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www.AmericanSecurityProject.org 1100 New York Avenue, NW Suite 710W Washington, DC

Defense Industrial Base American Competitiveness Perspective PaperAugust Cole

April 2013

In Brief

• DefenseindustrialbaseisakeycomponentofAmericancompetitiveness

• Engineeringandtechnologyskillsetsatrisk

• Stableandpredictablebudgetsneeded

• Lookbeyondcompanies:thedefenseindustrialbaseworkforce/pipelineneedsattention

• Encouragenewentrants,betterpracticesinindustryANDgovernment

IntroductionSomeofthemostdamagingeffectsofsequestrationandstop-and-gobudgetingthisyearwillbethehardesttoseefromWashington.

NowhereisthismoretruethanwithAmericancompetitiveness,andinparticularthedefenseindustrialbase (DIB) -- thenetworkof thousandsofcompanies thatdoeverything fromdesigninglanding-geardoorsfortheAirForce’sstealthyfighterstoconstructing2,700-tonwarshipsfortheNavy.

TheDefenseDepartment spendshundreds of billions of dollars each year on goods andservicesfromtheprivatesector.

Evenwithstakeslikethis,thereisfarmoreontheline.

August Cole is an Adjunct Fellow at the American Security Project

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ThedefenseindustrialbaseistiedtoAmericancompetitivenessinthe21stCentury.Forthatreason,leadersintheprivateandpublicsectormusttakestepstothriveduringadrawnoutperiodofchangingexpectationswhilealsoremainingcommittedtokeepingthecountrystrongthroughinnovation,long-terminvestmentanddisciplinedmanagement.

Competitivenessisdefinedbyanation’sabilitytoleadgloballyonthestrengthofitsactionsandideas,tosupportavibrantfree-marketsystem,tonurturearesponsivedemocraticpoliticalsystemandtoupholdasocialcontractthathonorseconomicandsocialprogressforitscitizens.

Politicalandbusinessleadersneedaconsensusthatimprovingournation’s competitiveness is an urgent priority with much higherstakesthanacknowledgedtoday.

Itisamatterofnationalsecurity.

A Key Component Of CompetitivenessThedefenseindustrialbasecomprisesmuchofthecountry’saerospaceknow-howanddirectlysupportsthemilitaryand intelligencecommunity. It sustainsanengineeringandtechnologyworkforcewhose focus isdifferentthan,forexample,consumer-orientedITfirms.

InoneofhislastpublicaddressesatGeorgetownUniversity,formerDefenseSecretaryLeonPanettaspokeupforthedefenseindustrialbase.

Mr.Panetta’sappealto“investintheabilitytomaintain…thatdecisivetechnologicaledgeinthefutureandmaintainourindustrialbaseinthiscountry”underscoresthisisnoparochialmatterforthePentagon.

WhileitmakessensethatthePentagon’sbudgetshouldcomedownafterrisingmorethan80%since2001,howthatreductionismanagedisoneofthemostimportantquestionsforAmericanpowerinthe21stCentury.

As it stands, the Pentagon’s budget officials and service chiefs are forced toscramblefortranchesofmoneythatafewyearsagowouldhavebeenconsideredinconsequentialtotheoverallDefenseDepartmentbudget.

“Weareintriagemodeintermsofgettingthroughthisyear,”PentagoncomptrollerRobertHalerecentlysaid.“Butthesenear-termactionswon’tsolvetheproblemsofsequestration.”1

Theultimatecostof sequestrationwillnotbe talliedupfor sometime.Butwehavealreadyseensignsofdisruption,whichimpactsthedefenseindustrialbase.InFebruary,theNavysaiditwasputtingoffanoverhauloftheaircraftcarrierUSSAbrahamLincoln,amovethatcausesproblemsfortherestofthefleet’smaintenanceandoperations.2Itisanexampleoftheripple-effectriskthatonechangecanhave.

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AssessingAmerica’snationalsecurityfrequentlyfocusesonhowmanycarrierbattlegroupsthecountrycansendtoseaortheendstrengthoftheMarineCorps.

ButgaugingAmerica’sstrengthisnotamatterofordersof battle. As the drama around sequestration and thecountry’sfiscalpolicyshows,othercrucialelementssuchasthenationaldebt,anefficientandresponsivepoliticalprocess, a productive education system and a viabledefense industrial base are all part of what will makeAmericastronginthecomingdecades.

