Review Warns Defense Industrial Base Faces 'Unprecedented Set of Challenges’

Earlier today, the administration formally released the long-awaited findings of its review of the defense industrial base, “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States.”

Q1: What is the Defense Industrial Base report?

A1: The Defense Industrial Base report is the output of the defense industrial base review mandated by last July’s Executive Order (EO) 13806 —Presidential Executive Order on Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States. EO 13806 required the Secretary of Defense, in coordination with an interagency team, provide an unclassified report assessing the capacity and resilience of the defense industrial base and its supply chains. Furthermore, the EO mandated an assessment of future needs, current gaps in the defense industrial base, defined as either non-existing, threatened, or single-point of failures, and a comprehensive list of potential contingencies that could disrupt the defense industrial base.

In addition to reviewing the strength and capacity of the defense industrial base, EO 13806 mandated that the report includes recommendations for potential legislative, regulatory, and policy changes required to avoid or prepare for contingencies; fortify vulnerable supply chains identified in the review; or strengthen the manufacturing capacity and resilience of the defense industrial base.

Q2: Why did the president order a review of the defense industrial base?

A2: The administration ordered a review of the defense industrial base given concerns about its current and future health and its importance to sustaining U.S. military superiority. A healthy, robust and advanced defense industrial base has been one of the United States’ asymmetric advantages over its adversaries since World War II. However, in recent years, there have been concerns about the health and future of the defense industrial base given the defense budget cuts triggered by the 2011 Budget Control Act and sequestration and broader U.S. manufacturing trends. A CSIS study released earlier this year found that the number of Department of Defense (DoD) prime vendors declined by 20 percent over the course of the most recent defense drawdown, with the largest declines in the facility-related and construction sector.

Additionally, there are significant concerns over the health and resilience of the subcontractors comprising the lower tiers of the supply chain. By DoD’s own estimates, 60 to 70 percent of all prime defense contract dollars awarded are subcontracted out to the vendors comprising the lower tiers of the defense industrial base. In some instances, these lower tiers of the industrial base are extremely brittle, limited to just a single-supplier, leaving the supply chain vulnerable to disruption should anything happen to that vendor’s ability to execute its subcontracts. The administration ordered this review in-part to identify these vulnerabilities and ways to fortify the supply chain.

Q3: What were the key findings of the reports?

A3: The report found that that U.S. defense industrial based faced an “unprecedented set of challenges” that "threaten the Department of Defense's (DoD) ability to be ready for the 'fight tonight’, and to retool for great power competition,” particularly in the lower tiers of the supply chain. Broadly speaking, the report found that: the U.S. defense industrial base is “surprisingly” dependent on “competitor nations”; the current domestic workforce is insufficient; and that “many sectors continue to move “critical capabilities offshore in pursuit of competitive pricing and access to foreign markets.”

The report went on to identify five macro trends affecting the defense industrial base:

1. Uncertain U.S. government spending creating instability that drives away small firms
2. Declining U.S. manufacturing capability and capacity
3. Antiquated U.S. government business practices
4. Competitor nations’ industrial policies, both specific targeting policies and the “collateral damage of globalization”
5. Workforce gaps resulting from diminished U.S. Science, Technology, Engineering and Mathematics, and trade skills

The report further analyzed the defense industrial base by sector to identify the specific risks and challenges facing DoD in each sector of the defense industrial base. This assessment identified almost 300 specific vulnerabilities in the defense industrial base. Some of the most pressing vulnerabilities this review identified were the single suppliers of critical equipment like ship propeller shafts or rocket motor fuel. Other identified vulnerabilities ranged from a shortage of skilled workers in the aircraft sector to the negative effects of consolidation in the shipbuilding industry to the “lack of steady orders” in the ground systems sectors to the lack of U.S. producers of certain critical fibers used in military tents and uniforms in the textiles industry. Finally, the report identified concerns about the availability of rare earth metals and other specialized components used to produce critical high-tech equipment, particularly with regards to the availability of “ceramics, high performance aluminum and steel, titanium, tungsten and carbon fibers.”

Q4: What were the report's main recommendations?

A4: The report provided a series of recommendations for strengthening the defense industrial base using four levers: “investment, policy, regulation and legislation.”

• Some of these recommendations include but are not limited to:
• Create a National Advanced Manufacturing Strategy
• Urged Congress to provide steady, on-time defense budgets
• Increase investment in the lower tiers of the defense industrial base using the Defense Production Act Title III authorities
• Modernize the Committee on Foreign Investment in the United States and Section 301 of the U.S. Trade Act of 1974 investigations to combat intellectual property theft
• "Working with allies and partners on joint industrial base challenges through the National Technology Industrial Base and similar structures."
• Accelerate the security clearance process, to include, clearing out the current backlog
• Diversifying the supplier base in those areas where the United States is completely dependent on foreign suppliers and at risk if politically unstable country cuts off U.S. access.

Q5: What's next for the defense industrial base?

A5: The Pentagon’s next course of action is to go about implementing these recommendations and the more detailed action plan found in the classified version of the report that includes more specific recommendations for solving the almost 300 identified vulnerabilities. The administration will kick off its implementation of these recommendations later today when the president is expected to sign off on measures authorizing nearly $30 million of Title III of the Defense Production Act funding for critical cell and battery manufacturing capabilities. Notably, the allies and partners recommendation suggest an opportunity to build on the momentum of Congress’s 2017 expansion of the National Technology Industrial Base and to address common defense industrial base priorities through reciprocal steps to build on existing trusted partnerships.

Implementing the other recommendations requires more time and money. Eric Chewning, Deputy Assistant Secretary of Defense for Industrial Policy, has indicated that the forthcoming president’s fiscal year 2020 budget request will ask for increased funding to address the specific vulnerabilities identified in this report.

Rhys McCormick is an associate fellow with the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies in Washington, D.C.

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