TOP LINE SUMMARY OF THE 2018
DEFENSE INDUSTRIAL BASE STUDY
ASSESSING AND STRENGTHENING THE MANUFACTURING AND DEFENSE INDUSTRIAL BASE
AND SUPPLY CHAIN RESILIENCY OF THE UNITED STATES
The Defense Department has just released a study on the health and
resiliency of the defense industrial base. As directed in Executive
Order 13806, signed July of 2017, the report directed the Secretary
of Defense to conduct a government-wide examination of risks,
impacts and proposed recommendations to ensure a healthy
manufacturing and industrial base.
FIVE MACRO FORCES
Findings from a micro-level sector analyses of the working groups
found that there are FIVE MACRO FORCES CURRENTLY DRIVING THE
RISKS TO THE INDUSTRIAL BASE.
1. SEQUESTRATION AND UNCERTAINTY OF GOVERNMENT SPENDING
levels leave companies with unpredictable markets, negatively
impacting their ability to forecast revenue, discourage them
from investing in new capabilities and R&D, and create risks
for companies undertaking capital intensive investments. With
conrmed investments, suppliers will take on high xed costs
to develop new capacity to meet programmatic needs but
when programs draw down, companies can be left with excess
capacity and high costs. This creates a “bullwhip effect” that is
felt across the entire supply chain.
• The Rand Corp found that unpredictability in ship
maintenance reduces incentives to invest in facilities and
human capital, delaying modernization and putting future
surge maintenance capabilities at risk.
• The Center for Strategic and International Studies estimates
that from 2001 to 2015, 17,000 companies ceased to be
prime vendors for Defense Department.
• In 2017 alone, there were 75 new programs within the
Defense Department that could not be executed because of
the uncertainty of operating under a Continuing Resolution.
2. DECLINING US MANUFACTURING BASE capabilities and capacity
cuts at the core of the US military technical advantage. From 1979
to 2017, the US lost 7.1 million manufacturing jobs, 36% of the
industry’s workforce, with more than 5 million manufacturing jobs
and 66,000 manufacturing facilities lost since 2000 alone. The
share of employment attributed to manufacturing has decreased
from more than 30% in 1970 to only 10% in 2017. The report
nds that loss in domestic manufacturing capabilities has reduced
technical innovation, deterred investments in next-generation
manufacturing and created dependencies on foreign sources.
• China’s strategic subsidizing of rare-earth materials, used
for things such as lasers, radar and missile guidance, has
created a vulnerability by driving out domestic competitors
and deterred new market entrants.
• Reliance on the import of electronic equipment has driven
lower yields, higher rates of failure in downstream production
and increased the risk of “trojan” chips inltrating US
defense systems.
• Since 2000, the shipbuilding industries have been particularly
impacted, losing more than 20,500 establishments and
completely eliminating competition in a number of areas.
• While the US once led the world in the production of high-end
machine tools required for manufacturing processes, China
now accounts for over 40% of the total global consumption
and producers have shifted production locations away from
the US to more easily serve the growing Chinese market.
3. DELETERIOUS GOVERNMENT BUSINESS AND PROCUREMENT
PRACTICES create complex relationships between industry
and government, often requiring lengthy negotiations, the use
of bespoke accounting standards and a burdensome security
clearance process. Efforts like the Section 809 Panel represent
a bright-spot in the Defense Department’s efforts to improve the
process but the median time for developing a major defense
acquisition program has remained steady at 8 years since the
1980s. The current system of requirements-driven acquisition
solicits solutions for specic capabilities rather than for outcomes,
potentially imposing an opportunity cost on innovation.
4. INDUSTRIAL POLICIES OF COMPETITOR NATIONS have created
an unfair and non-reciprocal trade environment. China remains a
focus of the ever-changing economic playing eld. Since 2001,
the Chinese GDP has grown more than 300% while military
spending has increased from $20 billion to $170 billion in 2017
and the US trade decit with China has grown from $83 billion to
$375 billion over that same period. Chinese business practices
requiring conditional access and tech transfer have increased
their dominance in global markets and the risk they post to the
supply of materials and tech deemed strategic and critical to US
national security. Chinese investment in developing countries adds
a key level of consideration to the threat to American economic
and national security and those of our allies such as Germany and
Australia. China’s current 5-year plan calls for increasing its R&D
spending to 2.5% of GDP up from 2.1% in 2011-2015, meaning
that they will likely reach parity with the US in the near future.
• China’s aggressive industrial policies have eliminated some
capabilities with critical defense functions including solar
cells for military use, at-panel aircraft displays, and the
processing of rare earth elements
• In multiple cases, the sole remaining domestic producer of
materials critical to DoD are on the verge of shutting down
