Trump Administration, DoD Zero In on Threats from China

President Trump’s administration is making clear through recent speeches, published reports and legislation that the U.S. economy — and within it, the defense industrial base — is suffering due to a series of targeted, deliberative efforts by China.

In 2017, Trump directed the Department of Defense (DoD) to lead a multi-agency analysis of the health of the domestic defense industrial base. The findings, released Oct. 4 in a report titled “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States,” lay out over 300 risks that are challenging defense firms and their subcontractors, along with possible remediations (Defense Daily, Oct. 4).

U.S. Secretary of Defense James N. Mattis meets with China's Minister of Defense Gen. Wei Fenghe at the People's Liberation Army's Bayi Building in Beijing, China, on June 28, 2018. (DoD photo by Army Sgt. Amber I. Smith)

U.S. Secretary of Defense James N. Mattis meets with China's Minister of Defense Gen. Wei Fenghe at the People's Liberation Army's Bayi Building in Beijing, China, on June 28, 2018. (DoD photo by Army Sgt. Amber I. Smith)

China and the threat it presents to the U.S. defense industry feature prominently in the document, from Beijing’s predatory economic practices, to its monopoly over several crucial resource markets for military capabilities, to the cybersecurity risks imposed by commercial drones and other technologies.

In an Oct. 4 speech at the Hudson Institute in Washington, D.C., Vice President Mike Pence detailed what the administration views as Beijing’s predatory practices to obtain U.S. intellectual property “by any means necessary” and otherwise subvert American leadership in the world. The country now spends as much on its military as the rest of the Asian continent combined, he noted.

The massive transfer of U.S. manufacturing over to China in the last two decades has “fundamentally rebuilt” the country, Pence said.

Beijing’s “Made in 2025” plan includes a goal to control 90 percent of the global robotics, biotechnology, artificial intelligence and other advanced industries within the next decade, he noted in his speech.

China requires American firms to reveal their trade secrets to do business in the country, Pence said, adding, “Worst of all, Chinese security agencies have masterminded the wholesale theft of American technology — including cutting-edge military blueprints. And using that stolen technology, the Chinese Communist Party is turning plowshares into swords on a massive scale.”

As U.S. manufacturing has decreased in the past several decades and more companies flock to Beijing for cheap labor, the defense industrial base has grown increasingly reliant on Chinese markets for certain rare earth minerals and advanced technologies, the interagency report noted.

“China’s aggressive industrial policies have already eliminated some capabilities with critical defense functions, including solar cells for military use, flat-panel aircraft displays, and the processing of rare earth elements,” the report said. “China’s actions seriously threaten other capabilities, including machine tools; the production and processing of advanced materials like biomaterials, ceramics, and composites; and the production of printed circuit boards and semiconductors.”

The microelectronics market is widely controlled by China, and the United States must do more to support its domestic developers, according to the report. U.S.-based production of circuit boards and microelectronics has dropped by 70 percent since 2000, it said.

Byron Callan, of the Capital Alpha Partners, noted in an emailed statement Oct. 5 that the study’s implications are favorable for “trusted” suppliers of U.S. microelectronics, such as American Pacific or Mercury Systems [MRCY]. He added that the report should be viewed in the context of the broader U.S.-China strategic competition, as Pence discussed on Thursday.

In an Oct. 4 roundtable with defense reporters, Deputy Assistant Secretary of Defense of Industrial Policy Eric Chewning called out the industrial policies of competitor states — and most notably China — as one of five key forces driving risk within the domestic industrial base.

One concern is China’s ability to “control access to potential inputs into the DoD supply chain,” Chewning said. That could lead to an increase in potential supply chain tampering, he noted.

Investors will need to consider how changes in supply chain and domestic sourcing could impact overall weapons and support costs, Callan noted.

The vulnerabilities stemming from the U.S. dependency on certain Chinese products, cybersecurity risks and sole- or single-source suppliers “suggest vulnerability if foreign suppliers are cut in a time of heightened crisis,” he said. “As well, they would hinder any major U.S. defense mobilization efforts.”

However, “Supply chain is a double-edged sword,” he said. China is facing its own vulnerabilities as it must import over half of its non-fuel minerals for use in emerging technologies, he added. “There may be more of a global scramble if China or other countries believe the U.S. will pursue” self-sufficient policies, he said.

Companies must work to ensure that proper cyber hygiene efforts are performed at every step of the supply chain as U.S. companies have experienced cyber attacks from China, Russia and North Korea in recent months, said Ellen Lord, undersecretary of defense for acquisition and sustainment, in a media roundtable.

The report cited a 2014 analysis that found that 90 percent of cyber attacks occur within the manufacturing sector, and that fewer than half of small firms had proper cyber techniques in place. It also noted how the U.S. Army was recently forced to remove all of its Chinese-made commercial DJI drones from the service, for fear of a potential data breach.

The recent report outlines a series of recommendations meant to boost the U.S. defense industrial base, with several linked to China and the challenges it poses. They include the modernization of the Committee on Foreign Investment in the U.S., and investigations under Section 301 of the 1974 Trade Act into Chinese intellectual property theft, “to better combat Chinese industrial policies targeting American intellectual property.”

Likewise, the report lauds the Defense Department’s Microelectronics Innovation for National Security and Economic Competitiveness program to help boost domestic capabilities.

Lawmakers are working to understand the threats and assess proposed solutions. The Senate Armed Services Committee (SASC) is scheduled to hold a closed briefing on Oct. 11 on the military threat posed by China and Russia.

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