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July 1, 2011

Manufacturing Insecurity

Just how at-risk is our military supply chain because of reliance on non-U.S. providers?

ONE OF THE TOPICS the Pentagon doesn't like to talk about is offshore procurement of the weapons and components used by all branches of the military. The Department of Defense (DOD) advocates diversification of its procurement base, partly because a diverse supply system is thought to be more secure, but also because it tends to be more innovative, more supportive of allies and, often, more economical.

But to take this position, the military has to confront two significant issues. The first is the “buy American” sentiment, which has a powerful political and economic logic all its own. The second is the concern that a diversified supply base means that procurement of essential goods and services can be held hostage to opposition by foreign governments to U.S. military operations.

Now, there are indications that the risks of non-North American procurement are under study by the Office of the Director of National Intelligence (DNI), the highest-ranking American intelligence group. Published reports say the DNI is preparing a national intelligence estimate to study the impact of diminished domestic manufacturing capacity on national security.

As is customary, the DNI declined to comment on the report or confirm any details, but a spokesman says the defense industrial base would fall within the realm of potential study subjects.

The Pentagon has also begun addressing supply chain concerns through changes to its Office of Industrial Policy. The 2011 National Defense Authorization Act established a deputy assistant secretary of defense for manufacturing and industrial base policy (MIBP), who will oversee new programs to address supply chain vulnerabilities. Deputy Assistant Secretary of Defense Brett Lambert declined a request to be interviewed, but his spokeswoman, Cheryl Irwin, says several facets of the office are changing.

Updates include a new Industrial Base Fund to examine industrial readiness, address supply chain vulnerabilities and other issues related to urgent operational needs, and support efforts to expand the industrial base. The office also plans to identify companies that are potential suppliers in the vicinity of military installations, Irwin says. The MIBP office has also absorbed the Defense Manufacturing Technology Program (ManTech), which develops technologies and processes to ensure the affordable and timely production of defense systems.

“These realignments will better posture MIBP to inject a new spirit of innovation into the department to ensure our service members are the beneficiaries of the best American industry can provide,” Irwin says.

Whether this sort of work will have a meaningful impact on defense procurement is unclear. In February, The Boeing Co. won a highly anticipated $35 billion Air Force contract to build new aerial tankers, three years after the Pentagon originally awarded the bid to the American-based arm of the European Aeronautic Defence and Space Company N.V. (EADS). EADS, which makes Airbus commercial jetliners, had promised to build a factory in Alabama. Boeing appealed that decision, and U.S. Rep. Norm Dicks (D-Washington) persuaded the Pentagon to shift its cost-analysis formula to consider operational costs over 40 years, rather than 25. The Boeing aircraft is smaller and burns 24% less fuel than the Airbus model; with fuel costs projected to rise in the long term, the 40-year time frame benefited Boeing. Under the updated life-cycle formula, the Boeing bid was 1% lower than that of EADS.

The long-running tanker controversy is not the only overseas procurement issue to rise to the level of public notice. One question has been China's almost complete domination of the market for essential rare earth minerals, which are used in a variety of weapons systems, including laser-guided weapons systems and fighter aircraft, to name just two. Last spring, the Government Accountability Office said it could take 15 years to wean the United States off a foreign rare earth supply.

Friendly countries have also disrupted the defense supply chain when American interests run counter to their own interests. In 2003, Swatch Group AG of Switzerland blocked shipments of parts required to build guidance equipment for the Joint Direct Attack Munition (JDAM), because the Swiss did not support the war in Iraq. The JDAM guidance kit converts free-falling bombs into guided missile systems.

Even natural disasters have disrupted the supply chain. During the initial phase of the Iraq war, an earthquake in Taiwan stalled production of computer chip components used in guided missiles.

Buy American

The 1941 Berry Amendment requires the Defense Department to give preference to domestically produced products, including food, fabrics and specialty metals, as well as some materials used in naval vessels. However, under certain conditions, the secretary of defense has the authority to waive these requirements, including when “unreasonable costs or delays” would be incurred, and when the requirement would impede cooperative programs between the Pentagon and a foreign country. Using that authority, the secretary of the Army in May 2007 granted waivers to obtain steel from foreign sources to build Mine-Resistant Ambush Protected (MRAP) vehicles, said a spring 2010 National Defense University (NDU) study of land combat systems. “We've gone through this Wal-Mart-ization, where it's all about price,” says Robert H. Trice, retired senior vice president of corporate strategy and business development at Lockheed Martin Corp.

