White House warns of ‘domestic extinction’ of suppliers in industrial base report - and DoD is ready to help with cash

By: Aaron Mehta

WASHINGTON — A combination of Chinese influence and budgetary uncertainty means America's defense industrial base is decaying at the lower levels, with some vital suppliers facing “domestic extinction,” a new study from the Trump administration is warning — and direct investment from the administration appears to be the solution.

The study, the result of an executive order issued by president Donald Trump last July, also warns that if the situation is not remedied, the Pentagon faces “limited capabilities, insecurity of supply, lack of R&D, program delays, and an inability to surge in times of crisis.”

The language seems dire, but much of the 140-page report appears to contain little new for those who have paid attention to defense industrial issues over the last several years. Many of the concerns outlined in the report echo that of a Defense Department internal study, released earlier this year, which warned long-term trends, including demographics and sole-source suppliers going out of business, were set to create major hurdles for the department.

The report has been long coming. Trump ordered its creation in July of 2017, with Peter Navarro, his trade czar and a well-known China hawk, as the coordinating point man. At the time, Navarro said the study was being driven by concerns that “we cannot retain a preeminent military without a healthy, growing economy and a resilient industrial base.”

By May 2018, the Pentagon had sent its conclusions into the White House for coordination which set industry expectations of a release shortly thereafter. However, the release dated continued to be pushed back, due largely to other news overtaking the White House.

Trump, along with Deputy Secretary of Defense Pat Shanahan, is expected to appear at the White House Friday around 1:45 PM eastern time to sign several actions into law. The full report will be released shortly after.

The report identifies five macro issues facing the defense industrial base:

• Sequestration and uncertainty in U.S government spending, which create instability and drives small firms away from defense work
• A decline of U.S. manufacturing capability and capacity, leaving weaknesses throughout the supply chain
• Antiquated U.S. government business practices, which the report warns leads to contracting delays and discourages innovation
• Industrial policies of competitor nations, both due to “collateral damage of globalization” and specific targeting by great powers like China
• And diminished U.S. STEM and trade skills, which are creating gaps in the workforce.

The Departments of Defense, Energy, and Labor all submitted recommendations in the report, to deal with 300 individual weak points that are of concern.

Notably, DoD's conclusion calls for the expansion of “direct investment in the lower tier of the industrial base,” through the department's Defense Production Act Title III, Manufacturing Technology, and Industrial Base Analysis and Sustainment programs. That would address “critical bottlenecks, support fragile suppliers, and mitigate single points-of-failure.”

Ellen Lord, undersecretary of defense for acquisition and sustainment, told reporters it would not be “prudent” at this point to put a total dollar figure on what investment might be coming, but a senior administration official, speaking on background ahead of the report release, identified several shops being given extra cash.

Those include $70 million fr a plant that produces gun components, in order to launch modernization and risk mitigation programs, as well as $1 million for the facility that produces the Abrams tank to procure better tooling.

DoD's conclusions also call for the creation of an industrial policy to “inform current and future acquisition practices;” to attempt to diversify away from complete dependency on sources of supply in politically unstable countries who may cut off U.S. access, including “reengineering, expanded use of the National Defense Stockpile program, or qualification of new suppliers,” to work with allies on joint industrial base challenges; and to “modernize” the organic industrial base to ensure readiness.

The Department of Energy, whose National Nuclear Security Agency handles the development of nuclear warheads, will propose establishing an “Industrial Base Analysis and Sustainment program to address manufacturing and industrial base risk within the energy and nuclear sectors” as part of its FY2020 budget request.

And the Department of Labor will work to encourage STEM growth, as well as consider “potential incentives to recruit and retain workers to enter and/or stay in the industrial base, such as tuition reimbursement.”

All three departments must provide an update 180 days from the issuance of the report.

The Chinese Bogeyman

While the report casts itself as part of the broader return of great power competition, it is impossible to miss that the authors view China as the industrial bogeyman. The words “China," “Chinese” or “Beijing” appear in the report 232 times; “Russia” appears only once, as part of a quote from another document — which also mentions China.

The report is being released the same day that Vice President Mike Pence gave a keynote speech in Washington decrying what he called Chinese attempts to influence the American public, and just hours after Bloomberg issues a bombshell report that a Chinese company had managed to insert tiny, microscopic chips into hardware used by both the DoD and American intelligence services.

