BREAKING: Report Finds Imbalance Between Defense Strategies, Industrial Base Capacity

Defense Dept. photo

U.S. national security policies and financial investments are not aligned to support the defense industrial base’s need to support great power competition, according to a new report released Feb. 8.

The annual report’s fourth iteration — “Vital Signs 2023: Posturing the U.S. Defense Industrial Base for Great Power Competition” — found that several components that make up a resilient industrial base have declined in the post-Cold War era. Budget and economic instability, labor challenges and a limited surge capacity were indicators headed in the wrong direction, the report said.

Vital Signs is an annual study published by the National Defense Industrial Association, which also publishes National Defense magazine.

“U.S. policies and financial investments are not currently oriented to support a defense ecosystem built for peer conflict,” the report read. “This was a troubling truth during the last 20 years of asymmetric conflict against non-state actors. In the return of great power competition, this gap is an unsustainable indictment.”

Whereas past reports tracked 60 indicators that determined an overall health grade for the defense industrial base for that year, 2023’s edition determined its results from three data sources: a survey of NDIA member companies conducted by the association, publicly available reports and non-public data compiled by Govini.

The report aimed “to draw laser-focused attention to the enduring, systemic challenges NDIA member companies highlighted as their top concerns as they seek to re-orient in the current security environment.”

Changes to the domestic economy, heightened by the 2008 recession and 2020 COVID-19 pandemic, as well as the United States’ increased focus on modernization efforts for deterring conflict with China or Russia contributed to the report’s findings.

One of the most enduring challenges defense companies continue to face is the cumbersome regulations required to work with the Defense Department. Forty-four percent, a plurality of respondents, said agreed that it was "somewhat difficult" to do business with the Defense Department, and a further 18 percent said it was "very difficult." The “burden of the acquisition process and paperwork” was an oft-cited reason.

In particular, the report highlighted the unique challenges that small- and medium-sized businesses have when compared to larger defense firms that have more resources to navigate the barriers and costs associated with working with the Pentagon.

Despite the emphasis on acquisition reform within the department, 57 percent of respondents predicted business conditions with the Defense Department would not change in 2023.

“Industry’s assessment that it will be harder to conduct business with the department than in the civilian economy under these economic conditions is pointed feedback from an industry currently responding to surge demand signal with the illegal invasion of Ukraine and quietly preparing against the darkening security environment in the Indo-Pacific,” the report said.

Another issue facing the defense industrial base is a declining workforce, both in terms of skilled labor and in the fields of science, technology, engineering and mathematics. In the report’s survey, 23 percent responded that finding and retaining talent was their most pressing challenge.

Overall, 64 percent reported it was “somewhat difficult” or “very difficult” to hire skilled labor workers, while 82 percent reported that it was either “somewhat difficult” or “very difficult” to find STEM workers, according to the report.

A transition to a digital- and services-based economy over the last three decades has resulted in a decline in manufacturing and reduced the demand for skilled labor, the report noted. Students are not encouraged to enter skilled trades, which has resulted in a massive decline in the workforce needed to surge the defense industrial base, it added.

The report noted that since 1979, the United States’ manufacturing sector has lost 7.1 million — or 36 percent — of the industry’s workforce. This includes more than 5 million manufacturing jobs since 2000. The authors called for policies that target rebuilding and expanding the capacity of the defense skilled labor workforce.

“Reversing the loss of defense skilled labor and filling key vacancies matters under great power competition because skilled workers are essential to increasing the capacity of the U.S. military, including the construction of naval platforms and the production of ground vehicles and aircraft,” the report said.

In addition, defense companies are in steep competition with the commercial sector for talent with STEM backgrounds, with 80 percent of respondents indicating it was “somewhat difficult” or “very difficult” to compete with non-defense firms that have greater flexibility.

Financial issues affecting the United States’ economy were also of concern to respondents. According to the report, 22 percent noted that budget instability was the most pressing issue facing the defense industrial base, while 11 percent answered inflation.

The report sounded alarms over declining trends in national defense spending, which dropped from 5.8 percent of the United States’ GDP in 1985 to 3.2 percent in 2021.

The defense industrial base has been particularly impacted by the federal government’s frequent use of continuing resolutions, which force the government to operate under the funding levels from the prior year’s appropriations.

“The result is the parts of the budget most crucial to re-orient DoD to prepare for, deter, and — if necessary — respond to peer conflict are the accounts most vulnerable to being cut or squeezed during budget instability: research and development for emerging technologies, as well as procurement and sustainment of current and next generation major platforms,” the report said.

Continuing resolutions also place restrictions on how the Pentagon can use its budget to initiate new production, increase production rates and begin multi-year procurements — which are critical to keeping munitions stockpiled and the construction of replacement platforms, like strategic submarines, on track, the report said.

Meanwhile, defense companies have grown increasingly worried about rising inflation rates, which reached their highest levels in 40 years during 2022 due to the economic downturn during the COVID-19 pandemic.

“The underpinning drivers of high inflation levels are geostrategically fragile supply chains, amplified by the backlogs created during the 2020-2021 global pandemic, and tight labor markets,” the report said. Respondents indicated they were concerned about increasing costs of production inputs, labor costs and finding or retaining employees, the report added.

When asked what the executive and legislative branches could do to further support the industrial base moving forward, the report noted 34 percent of respondents indicated they wanted to see the acquisition process streamlined and another 34 percent said they wanted a secure budget.

Furthermore, a majority of companies who responded to the survey — 87 percent — believed that over the next year the conditions within the defense industrial base would either stay the same or worsen “despite the sense of urgency to re-posture the DIB to deter and — if needed — decisively prevail in peer conflict, nothing about their business environment is going to change,” the report said.

Moving forward, the report called on the government and private sector to address the problems facing the industrial base together.

“Strong defense industrial readiness — ensuring our fighters have everything they need so they never engage in a fair fight — is a key element of current national deterrence,” it read. “If conflict ever erupted, national leaders will either have credible or constrained response options based on the investments to the DIB they inherit from this current generation of leaders serving in the executive branch, the congressional branch, and industry.”

Topics: Defense Department, Defense Contracting