December 1, 2009  

The unseen cost

Industrial base consequences of defense strategy choices

“If one examines U.S. national security or defense strategy documents, or the last three Quadrennial Defense Reviews (QDRs), there is almost no mention of the industrial base. The latest QDR does not use the word ‘company’ once, and the word ‘industry’ has but a single occurrence.”

— Barry Watts, Center for Strategic and Budgetary Assessments

From America’s earliest days, the U.S. defense industrial base has been a critical part of the nation’s economic and military power grid. The government relied upon a combination of arsenals and private industry for much of our history. However, since World War II, virtually all of America’s modern military equipment has been manufactured by private industry.

Despite that, the Defense Department still has a government arsenal mindset and has traditionally made decisions on its strategic postures — what kind of wars to prepare for and how to prepare for them — with the belief that the largely private-sector defense industry would be able to support whatever course DoD set. Indeed, industry has fulfilled this role over the years with such success that DoD’s strategic planning processes take it for granted, and do not include formal consideration of industry’s future ability to support resulting strategies and force postures. The current QDR was initially no exception.

Many in DoD view the defense industry as a perpetually accessible repository of capabilities. But the defense industry has changed, and this assumption is no longer valid. Today’s aerospace defense industry is more consolidated, more driven by non-DoD market forces and must pay much more attention to maximizing shareholder value.

In 1993, DoD leadership informed a dozen or so executives of the largest defense companies that there were twice as many defense suppliers as required and that the government was prepared to watch some go out of business. This event, dubbed the “Last Supper,” precipitated a tidal wave of consolidation — in less than a decade more than 50 major defense companies consolidated into only six. As part of this consolidation, what had been six aircraft primes narrowed to two as Martin Marietta, General Dynamics’ fighter division, North American, Rockwell International and McDonnell Douglas merged into or were acquired by Lockheed Martin and Boeing. Well-known companies such as Hughes, IBM, Unisys, Westinghouse, Tenneco, Ford and Goodyear left the defense market entirely. Others sold off their defense and space assets.

This contraction has necessarily changed the behavior of the industry as a whole. Previously, industrial base decision-making was predicated on the likelihood that sufficient defense business would be available to justify continued investment in plant, equipment, technology and skilled labor. Today, the loss of, or a decision to forgo, a single competition could mean that a corporation may be driven out of a line of business or elect to exit the business altogether. Increasingly, this dynamic results in reduced competition at the prime level, where sometimes only two or three major contractors are capable of competing for a contract.

Industry now lives by a set of business rules that turn on the realities of market forces. Company officers and executives are bound by law and market forces to maximize value to the company’s shareholders. Corporate strategic decisions on the use of resources are made on the basis of profit and loss, with a much shorter time horizon than DoD uses and with alternative uses for resources in mind as well.

Companies cannot maintain unproductive or excess capabilities to please government customers unwilling to pay for them. Since retaining capabilities creates ongoing costs, industry is motivated to eliminate capacity excess to near-term needs, while DoD might assume that unused capability will continue to be available until needed again years later.

To be sure, DoD understands a role for market forces. The Pentagon’s 2009 Industrial Capabilities Report to Congress notes, “The industrial strategy of the Department of Defense is to rely on market forces to the maximum extent practicable to create, shape and sustain those industrial and technological capabilities needed to provide for the nation’s defense.”

The problem with this formulation is that the DoD requirements cycle, DoD’s acquisition cycle and industry’s response to market forces are on very different timelines. DoD’s strategy-driven requirements are determined in four-year cycles, and the creation process is largely opaque to industry. And most important, the market forces DoD creates are not the only ones — or, in some cases, the most significant ones — acting on industrial companies. Industry has an obligation to increase efficiency and maximize shareholder value, which often drives industry to eliminate unprofitable assets. The smaller the demand DoD has for military-unique capabilities, the more likely these capabilities are to be shut down, sold off or otherwise eliminated. This elimination can be accomplished in weeks, yet the capabilities may take years to recreate. This doesn’t mean industry cannot or will not recreate them, but it does mean that DoD has to understand the timelines and costs of bringing industrial capabilities back on line.

Therefore, a Defense Department that makes its plans for the future without including industry as a partner in the planning process and understanding the forces that drive industry decisions is liable to find itself in a new world with declining industrial capabilities and far fewer employable weapons. This will translate ultimately into far fewer strategy options for national security decision-makers.

What does this all mean in terms of core military capability? During the modern era, American military dominance has rested on the clear superiority of its aerospace forces. One of the most significant factors in assuring that this industry remains viable over the long term will be its ability to retain minimum sustaining technical capabilities in advanced military aircraft design and development. The size and cost of sustaining a “minimum core,” or cadre, of design and development engineers is substantial. At the highest level, those capabilities cut across a broad range of highly specialized skill sets.

