The defense-industrial base will still have ample contracting opportunities–despite the Pentagon’s shrinking budget–in areas such as cybersecurity and new innovations, analysts say.
The defense industry is no doubt facing challenging times–as the March 1 start date for $500 billion in longterm Pentagon cuts nears. Still, companies that position themselves to address unavoidable threats and offer cost-saving innovations will tap pockets of growth in the military budget, panelists said last Friday at the nonpartisan Center for Strategic and International Studies (CSIS) think tank in Washington.
“Austerity drives the need for innovation,” said Bill Greenwalt, vice president of acquisition policy at the Aerospace Industries Association (AIA) trade group. “Austerity drives the need to come up with new ways of doing business, whether it’s technological business practices and so on. Those are the areas I think where the industrial base can thrive and present new processes.”
Todd Harrison, a senior fellow at the nonpartisan Center for Strategic and Budgetary Assessments (CSBA), similarly said he sees “opportunities for companies that can come in and truly innovate, and give (officials at the Department of Defense) DoD something that they don’t even know they need yet.”
“They can fulfill a need they may not even realize they have, yet,” Harrison said.
Meanwhile, the Pentagon has some clear and growing needs related to cybersecurity and special-operations forces, he added.
“I can say comfortably that those two area will grow because they’re relatively small, compared to the overall budget,” Harrison said.
For other areas that the defense industry previously has focused its energies, though, “these are going to be challenging times,” he said.
Democrats and Republicans in Congress the White House remained at odds late last week over how to address “sequestration,” the $500 billion in across-the-board cuts to planned defense spending slated to start next month. Even if the two parties can agree to an alternate plan to replace sequestration–which is widely unpopular in Washington–many experts expect it still will contain Pentagon reductions. Because of the Budget Control Act of 2011, the longterm defense budget already has been cut by nearly $500 billion.
Clark Murdock, director of CSIS’s Defense and National Security Group, said that people should remember during the current defense drawdown “how big defense is.”
“When you’re looking at a $520 billion base budget in (fiscal year) FY ’13 dollars, and if you control, you allocate your costs so that you’re spending 32 percent of that on modernization, that’s a lot of dollars that’s going to buy a lot of stuff,” Murdock said.
He noted that the rapid growth of the unmanned-aerial vehicle fleet was driven by demands from the battlefield. “There’ll be similar changes,” he said.
“The amount of dollars that (the Pentagon) spends is so large that there’s always going to be opportunities,” Murdock said.
Harrison and Greenwalt–speaking at the think tank event on the “deep defense drawdown”–said the Pentagon must adjust how it works with private industry to allow for new innovations.
“DoD is increasingly going to have to relax some of its requirements, relax some of its standards in the way that is normally does acquisitions, to open it up, to bring in new entrants into defense, companies that might not have the legacy costs some of the incumbents have, that can innovate and come up with products that are just fundamentally different,” Harrison said.
Greenwalt, the AIA official, said he is concerned because he sees the need for “business management change” within the Pentagon related to its requirements-setting and budget processes.
“We need to kind of rebaseline everything from the managerial side to start driving the industrial base, to incentivize the industrial base in the right way to provide whatever solutions there are to meet the strategy that the department wants,” he said.
Going forward, he predicted the desire for the military “to do everything” will remain.
“So it’s going to be up to the (Defense) Department to provide the industrial base the right incentives so we can try to meet those missions,” Greenwalt said. “And I think the industrial base can do that if properly incentivized, and the management structure is such that we can do that.”
Greenwalt said he is “optimistic” that such changes will be made, and pointed to the last military downturn as evidence.
“It didn’t solve everything, but we made a lot of change” that was positive, he said about the last downturn, predicting such adjustments will be made again.
The defense industry is already consolidated to a great extent since the last downturn, leaving scant room for additional consolidation, Harrison noted.