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America’s Depleted Industrial Base Is a National Security Crisis

The U.S. needs to fix vulnerabilities in the military’s supply chain and build a more capable manufacturing workforce.

The Pentagon’s small suppliers are on the edge.

The Pentagon’s small suppliers are on the edge.

Source: Bloomberg

President Dwight D. Eisenhower’s farewell address is most famous for its warning against the “unwarranted influence” of the military-industrial complex. But Eisenhower also stressed the defense industry’s importance to the country’s security: After all, it helped the U.S. maintain superiority over its rivals, forestall great-power conflict and win the Cold War.

Six decades on, America’s military remains the most advanced in the world — but the industrial base supporting it has deteriorated. Industry consolidation, domestic manufacturing decline and dysfunctional federal budgeting have combined to reduce competition throughout the defense supply chain, eroding military readiness and potentially jeopardizing national security.

As Congress considers the Defense Department’s next budget, investing in a more nimble, innovative and resilient defense-industrial base should be among its highest priorities.

Some parts of the defense industry, to be sure, continue to flourish. The U.S. spends more on its military than the next 10 countries combined, with the Pentagon’s budget consuming more than half of all federal discretionary spending. Revenue for defense contractors has increased by 83% since 2011, with annual spending per company doubling in the past five years alone.

That money, however, is flowing to a reduced cast of contractors. An analysis by Bloomberg Government found that the number of Pentagon “prime vendors” — those that receive contracts directly from the government — has dropped by 36% in the last decade. An even smaller handful has reaped the most gains. According to the Government Accountability Office, nearly half of the 183 major contracts awarded by the Pentagon in 2018 went to just five contractors and their subsidiaries.

Such concentration imposes costs on both the military and the public. The first is financial. More than two-thirds of major Defense Department contracts are awarded without a competitive bidding process, according to the GAO; most of the rest receive bids from two or fewer companies. Fewer bidders means pricier contracts: Between 2008 and 2018, the average acquisition cost of a U.S. weapons program, in constant dollars, increased by 12.5%.

A lack of suppliers also undermines America’s ability to respond to crises. The Pentagon has identified a “staggering” number of cases where it relies on a single vendor for critical components. It’s down to a lone domestic source of both ammonium perchlorate, a key ingredient for warship propulsion systems, and chaff, a material that fighter jets release to evade enemy radar systems. A sole manufacturer provides all of the Army’s gun and howitzer barrels and mortar tubes. Meanwhile, offshoring has made the supply chain more vulnerable to trade disruptions, cyberattacks and sabotage.

This attenuation of the U.S.’s military supply chain poses a growing national security risk — and it demands a bold response.

President Joe Biden’s $2.25 trillion infrastructure plan includes $180 billion in investments to strengthen U.S. supply chains. The administration should use the Defense Production Act and other authorities to boost support for smaller domestic suppliers of critical goods and services. The Pentagon should also streamline its cumbersome contracting and acquisition process, which discourages innovation and crowds out nontraditional vendors. Initiatives like the Trusted Capital program, which connects investors with companies developing new military technologies, should be expanded. Finally, the Federal Trade Commission and the Justice Department should increase scrutiny of defense-industry mergers and acquisitions to limit excessive consolidation.

A well-functioning supply chain depends on a diverse array of private-sector companies. The viability of those companies, in turn, depends on a sufficient supply of skilled labor. Upgrading the skills of both service members and the civilian workforce that supports the military is critical. The Pentagon should expand digital training for current employees and offer promotions and higher pay to civilian staff with advanced technical skills. Congress should boost funding for the department’s Skills Imperative initiative, which brings together schools and employers to address defense-industry workforce needs. It should also encourage apprenticeship programs in key sectors, such as shipbuilding, that lack qualified workers.

As Eisenhower recognized, America’s influence abroad depends on its strength at home. Revitalizing the defense-industrial base is essential not only for national security, but also for the preservation of peace around the world.  

    —Editors: Romesh Ratnesar, Timothy Lavin.

    To contact the senior editor responsible for Bloomberg Opinion’s editorials: David Shipley at davidshipley@bloomberg.net .