These core capabilities support an expanse of industrial activities related to the maintenance of highly specialized military aircraft design: studies and analyses; science and technology, including basic research, exploratory development and applied research; a wide array of engineering disciplines, including but not limited to aeronautical, electrical and mechanical; technology applications; technology demonstration; and importantly, the integration of design, development, production and support activities.

The U.S. has a world-class advantage in aerospace. But this advantage is perishable. A comprehensive and well-integrated military aircraft design capability must be sustained at some minimum level or that capability will begin to atrophy. While core design teams might survive for a few years between programs without R&D funding, they cannot survive in perpetuity. Interruptions in design and development activity will ultimately have serious consequences — intended or unintended — that will change the composition and technical capabilities and the aerospace and defense work force itself. While industry can “work around” such interruptions with adaptations such as increased teaming, changing the roles of primes and suppliers, and other innovations, the overall corporate business base for the enterprise will be challenged and minimum core capabilities will begin to atrophy. The current defense program of record pursued by this and previous administrations of both political parties has already led to the decline of critical capacities in areas such as rotorcraft, long-range bomber design and space systems.

Reconstituting lost production, design and engineering capabilities could take many years. This has been seen on the few occasions when systems such as the B-1 and C-5 endured significant production gaps. Industrial capability can often be regenerated, but only with considerable time and expenditure. DoD should be conscious of those costs when making strategic posture decisions in order to understand the constraints that those decisions may place on future leaders, just as attention is paid to effects on end strength and force structure.

While many defense industry sectors might be relatively unaffected by a particular notional change in strategic posture, the bad news is that it is often because a given sector’s industrial capacity is already overstressed or nonexistent, often due to previous strategic decisions. For one example (there are many): A lack of new rotary-wing requirements in the current program of record has led to significant reductions in the rotary-wing design and engineering industrial base, increasing the execution challenge that any new program would encounter and requiring greater lead time before industry could meet the requirements of a changed strategy.

The American aerospace industrial base is a perishable national asset. Like any military asset, it requires well-synchronized planning and management to remain healthy and vital. Without considering and understanding how industry will react to strategy decisions and what industrial capabilities could be lost as a consequence, decisions made during and after this year’s QDR may significantly reduce the strategy options available to future decision makers unless plans to retain minimum capabilities are included.

How is this possible? The QDR currently underway considers force structure, capabilities and resources to establish a new balance point between the competing demands for wars of the present and challenges of the future. Industry reacts continually to changes in current market conditions, including the QDR results. Without considering how industry will react to this year’s strategy decisions and what industrial capabilities could be lost as a consequence, DoD may inadvertently encourage industry to reduce or eliminate capacities today that may be required in the future. And strategic decisions are not a one-time event.

Even though DoD has recently decided to include industrial base references in the current QDR — a positive step forward — these references are not integrated into the ongoing strategic planning processes. Without including industry as a partner in the planning process, understanding the forces that drive industry decisions, and acting to preserve America’s competitive advantage, DoD is liable to find itself in a new world of declining industrial capabilities with nothing like today’s dominance. It follows, therefore, that DoD and Congress should carefully consider the industrial base implications of QDR and other strategic decisions and implement corresponding industrial base policies and actions.

Given the rules under which industry operates today, if DoD makes significant strategic policy decisions without full awareness and appreciation of the likely effects on industry, America’s strategic defense policy choices could unintentionally damage the defense industry’s ability to service our broad national security objectives, whether they be in the short or long term. That would be a decidedly negative outcome for national defense.

Giving “leaner” companies time needed to plan and respond to alternative defense policies goes beyond the traditional notion of making industry a partner, as advocated by the Defense Science Board. The board recommends “establishment of DoD and private sector councils for finance, information technology, human resources, and logistics” — all meritorious ideas. The most important element, however, is missing — a common DoD/industry view of the future requirements for industrial capabilities. Only when industry understands what will be needed in the years ahead can it begin to assess what issues it will face. Conversely, only with an appreciation of industry’s broad capabilities, limitations and needs can DoD ensure that its strategies will be supported by available and relevant industry capabilities in the event that threats with cutting-edge aerospace weapons emerge.

The current DoD leadership has shown welcome signs of acknowledging industrial-base concerns. However, the sooner partnership and coordination become standard and normalized, and included throughout the department’s planning process, the more likely American aerospace capability will continue without dangerous gaps. The consequences for the nation of continued inaction are potentially severe. AFJ