The defense industrial base in America is being pressured by several key forces that will reshape the defense market and the incoming administration of President-elect Donald Trump has an opportunity to help influence these changes so the country’s military forces retain their longstanding technological edge, a defense industry executive said on Thursday.
The defense market is on the “cusp of a third pivot” in terms of its structure and the three primary forces driving this turn are the consolidation of military platforms and related industry prime contractors, use of a global supply base that will reach the prime contractor level, and greater use than ever before by the defense industry of commercial technologies, William Lynn, CEO of the North American division of Italian defense contractor Leonardo, said during a panel discussion at the Center for Strategic and International Studies.
Lynn, who also ran Raytheon’s [RTN] government operations and was a deputy secretary of defense in the first two years of President Barack Obama’s administration, said “maybe the most important” force on the defense industry is making sure it can access commercial technology and “operationalize it for military uses.” The defense industry is now importing 3D printing, materials science, nano-technology and autonomous operations whereas during the Cold War the industry developed technologies that found their way into the commercial sector, he said.
The first pivot for the defense market occurred during World War II when the administration of Franklin Roosevelt successfully transitioned to permanent defense industrial base away from a model that just “pulled” from industry when there was a war, Lynn said. The new model lasted through the Cold War and a key feature was multi-industrial companies that each had a defense division, he said.
Under the administration of former President Bill Clinton, Defense Secretary William Perry and others told industry to change itself because federal resources couldn’t support such a broad base of companies, which led to industry consolidation into more pure-play defense contractors, Lynn said. This approach, just as with Roosevelt’s, proved successful with the U.S. military retaining its technological edge, he said.
“The most important thing for the new administration is to think about how they want to shape it,” Lynn said of the pending pivot in the defense market. “And their aspirations should be frankly, in my mind, is to be as successful as the first two pivots.”
The industrial base needs to be shaped to “ensure we don’t lose that technological edge,” Lynn said. There is time to address and solve these issues, he said, adding “We’re not heading towards a cliff. But those three forces I mentioned are going to continue to press on the market. The industry is going to have to react.”
Helping to ensure success of this shifting defense market will require an “agenda” from the Defense Department this is focused “on how do you improve the agility of the structure we have,” Lynn said. The focus is typically on acquisition reform and the changes here should be less around “cost and schedule” but rather how to shorten the cycle of development to production that typically lasts, seven, 10 or 12 years, he said.
Lynn’s prescription includes incentivizing investments by industry in research in development by getting back to a more stable budget environment because it’s “hard to ask companies to invest when they don’t know what the department’s going to buy even 18 months from now.” He said the most important feature of the incoming administration’s focus on acquisition needs to be to create a “structure that allows defense companies to import commercial technologies or lets commercial companies compete directly.”
“The department has a strong interest in making sure the defense market is permeable to those commercial structures,” Lynn said.
David Melcher, president and CEO of the Aerospace Industries Association, said that the defense industry is making efforts to bring in commercial technologies and partner with Silicon Valley. However, he said the “rules of the game” for commercial companies need to be the same for the defense industry, adding that defense companies are more burdened with “compliance” rules than are commercial firms.
On the broad topic of reform regarding the way the Pentagon and government as a whole deal with industry, Melcher said that there remain “too many hoops” to sell U.S. defense technology and systems to the nation’s allies, and growth in regulations around things such as reviews of internal R&D spending, cyber security, counterfeit parts, human trafficking, which all are “impediments” to innovation.
“It’s a compliance mentality as opposed to a fostering innovation mentality and that’s something that ought to be addressed, Melcher said.
Joseph Benkert, vice president with the strategic consulting firm The Cohen Group, said that on the subject of foreign military sales there also needs to be reform around congressional notifications, noting that this aspect of some deals can add years of delay to an actual sale.