Pentagon targets China in new defense industrial base report

By Marjorie Censer, Tony Bertuca / October 4, 2018

The U.S. defense industrial base is increasingly at risk, specifically from China, and in need of new, direct investments at the subcontractor level to prevent single points of failure and dependence on foreign sources, according to a long-awaited Pentagon report commissioned by President Trump.

The Defense Department, which led the industrial base assessment following a July 2017 executive order, makes three broad assertions in the report: the United States has a “surprising level” of foreign dependence on “competitor nations”; there exist workforce challenges across every sector of the industrial base; and many sectors continue to move “critical capabilities offshore in pursuit of competitive pricing and access to foreign markets.”

The report also outlines several “macro forces” that have impacted sub-tiers of the defense supply chain: sequestration and uncertainty of government spending; the decline of U.S. manufacturing capability and capacity; government business practices; industrial policies of competitor nations; and diminishing science, technology, engineering, mathematics and trade skills.

The macro forces each contribute to 10 different “risk archetypes” ranging from sole and single sources, fragile suppliers and markets, foreign dependency, constrained supply, diminishing capacity, gaps in human capital, erosion of infrastructure and product security.

To mitigate these challenges, the report makes several recommendations including: Create an industrial policy in support of national security efforts to inform current and future acquisition practices; use existing statutory authorities to expand direct investment in the lower tier of the industrial base to “address critical bottlenecks, support fragile suppliers, and mitigate single points-of-failure”; diversify away from total dependency on sources of supply in “politically unstable countries who may cut off U.S. access”; and consider reengineering and expanding use of the National Defense Stockpile program, or qualification of new suppliers.

Cybersecurity remains a key challenge, according to the report, which states U.S. defense supply chain operations rely on an an “infinite number” of vulnerable “touch points” across multiple networks and manufacturers.

Additionally, the White House has also produced a classified action plan that directs DOD to conduct a comprehensive study on the industrial base requirements needed to support force modernization and investments in new technologies.


The report also discusses China's “industrial policy aggression” and the way Beijing has forced many American companies to move their research and development operations offshore in exchange for access to the Chinese market.

The report notes that “not all foreign dependency is equal,” noting China is the sole supplier of a number of specialty chemicals used in munitions and missiles.

“In many cases, there is no other source or drop-in replacement material and even in cases where that option exists, the time and cost to test and qualify the new material can be prohibitive -- especially for larger systems (hundreds of millions of dollars each),” the report states.

China has also gained control of commodity materials and rare earth metals by investing in developing countries in exchange for access to natural resources and markets, particularly in Africa and Latin America.

China's foreign investments represent an “additional level of consideration for the scope of this threat to American economic and national security,” the report states.

'Government-inflicted damage'

Though Congress recently passed an on-time defense budget for the first time in a decade, the report notes that past fiscal dysfunction has had negative impacts on the defense industrial base, calling it “government-inflicted damage.”

In 2017, for instance, DOD could not execute 75 new-start programs at the beginning of the fiscal year because it was operating under a stopgap continuing resolution from Congress, “with multiple tiers of the manufacturing and defense industrial base’s supply chain taking the brunt of the impact,” according to the report.

Congress has enacted more than 30 CRs since 2009, with an average of 127 days spent under each year's measure, leading to cost volatility that deters companies from working with DOD unless they have existing defense business.

“Unstable appropriations over the past decade created additional uncertainty in DOD’s procurement plans, leading to unreliable demand signals to industry,” the report states.

Navy shipbuilding

The report includes a sector-by-sector appendix outlining specific challenges, warning in one section that the Trump administration's goal of building a 355-ship Navy might be hampered by the shipbuilding industrial base.

“Industries involved in the manufacturing of shipbuilding components were among the hardest hit by the global shift in the industrial base over the last 20 years,” the document says. “Of the top ten highest grossing industries in Navy shipbuilding, six are in the manufacturing sector. Since 2000, these industries experienced a combined decline of over 20,500 establishments in the U.S.”

This contraction limits competition among U.S. suppliers of Navy parts, the report notes, adding that in some instances, “competition has altogether vanished, forcing the Navy to rely on single and sole source suppliers for critical components.”

“These companies struggle to survive and lack the resources needed to invest in innovative technology,” the document adds.

As an example, the report says there is only one forge manufacturing and refurbishing shafts for surface ships and submarines.

“The limited capacity of the equipment at the sole forge doing this work for the Navy hampers the forge’s ability to meet demand,” the document says. “Further, it is difficult to recruit and retain qualified personnel to operate the equipment because technical schools have stopped training on the equipment, given its age. If the forge is not modernized, the facility may exit the market, causing disruptions to multiple Navy programs.”

There is also a shortage of competition in “high voltage cable, propulsor raw material, valves, and fittings,” the assessment says.

The defense industrial base report says it's important to expand “the number of companies involved in Navy shipbuilding” to maintain “a healthy industrial base that can fulfill the 355 ship fleet.”

At the same time, the assessment finds that the Navy's “high operational tempo” in recent years, coupled with unstable funding, has generated a backlog of repair work.

This backlog, along with boosts in new ship construction, has strained suppliers, the document says.

“The increased demand creates pressure on already-aging production equipment and could necessitate additional hiring in highly specialized fields, where it is often difficult to find suitable candidates,” the report says. “Technical requirements for new ships, a large volume of mid-life availabilities, and a general lack of investment by industry in new dry-dock capacity will create a significant constraint for completing Navy ship maintenance. The combination of limited suppliers and an increase in workload could increase cost and potentially create schedule slips.”

The report notes the shipbuilding industry has “long been challenged by an eroding skill base,” but the problem is worsening.

“Left unaddressed, a lack of skilled workers will significantly impact the shipbuilding industry’s ability to meet the Navy’s long term demand,” the document says.

Other sectors

The report says the aircraft sector is experiencing several workforce challenges, including a shortage of workers with critical hardware and software design capabilities amid “skyrocketing” demand for such employees in non-defense industries.

The report also notes consolidation among prime suppliers has expanded into the sub-tiers of the supply chain, “creating additional risks for single or sole source vendors.”

Ground systems, meanwhile, face fragility in the sector brought on by a “lack of steady orders,” leading prime vendors and their suppliers to reduce excess capacity. As a result, the report says the sector is at risk of being unable to surge to meet warfighter need.

Technological advancements in space systems are poised to provide the United States with new strategic advantages, but DOD business practices, market trends, supply chain globalization and manufacturing costs could combine to make U.S. access to space uncertain, according to the report.

Industry response

An industry group said the report demonstrates the importance of providing on-time budgets and ending sequestration.

“This report paints a sobering picture of the current state of our defense industrial base by identifying more than 250 areas where the base and its supply chain face critical risks,” Hawk Carlisle, the chief executive of the National Defense Industrial Association, said in a statement. “Reliance on single producers within the supply chain, dependence on unstable or unfriendly foreign suppliers for critical components, and misplaced presumption of continued preeminence of American military superiority are examples of findings that should be immediately addressed.”

The Aerospace Industries Association agreed, noting in a statement that "none of the advancements in acquisition policy, key capabilities or workforce will matter without adequate DOD budgets.

"A return to the spending levels imposed by the Budget Control Act will devastate the progress made by the Administration to foster a resilient and innovative manufacturing and defense industrial base that can sustain U.S. and allied forces in a severe and prolonged conflict," the organization added.