Army Under Pressure to Downsize Industrial Capacity as Funding for New Vehicles Dwindles

The Army's latest attempt to build a ground combat vehicle is in the dustbin of history and there are no prospects of new production for the foreseeable future. Saddled with excess industrial capacity, the Army must soon begin to pare down its suppliers, an industry expert said.

In the wake of the cancelation of the ground combat vehicle program — which was conceived as a replacement for the Bradley infantry fighting vehicle — the industrial base is in a "tenuous" position, said retired Army Lt. Gen. Jeffrey Sorenson, a partner at A.T. Kearney Aerospace & Defense practice.

A.T. Kearney, a consulting firm, recently completed a sweeping study of the Army's combat vehicle and tactical support vehicle supplier base. The first portion of the study, which probed private sector suppliers for combat vehicles, was delivered last year. A second piece, dealing with combat support systems, will be briefed to Army Acquisition Executive Heidi Shyu in March, Sorenson said in an interview.

The Army has not released the portion of the study that addresses government-owned industrial depots. "They only felt comfortable putting forth the supplier piece," said Sorenson. Every piece of information the Army asked for has been delivered, he said. Now it is up to service leaders to use the data to make funding decisions.

Because the A.T. Kearney study was completed before the termination of the ground combat vehicle, it is fair to predict that the Army's excess capacity is only going to grow, Sorenson said. GCV was supposed to be "the system" that was going to keep contractors' assembly lines in business for the next decade. Now the Army is going back to the drawing board after it concluded the GCV was too heavy and too expensive.

The Army's remaining vehicle programs — a new armored multi-purpose vehicle to replace aging M-113 armored personnel carriers and upgrades to existing M-1 tanks and Bradley vehicles — do not provide enough work to sustain private sector suppliers and organic depots, Sorenson said.

BAE Systems already has slashed itsworkforce at the Bradley plant in York, Pa. General Dynamics could face similar decisions at its Lima, Ohio, plant where the M-1 tanks are refurbished. "The situation in Lima has become more tenuous since the time we delivered the study," said Sorenson.

While the Army's five maintenance depots and three manufacturing arsenals would be kept busy doing repair and upgrade work on existing vehicles, prime contractors would suffer without new programs, he said. "As you look at the future, a real effort will be needed by the Defense Department to keep some of these prime contractors healthy."

The A.T. Kearney study identified weak links in the supply chain in areas such as thermal sensors, engines and transmissions. The termination of the ground combat vehicle raises new questions about the entire industrial base, Sorenson said.

"Over time we have built large capacity, not just in General Dynamics and BAE but also in the organic base. We ramped those guys up to deliver capability that we required. We had the money to do it because of the supplemental budgets," he said. "Now we have to make some hard decisions."

Army leaders will be walking a tightrope, said Sorenson. They have to balance the workload of the organic base, a prime vendor base and key suppliers. "It is not trivial," said Sorenson.

The broader budget crunch the Army faces — including steep cuts to its active-duty force — means it has to postpone modernization decisions until it can downsize enough to free up money for new hardware. "Senior leaders are doing the best they can given the circumstances," said Sorenson.

According to the Pentagon’s 2015 budget proposal, the Army would drop from 520,000 to about 440,000 to 450,000 soldiers. Experts predict the budget squeeze beyond 2016 will compel further cuts. Bloomberg Government analysts estimated that a reduction of 50,000 troops saves approximately $5 billion in personnel costs.

How these troop cuts shape future industrial workload is a big question. The Army has yet to define the "new normal" for the industrial base, said Kevin Fahey, program executive officer for combat support and combat service support. "Depending on where you sit, it looks a little different," he said last week at an Association of the U.S. Army conference in Huntsville, Ala. A central question is the future size of the Army and what equipment will be required for that force, he said. Until that issue is resolved, it will be difficult to manage industrial capacity, he said. The Army is not yet clear on the specific workload that industry needs to satisfy uncertain requirements.

The good news for Army depots is that there will be plenty of repair work as damaged equipment returns from Afghanistan. Army chief of logistics Lt. Gen. Ray Mason said that more than half of the Army’s $16 billion worth of gear now in Afghanistan will be brought back. The Army will spend $9.5 billion, he said, to repair that equipment as well as the backlog from the Iraq war.

