DoD’s ‘industrial capabilities’ dilemma

DoD’s ‘industrial capabilities’ dilemma

The Defense Department’s new “Annual Industrial Capabilities Report to Congress” is not the industrial strategy that many people in the game say it needs. Instead it is an often fascinating, sometimes bizarre look inside the Pentagon’s disconnected policy brain, where, just as with other places in the federal government, up is sometimes down and black is often white.

For example, the report begins with an affirmation of DoD’s unshakable belief in basic capitalistic principles: First, competition is the holy mystery that always creates better value. Given that this theoretically is a free market, the department recognizes budget cuts will mean less money to go around, so firms may need to join together to survive. If so, the miracle of the market must be allowed to work — except when it mustn’t:

These forces will doubtless lead to an uptick in the volume of mergers and acquisitions and other industry adjustments in the coming period, and this is normal. The Defense Department welcomes needed adjustments that lead to greater overall efficiency but will require transparency with respect to all contemplated transactions. These transactions will be examined to ensure that the Department’s long-term interests in a robust and competitive industrial base dominate any near-term or one-time proposed savings, that potential organizational conflicts of interest are avoided or carefully mitigated, and that the Department has full visibility into restructuring costs and the potential for continuing capital investment and R&D. The interests of the taxpayer and the warfighter will be in the forefront as the Department reviews proposals that may result in the creation of weaker stand-alone firms less likely to thrive without the necessary capital structure that their larger parent company is able to provide.

So market forces may take effect, except when that’s forbidden. We see that sentiment again in core principle number two, in which DoD positively outlaws M&A activity by other vendors:

… [C]ompetition is one of the key drivers of productivity and value in all sectors of the economy, including defense. Accordingly, the Department is not likely to support further consolidation of our principal weapons systems prime contractors.

So: DoD will go along with mergers and acquisitions in some cases, but not others, in order to keep “market forces” active in some areas, but not others. The policy is: It depends. One can begin to understand when defense contractors joke publicly and grumble privately about dealing with Uncle Pentagon.

Moving on to DoD’s seventh core principle, the report makes clear that “globalization” of the department’s supply base “is not an option — it is reality.” Not only that, if a “globally sourced” component is the best one for the job, it’s best to buy it. The key, DoD argues, is to make globalization work the best way possible: Get the best deals while “striking the appropriate balance with security concerns.” In other words, DoD is saying, look: There is nothing we can do about the fact that we can only buy some stuff overseas, so let’s make the best of it.

But then we come to the section on rare earth materials, the once-obscure, now-famous elements that are essential for today’s electronics. Some 97 percent of the world’s supply of rare earths come from China, according to the report. No problem, right? We just read about how DoD is accepting the “reality” of a “globally sourced” supply chain. Wrong — this rare earths situation is a big problem, the report says:

In spite of increasing RE global demand, export quotas from China have reduced by 40 percent since 2009, as China’s export taxes have increased from 10 percent to 25 percent in that same period. These changes have led to higher prices for RE material. Faced with increased RE prices and a decrease in China’s export quota, the biggest issue facing domestic RE consumer companies is the need for a stable non-Chinese source for rare earth oxides (REO). It is essential that a stable non-Chinese source of REO be established so that the U.S. RE supply chain is no longer solely dependent on China’s RE exports. It is also essential to develop non– Chinese RE sources that in total create an RE supply that meets the U.S. demand for both heavy and light rare earth elements (REEs).

The defense market is a small player in the North American market for RE. Typically, the defense market requires approximately seven percent of the overall global market. Yet in some areas, defense usage can be less than one percent. Due to the limits on China’s REE exports, REO prices are projected to increase by 30 to 50 percent in 2011, from mid-2010 levels. As capital investment plans for additional non-Chinese capacity become a reality, prices should significantly trend downward on a similar path as in the 1988 — 1993 period, when market dynamics were very similar to what they are today.