“The Chinese Communist Party has also used an arsenal of policies inconsistent with free and fair trade, including tariffs, quotas, currency manipulation, forced technology transfer, intellectual property theft, and industrial subsidies doled out like candy, to name a few,” Pence said in his speech. “These policies have built Beijing's manufacturing base, at the expense of its competitors — especially America.

That China is attempting to infiltrate the defense industrial base is no surprise to those who have been tracking DoD's comments on the issue in the last several years, but the report sums it up thusly: “While multiple countries pursue policies to bolster their economies at the expense of America's manufacturing sector, none has targeted our industrial base as successfully as China.”

“China represents a significant and growing risk to the supply of materials and technologies deemed strategic and critical to U.S. national security; a challenge shared by key allies such as Germany and Australia,” the report adds, singling out rare earth metals and critical energetic materials for munitions and missiles as areas of concern.

“China's actions seriously threaten other capabilities, including machine tools; the production and processing of advanced materials like biomaterials, ceramics, and composites; and the production of printed circuit boards and semiconductors.”

China is four times as large as its next closest competitor when it comes to exporting to the U.S. rare earth materials, used in lasers, radar, sonar, night vision systems, missile guidance, and jet engines, making Beijing a significant supplier of these capabilities needed for America's high-end defense capabilities.

Single sourced, and disappearing

While much of the specific weak points in the defense industrial base are not spelled out in the public-facing part of the report, the 140-page document does include a number of examples of weak spots in the defense industrial base, largely in the lower-tier suppliers who make pieces and parts that would ordinarily go unnoticed on a large military system.

A senior administration official, speaking ahead of the report's release, cited ceramics, high performance aluminum and steel, titanium, tungsten and carbon fibers as some of the components the Pentagon is concerned about.

The report offers further examples. For instance, it says there are only four America suppliers with the capability to manufacture large, complex, single pour aluminum and magnesium sand castings, needed to help produce American airpower. Those suppliers “face perpetual financial risk and experience bankruptcy threats and mergers mirroring the cyclicality of DoD acquisition,” per the report.

Meanwhile, there is only one qualified source for the upper, intermediate, and sump housing for an unnamed heavy lift platform used by the Marines (potentially the CH-53 King Stallion) that recently went through bankruptcy proceedings. “Without a qualified source for these castings, the program will face delays, impeding the U.S. ability to field heavy lift support to Marine Corps expeditionary forces,” the report warns.

A material called ASZM-TEDA1 impregnated carbon is used in 72 chemical, biological and nuclear filtration systems owned by the DoD, and there is only a single qualified source, the report notes. “The current sourcing arrangements cannot keep pace with demand. DoD is using Defense Production Act Title III authorities to establish an additional source of this critical material,” the report says.

In yet another example, the study looked at the companies that make flare countermeasures for military aircraft. There are only two domestic suppliers for flares with “little incentive to invest in infrastructure,” and both suffered explosions at their production sites in recent years. “Both companies have experienced quality and delivery problems since the accidents. As program offices look to improve quality and cost, they are beginning to look offshore at more modern facilities, where there are fewer quality and safety concerns.”

Hawk Carlisle, a former Air Force officer who now leads the National Defense Industrial Association, called the reporter's findings “sobering."

“Recent efforts by Congress and the administration have been encouraging, but more must be done,” Carlisle said. “Streamlining the acquisition process, updating the Committee on Foreign Investments in the United States guidelines, and reforming how we sell our systems to allies and partners have all been steps in the right direction.”

Added Eric Fanning of the Aerospace Industries Association, "Guaranteeing the health of the American manufacturing and defense industrial base is a critical national security and economic priority as the United States combats today's threats and those we'll face tomorrow. We applaud the Administration's focus on these issues and look forward to working together to implement the assessment's recommendations with the same spirit of industry-government cooperation and engagement that led to today's report,”

Both groups were part of 15 conversations the working group had with industry during the production of the report.

https://www.defensenews.com/pentagon/2018/10/04/white-house-warns-of-domestic-extinction-of-suppliers-in-industrial-base-report-and-dod-is-ready-to-help-with-cash