Sec. Panetta’s caution is worth heeding because thedefenseindustrialbaseisimportanttomorethanjustthemilitaryorthelocaleconomiesthatrelyonaparticularproductionlineorengineeringfacility.Thevalueismuchbroader, and it is interconnected to other elements ofAmericancompetitiveness.

Changing Focus

Itiseasytoseethedefensesectorthroughthelensofitshighest-profileproducts,suchasanaircraftcarrierora$200millionfighter.Afterall,theU.S.exportsmoreweaponsthananyothernation,recordingmorethan$66billioninsalesin20113.Eachofthoseweaponssystemsistheproductofeffortbythousandsofsmallerfirms,averitableeconomicfoodchainspreadthroughoutthecountry.

Thefigurethatmaymatterthemostis1million.Thatisthenumberofworkersintheaerospaceanddefensesector.4Thesecompanies,andthetechnologiestheybringtomarket,countontaxpayerstosupportscienceandengineeringjobsthatareuniquetothesector.Theirexperiencedemployeeswillmoveontomoreprosperousfields if they are not given incentives to stay.This is among the aerospace anddefense industry’s biggestchallenges:howtoretain,rewardandadvancetheirbestworkers.

Thisalsoleadstoconsiderationofabroaderseriesofquestionsforpolicymakers:Whatmarketforcesshouldinfluencethedefenseindustry’sfortunes?Willthishurtorhelpthecountryinthelongrun?Howcanmoremarket-drivenbusinesspracticesimprovecontractorperformance?

Anotherareawherethiscomesintoplayiswithstrategicmaterialssuchasrareearthsmetals.TheDefenseDepartmentrecentlyconcludedthatAmericafacessupplyshortfallsfornearlytwodozenmaterials.Chinadominatesthemarketformanyrareearths.Thisrequiresalong-termapproachtoanissuethatisregularlyeclipsedbymorepressingmatters.ItalsonecessitatesastrategiclookatAmerica’svulnerabilities.

Thesechallengescomeamidsignificantchangestothepoliticalclimatearounddefensespending.

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Discussionsofcuttingthedeficitpointtoplansthatwillcertainlyreducemilitaryspending,particularlyoncostlyhardware that the industry reliedonasmainstaysof itsprofitability andgrowth.While thebiggestgovernment contractors say they are diversified, thousands of subcontractors and suppliers are faremorevulnerabletothiscyclicalbusiness.Initiativessuchasthe“BetterBuyingPower”approachtoacquisitionareahallmarkofthecurrentcycleintheindustry,andpressuretoimproveefficiencywillcontinuetorise.

ThetensionforpolicymakersandCongressisthegovernmentneedsafinanciallysoundandresponsivedefenseindustrialbase,yettaxpayersdonotwanttobeforcedtopropupthesefirmswhenthiscyclicalindustryfacesadownturn.

Seeking SolutionsAmongthestepsthatwillhelpthe industry inthenear-andlong-termarethosethatcanbe lookedatasinvestmentsinthefuture,evenduringatimeofbudgetcuts.Thisframessuchsupportwithinasystemiclookatthecountry’snationalsecurityandtherolethatdynamicandinnovativecompaniesmustplayinit.

1. Support science, technology, engineering and math programs at all education levels.Startwithafocusontwoareas:raisingsupportforrelevantPhD-levelprogramsandofferingmoremechanismstobringhighschoolstudentsintoadvancedSTEM-relatedcourseworktracks.Thissupportcanrealizebenefitswithinthedefenseindustryaswellasinrelatedsectors.

2. Establish new on-ramps for Pentagon contractors.Smallerfirmsandnewentrantsfrommoredynamicsectorsof the economy should be drawn in to help support thehealthofthedefenseindustrialbase.Foreignfirmsinvestingin theU.S. commercial aerospaceproduction should alsocontinuetobeencouragedtocompete,thoughpolicymakerswillhavetoweighthiscompetitionwiththedesiretoretaincertainindustrialcapabilitiesthatotherwisewouldbelost.

3. Involve the defense sector in infrastructure projects.TheAmericanSocietyofCivilEngineersrecentlygavetheU.S.a“D+”gradeinits2013survey.Aviationreceiveda“D”grade,asdidtransitandroads.Majorgovernmentcontractorshaveusefulexpertiseinsomeareassuchasairtrafficcontrol,andcommitmenttosuchprogramswillhelpretainthekindofsystemsengineeringexpertisethegovernmentprizes.Thereisaconsiderableamountofmoneyontheline,whichalsounderscores the chance for government and industry toprovetheycanbettermanagemajorprogramssotheyarecompletedmore quickly and on budget.TheU.S. needsto spend$1.6 trillionmore than the$2 trillion currentlyforecastby2020,ASCEfound,ifneededimprovementsaretobedone.

