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 May 2008 

Lawrence P. Farrell Jr.Defense Industrial Base: Plans Needed to Ensure Soft Landing

May 2008

By Lawrence P. Farrell Jr.

Discussions about the impending collision between military needs and resources mostly occur in the context of service priorities. But what about the industrial base? What does a future of possibly declining budgets hold for large prime contractors and thousands of lower tier subs that supply piece parts, assemblies, components and subsystems? And what about service providers and, especially, the ammunition sector?

It is probably not too early to contemplate what sectors of the U.S. defense industrial base should brace for a hard landing after the huge war supplemental budgets begin to wane.

The nation’s brief industrial base history is rife with examples of the effects of rapidly decreasing budgets driven by shifting priorities. When priorities change, the tendency is for budgets to shift quickly with little regard for what happens to the sectors that are losing business. Most recently, we witnessed the “procurement holiday” of the 90’s, which was preceded by a major drawdown. Some of the more noticeable effects have been consolidations, mergers, industry shrinkage and market exit.

In a June 2007 National Defense article, Bill Holmes and Bob Seraphin documented an 80 percent funding reduction for ammunition between 1985 and 1994. “More than 70 percent of the firms that had participated in the manufacture of munitions exited the field, never to return,” the authors pointed out.

Little consideration was given to the potential effects of this drop and hardly any planning was done.

There was virtually no predictability for the industry, and a majority of the firms had little choice but to leave.

In other areas one also sees attrition of critical skills and design teams as fewer acquisition programs are offered. As a result, the potential for competition decreases and the services face a much-reduced competitive environment for subsequent procurements.

The fiscal and political storm clouds are gathering. Sometime in the next several years — maybe sooner than later — U.S. combat duties in Iraq will begin to power down as we transition more to training and stability operations. Given the economic realities and pull from other national budget accounts, there will be a run on the defense supplemental budget and most likely, too, on the baseline budgets. A substantial amount of procurement dollars has been inserted into supplemental budgets in recent years, especially for reset/recap, ammunition and even major platforms. It would not be unreasonable to expect a precipitous budget decline to ravage some sectors of the industry. In that case, what is to prevent a “fast rat gets the cheese” scenario?

What is needed is a rational approach to baseline defense needs ahead of the funding decline, so the industry can land softly.

The Defense Department and industry need to jointly decide how to do this, and determine what skills and production capacity need to be protected. Holmes and Seraphin noted that the failure to do so results ultimately in fiscally inefficient rescues, when it becomes apparent after the fact that a critical sector is on life support. They pointed out that the Pentagon added more than $2 billion and Congress an additional $2 billion in the 1995-2002 period for ammunition. This infusion along with the increased demand of the Iraq and Afghanistan conflicts have saved ammo producers for now, but the industry sees the looming financial crisis and the need for a “soft landing.”

NDIA’s Industrial Committee of Ammunition Producers has created a “soft landing subcommittee,” which joined forces with the Joint Munitions Command and Program Executive Office for Ammunition to study the issue in depth and to devise both short- and long-term strategies to deal with the coming budget reductions. The subcommittee has thus far fostered improved communication between companies in this sector and government agencies, and has completed a white paper on the issue.

The group also has begun the process of defining an objective industrial base for munitions, and advocating the structure and size of the base that is derived from anticipated future requirements. It seeks a predictable glide slope to a “defined objective base.”

The subcommittee recognizes and assumes an inevitable downturn in defense funding and it is prepared to suggest the appropriate adjustments for the industry. There is a joint understanding by both industry and government that the situation is critical and if not managed properly, great damage will be done to the ammunition industrial base. It is encouraging that one of the objectives of the subcommittee is to try to preserve competition going forward.

We should applaud this most prescient initiative. It is an example of how other sectors in the industrial base should respond. If the U.S. military is to remain in the lead on the battlefield, the nation must retain the industrial capacity to continue to produce the best systems in the world. Technology is our edge. That requires critical industrial skills, world-class design teams, top-notch production facilities and processes.

To support these capabilities, the Defense Department needs to continue to procure systems in critical sectors, otherwise industrial capability will attrit, never to return, or if returning, only at a much greater cost than if the industry remained engaged at a reasonable level.

Thus, the Defense Department, Congress and industry representatives in all vulnerable sectors need to start preparing now to avoid the carnage caused by the shortsighted policies of the past.

Please email your comments to LFarrell@ndia.org

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