"I think a three month slow-down in program activity is an optimistic projection based on the level of damage the economy is currently sustaining."
By PAUL MCLEARYon April 21, 2020 at 3:33 PM
WASHINGTON: Defense industry and Pentagon leaders are struggling to assess what impact the COVID-19 pandemic will have on building and maintaining the global US arsenal, but early assessments agree there’ll be some disruption and delay as the global economy teeters.
How much, how long, and where those disruptions will occur are something of an open question. With massive supply chains across the globe that run from small mom and pop manufacturing shops to massive global conglomerates, there’s no one formula to assess what will happen to the industrial base in the weeks and months to come.
On Monday, Pentagon acquisition chief Ellen Lord said she expects the largest programs to see three-month delays, but some analysts say that assessment could be too rosy.
“I think a three month slow-down in program activity is an optimistic projection based on the level of damage the economy is currently sustaining,” said Andrew Hunter, former chief of staff to two heads of Pentagon acquisition. Hunter is now at the Center for Strategic and International Studies.
The designation of the defense industry as critical infrastructure has ensured that shipyards, factories, and shops have generally remained open, as workers stagger shifts and companies provide liberal leave and teleworking where possible. That has placed the defense industry in a good position relative to other parts of the economy. But the supply chain those companies rely on “is tightly interlinked with the commercial economy, especially the aviation and automotive sectors, and this will transmit a degree of economic disruption into defense in the coming months,” Hunter said.
Lord singled out the aerospace sector, along with shipyards and space launch as areas most at risk of slowdown and disruption.
So far, though, the Navy and its largest shipbuilder say they’re mostly working through the issues, and are staying away from putting a specific length of time on any delays.
“We do not have a list of programs that are delayed, but as Ms. Lord and [Navy acquisition head James] Guerts have both said, while it’s too soon to identify specific delays, generally we are expecting and planning for program disruptions,” Navy spokesman Capt. Danny Hernandez told me in an email. Geurts has moved to accelerate funding for some work and parts supplies so industry can eventually ramp up once the entire workforce is back on the job.
Speaking to reporters last week, Geurts said over the “next three four weeks we’ll get a better view of the exact delay and disruption and then how we might mitigate that, or quite frankly, where do we have opportunities where we can accelerate things” due to some excess capacity in the supply base because it’s not being consumed by commercial aviation or shipbuilding.
At the country’s largest shipbuilder, Huntington Ingalls, company executives told me recently they’re not seeing significant reductions in the number of parts they’re receiving. “We are working with a few critical suppliers that are having challenges, but I think for the most part are going to be able to get through that,” said Lucas Hicks, vice president of new construction aircraft carrier programs. “We have reached out to all the suppliers and are working with them to try to help them.”
There will be some pain, though how much is up for debate.
Analyst Byron Callan of Capital Alpha Partners said in a note Monday that a three-month impact might not force companies to drastically change their expectations for the whole year. Any slippages this spring “could conceivably be made up in subsequent months, but that may be a challenge. Contractors could sustain prior guidance and just call out COVID-19 as a risk for the full year, or drop guidance altogether. No one has a perfect crystal ball.”
Hawk Carlisle, president of the National Defense Industrial Association, said on a Monday conference call organized by the Jewish Institute for National Security of America that the slowdown in the global economy “is going to cause things to cost more, whether it’s service agreements or products and manufacturing capability.”
He’s looking to the next congressional stimulus package for an acknowledgment “that these programs are going to exceed budget,” he added, “because of this two to three months of delays, partial workforce, paying the workforce, inability to perform on contract.”
But Hunter thinks, so far, the Pentagon has handled the situation as well as can be expected: “To the department’s credit, they have been aggressively looking for issues in the supply chain, which means that Ms. Lord’s estimate becomes a lot more likely if they succeed in staying ahead of these problems.”