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4. Commit to stable and predictable budgeting.While encouragingmulti-year acquisitionmay seempreposterous during a timeof continuing resolutions and late-night budget dealmaking, the currentapproachtobudgetingiscurrentlysoineffectivethatitmakessensetomakeseriouschanges.Forindustryandgovernment alike, being able tobudget outbeyond a singlefiscal year for select programsofferspotentialsavingsandcoulddecoupleacquisitionsandpolitics,ifonlyslightly.Suchanapproachwouldrest,however,oncertifyingaprogramasmeetingaveryhighperformancestandard.

5. Ensure strategic materials access and supply. The Defense Department needs to use its strategicmaterials analysis to comeupwith a near-termplan to address these potential shortfalls.Relying onChinaasanongoingsourceforrareearthmetalsisnotviableoverthelongtermbecauseoftheadvantageitgivesapotential strategicrival.5Optionssuchasrapidstockpilingmaybeattractivebutneedtobecarefullyconsideredgiventheimpactthatwouldhaveonmarketpricing.Similarly,aprudentapproachtoNorthAmericanproductionisneededgiventheclearenvironmentalimpact.CapturingtheimportanceofimprovingAmericancompetitivenessandweighingthesecosts,itisworthfullyexploringalternativetechnologiesandsystemstobypasstheuseofrareearthswhenpossible.

ConclusionImprovingAmericancompetitivenessdependsonchangingcurrentgovernmentpolicyandcorporatesectorpracticesasmuchasitdoesintheapproachtowardcomingupwiththesesolutions.

Thedefenseindustrialbaseisanimportanttestforthecountry’sresolvetoimproveoureconomiccapabilityandresiliencywhilealsostrengtheningournationalsecurityinobviousandnotsoobviousways.Thereare,ofcourse,othercrucialcomponentsofAmericancompetitivenessthatalsoneedurgentattention.

Takingon the challenges facedby thedefense industrial basewill help set the stage for comingupwithstrategicapproachestoallofthem.

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This report follows on from ASP’s White Paper: American Competitiveness – An issue of National Security

August Cole is an Adjunct Fellow at the American Security Project, he specializes in  Defense Industry Policy, Oversight, Strategy and Financial Markets; Battlefield and Intelligence Contracting; «Smart Power».

From 2007 to 2010, Cole reported on the defense industry for The Wall Street Journal from Washington. He covered companies ranging from Boeing to Blackwater, as well as broader defense policy and political matters. From 1998 to 2006, he worked as an editor and a reporter for MarketWatch.com, a financial Web site, where he began covering the aerospace and defense industry. In 1998, he worked as an intern at the Freedom Forum’s

European Centre in London and as an intern at the NBC News London bureau.

August is also is a writer focusing on national security issues. His fiction writing tackles themes at the core of American foreign policy and national security in the 21st Century, including the privatization of military and

intelligence operations and the future of American power in the Pacific.

Endnotes

1. Miles,Donna,ArmedForcesPressService.“Comptroller:BudgetCrisisThreatensSevereReadinessImpact,”March28,2013.http://www.defense.gov/news/newsarticle.aspx?id=119644AccessedMarch29,2013.

2. McCarthy,Mike.DefenseDaily.“NavyDelaysCarrierRefueling,CitesLackOfFunding,”Feb.11,2013.http://www.defensedaily.com/free/Navy-Delays-Carrier-Refueling-Cites-Lack-Of-Funding_20563.htmlAccessedMarch4,2013.

3. Shanker,Tom,TheNewYorkTimes.“U.S.ForeignArmsSalesAreMostOfGlobalMarket,”August27,2013.http://www.nytimes.com/2012/08/27/world/middleeast/us-foreign-arms-sales-reach-66-3-billion-in-2011.html?_r=0AccessedMarch25,2013.

4. AerospaceIndustriesAssociation.“FactSheet:U.S.AerospaceandDefenseIndustry:SecondtoNone.”www.aia-aerospace.org/assets/3_-_facts_to_know.pdfAccessedApril1,2013.

5. Coppel,Emily,AmericanSecurityProject.“Briefing:RareEarthMetalsandU.S.NationalSecurity,”February1,2011.

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