Did you copy that? DoD says China is going to cause a spike in world prices for rare earth materials and that it is “essential” that the U.S. establish “a stable non-Chinese source” for them. The good news is that if and when that happens, “prices should significantly trend downward,” and the U.S. and its consumers can’t be held hostage for these things. So — sometimes global sourcing is bad after all.

Maybe the department is making the right calls and maybe it isn’t. The complexities and contradictions that emerge even in just the first few pages of this document show how difficult it is even to get an overall grasp on today’s reality. Now imagine trying to write a forward-looking, all-encompassing “industrial strategy” that would protect all the big vendors and suppliers over the long term … no wonder the Building isn’t eager to attempt it.

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So, we’re not going to tolerate any more mergers among the prime contractors, but we also have to protect our industrial base. The government is pledging, come hell or high water, to keep these companies in business. Is there any other way to read this? What’s “free-market capitalist” about that?

The Pentagon loves capitalism. That’s why they provide their contractors with capitalist incentives to drag programs out and jack up costs; incentives to screw you, the US taxpayer. Similarly they love to outsource the production of weapons. After all, what could possibly go wrong with that. It’s not like China would ever make us wholly dependent on them as a supplier of something and then jack the costs through the roof, unless it was rare earth minerals. But nothing else. They would never do that with anything else. So don’t worry that our defense contractors once employed 700,000 people but now with defense budgets at Cold War peaks they currently only employ 190,000. That only means we are more secure, not less — in Pentagon bureaucrat double speak.

I’m sorry, aren’t you the one who always claims that defense contractors are bloated and inefficient dinosaurs who only exist to bilk the taxpayer out of billions of dollars?

We will be losing capabilities if what we end up with is large bloated defense companies that have no innovative technologies. Just spiffy powerpoints.
The small companies are now where the technical skills reside.

A key point in the report says: “The Defense Department would not want to see its industrial base experience what has happened in some other sectors of the economy: poor risk management, unnecessary leverage, and excessively short-term behavior at the expense of long-term health.” Gee, now who’s fault would that be? A Pentagon that encourages mismanagement and inefficiency fron defense contractors? Maybe paying for a monopoly premium price of 20 to 50 percent is better than our current free-market “competition” prices which double and triple over the life of the program?

I’d like to hear some discussion about whether we should just nationalize all the R&D capability in our national research labs. As weapons development nears completion, we invite the “defense contractors” in to get the specs right so they can make post-prototype models for bidding for manufacturing production. They’ve made a disaster of R&D in every program they touch up to now.

Our defense contractors themselves have already destroyed our defense industry. They eliminated the position of weapon designer 20 years ago or more. Instead they have nameless, faceless committees of bureaucrats do systems engineering trade studies. After all, anyone can design a new jet fighter. Just look at that piece of crap Boeing entered in the JSF competition, not that the “winner” was much better. There’s no benefit to having someone who knows what they’re doing design the weapon, because to the mo rons at the DoD who evaluate the proposals, a lie is just as good as the truth. In fact, it is often better. The defense contractor facilities are nothing but hollowed out shells of buildings that once housed a huge amount of industrial might. Today these buildings are nothing but glorified parts storage bins. They can’t make anything, but they can sure bolt together the stuff that comes from overseas contractors. When it comes to our military might, America is a giant country with an empty sack.

Wow, spoken like someone who hasn’t actually supported a DoD PMO! There is no “incentive” by the gov’t to drag out the costs. Any incentives are usually done for milestone completions and key tasks (when actually in the contract). Dragging out the contract is not usually the fault of the PMO, but can be (IMHO) attributed to 2 things (generally speaking); unstable requirements (requirements creep from user community) and funding “games” by Congress. There are costs associated with the contractor’s “standing army” of personnel on the program while the fun and games are being (supposedly) resolved.
Corporate buyouts is also not helping. I saw a presentation recently showing the defense industrial base over the past 50 years go from maybe 60+ companies down to basically 5–6 due to mergers & buyouts. I used to joke about getting to the point with the mergers that there would eventually be 1 DoD contractor but then the gov’t would have to justify a sole-source contract!

