Pentagon Should Promote Competition Within An Integrated Industrial Base

Most Americans are unaware that the United States has two defense industrial bases. The one they hear about most, partly because it advertises its wares, is the private defense industrial base. This consists not only of large defense contractors, the so-called primes such as Boeing, Lockheed Martin, General Dynamics, BAE Systems, Northrop Grumman and Raytheon, but also hundreds of medium and small firms.

There is also another defense industrial base. This is the public or organic base which consists of depots, logistics centers, arsenals and specialty facilities such as ammunition plants that the government owns. Most of these are government-owned and operated, although some are run by private contractors. The organic base is primarily concerned with maintenance, repair and overhauling military equipment although it has come to do assembly and even manufacturing of some new equipment, often in partnership with the private sector.

Both parts of the nation’s defense industrial base have done quite well over the past decade, when the demand for their products and services was high and the money flowed. Now, with defense spending set to decline, perhaps precipitously, both parts face challenges remaining viable in the years to come.

The private sector is moving aggressively to reshape itself in anticipation of reduced demand and fewer dollars. Seeing the writing on the wall, many firms began to reduce costs and restructure their businesses several years ago. They intend to do much more going forward. At a recent meeting in New York with investors, defense company representatives made it clear that their strategy is to continue to cut costs, seek more international sales and look to increasing their commercial opportunities.

There are other options for the private sector. Some defense companies, such as Boeing, and General Dynamics and United Technologies have commercial divisions. Others, like Lockheed Martin, have strong IT groups that do much of their work either for other parts of the federal government or commercial customers. These non-defense operations can be expanded. Finally, a number of companies appear to be positioning themselves to exit all or part of the defense market.

The public defense industrial base has many of the same problems as the private base but fewer options. The depots and logistics centers can try to cut costs but they already have a difficult time even accounting for their expenses. One of the major criticisms of Pentagon studies that try to compare the costs of performing work in the private or public bases is that the latter is unable to provide full and accurate accounting of its costs. They cannot move aggressively into other sectors; in fact, they are not really even supposed to compete with one another for business.

In addition, the organic industrial base was significantly oversized even before the current downturn. The 2005 Base Closure and Realignment Commission (BRAC) rejected many of the recommendations from the Pentagon that would have closed several facilities outright and realigned or consolidated others.

The organic base could try to counter the effects of reduced overall levels of spending by taking additional work away from the private sector. Mind you, the depots and logistics centers already enjoy protected status, being guaranteed by law at least 50 percent of all depot-maintenance dollars. However, by poaching work from the private sector the depots and logistics centers not only risk their long-term relationships with the defense companies but also threaten the stability of the Pentagon’s maintenance and sustainment budgets. Costs would increase and private companies would have an additional incentive to exit the sector.

A better solution is for DoD to guide the creation of an integrated national defense industrial base. This would involve, inter alia, another base closure round to reduce excess infrastructure, including depots and logistics centers. It also would entail encouraging competition at two levels, within the private defense industrial base and between the public and private entities.

The mechanism by which a single, cost-effective defense industrial base can be created is fair and open competition. DoD will need to create a more level playing field so that both the private companies and public institutions can compete based on technical capabilities, cost, flexibility and responsiveness. The Pentagon has made increased competition a centerpiece of its program to reform the acquisition system. But it has limited this competitive spirit largely to the private sector. It needs to expand the concept to include both parts of the defense industrial base.