companies to engage with the Defense Department and Congress.  The group has grown from 12 to 35 members since its inception.

The equipment sector, which includes everything from night vision goggles, knives, and combat uniforms, is fragmented and fragile, said WPRC Executive Director Craig Heilman. Some contractors rely almost exclusively on military sales, while others are primarily commercial businesses that began selling to the military because of wartime needs.

One issue plaguing the industry is opaque funding. While there is a line item on the federal budget for research and development of critical equipment, there is no such line for procurement.

Instead, equipment procurement is primarily done through operations and maintenance accounts and overseas contingency operations (OCO) spending, a supplemental fund for the wars. The Defense Logistics Agency (DLA) handles equipment sustainment, using a revolving capital fund.

The Obama administration has proposed cutting OCO funds from $115.3 billion in fiscal year 2012 to $88.5 billion in fiscal year 2013, and placing a $450 billion cap on OCO spending through 2021. However, with no procurement line items on the budget for individual equipment, it’s unknown exactly which companies and programs will be hit hardest.

In order to help sustain the industry, there needs to be procurement reform work, said Heilman. “Based on some of the visible budget lines specific to research and development, there’s been some good support for R&D funding in this area. When it comes to procurement and what will actually be purchased, we have very little understanding going three, four, five years out.”

The most vulnerable companies will likely be those that rely on the Defense Department for a majority of their income, such as those that produce ballistic fabrics or other textiles.

“Because a lot of the textile industry has already left the United States, a lot of what is left is making products for defense needs,” Heilman said. “So we’ll certainly see companies go out of business there.”

Also, vulnerable are body armor manufacturers, which Heilman said have consolidated even during a wartime period of continued demand. “You had one set of companies in 1995, and then you kind of had a different set of companies in 2000, and then different ones in 2005. And you can probably see that that’s going to repeat itself, and you might lose some companies there.”

For Ceradyne Inc., which produces hard body armor plates, about $400 million of its $600 million revenue comes from military sales, said President Marc King. However, he has no visibility of what the future holds after June 2013, after the company wraps up a sustainment contract with DLA.

“After June of 2013, all they [DLA officials] can give me is an estimate of what they think they might order, and the numbers drop off pretty dramatically,” he said. “So my concern as a manufacturer is how do I keep my plant running? How do I keep from laying off the most critical people in the plant, so that if and when the DoD decides, ‘Hey, we need to surge …’ I have a fully functional factory that’s capable of doing that?”

Part of the problem is the Defense Department’s conflicting desire to sustain the industrial base while also promoting competition among companies. The amount of work needed to sustain so many body armor companies simply does not exist, King said, and the department’s practice of spreading out contracts among the industry leaves businesses surviving from contract to contract.

At the beginning of the Iraq war, a shortage of ceramic body armor plates cost soldiers’ lives. A classified Pentagon study acquired by The New York Times in 2006 noted that as many as 80 percent of Marines who died of wounds to the upper body may have survived if they had been wearing armor with better protection for the torso, shoulders and sides.

Funding for body armor comes from discretionary OCO spending. Although Congress has advocated creating a procurement line for body armor on the budget, it has faced opposition from the Pentagon.

In addition to procurement issues, the industrial base is worried that less funding and fewer requirements will lead to a loss in innovation. Even larger defense contractors are becoming more cautious with their investments in equipment development.

BAE has won long-term sustainment contracts with DLA for items such as hard armor plates and the improved outer tactical vest, said John Norwood, BAE’s business development vice president. A lack of new requirements means that BAE faces more competition, and must choose wisely the projects for which it competes.

“You have less opportunities to fail. You have to kind of get lucky, almost,” he said. “You have to place your bets on the right programs. You’ve got to invest millions of dollars to get to a place where you think that you can win a production contract.”

One requirement still out there is the Army’s Soldier Protection System, with components that include equipment for the full body, including helmets, eyewear, torso and extremity protection, and sensors to monitor the war fighter’s physiological status.

“We’re looking at that right now, how we should position ourselves, … which parts we should go after, and how we should allocate our internal investment to support the development of those systems that are part of the SPS requirements,” Norwood said.

But with a deadline for prototypes and proposals in March and a product demonstration in Fort Benning, Ga., in August, Norwood said there’s not a lot of time for companies to innovate.

“It could be very difficult, unless you’ve already been investing in that,” he said. “Unless you have something ready to go that’s revolutionary, you’re really going to be looking at what’s the minimum requirements in play here.”

The Army’s R&D budget has a $25 million line item for body armor, said King, but “$25 million is not much when trying to develop new body armor solutions, and usually the focus is on making it lighter and stopping the same threats — a difficult task.”

The military cannot afford to sacrifice innovation because the enemy will continue to develop countermeasures, said Doug Morrison, DuPont director of Army programs. “We cannot let the budget pressures drive what the solutions are.”

Just as the procurement process should be streamlined, “We need a more holistic look on what a soldier needs. … We can no longer budget individual bits and pieces,” he said. Unlike an Abrams tank that can be outfitted with an improved capability, it’s not effective to keep adding equipment to a soldier. “You don’t want a soldier carrying a 120 -130 pound load,” Morrison added.

While government and industry are aware of the problem, there is little consensus on the best way to solve it.

“We work to be good stewards of the taxpayer’s money,” said Debi Dawson, public affairs officer for the Army’s Program Executive Office Soldier. “PEO Soldier also understands the need to preserve the industrial and scientific base necessary to continue providing the American soldier with the advanced equipment necessary for meeting the challenges of the future.”

Norwood, King and Morrison all agreed that some budget lines for equipment procurement would be helpful for industry, but itemizing each piece of equipment is unlikely to happen.

“One side of that would say that you can’t just take every single thing that a soldier wears and carries and make it a program of record,” but if the department continues to purchase equipment through O&M funding, it needs to figure out how to give industry a better sense of how funding will be distributed, said Heilman.

Also needed is a better picture of the equipment required for the Joint Force of 2020. “Right now the SPS is the only new requirement that’s really out there,” said Norwood. “But there’s a whole host of other soldier items that will need to be upgraded over time, and those really have no programs associated with it.”

The WPRC is working on establishing regular, formalized contact with the Defense Department, which it hopes to see accomplished in 2013. Although Army officials have talked about the importance of equipment modernization, they need to ensure the industry is healthy enough that it can surge production if needed, Heilman said.

“We went through a period of time where we weren’t ready at the individual warfighter need, and that’s really unacceptable,” he said. “If you look at it relative to major programs, it’s a small investment. It’s not a lot of money.”

Photo Credit: Army

Topics: Defense Department, Land Forces

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