Report: Defense-Industrial Base Weakened by Global Competition, Reduced Capacity at Home

A report released on Friday on the state of the U.S. defense-industrial base paints a grim picture of the varied challenges, both domestic and global, that are eroding the base’s capability to ensure that warfighters are well-prepared for current and future threats.

Sequestration, the decline of U.S. manufacturing capability and capacity, cumbersome government business practices, global competition, and industry-wide workforce challenges have all negatively impacted parts of the defense supply chain, according to the report, titled “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States.”

“All 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 report said.

The forces outlined above have led to 10 “risk archetypes” that have a widespread impact on the defense industry, regardless of the sector. Contractors are seeing a reduced investment in both new capitol and R&D, diminished modernization and technological innovation, and a loss of suppliers across the supply chain as a result, all of which ultimately lead to lower quality, higher prices and schedule delays for military programs.

“Ultimately, these negative impacts have the potential to result in diminished readiness, decreased lethality, insecurity of supply, program delays, and an inability to surge,” the report said. These issues have been reported across the U.S. manufacturing industry, not just the defense sector.

The document was written as part of a July 2017 executive order signed by President Trump, which directed the Pentagon to conduct a “whole-of-government effort to assess risk, identify impacts, and propose recommendations in support of a healthy manufacturing and defense industrial base.”

The White House Office of Trade and Manufacturing Policy and the Pentagon’s Office of Industrial Policy established an interagency task force led by DoD and developed 16 working groups to fulfill this report. The Departments of Commerce, Education, Energy, Homeland Security and Labor also contributed resources to the working groups, encompassing over 300 subject matter experts in total.

The working groups point to the detrimental effects of sole-source and single-source industries, fragile markets and suppliers, and capacity constrained markets. They also point out that the Pentagon’s own policies and demands have contributed to those risks in certain sectors.

“Defense-unique requirements and decreasing DoD demand drove out other suppliers, leaving one company as the only source for chaff,” the report said. “Similarly, DoD acquisition policy modifications to meet demand and surge requirements from overseas operations have led to capacity issues within our organic arsenals,” such as for the sole production line for large caliber gun barrels, howitzer barrels and mortar tubes, it added.

The U.S. defense industrial base has also become overly reliant on foreign suppliers as certain items are no longer manufactured domestically, the report said. China, a near-peer competitor highlighted as one of two main adversaries in the National Defense Strategy along with Russia, is the single or sole supplier for many specialty chemicals used in munitions and missiles.

Beijing plays a role in several areas of weakness for the U.S. industrial base, according to the report’s authors. Ninety percent of today’s globally printed circuit boards are made in Asia, half of which are produced in China. Domestic manufacturing has declined by 70 percent since 2000.

“With the migration of advanced printed circuit board manufacturing offshore, DoD risks losing visibility into the manufacturing provenance of its electronics,” the report said.

The base must also improve its cyber and/or physical protection of products to prevent situations, such as the Army’s 2017 ban on Chinese-made DJI drones due to concerns about the software’s security. On Oct. 3, Bloomberg Business Week reported that China used a tiny microchip to hack into almost 30 U.S. companies, compromising the supply chains of firms like Amazon [AMZN] and Google [GOOGL].

“In today’s digitized world, every one of these supply chain touch points represents a potential product security risk,” the report said. 

The document is not all doom and gloom. The interagency task force noted ongoing efforts to address the varied challenges, including the passing of the Bipartisan Budget Act of 2018 which helped pave the way for the Defense Department’s approved $716 billion budget for fiscal year 2019.

The report also singles out the recent reorganization of the former Office of the Undersecretary of Defense for Acquisition, Technology and Logistics and the work of the Section 809 panels to streamline acquisition processes as steps in the right direction.

In addition to those ongoing efforts, the report outlines recommendations that focus on improvements in investment, policy, legislation and regulations. They include: the creation of an industrial policy that supports the national security efforts outlined in the 2018 National Defense Strategy; diversifying away from the current dependency on resources in politically unstable countries; building stronger relationships with allies and partners to meet joint industrial base challenges; modernizing the organic industrial base; accelerating workforce development efforts to grow STEM skills domestically; reducing the personnel security clearly backlog; and expanding direct investment in the lower tier of the industrial base.

These recommendations are further detailed within a classified action plan, which includes direction for the Pentagon to conduct a comprehensive study on the requirements needed to support force modernization efforts. The report also details recommendations for the Departments of Labor and Education, and urges Trump to sign a new executive order directing the three departments to swiftly implement the proposed actions.





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