Industrial Base Continues to Face Difficulties

Later this month, the National Defense Industrial Association will release its second annual report on the health and readiness of the defense industrial base, “Vital Signs 2021.”

This year we again give a rating of a C with an overarching score of 74, slightly lower than that of 75 last year. Because this report is an indication of the environment defense contractors operate in vice a report on the companies themselves, this means that the environment remains challenging. In the January issue of National Defense, you will get a preview of the scores and findings and articles that begin to decipher what that means going forward.

“Vital Signs” is a data-driven report drawing from the expansive data set provided by our data science partner, Govini, and by multiple other unclassified sets available on a yearly basis.

Because this year has been unique to say the least, many will look immediately to see what effect the COVID-19 public health crisis had on the industrial base and what long-term effects will result. But the nature of the data sets we use means that much of the report provides a lagging indicator of what is happening within the defense industrial base.

For one, to ensure we control for one-year anomalies and show real trends, all our scores are based on a three-year running average. Additionally, to get a complete and comparable data set across variables and measures, scores reflect data collected up to the end of the previous calendar year. This means that for “Vital Signs 2021,” we capture the state of the industrial base up to, but not including, the onset of the COVID-19 crisis.

So, when reading the report, one needs to remember this is what the defense industrial base looked like going into the crisis, and all that has happened since will impact what the sector looks like post-pandemic. So, when we find that year-over-year we saw a halving of new entrants receiving Defense Department contracts — 12,000 in 2018 compared to 6,000 in 2019 — even before the pandemic hit, this is a worrying statistic.

There is one caveat to this report being a lagging indicator, and that is something that we have added to our report to capture some qualitative aspects of the health and readiness of the industrial base we couldn’t through available databases. We have begun an annual survey that asks two sets of questions.

One set is questions we will ask each year to include questions related to their work with the Defense Department, business confidence and outlook. With the questions asked each year, we will be able to do trend analysis over time. The other is a set of questions that will change annually focused on unique aspects affecting the defense industrial base that year. For this year, those questions focused on defense contractors’ experiences surrounding the COVID-19 crisis and their resulting expectations.

Interestingly, the results of this study give us some leading indicators of what we have noted anecdotally happening within the base. On average, the smaller the contractor, the more challenging the COVID-19 crisis is to the company. Also, across the board over 70 percent say the crisis has had a moderate to large negative effect on their company’s business. Regarding business recovery, over 50 percent believe it will take a minimum of six months to return to normal while an additional 13 percent believe the sector will never fully recover.

We enter the next policy cycle with a new Congress, a new administration, and new leadership in the Pentagon. It is these headwinds, coupled with predicted flat budgets, increased regulatory burdens like those focused on industrial security with the implementation of the Cybersecurity Maturity Model Certification and Section 889 Part B of the fiscal year 2019 National Defense Authorization Act, and an increasingly capable threat that these leaders must take into account when crafting the legislation and rules affecting the industry.

Some good has come out of 2020. The silver lining of the COVID-19 crisis has been that companies and the Defense Department have an increasing understanding of the supply chain. With supply chains already identified as vulnerable by the Executive Order 13806 Report, the collective headwinds have demonstrated that supply chain visibility and resiliency are vital going forward and worthy of increased attention and investments.

The health and readiness of the defense industrial base have been and will remain key to our military’s continued advantages across all warfighting domains. For the sector to remain vibrant, it has to be one where well-run companies thrive no matter where they sit in the supply chain and innovative new and nontraditional companies see opportunity.

That combination is key to producing the best of the best for our warfighters; providing interoperable capabilities to our friends, allies and partners overseas; and having a surge capacity in the event of a national emergency.

So, as you read through this issue of National Defense, take the time to look at both the lagging and leading indicators measured in this year’s Vital Signs report and consider what it means to have a healthy, ready industrial base.

Also, consider what it takes in terms of deliberate policy and investments to restore its health following the COVID-19 crises and reinvigorate the sector as one of both opportunity and meaningful impact to the nation’s security. 

Retired Air Force Gen. Hawk Carlisle is president and CEO of the National Defense Industrial Association.

Topics: Defense Department