Analyst: Pentagon Should Move To Protect ‘Core’ Industries Before Budgets Collapse

It is the same debate that resurfaces after every post-war defense downturn: Should the Pentagon take preemptive action to protect select companies from economic collapse?

The question again is being raised as the Defense Department faces draconian spending cuts and a chaotic budget process that moves from one cliffhanger to the next.

The Pentagon typically has been more comfortable with a laissez-faire approach to industrial policy, but that is a luxury it might no longer be able to afford, contends a new study by the Center for Strategic and Budgetary Assessments.

The study, “Sustaining the U.S. Defense Industrial Base as a Strategic Asset,” will be unveiled Sept. 18 on Capitol Hill.

The Pentagon has shown little appetite for picking winners and losers in the defense industry on the belief that the market will separate the wheat from the chaff. That thinking is misguided, said CSBA senior fellow Barry D. Watts.

“There is an assumption that the defense industrial base will always be here,” Watts told reporters at a CSBA news conference. But there is a strong chance that many companies – including sole-source suppliers of critical components of U.S. weapons – will not survive the steep budget cuts that are now projected, Watts said. The industry is vulnerable, “even in a country as wealthy as the United States.”

Underlying the Pentagon’s flawed reasoning about its supplier base is a belief that the industry is a “free market,” he said. Defense contractors are, indeed, profit-seeking corporations, but do not operate under the same rules of commercial markets, he said. They only have one customer, and are regulated by that very customer, he noted. “The defense industrial base is a strategic asset,” said Watts. “But there hasn’t been much of a strategy managing this.”

CSBA identified several sectors that it believes should be propped up in order to keep suppliers in business: Precision weapons, nuclear forces, capabilities for combined-arms campaigns, naval platforms to access the world’s oceans, space and cyberspace skills, cryptology and combat training technologies.

Watts acknowledged that such lists are controversial as they elicit backlash for leaving out areas that others consider more relevant.

“The Pentagon has not been able to get down to a list of what they think is important,” Watts said. “This generates a lot of uncertainty in industry.”

Industry CEOs, he said, “would sleep better at night if they could get the building to agree on a reasonably short list – of less than 10 core competencies – that could drive a coherent strategy.”

But there is no consensus in the Defense Department on this issue, he added.

“The Defense Department has never had a coherent, long-term strategy for sustaining the defense industrial base’s core competencies,” said Watts. “Absent a strategy that proceeds from deciding first what to keep rather than what to cut, the possibility is growing that a day will come when the country’s industrial base will no longer possess all the critical design and manufacturing capabilities that the U.S. military needs.”

Major prime contractors are making substantial profits and appear to be on solid financial ground, but the perils to the industrial base are found further down the food chain, in the lower-tier suppliers, said Watts. The Pentagon only realizes it has a supplier problem when it finds out that a certain component no longer is manufactured in the United States because a small business went bankrupt, said Watts. Even though CSBA does not have access to the Pentagon’s classified database of suppliers, Watts suspects that there are many potential points of failure in the supply chain. “We haven’t been paying attention to the defense industrial base,” he said.

The industry not only must cope with a policy vacuum in the Defense Department but also with the loss of its traditional allies on Capitol Hill. A divisive, partisan budget process in Congress has turned the defense industry into a political orphan, Watts said. Even though lawmakers worry about losing defense industry jobs in their districts, that has not proved to be a strong enough motivator to reach budget deals. “There is not much hope that Congress” will help, he said. “Very few members these days care about the defense industrial base. It is not a topic that grabs them, that gets them excited, that makes people want to do something sensible and strategic,” said Watts. “You get a sense that this is going to be a very difficult five to 10 years ahead in the Defense Department.”