Memo To Secretary Carter: The Electronics Industry Is Not Comparable To The Defense Industry

On June 28, the Under Secretary of Defense for Acquisition, Technology and Logistics, Dr. Ashton Carter held a convocation for defense industry leaders. The subject was restoring affordability and productivity in defense acquisition. The Under Secretary began by telling his audience that the era of rapidly increasing defense budgets was over and that future defense budgets would grow slowly, if at all. Using this point as a base for his comments he said that the Department of Defense was embarking on a program to make its acquisition of goods and services less expensive.

The Under Secretary called on the defense industry to do “more without more.” He pointed to the computer industry as the model. “You get a better computer every year, and cheaper. But we haven’t seen productivity growth in the defense economy. More has been costing more. And we need to reverse that trend and restore affordability to our programs.”

The Under Secretary’s comparison to the computer industry is misplaced. In fact the computer and electronic products sector is an outlier across all sectors of the U.S. economy. Using data from the Bureau of Labor Statistics on labor productivity growth and labor costs as a surrogate for overall productivity and costs, between 1987 and 2008, this sector alone experienced significant rates of productivity growth with falling prices. Productivity grew at an average annual rate of 9.8 percent while costs increased 1.4 percent. This phenomenon was driven by the computers and peripherals sub sector which experienced productivity increase over this period of 20 percent a year and cost decreases of 2.1 percent. No other manufacturing area experience faintly comparable results.

Looking at other sectors that are analogous to parts of the defense industrial base tells a very different story. The motor vehicles sub sector has experienced annual productivity gains of 1.4 percent with costs rising 1.3 percent. The aerospace products and parts sub sector actually experienced falling productivity (-.5 percent) and rising costs (.7 percent).

The use of the computer industry as the standard for the defense industry is misleading. Moreover, it does not reflect the nature of the two sectors. From the first integrated circuit board to the products of today, chipmakers have been making the same product and simply refining it. But when there are both high rates of innovation and great uncertainty in the requirements and character of commodities, as there are in the defense sector, the analogy to the commercial world breaks down. Take Dell’s offer to allow customers to design their own computers. Its mass customization is only valid within a fairly restrictive framework. Once you decide among a few key variables, the choices available to consumers are remarkably limited. With Dell, the framework is set by the manufacturer. With the defense sector, the framework is set by the customer and is subject to significant change through the life of a weapons system, often radically so. If the defense industry could build nothing but F-15s for 100 years, you would then probably see its productivity go up and costs go down as significantly as in the computer industry.

The reality is that the most significant difference between the computer and the defense industrial sectors, indeed between defense and the entire commercial economy is the nature of the buyer and not the seller. As the Dell example suggests, commercial producers can exercise a temporary tyranny over those who want to buy their products. Consumers can buy what the producers offer or go without. Henry Ford only offered cars in black initially because Black Japan Enamel was the only paint which would dry quickly enough to satisfy the speed of the production process. This worked as long as the consumer was willing to accept this, which they weren’t for long. Mercury released very similar cars to Ford, but with a varied color palette. Costs went up, but that did not dissuade car buyers from passing up Ford and buying a Mercury. Ford had to switch, its costs went up and so did the price for its automobiles.

The DoD-defense industry relationship is a tyranny of the consumer. DoD sets the parameters, often unrealistically as it pertains to the state of technology or the limits of producibility and maintainability. There’s a difference between saying, “I want an F-15” and “I want the world’s best air-superiority fighter,” just as there is a difference between saying “I want a car that is two seconds a lap faster than last year’s car” and “I want a car that wins the World Championship.” Most defense products are items custom built to the buyer’s specifications. The defense buyer is much more demanding than most commercial buyers. Would the “bugginess” of much commercially available software products be tolerated in a weapons platform or munition? Certainly not.

Not only is the buyer a demanding customer he also is fickle. He acts like a raging bull changing requirements, the availability of funding, the quantities of items to be purchased, production schedules and the environment in which products must operate. Then he acts surprised when productivity does not increase and costs decline.

Under Secretary Carter’s proposed reforms focused about 80 percent on changes that industry needs to make and 20 percent on changes that DoD needed to implement. Frankly, it should have been the other way around.