Key Takeaways from Industrial Base Report

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Last year, President Donald Trump issued Executive Order 13806, which commissioned a comprehensive evaluation of the defense industrial base and supply chains of the United States. That evaluation recently was released in unclassified form.

In a 140-page report, a Defense Department-led interagency task force identified numerous threats, risks and gaps, and concluded that “[a]ll facets of the manufacturing and defense industrial base are currently under threat, at a time when strategic competitors and revisionist powers appear to be growing in strength and capability.”

The task force made four overarching findings.

First, it determined that the identified impacts and risks primarily affect “sub-tiers” of the supply chains, rather than major defense prime contractors.

Second, it found that a “surprising level of foreign dependence on competitor nations exists.”

Third, it observed that human capital challenges are significant, including the decline of STEM and manufacturing trade skills among American workers.

Fourth, it noted that key capabilities are moving offshore to capture foreign market share and to take advantage of cost savings opportunities.

The appendices to the report offered case studies that assessed relevant sectors — ranging from traditional ones like aircraft, munitions and shipbuilding, to “cross-cutting” sectors such as electronics and cybersecurity.

The report also identified several “macro forces” — including the “decline of U.S. manufacturing capability and capacity,” the “industrial policies of competitor nations” and “sequestration and uncertainty of U.S. government spending” — that impact the relevant sectors, and “represent the root causes” of major risks to the supply chain.

The identified risk archetypes include threats like single points of failure, erosion of domestic human capital and infrastructure, and foreign dependency.

Importantly, the task force offered a “blueprint for action” that summarized the current and future efforts intended to provide the groundwork for important measures, mitigations and ongoing monitoring that will strengthen the industrial base, without providing detailed policy prescriptions.

As the implementing policies start to take shape, there are some key takeaways for contractors.

First, the report noted that the Pentagon already has tools in place to mitigate some of the identified risks, including authorities to make “direct investment in the lower tier of the industrial base” through programs like Title III of the Defense Production Act, and the Manufacturing Technology and Industrial Base Analysis and Sustainment programs. Contractors should consider how they can work with the department to effectively use and leverage these tools to address the risks identified in the report and create opportunities.

Second, the study found that “[m]any of the current [business and procurement] policies and practices of the U.S. government … strain the industrial base and reduce incentives to supply to DoD, resulting in an inability to meet national security demands, [and] increasing foreign vulnerabilities.” The task force commended the ongoing efforts of the congressionally chartered Section 809 panel to improve defense acquisition procedures. Contractors would be wise to anticipate potential changes to procurement policy and regulation that could lead to reduced barriers to entry and shortened contracting timelines. They should also consider how best to contribute to the discussion, including through the rulemaking process and congressional engagement.

Third, the task force recognized significant cybersecurity vulnerabilities given the Defense Department’s continuing transition from conventional battlefield weapons to software-intensive systems. Contractors must continue to be vigilant in safeguarding against cyber attacks.

Fourth, much of the report’s threat analysis focused on China, including concerns about Chinese products and components in the defense supply chain. To mitigate some of the perceived risks arising from China’s “economic aggression,” the task force recommended leveraging the capabilities of close allies and partners through constructs like the National Technology and Industrial Base — a group that includes the United States, Canada, Australia and the United Kingdom — and similar structures.

The report invites opportunities for key allies and partners to play a crucial role in offsetting risks presented by “competitor nations,” and simultaneously strengthening the capacity of U.S. industry.

These findings could influence the policies stemming from a separate report on “Buy American” initiatives — which are intended to give preference to U.S.-manufactured defense items — that was commissioned by Executive Order 13788 in April 2017, but has yet to be released.

Finally, the task force underscored the role that sequestration and broader budget uncertainty plays in “impeding forecasting across every tier in the supply chain[,] … inhibit[ing] investment in capabilities,” and negatively impacting the military’s ability to sustain readiness and modernization efforts. The ripple effect of spending fluctuations and reductions has resulted in the loss or consolidation of thousands of defense contractors and is impacting the viability of many suppliers.

Because the challenges identified in the report are set against the backdrop of a rapidly evolving landscape of threats, strengthening the defense industrial base will require a coordinated effort from the government and industry, both domestically and with allies and partners.

We look forward to working with stakeholders to develop and implement potential solutions. 

Jeff Bozman is an associate, Justin Ganderson is special counsel and Zach Mears is a senior advisor at Covington & Burling LLP. Susan Cassidy, who contributed to this article, is a partner at the firm.

Topics: Defense Department, Government Policy