Requirements creep can be partially PMO’s fault as well. One of the many problems in technology development is the disconnect & lack of communication between users & acquisition community. PMO’s often lack the experience and the guts to tell their users the truth about contractual and technical reality, and they make promises that they can’t live up to. Ultimate responsibility is with agency senior leadership in general, that allows a culture of poor discipline to fester.

Not only that but nobody really sells “weapons” anymore. They sell the DoD an idea and mock up a demonstrater and then promise thay can make it work within a budget and schedule that always gets blown up. Having worked in the business long enough I know that it’s easier to low-ball the competition to win a contract and then go back later for more money when the actual costs balloon upwards.

Agreed! It’s rare to see a PM (or PMO) actually say “no” to a requirement change from a user.

lol there are a lot of people that seriously need to grow a pair

If its a “real” requirement, as in “an operational necessity” he has no choice!.… . .If its a “pet rock” or a “nice to have” or a good candidate for a P3I, …. the PM has to stand his ground. The trick to being a good PM, (and those usually avoid the congressional testimony that makes the news so we never see them!), is knowing the difference.… :-)

Unfortunately, the “spit shined” professional PM with his PMP and a wall full of DAU certificates, as opposed to a user/“crew dog” who happens to be pulling a desk tour, very rarely has the essential operational insight to know the difference, or the strength of character to find that dusty old crew dog for advice.

It all comes down to integrity from the vendors and from the procurement community. “Low ball” works for the contractors largely because the people in the procurement side who “buy in ” at the start are almost certainly not around when the fecal matter hits the air movers and the price goes up! Stretch out the development cycle far enough and you can just about insure that you dont have to answer for your decisions! (Then there is the simple fact that if you stretch it out far enough, HONEST increases in cost, traceable to technology issues, parts obsolesence, threat improvements, labor costs, etc are almost assured!)

there are many excellent professionals of integrity that work for vendors & acquisition community. the problem is they are in a swamp. people can try to make change happen from the bottom up but they will keep banging their heads against an immovably corrupt leadership culture. the culture change must come from leadership, such as when Fogelman pushed the Core Values reform of the 90s.

I had the opportunity during my AF career to work for a PM that actually did say “no” to the customer. I was in the room when it happened (a room full of O-6’s). It got real quiet and one of the customer O-6’s actually thanked him for saying “no”. He made a statement along the lines of “I wish you where here several years ago when this started. Things may have turned out different.” The PM taking that position forced to customers to actually rethink the “nice to have” vs. “requirement” issue much harder. That particular system started to improve (became much more stable) after that initial event.

LOL! O-6’s with pet rocks! The curse of any developmental program! :-)

I think that the PM who made his stand probably gained a great deal of respect from the users for raising the bar a bit. The “bottom line” is that there has to be a cost/risk/benefit tradeoff associated with each requirement change, since there is no way to know which straw will take down the camel. Bravo Zulu to that PM and I hope that he was right! :-) Also an even bigger “attaboy” to the customer O-6 who realized the wisdom of “better” being the enemy of “good enough” (or just noticed the smell of that pet rock!) ! :-)

DoD and Congress also need to realize that the current depot structure cannot continue with its current overcapacity and underproduction. Depots need to compete with industry to make them more efficient.

Really, there’s no incentive for a contractor to drag out a development program or jack up the cost of the product? You don’t call paying a contractor profit on development an incentive to drag out development? Last I checked, if I make a profit on every day it takes to design a weapon, I make more profit if it takes 10 years than I do if it takes just one. Is that just too tricky for you to understand, or what? Then if I get a 10% profit on a weapon and it costs $100,000 instead of the $1,000 I told you it would cost, guess who the big winner is? Let me give you a clue, it’s not the US taxpayer. This isn’t rocket science.

Damn straight. I submitted a proposal to NASA once. I told them the truth. A competing company told the NASA person in charge of the program the lie he needed to tell his bosses so they’d give him the money to fund his program. The company who told the lie got the contract and I got reprimanded by NASA for not bidding aggresively enough. My competitor never did what they said they’d do, but that didn’t mean I got the next contract. The current system only promotes lies. The only way you can win and tell the truth is if everyone tells the truth. And they don’t, what a surprise.

