The US defense industrial base has faced a number of challenges in recent years. The COVID pandemic revealed weaknesses in the supply chain. Supporting Ukraine depleted materiel stockpiles that are being refilled, but not quickly enough due to capacity limitations.
Rebuilding the industrial base and reshaping acquisitions is a top priority for the Pentagon, and being able to meet the demands of the modern battlefield requires an overhaul of acquisition, production and procurement processes. Breaking Defense discussed these challenges with Jerry McGinn, director, Center for the Industrial Base, Center for Strategic and International Studies.
Breaking Defense: What do you see as the current state of the industrial base and what are its biggest challenges?
McGinn: We have the most dynamic and strong industrial base in the world. That being said, we have a fair bit of brittleness in our industrial base and the ability to surge capacity and production. We struggle to bring in new entrants; we have traditionally struggled with that.
We have adopted a lot of commercial practices — just-in-time manufacturing and delivery — which works okay when you don’t have stressors. COVID obviously showed that model has limitations and that has been a challenge in the defense industrial base. There already are a lot of single and sole-source suppliers because some of these parts for specific systems are military unique or unique for a specific system. We’ve gotten somewhat better at identifying the challenges, but we’re not fundamentally better at fixing the overall capacity issues on parts and subcomponents.
What will it take to make us better at those? What do you see as the challenge in identifying and fixing those weaknesses?
Part of it has been how the government buys. They’ve been buying systems from a prime contractor, and then most of the time set it up where the intellectual property was controlled by the prime contractor and got locked into what they call vendor lock concerns. There’s been a strong focus over the last better part of a decade to be more upfront about negotiating intellectual property rights with the government to try and build in more modularity, what they call modular open systems approaches (MOSA).
That is starting to have an impact, where you’re able to recompete subsystems and recompete systems over time. There’s going to be a big focus on doing more of that going forward so we don’t have single-source bottlenecks and choke points in the supply chain.
Secretary Hegseth announced a new acquisitions model recently. What are the practical effects of that announcement?
It all comes down to implementation. It’s an incredibly ambitious agenda, and you’re not going to find a lot of people that disagree with most of the things that the secretary laid out — some common sense approaches to help build capacity, incentivize new entrants, create more profit and incentives for companies. But doing it is obviously much harder than saying it. That’s going to be the big focus. The good thing about this market is the government sets the market and they regulate the market. So for companies, their job is to respond to those different incentive structures.
‘Demand signals’ is the big term. If the government sets demand signals that allow for more competition, recurring competition throughout the life cycle of the program, companies are going to respond. They’re going to find ways to be competitive throughout the life cycle of a program.
Traditionally, much of the Pentagon’s acquisition has been through prime contractors. What’s the role for smaller, mid-size companies in future acquisitions?
To a degree that’s not going to change that much.The government generally contracts with the prime contractor, whether that’s a traditional firm like a Lockheed or Raytheon.
The government’s still going to do that overwhelmingly, but what they’re trying to do is create more opportunities by doing what they call two-for production. Building two systems for production made by two different contractors. For big systems; not for all of them, for some of them. Then on the component level, they’re also trying to build in more ability to do multi-sourcing. If you have common interfaces, it allows the contractors to keep their black boxes, but allows the government to maintain operational control so they change out vendors over the course of a program. That’s what MOSA is all about and that’s going to create opportunities for all kinds of companies, for new entrants, for small companies, for mediums.
The ability to plug and play not only replacement parts but new capabilities is a big priority. Is the implementation there yet?
The implementation is to be determined. The intent is there. They’ve got the authority they need to do it. Second sourcing was done back in the ‘70s and ‘80s with missiles, in particular, for the Air force and Navy. What they found is it costs a bit to set it up on the front end, but on the back end what happens is you get companies competing over lot buys. It creates price drops as companies are competing.
Where the government’s looking to go is to have overall capacity so you don’t have bottlenecks. For instance, right now with Patriots, Denmark didn’t buy Patriots largely because they couldn’t get them for at least five years because they were so backed up in production.
What is the Pentagon seeing that is making this an urgent priority right now?
We saw this most clearly in support to Ukraine, where you had this initial need for Javelins and HIMARS and other capabilities. We were able to ship them over but then when we asked the prime contractor, ‘how fast can you surge production,’ their response was two years. The reason why is they built their facilities to the terms of the contracts they were awarded. They’re going to build just to the terms of the contract.
Going forward the government has to create a demand signal that allows them to be able to surge in the future. Do things like set up a surge claim where they award a contract for, let’s say, one munition, and say to the company ‘I want you to be able to surge production in six months, double production in six months.’
That would require the government to pay the contractor to do the environmental impact study, to plan for a new facility that would increase that capacity, so when the balloon goes up they could do that in six months instead of two years. Those kinds of actions are going to be required for us to ramp up capacity.
What have been the main lessons learned from Ukraine, and how have they shaped thinking about the industrial base?
There’s been a lot of focus on the speed of the technology replacement cycle in Ukraine, particularly with drones. The technology gets implemented and then the Russians spoof it within 6-8 weeks. The turn cycle and the focus on speed and commercial systems has been a big takeaway from Ukraine. There’s also been a lot of decentralization where the units themselves are allowed to buy direct from commercial. I’ve seen an estimate where virtually half of Ukraine’s defense budget now is on commercial systems and most of it is being spent at the unit level.
But there’s a challenge with that. We have to be careful about not overreading that because of two things. Number one, the Indo-Pacific theater is not Ukraine. Small commercial drones may have much less impact [in the Indo-Pacific] because of the distances involved.
Second, the challenge of the Ukraine model is that it allowed them to be very adaptive, but it’s so decentralized that they can’t scale. They can’t really build mass across the battle space because individual units are buying different systems. They’re not compatible, there’s no overall integration, so you’ve seen the point now where Russia, with this cumbersome kind of central planning focus, has actually built a lot more scale on drones and they’re launching many more drone attacks. The Ukrainians are able to probably confront them at about the same rate they were doing before, but the Ukrainians are not able to get mass. It’s that balance of finding the balance of speed and scale that points to some of the limitations of the Ukraine approach.