The two prime contractors that were competing in the ground combat vehicle program — BAE Systems Land and Armaments, and General Dynamics Land Systems — are weighing their next moves. Both firms had been awarded about $1.2 billion in incremental contracts since 2011 to design and develop prototypes. Current GCV contracts expire in June. The companies were expecting about $600 million of new funding in the 2015 budget, but the Army opted to terminate GCV and request $100 million for technology studies.

Mark Signorelli, vice president and general manager of BAE Systems' combat vehicle operations, said the company already had been shedding workers before the cancellation of the GCV. Since the wartime production peak through the end of 2014, BAE’s land armaments workforce dropped by 75 percent, he said at the AUSA conference. Just in the past year, the company experienced a 45 percent reduction in manufacturing hours and 61 percent drop in engineering hours. By the end of the year, it will complete the shutdown of two major manufacturing facilities in Fairfield, Ohio, and Sealy, Texas, as well as significant downsizing in York, Pa. and Louisville, Ky.

“We are trying to identify the minimum core of capability we need,” Signorelli said.

Vehicle manufacturers worry about keeping enough engineers employed so they can respond when the military asks for a new design. BAE has 250 combat vehicle engineers and GDLS has about 300.

After losing the GCV, it remains to be seen whether companies can keep their current engineers on the payroll, said Peter Keating, spokesman for General Dynamics Land Systems. That will depend on the amount of work the Army funds in 2015 for research and development, and for vehicle upgrades, Keating said in an interview. “These are not people who can be moved to other programs."

The Army has committed to funding upgrades — known as engineering change proposals — for the Abrams tank and the Stryker wheeled armored vehicle, he said. “That keeps engineers working."

“No one has cracked the code yet on how you maintain the industrial base in lean times,” he said. “Government policy and law have a major effect on the industrial base. It's not a free market per se.”

Before the A.T. Kearney study, the Army lacked reliable data on the industrial base. Now that it has that information, industry executives believe that it should be able to make sound policy decisions.

“When you take everything in aggregate, you probably have too much capacity,” Keating said. Consolidating is a balancing act because many facilities do not have overlapping capabilities. And by law, the Army has to allocate at least 50 percent of the maintenance and repair work to government-owned depots. “When you look at it in large scale, there is not enough work to feed all those facilities, and the law complicates your ability to spread and manage the work hours,” said Keating.

Both Army and industry officials have called for greater collaboration between the depots and private manufacturers to get through the downturn. That was done in the 1990s rather successfully, said Keating. Public-private teaming requires “reasonable policy changes” so the Army doesn’t build up capacity in the depots that it already has in industry. It also means the depots and industry have to work in a trustful relationship to level the work fairly.

Government depots and private facilities each contribute particular skills, Keating said. “Neither are viable on their own if they do not share and cooperate.”

GDLS officials are banking on congressional support to keep the Lima M1 Abrams tank plant running with a combination of U.S. and foreign orders. “We've gone to Congress in the past asking for U.S. production. We'll continue to advocate for that,” at least until 2017 or 2018, when the Army said it would start funding engineering upgrades, Keating said. Current international orders include upgrades to Saudi Arabia’s and Egypt’s tank fleets. The company expects an order later this year for upgrades to Iraq’s tanks. Modifications to the Stryker — from the conventional hull to a double-V design — will bring some work to Lima and to GDLS’ facility in Anniston, Ala.

“There's no one program that solves all your problems,” Keating said.

Both BAE and GDLS will be competing in an upcoming Army program to build a new armored personnel carrier to replace the Vietnam-era M113. The armored multipurpose vehicle, or AMPV, was advertised as a 13-year program to produce more than 2,900 vehicles.

Playing in BAE’s favor is the Army’s decision to have AMPV be a derivative of the Bradley, in order to reduce costs. Competitors were asked in November to submit bids.

“AMPV will probably be the biggest production program for sustaining the combat vehicle industrial base in the near term,” Keating said.

The schedule is in flux, however, pending the resolution of a dispute over GDLS being given sufficient time to study the Bradley’s technical specifications.

“We have said that to compete in this program we need access to the data on the Bradley,” Keating said. “We need time to analyze that data.” GDLS asked the Army for an extension and got one, but it wasn't adequate, so it filed a protest with the Army Materiel Command.

AMC has to rule by March 24. “We'd like to have a dialogue with the Army on this,” Keating said. AMPV has now taken on such great significance, he noted, that the company is going to fight to ensure it is a fair competition.

Topics: Combat Vehicles, Defense Contracting, Logistics, Manufacturing, Procurement