While the U.S. defense industrial base is healthy and strong, there are serious concerns regarding the industrial security preparedness – including cybersecurity – and as such it has earned a less-than-stellar overall grade of “C.” This is according to the newly released “Vital Signs 2020: The Health and Readiness of the Defense Industrial Base” (DIB) study compiled by the National Defense Industrial Association (NDIA) and its partner, the data analytics firm Govini.
This was the first in what is expected to be an annual report, and it included analysis of a three-year running average of 44 longitudinal statistical indicators that included surge capacity, as well as threats to digital systems. The study graded each of these 44 indicators from 0 (bad) to 100 (excellent), and this was slotted into eight sections, or dimensions, where each was graded individually. The composite grade from these eight dimensions was then used to determine the overall defense industrial base’s C grade – or 77 for 2019. Despite continued emphasis on cybersecurity, the overall score is actually down 2% since 2017.
“2020’s mediocre ‘C’ grade reflects a business environment characterized by highly contrasting areas of concern and confidence. Deteriorating conditions for industrial security and for the availability and cost of skilled labor and materials emerge from our analysis as areas of clear concern. Favorable conditions for competition in the defense contracting market and a rising demand for defense goods and services reflect recent year-over-year growth in the defense budget,” the report summary noted.
Understanding the DIB
The defense industrial base is more than just the producers and major capabilities that are vital for the national defense. It encompasses manufacturers, systems integrators, service providers, technology innovators, labs and research organizations as well as other suppliers. All of these are linked to one another by contracts into regional, national, and global supply chains and thus provide America’s warfighters with the superior tools, capabilities, and resources needed to address threats around the world.
“Make no mistake about it. The United States and China are locked in a war for industrial supremacy unlike any struggle in our history, which necessitated this report,” said retired Air Force Gen. Hawk Carlisle, president and CEO of NDIA, via a statement. “China is closing the research and development gap the United States narrowly enjoys, so knowing the full measure of the defense industrial base to monitor and counter this rival is paramount for our nation’s continued security.”
Areas of Concern
The Vital Signs analysis revealed “a stressed defense industrial base that is trending negative.” It highlighted the composite scores for four of the eight dimensions eroded in 2019, while six dimensions earned composite scores that were lower than 80 – and three of those were below 70, which are seen as failing grades. Simply put, “the defense industrial base is increasingly struggling to meet the ‘unprecedented’ challenges it faces.”
Of the eight dimensions, industrial security earned the lowest grade, with a failing score of 63. This was due to “brazen acts of industrial espionage” as well as data breaches by state and non-state actors that targeted defense contractors in recent years. Production inputs followed as the second lowest grade, a C, which was due to the fact that the defense industry workforce declined from a peak of 3.2 million workers in the 1980s to just 1.1 million today. In addition, the security clearance backlog was another contributing factor due to the stagnating approvals.
Supply chain was a major area of concern as it saw its grade fall from 83 to 68 in just two years. The dynamics of this dimension were affected by the frequency of contract terminations, financial performance, inventory schedule, and cost management.
Despite major advances in the technology sector in the United States, innovation conditions had a grade of just 74, due to declining investment in scientific and basic research and development (R&D), as well as the lack of international competitiveness and the steep drop in patent applications.
Productive capacity and surge readiness was seen as a bright spot in the overall health of the DIB, but it remained a concern due to its capacity for improvement. The Vital Signs study suggested that the U.S. is more than capable to meet a peacetime demand surge and that there were fewer shortages in critical defense supplier industries. The dimension only earned a 77 in the report – which was a 9-point increase from its 2017 index score.
One significant area of concern was political and regulatory conditions, which declined 13% in two years to a grade of 79. The score of this particular dimension was the largest drop of any of the eight. This was due to a combination of unfavorable congressional defense budgeting process indicators as well as the lack of congressional interest in major defense acquisition programs.
Areas of Confidence
The two dimensions that had the top grades highlight the ability of American industry to rise to any occasion. This included demand, which scored a 94. However, it was fueled by foreign military sales of logistics management, which saw a 214% increase; knowledge-based services with 143% growth; medical services with 121% growth; and the “big-ticket” items that included aircraft, land vehicles and ships, which resulted in 113% growth.
The other area was competition conditions among the thousands of defense contractors, which resulted in the highest scoring dimension at 96. Profitability was up 3% since 2018 and 7% since 2017, and this enabled companies to expand business operations and lure new entrants into the market. Yet, market concentration as well as vanishing suppliers in some important sectors will remain areas of concern.
“Measuring the health of the defense industrial base is the first step toward remaining secure, as the competition with China is intense,” said retired Air Force Col. Wesley Hallman, NDIA’s senior vice president of strategy and policy, via a statement.
Top Defense Contract Spending Locations
The study listed the Top 10 Defense Contract Spending Locations (Source: Office of Economic Adjustment, 2019; NDIA) and these included:
- Washington-DC-VA-MD-WV – $13.7 billion for FY 2017 defense contracting expenditures
- Dallas-Fort Worth-Arlington, TX – $13.0 billion
- San Diego-Chula Vista-Carlsbad, CA – $9.2 billion
- Seattle-Tacoma-Bellevue, WA – $8.1 billion
- St. Louis, MO-IL – $7.2 billion
- Norwich-New London, CT – $7.0 billion
- Huntsville, AL – $5.7 billion
- Los Angeles-Long Beach-Anaheim, CA – $5 billion
- Boston-Cambridge-Newton, MA-NH – $5.1 billion
- San Jose-Sunnyvale-Santa Clara, CA – $4.8 billon
Vital Signs 2020 highlighted the hurdles that exist and need for improvement, as well as the positive productive capacity and surge readiness of the defense industrial base, which are trending in a favorable direction.
There are still risks from flattening budgets and growing international competition, however.
“This holistic, data-driven analytical approach not only provides a necessary baseline assessment but also begins to point the way forward,” said Tara Murphy Dougherty, Govini’s CEO, of the report.
