The National Defense Industrial Association, in a new report with data firm Govini, says the U.S. defense industrial base last year received an overall grade of 69, or a D, falling from a 72 the previous year, partly because of the "unprecedented disruption" the COVID-19 pandemic has had on U.S. supply chains.
The “Vital Signs 2022” report assessed data in eight areas: demand, production inputs, innovation, supply chain, competition, industrial security, political and regulatory issues and productive capacity and surge readiness.
“The largest drops from last year were in ‘supply chain,’ and ‘production capacity and surge readiness,’” the report states. “This will come as no surprise as these issues featured very prominently across the world, due to [COVID-19] disruptions. They are also critical to U.S. national security interests as they feed into the ability to respond to a crisis.”
Specifically on supply chain, which scored a 63 and saw an eight-point drop from its score the previous year, the report says delays have led to companies having poor “cash conversion cycles,” meaning firms are less able to quickly convert product investments into cash receipts.
The report also included a survey of nearly 400 businesses, 14% of which say they believe their bottom lines will never recover from the pandemic. The report also notes that 63% of the companies that responded to the survey say they have not received financial assistance from any source, including the federal government, since December 2020.
Additionally, the report says there has been a “worrying” decline in DIB vendors, dropping to 55,000 from 58,000 the previous year, or a “significant” drop from 69,000 in 2016. The report also notes the number of new companies entering the defense industrial base fell from 6,500 in 2019 to 6,300 in 2020.
“The report reinforces the notion that the DIB is not insulated from the rest of the economy; it paints a picture of a DIB that has struggled through the first year of the pandemic alongside the rest of the economy,” the report states. “Moving forward, the goal of maintaining or improving the health and readiness of the defense industrial base continues to be a pressing challenge for national security and defense policy communities.”
Meanwhile, “industrial security” continues to pose a challenge for the DIB because of cyber vulnerabilities, receiving a score of 50.
“While the rate of growth has slowed down, the base continues to experience year-on-year increase in the number of cybersecurity vulnerabilities,” the report states.
The only area to see significant improvement, according to the report, was “demand,” which scored a 94, reflecting recent growth in the defense budget.
“Moving forward, this will be an indicator to closely monitor, as the prospect of flatter defense budgets and rising inflation pose potential headwinds in the near term,” the report states.
“Competition” also received a passing grade of 88.
“This high mark was driven by several high-scoring factors including a low level of market concentration for total contract awards, the low share of total contract awards received by foreign contractors, and a high level of capital expenditure in the DIB,” the report states. “Conversely, other factors within the ‘competition’ sign experienced decreases, including a significant 11-point decrease for liquidity. These decreases were anticipated, however, due to the impact of the pandemic on the economy.”
The report scored “innovation” at a 69, the same as the previous year, noting a decline in basic research investments.
“Outside of the private sector, public sector investment in innovation also continued to deteriorate,” the report states. “This is especially significant considering that public sector funding dominates the area of basic, experimental and theoretical research in the U.S.”