“The intelligence community has never paid close attention to the industrial base in the U.S., nor has the Pentagon. It was always assumed those things would take care of themselves,” says Loren Thompson, a security expert and chief operating officer of the non-profit Lexington Institute, based in Arlington, Virginia. But now, says Thompson, “the intelligence community has begun to detect problems in military readiness and national security arising out of the loss of indigenous industrial production.”

For instance, China outpaces the United States in steel production by a ratio of 11 to 1. Even drug manufacturers rely on foreign sources to produce drugs like penicillin, Thompson says. An estimated 80% of the active ingredients and bulk chemicals in American pharmaceuticals is imported from foreign countries, with up to half those ingredients purchased from plants in India and China, Allan Coukell, director of the Medical Safety Portfolio at the Pew Health Group, said in an April 2011 congressional testimony.

“If you look at each of these as a disconnected fact, it seems the invisible hand of the market is working its magic. But when you put it all together, you realize the American manufacturing base is very rapidly slipping,” Thompson says. “Although it presents no problem at the moment, during peacetime, if the U.S. were to go to war with China, it would be hard-pressed to get some types of commodities that are essential to producing military systems.”

Tracking Systems

The government's Federal Procurement Data System tracks purchases from general contractors, and it tracks the country from which those purchases are made. But each purchase often contains multiple items, all of which might be manufactured in different places.

In a 2010 study, the Industrial College of the Armed Forces at NDU reported that some aerospace companies sourced nearly 75% of the parts for their engines from foreign suppliers. In 2010, the United States imported 12,300 metric tons of tungsten, used to make heavy alloys for armaments, from countries including China, Canada, Germany and Bolivia, representing 68% of U.S. tungsten consumption. Only one domestic mine produced tungsten that year, says the U.S. Geological Survey (USGS).

In 2010, no U.S.-based company mined or refined cobalt, which is used in aircraft gas turbine engines and afterburners. Instead the United States imported 11,000 metric tons from Norway, Russia, China and Canada. Forty-nine percent of the cobalt consumed in the United States last year was used in superalloys, mainly in aircraft gas turbine engines, according to the USGS.

Without a mechanism for tracking overall industrial readiness, the federal government can't know whether the United States is capable of supporting a major war effort without relying on offshore sources.

In the meantime, U.S. Reps. Walter Jones (R-North Carolina) and Chris Murphy (D-Connecticut) have formed the Congressional Buy American Caucus to highlight domestic manufacturing. Murphy took interest after hearing about Waterbury, Connecticut-based Ansonia Copper & Brass, located in his district. The company believes it is the only domestic supplier of large-diameter copper-nickel seamless tubes for the U.S. Navy, and it recently lost a bid to a German-based arm of European metals conglomerate KME AG, a subsidiary of KME Group. KME will make the tubes for submarines built by General Dynamics Electric Boat.

In April, Murphy introduced H.R. 1354, the American Jobs Matter Act, which directs military procurement officers to consider job impact statements from defense contractors, including the number of American jobs that would be created or lost as a result of domestic or international sourcing. “American defense dollars should go to American companies—period,” he says. U.S. Rep. Steny Hoyer (D-Maryland) included the bill in his “Make It In America” legislative agenda announced May 4.

Lockheed Martin's Trice says small American aerospace and defense suppliers—comprising more than 30,000 enterprises, many employing fewer than 100 people—are an important part of maintaining a vibrant, defense-oriented manufacturing sector. A Virginia-class nuclear-powered submarine built by General Dynamics Electric Boat has a million separate parts, Thompson adds. This requires “a very complex supply chain supporting the final product,” he says.

“The future health of the manufacturing sector depends upon new projects, new products, new innovations,” Trice says. “That's the biggest fear for aerospace and defense professionals—that they will not have new projects to keep their engineers busy, and over time those skills as a nation will atrophy.”