We have a procurement system that promotes lies, provides financial incentives for companies to drag out development and jack up costs, and then the US taxpayer wonders why they get screwed. It’s really not that damn hard to figure out, is it?

I think that what you are proposing would work very well in some cases. For big things like naval carriers or large submarines. In fact, probably for almost every naval ship of any significant size I think the R&D capability should be nationalized. It was once. The Naval Warfare College did most naval ship designs for many years. Hell, that’s got to be better than paying a contractor more to drag out R&D.

I think the same is true for NASA and rocket design. Anyone can see they did a better job when Von Braun designed their rockets than when contractors did. Similarly the USAF should design its own large cargo aircraft. If it is something so large that a decent sized defense contractor could not afford to foot the bill for the design themselves, then these items should be designed by a nationalized design bureau.

Don’t just let these tanks place on display. Put in in where it is needed like in US Jersey Shore and around the US borders. Add anti ship/ boat/ tank missiles on each unit when place on its location. Iran is planning to place an armada of sips in Jersey shore.

Don’t just let these tanks place on display. Put in in where it is needed like in US Jersey Shore and around the US borders. Add anti ship/ boat/ tank missiles on each unit when place on its location. Iran is planning to place an armada of ships in Jersey shore.

“…if I make a profit on every day it takes to design a weapon, I make more profit if it takes 10 years than I do if it takes just one.”

Except you don’t, actually, make a profit on “every day it takes”. The DoD gives profit as “award fee”. It is perfectly willing to cut payments back to bare cost–and that’s agreed-upon-in-the-contract cost, not what-the-contractor-actually-paid cost. It’s entirely possible for contractors to lose money on “cost-plus” contracts.

“Anyone can design a new jet fighter.”

Wow, just wow.

Thanks for the ideas. I was also thinking that maintaining in-house capabilities at good wages and benefits for the long term provides the open atmosphere to permit a range of ideas and competiting solutions.

I think we need this for defense. I think Iran is planning an attack on us any time soon, where they are plannng to send an armada of battle ships. They already confirm their plans of sending this ships.We need to beef up our defenses on air, land and sea.

Most regulations prohibit, or hinder individual entrepreneurial weapon design and acquisition. The industry is regulated with fee based price floors, so that it can only be feasibly done by government controlled bureaucratic corporations. Think about a guy in his garage wanting to build a new exotic weapon system with rare earth, and other listed metals. If he could even afford the required licenses and permits I highly doubt that they would give it to him, and if they did then how would he deal with the scrutiny of the alphabet soup constant surveillance. Unless the USA becomes more friendly to individual weapon architects completed systems are not going to be the industry standard.


#1: The US has as much if nit more “rare-earth” materials as China, if the gov’t would just get out of the way. That means the EPA needs to get schooled on reality.

Item #2: Consolidation of competitors may mean slightly less costs, but also less diversity of thought or ideas. Boeing didn’t come up with the Space Shuttle, the F-22, the F-15, the F-35, etc. etc. etc. Boeing just bought out their more successful competitors. Boeing still can’t come up with a fighter on it’s own nickel.

If you let the industry consolidate further — there will be less fresh ideas, and less creativity. The gov’t should be promoting More competition (even to the public sector) between defense contractors, so they are not totally beholden to the govt teat while they innovate.

You don’t take into account the costs of the “standing army” of engineers, etc., that have to be kept working when things drag out. It tends to severely cut into their profit margin.

ROTFLMAO! He’s obviously just on a roll (sorta like Belushi in “Animal House”).

I suspect that his understanding of the requiements for a “jet fighter” are based on careful study of the shadow one casts on the cold line at an airshow, and goes just about as deep.

I designed a jet fighter just now, on my notepad. I decided to give it 10% more thrust than an F-22, decreased the stealth by 40%, improved the weapons load to 12 AMRAAM and 4 AIM-9X, and included AESA. I also drew a picture, I based it on the ADF-01 from Ace Combat because I believe that is a highly-maneuverable arrangement. I estimate that a properly-run factory could build these for $3 million each.

See? ANYONE can design a new jet fighter!

So, basically your plan is to tell everyone to tell the truth? Hope and Change. You remind me of a young muslim who asked me to swear on my faith that I had told him every detail of what was wrong with the car he wanted to buy from me. As I had already offered to let him take it to a mechanic to have it checked out, I told him this was freaking America — buy the car or don’t, but leave my God out of it. You routinely whine about contractors, but who’s problem is it if the contractor doesn’t do what the govt. asked? Does the govt. create checks in the process to penalize contractors who fall behind or can’t produce? Who owns that issue? It sounds as though you were outbid on your NASA proposal because you didn’t know how the game is played.

One has but to look at the “huge volume of output” from our National Labs to find this hilarious. What motivates govt. employees? Patriotism? Recall that the DOE was established to answer our dependence on foriegn oil over twenty years ago. How’z that working? As a lifelong Taxpayer myself, I hope for a smaller, more affordable govt., not a bigger one, as you’re suggesting. BTW, can you explalin what part of “national research labs” needs nationalizing again?

Or, it makes a bloated, inept government even more so.

Govt. — “You’re hired!!”

The most extreme example of what you’re talking about is in embedded software design. Try living up to the standards of DO-178B and generate some level A software. While the requirments of this document create a very effective barrier to keep companies other than those specializing in defense out of the game, it also manages to make software less reliable, if it has any net effect at all other than jacking the costs through the roof. Typical quotes are on the order of 8 hours per line of code, and that’s just for organizations that are directly involved in writing code. There are a host of others that don’t do anything but siphon money. This is nothing but a huge scam. And if you ask if any data has been collected and analyzed to see what the billions spent on these regulations has delivered in terms of safer code, you’re told not to worry your little head about such things. In other words, the data has never been collected because that’s not the point of the requirments. The point is to keep the little guy out of the embedded software business.

Now you are scaring me as badly as the young nimrod who thought that a YouTube video was a viable source for credible engineering data on the combat performance of an aircraft! :-(

However, in the interest of participating in the military-industrial complex.… .I will see your $3m and throw in supercruise, an IRST, a Klingon disrupter, and warp drive! So there! :-b LOL!

You are displaying your ignorance here. The “Naval Warfare College” is not and was not a designer of ships. Back in the day, the Navy had an organization called the “Bureau of Ships” which did that but that changed a very long times ago, about the time that ship systems became integrated instead of the Federated equipment sets of old. The Navy still does the basic design in simulations to select the major equipments and capabilities but the actual detailed designs are done by the builders yard.

Funny, US Submarines are considered by many to be the best in the world. Just abould every one of them has been made by a privatre shipyard. The Navy’s own shipyards of which there are four are just not even close to cost competitive for building ships and instead concentrate on overhauls and upgrades.

I thought that you were arguing about Deense acquisition and spending.

DO-178B is an FAA spec for commercial aircraft.

Oh, and your “8 hours per line of code” may be the cost where you work but certainly not for the Multimode receiver (navigation systems) , inertial navigator and GPS Systems programs that I have managed while we incorporated DO-178B

As an Old Quality Assurance Dog from what was the National Stockpile.….It doesnt matter. We sold off all our raw materials because we have no industrial base. Now we must depend on future enemies to supply our forces. Lets jusst say in the middle of an action ” Wait a minute (enemy) can you send me supplies to fight you? Makes a lot of sense. There should be an initiatve in this country to start manufacturing again.

Yeah, it’s not like they have a line item in the contract to cover all the people who charge directly to that contract. Oh wait, yes, it’s just like that. Maybe you should do a little bit of research before you shoot off your mouth?

Yeah, that happens all the time, right? Poor little government contractors, losing money on those contracts they drag out. It makes you wonder how they turn in record profits year after year. I mean, it’s not like they have any contracts that are on time and on budget, is it?


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